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Plummeting prices force Micron write-down

The memory chipmaker's prices plunge in the third quarter and take its earnings down with them.

Memory prices plunged in the third quarter and took Micron Technology earnings down with them.

"We are not seeing strong signs of a broad-based demand recovery from our customer base in the immediate future," said Michael Sadler, Micron's vice president of sales and marketing.

After market close Thursday, the memory chipmaker reported a fiscal third-quarter loss of $301 million, or 50 cents per share, from continuing operations. Analysts surveyed by earnings tracking firm First Call produced a consensus forecast calling for a loss of 15 cents per share in Micron's third quarter, which ended May 31.

Including Micron Electronics' PC operations, which have been sold to another company, Micron Technology lost 53 cents per share. The PC business is recorded as discontinued operations for Micron.

About $260 million, or 86 percent, of Micron's loss stemmed from inventory issues, as the company wrote down the asset value of its memory chips to reflect a plummeting market.

Micron's write-down wasn't entirely unexpected. Earlier this week, German memory chipmaker Infineon Technologies warned of lower-than-expected revenue and said it would record charges for inventory write-downs.

"I think Micron's write-down is reasonable," said Hans Mosesmann, analyst with Prudential Securities. "Those are the numbers most people expected."

Analysts reduced their estimates over the past few weeks, as prices for memory chips spiraled lower. As recently as May 22, the consensus projection for Micron's third quarter was for a loss of 2 cents per share, according to First Call.

Third-quarter revenue for Micron plummeted 54 percent year over year to $818 million. The First Call consensus predicted revenue of $939.2 million.

Downward trend for prices
Prices for memory chips have been spiraling downward for months. The average price of Micron chips dropped 35 percent between the end of February and the end of May, and fell another 20 percent since then, company executives said during Thursday's conference call with analysts.

Memory prices are falling not just because of soft demand, but also because memory chipmakers tend to keep their plants running at full capacity to keep per-unit costs down, said Paul Leming, analyst with ABN ANRO. And with production still running high despite slow demand, memory chip companies need to get rid of their chips as quickly as possible "so there's nothing keeping prices up in the spot market," Leming said.

Net sales from Micron's semiconductor operations fell 24 percent from the second quarter, although shipments of megabits increased 20 percent.

Micron's loss seems relatively benign compared with recent news from other companies, Mosesmann said. "After two weeks of pre-announcements and horror, this is kind of ho-hum," he said. "I think we're at the bottom of the cycle."

Traders on the spot market for memory chips may believe prices are bottoming out because orders have risen in the first weeks of June, Micron's Sadler told analysts. But Micron executives were reluctant to say demand would pick up in the summer.

Micron executives echoed the view of many industry observers who believe PC demand will increase in the last few months of this year, when Microsoft rolls out the Windows XP operating system. Micron and many analysts believe memory chip vendors will be especially strong beneficiaries because XP's system requirements will force many PC owners to add memory.

"I think it would be foolish to bet against the marketing might of Microsoft, and, for that matter, Intel, which will be marketing the Pentium 4 in conjunction with Windows XP," said Leming.

However, Leming added, those events could be depressing PC sales now as customers wait for the new operating system and faster microprocessors. "I certainly would not bet my house or my firstborn on July and August being strong months," he said.

The time to buy chip stocks is when they're depressed, before a recovery actually begins, Mosesmann said. After this year's savage price wars for memory chips, the company's business isn't likely to get much worse, he said.

Shares of Micron traded at $36.49 in Thursday's after-hours activity on the Island ECN, immediately following the release of quarterly results. Micron rose 87 cents to $37.71 in Thursday's regular session, ahead of the news.