MU • 10-Q • Q2 2022 • Neutral

Micron's Memory Market Headwinds Intensify as Inventory Corrections Drive 48% Revenue Decline

July 01, 2022 • 1 min read

TL;DR

Micron faced severe market deterioration in Q2 2022 with revenue plunging 48% YoY to $3.69B amid inventory corrections and weakening demand across PC, mobile, and data center segments. Gross margins compressed dramatically to 21.4% from 47.2% last year as ASPs declined and cost absorption worsened. The company implemented aggressive supply cuts, reducing DRAM and NAND production by 20%+ while accelerating its transition to advanced nodes. Management expects market conditions to begin recovering

Financial Performance Overview: Revenue fell 48% YoY to $3.69B, with DRAM revenue down 41% and NAND down 47%. Gross margin collapsed to 21.4% (-2,580bps YoY) due to pricing pressure and underutilization charges. Operating loss of $449M compared to $1.62B profit last year reflects severe market downturn. Free cash flow turned negative at -$1.43B as working capital and capex remained elevated. Management's inventory reduction efforts and node transitions suggest margins likely bottomed this quarter.
Strategic Initiatives and Operational Changes: Micron accelerated production cuts to 20%+ for both DRAM and NAND while maintaining R&D investments in advanced nodes. The company is ramping 1-beta DRAM and 232-layer NAND to improve cost competitiveness. Capital expenditure plans were reduced 40% YoY to manage cash burn. Strategic focus remains on high-value segments like data center, automotive, and industrial applications where demand remains relatively resilient.
Market Position and Competitive Dynamics: Micron maintained its technology leadership in DRAM with 1-beta node qualification ahead of competitors. Market share held steady at ~23% in DRAM despite aggressive pricing by Korean competitors. Customer inventory corrections are progressing but remain elevated at 150+ days versus normal 100-110 days. The company's diversification into automotive/industrial helped partially offset consumer weakness.
Operational Efficiency and Profitability: Cost reductions of over $2.5B targeted through workforce reductions, supply cuts, and node transitions. Underutilization charges peaked at $450M this quarter but should moderate as production aligns with demand. Operating expenses decreased 5% sequentially through discretionary spending controls. The company maintained strong liquidity with $12.1B cash despite negative free cash flow.
Growth Catalysts and Material Risks: AI/ML workloads driving HBM demand represents major growth opportunity as data center customers transition architectures. Risk factors include extended inventory correction cycle, geopolitical tensions impacting China sales (~25% of revenue), and potential share loss during downturn. Management expects gradual recovery starting late 2023 led by mobile, followed by PC and data center in 2024.

Revenue

$3.69B ( YoY, QoQ) with DRAM $2.71B ( YoY) and NAND $903M ( YoY)

↓ -48%

Gross Margin

(-2,580bps YoY) impacted by pricing and underutilization

↑ 21.4%

Free Cash Flow

-$1.43B ( YoY) with conversion rate

↓ -167%

Operating Margin

(-4,580bps YoY) reflecting revenue decline and fixed cost impact

↓ -12.2%

Growth Indicators

QoQ for both DRAM and NAND

↓ -20%

Bit Shipments ↓DRAM -20% QoQ, NAND -10% QoQ

Inventory Days 150+ vs normal 100-110 days

Key Risks

Extended inventory correction cycle impacting demand recovery timing
China exposure (~25% revenue) amid geopolitical tensions
Negative free cash flow straining strategic flexibility
Competitive pressure from Korean suppliers maintaining production

Key Opportunities

AI/ML driving HBM demand with $25B+ TAM by 2025
Automotive semiconductor content growing 15%+ annually
Cost structure improvement from node transitions
Industry consolidation potential improving pricing rationality

Bottom Line

Micron's Q2 results mark the depth of the current memory cycle with unprecedented revenue declines and margin compression. However, the company's strong technology execution, strategic shift toward high-value segments, and aggressive supply response position it well for eventual recovery. Key catalysts to watch include customer inventory normalization progress, particularly in data center, and initial signs of pricing stabilization. The expansion of AI/ML workloads could accelerate demand recovery, though timing remains uncertain. Management's focus on maintaining technology leadership while reducing costs should enhance operating leverage in recovery phase. The contrarian view suggests current downturn severity could drive more rational industry behavior and potential consolidation, improving longer-term profitability.