Shares of Micron Technology have slipped more than 10% after the memory chip maker warned on Thursday that the U.S. trade war with China is still putting pressure on its business. The company, which has been hit hard by trade tensions this year, said export restrictions to Huawei weighed on its results in the fourth quarter ending in August and could continue to hurt its business in the current quarter.
Micron, the No.3 player in the memory chip business, has been facing falling prices, weak demand and elevated inventory at many of its customers. But it warned that restrictions on selling chips to Huawei and the broader trade war could delay the recovery it was expecting in the second half. The company forecast sales for the first quarter of 2020 in the range of $4.8 billion to $5.2 billion, down from $7.91 billion a year ago.
“We are encouraged by signs of improving industry demand, but are mindful of continued near-term macro-economic and trade uncertainties,” Sanjay Mehrotra, Micron’s CEO, said in a statement. “Micron delivered fourth quarter results ahead of expectations, capping a fiscal 2019 in which we executed well in a challenging environment.” The company’s shares have surged more than 30% in 2019 on better-than-expected earnings.
The company’s sales totaled $4.87 billion in the fourth quarter, falling from $8.4 billion a year ago. Micron had estimated sales of $4.6 billion. “DRAM demand bounced back as the factors that impacted first half demand largely dissipated,” Mehrotra said. He added that some of its customers are buying NAND chips before prices bounce back, which is “driving robust demand growth, causing industry inventories to improve rapidly.”
Micron has struggled over the last year to bounce back from a slowdown in smartphone sales and plunging prices (ASPs) for DRAM and NAND due to an ongoing oversupply. Higher prices pushed many of its customers to stockpile inventory in the second half of 2018. But since then demand has dropped off. Customers are trying to get through the inventory they already have before buying more from Micron and other firms.
Micron stopped selling chips to Huawei in May after the Trump administration added the Chinese company to the Entity List, which severely curtailed its access to U.S. products. Micron has been handicapped by the decision to blacklist Huawei—the world’s No.1 communications equipment vendor and the global No.2 smartphone brand. But in June it restarted some shipments to Huawei by using loopholes in the export rules.
Micron is applying for licenses to sell even more products to Huawei, its largest customer prior to the supply ban. Huawei’s spending on semiconductors in 2018 came close to $16 billion, with the Chinese OEM buying $1.7 billion worth of DRAM and $1.1 billion worth of NAND from Micron and other memory chip sellers, according to research firm IHS Markit. Huawei was the world’s fourth-largest chip buyer in 2018.
Mehrotra said on a conference call on Thursday that “there have been no decisions on the licenses to date.” Micron's sales to Huawei in the fourth quarter “declined sequentially and were down meaningfully” from its pre-Entity List estimates. “If the restrictions against Huawei continue and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters,” Mehrotra pointed out.
“We see ongoing uncertainty surrounding the U.S-China trade negotiations,” he said.
Micron said some Chinese clients are building up inventory in case more tariffs or sanctions are imposed as part of the trade war between Washington and Beijing. The DRAM and NAND supplies are also under threat from the trade spat between South Korea and Japan. The tensions could lead to shortages of chip-making materials used by Samsung and SK Hynix, the world’s No.1 and No.2 memory chip makers, respectively.
“In recent months, we have seen increased demand from customers in mainland China, some of whom could be making strategic decisions to build higher levels of inventory in the face of increased trade tensions between the U.S. and China as well as Japan and Korea,” Mehrotra said. “But we don’t think that inventory build is anywhere close to the kind of inventory build that had been going on in the second half of last year.”
The company signaled that its NAND business had started to bottom out in the fourth quarter. Micron said NAND ASPs have started to increase as more flash memory is crammed inside smartphones and price declines drive higher demand in data centers. Micron, which is cutting its NAND production capacity by 10% to help balance out supply and demand in 2019, is also seeing “supply tightness" in parts of the market.
Micron, which is also slashing its DRAM production, said DRAM ASPs declined 20% in the fourth quarter. The company said supplies of the short-term memory is still “exceeding demand” even though some customers are looking to start rebuilding inventory. DRAM demand is projected to grow 15% in 2019, Micron said. NAND demand will grow in the low-to-mid 40% range in 2019, with supply jumping by about 30%, Micron said.
The company’s profit totaled $560 million in the fourth quarter of 2019, or 49 cents a share, down from $4.33 billion, or $3.56 a share, in the year-ago quarter. Micron estimated earnings of 46 cents per share in the first fiscal quarter, with gross margins falling in the range of 25% to 28% due to pricing pressure, CFO Dave Zinsner said. That compares to margins of 30.6% in the fourth quarter and 59% in the first quarter of 2019.