Micron to Cut Capital Expenses Next Year by $1.25 Billion

Dec. 22, 2018
Micron to Cut Capital Expenses Next Year by $1.25 Billion

Micron Technology, the largest American memory chip maker, plans to cut capital expenditures next year by more than 10 percent as customers try to get through the long-term storage and short-term memory chips they already have. The company said on Tuesday that it would cut $1.25 billion of capital expenses next year, down to between $9 billion and $9.5 billion. The move feeds into fears that the semiconductor industry's boom is over.

Micron’s move to crop capital expenditures next year came as the company reported fiscal first quarter revenue of $7.9 billion, an increase of around 16 percent from the same quarter last year. Operating profit came out to $3.9 billion. Customers are slashing orders for chips used in smartphones. Shortages of Intel's Core processors have hurt demand in personal computers, according to Chief Executive Officer Sanjay Mehrotra.

Orders for chips used as main memory and storage in factories, automobiles and data centers have offset slowing sales of chips used in smartphones and personal computers. But the company’s broader customer base has struggled to protect it from fluctuations in supply and demand dynamics. According to Micron, average selling prices for NAND and DRAM have softened over the last year.

The Boise, Idaho-based company projects revenues in the current quarter in the range of $5.7 billion to $6.3 billion. That would be down from $7.35 billion in the second quarter of 2017, when revenue surged from $4.65 billion in the second quarter of 2016. DRAM prices have fallen between 5 and 10 percent over the last quarter, while NAND prices have fallen between 10 and 15 percent over the same period, Micron said.

“Because of a lengthy period of rising DRAM prices, we believe some of our customers decided to carry higher than normal inventory levels and as DRAM supply caught up with demand, these customers are bringing down their inventory levels,” Mehrotra explained on an analyst conference call on Tuesday. He said that customers will reduce the inventory buildup to normal levels by the second half of next year.

To prevent conditions from getting any worse, the company is scaling back plans to expand chip production. Micron said that it would try limiting DRAM output growth to around 15 percent, while it had previously projected production growth of around 20 percent in the current fiscal year. NAND output growth will be restricted to 35 percent over the next year to stop supply from surpassing demand.

Other companies have started reigning in capital expenditures. They are trying to calm concerns that they are adding too much manufacturing capacity too fast, endangering their profit margins. In recent years, Samsung's aggressive investments set the pace of capital spending in the memory chip business. But the South Korean conglomerate is changing course, with its capital spending falling around 30 percent from the second to the third quarter of 2018.

Other players in the memory chip space are following Samsung's lead. The combined capital spending of the the largest memory chip companies—Samsung, SK Hynix, and Micron—is forecast to drop 17 percent from $45.4 billion this year to around $37.5 billion next year, according to market researcher IC Insights.

“We will continue to remain flexible with capital spending to respond to market conditions," said David Zinsner, Micron's chief financial officer, on Tuesday's conference call. "While near-term market conditions are challenging, we are taking appropriate steps to manage production and spending" - including tighter controls on employee headcount and administrative expenses - "in order to deliver healthy profitability."

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