Micron misses 2Q estimates as DRAM prices slide

When DRAM supply tightens later this year, Micron could see a return to the profit margins it enjoyed last quarter

Micron Technology fell short of analysts' second quarter estimates, but said it sees a strong rebound in the current quarter.

The memory chip giant on Tuesday reported fiscal second quarter earnings of $161m (£99m), or 58 cents (35p) a share, on sales of $1.4bn (£870m). Average selling prices fell 20 percent in the quarter, while the fat profit margins it enjoyed last quarter dried up.

First Call's consensus expected the chipmaker to earn 74 cents (46p) a share in the quarter.

Ahead of the earnings report, Micron shares fell 4 1/8 to 131 1/2. In after hours trading, the stock was at 127 and sliding.

Company executives on a Tuesday afternoon conference call blamed the profit shortfall on a steep decline in DRAM demand because of corporate worries about Y2K problems and the wait for Windows 2000. "Fiscal Q2 was a challenging one for Micron from the standpoint of managing demand from our customers," said Michael Sadler, vice president of sales. "For the most part, these issues are now behind us."

Micron saw a sharp increase in demand near the end of the second quarter -- 40 percent of total shipments came in the final weeks, Sadler told analysts. After enjoying profit margins of 51 percent last quarter, Micron had to settle for 37 percent this time around.

Average selling prices fell 20 percent from the first quarter when it earned $341m (£211m), or $1.19 (74p) a share, on sales of $1.6bn (£990m). Contract prices for DRAMs currently run in the "low $5" (£3) range for 64MB blocks, and about twice that for 128MB, Sadler said.

Company officials said gross profit margins for semiconductor operations checked in at 41 percent, down from 58 percent in the first quarter. In the same quarter a year ago, Micron made $22.4m (£13.8m), or 8 cents (5p) a share, on sales of $1bn (£620m).

The huge profit margins that resulted in the upside surprise last quarter were nowhere to be found this time around. Company executives noted that the first quarter saw a surge in DRAM prices. Total chip sales slipped 14 percent from the first quarter to $1.2bn (£740m).

PCs consume a slightly higher percentage of Micron's DRAM shipments compared to the overall industry, which produces between 60 and 65 percent of its chips for PCs, the company estimated. But non-PC business is growing "fairly dramatically", Sadler said. Micron also sees rapid growth for its flash memory business, although that segment remains a small percentage of the company's overall revenue.

Unit shipments of PC systems fell 17 percent from the first quarter as a result of a 19 percent decline in desktop unit shipments to government customers. Analysts expected Micron's DRAM sales to slip a bit this quarter, but not that far.

Joseph Osha, an analyst at Merrill Lynch, predicted earlier this quarter that Micron would earn between 75 to 80 cents (47 to 50p) a share this quarter on sales of around $1.27bn (£790m). At the time, Osha said DRAM prices had already softened from "unreasonably high" levels in September and October. "We encourage investors not to engage in buying and selling Micron based on the volatile DRAM spot market," Osha said in a research note. "Investors who buy the stock now in anticipation of tightening supply during the next 12 months should be rewarded handsomely."

Donaldson Lufkin & Jenrette started coverage of Micron shares with a "buy" recommendation on Tuesday morning.

If and when the DRAM supply tightens later this year, Micron could see a return to the profit margins it enjoyed last quarter.

First Call consensus expects it to earn $3.67 (£2.28) a share in the fiscal year. Of the 22 analysts covering the stock, 15 maintain either a "buy" or "strong buy" recommendation. The stock peaked at 139 3/4 earlier this month after falling to a low of 34 1/4 in April.

Sergio G. Non contributed to this report.

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