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Slow PC sales sting Micron Electronics

Slumping computer sales and declining memory prices conspire to deliver a down quarter for the company.

Micron Electronics
Stock price from December 1999 to present.  
Source: Prophet Finance
Slumping PC sales and declining memory prices conspired to deliver a down quarter for Micron Electronics, although the company said Wednesday it hopes to recover on an increased push into services.

The Nampa, Idaho-based PC maker said that net income for its fiscal first quarter of 2001, which ended Nov. 30, came to $2 million, or 2 cents per share; revenue reached $404 million. The company met analysts' lowered expectation of 2 cents per share, according to First Call/Thomson Financial.

Although revenue increased from $353 million in the same quarter last year, net income dropped significantly from last year's figure of $15 million, or 15 cents per share. In the fiscal fourth quarter of 2000, which ended Aug. 30, the company reported revenue of $500 million and earnings of $23 million.

The figures for the latest quarter included gains from investments, which were offset by one-time expenses.

The numbers weren't a surprise. On Nov. 30, the company warned that earnings per share would come to 1 cent to 4 cents for the quarter. Before the warning, analysts expected the company to report earnings of 11 cents per share.

On a conference call, company CEO Joel Kocher largely blamed the shortfall on slowing PC demand, especially in the consumer segment, and on a decline in memory pricing, which hurt the company's SpecTek memory subdivision.

SpecTek, which sells reconditioned memory, saw sales drop to $118 million during the quarter, down from $206 million in the previous quarter. In the fiscal first quarter last year, the division reported $90 million in revenue.

SpecTek's margins were also hurt because it obtains components from Micron Technology, the PC maker's parent company, under pre-existing supply contracts. The price of parts from the parent company didn't drop nearly as fast as the market price, so SpecTek saw a substantial portion of its sales eaten up in costs.

Component costs ended up consuming 90 percent of pretax income, compared with 50 percent in the same quarter a year ago. The division had contributed mightily to last quarter's profit.

In its PC division, Micron Electronics saw sales jump in terms of units shipped by 27 percent. However, revenue came to $275 million, a 5 percent increase over PC revenue of $260 million in the same quarter last year. In the previous quarter, PC revenue came to $286 million.

Burning off excess inventory throughout the industry will take at least a quarter, Kocher said.

"The supply-demand picture for PCs is hugely out of whack. We are going to see short-term turbulence," he said. "Inventory levels are thick."

Despite some of the gloomy news, Kocher said the company will continue to expand its push into services and Web hosting. Net revenue in its HostPro services unit grew to $14 million, a 19 percent jump over the previous quarter. Further acquisitions in this area are likely, he added.

The company is also expanding its retail PC presence. Micron will now sell its PCs in Costco stores; the company, which mostly sells PCs directly to customers, has similar deal with Best Buy.