Micron Braces for Massive Plunge in Demand by Slowing Production

(Bloomberg) — Micron Technology Inc., the largest US maker of memory chips, is slashing production to cope with a steep plunge in demand, the latest sign of how the semiconductor industry’s boom times have quickly turned into a crisis.

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After forecasting quarterly sales that were nearly $2 billion below Wall Street estimates Thursday, the company said it was taking big steps to rein in supply. That includes slowing down production at existing plants and slashing its budget for machinery.

Micron and other chipmakers had been riding high during the pandemic, when the work-from-home trend fueled demand for computers and other consumer technology. But inflation and recession fears — plus a return to the office — have put a damper on purchases. That means Micron’s customers are sitting on stockpiles of unused chips.

“As we look ahead, macroeconomic uncertainty is high and visibility is low,” Chief Financial Officer Mark Murphy said on a conference call after the Boise, Idaho-based company released its quarterly results.

Micron’s aggressive moves to deal with the problem were enough to calm investors’ fears Thursday. The stock initially dropped more than 4% in the wake of its forecast, but soon rebounded.

Still, Micron will need help from competitors to address the oversupply problem. Memory chips are unique in the semiconductor field in that they’re built to industry standards, meaning products from rival companies are interchangeable. They’re traded like commodities, with publicly available pricing.

To restore the balance between supply and demand, South Korean competitors Samsung Electronics Co. and SK Hynix Inc. are showing signs of dialing back production. The country’s semiconductor output fell for the first time in more than four years last month.

For now, Micron is in for a difficult year. It expects sales of about $4.25 billion in its fiscal first quarter, which ends in November. That compares with an average analyst estimate of $6 billion, according to data compiled by Bloomberg. Excluding certain items, profit will be about 4 cents a share, compared with a 87-cent prediction by analysts.

As part of its response to the slump, Micron will cut capital spending by 30% in its fiscal year 2023, Chief Executive Officer Sanjay Mehrotra said.

“Yes, we have a challenging market environment, but we’re responding rapidly with actions,” he said in an interview. “Fiscal 2023 is, of course, an unprecedented environment, but the long-term drivers are intact.”

Customers across various industries are cutting orders to pare their stockpiles of chips, he said, and the industry is experiencing a tough pricing environment. Micron expects conditions to improve in the second half of the fiscal year, which begins in the May quarter.

Micron’s memory chips store data and help process information in phones, PCs and servers, making its outlook a key indicator of demand for a large swath of the electronics industry. While it has benefited from the spread of computing into everything from household devices to automobiles, it’s still heavily reliant on computers to fuel revenue.

The stock had fallen 46% this year through the close, part of a rout for the semiconductor industry.

In the three months ended Sept 1, Micron’s revenue shrank about 20% to $6.64 billion, its first decline in more than two years. Net income was $1.49 billion, or $1.35 a share.

In August, the company said it would likely miss its own projections and there would be significant declines in profitability. That added to a chorus of similar warnings from chip companies.

The US company competes with Samsung and SK Hynix, as well as Japan’s Kioxia Holdings Corp., in a market that has historically been perilous and unpredictable.