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Memory consolidation still up in the air

Posted: 08 Apr 2008 ?? ?Print Version ?Bookmark and Share

Keywords:memory? DRAM? NAND?

Everyone seems to agree the memory IC market needs another round of consolidation, but so far, none of the leading suppliers are showing any signs of exiting the sector despite spiraling losses and increasingly negative cash flows.

Analysts and industry executives have recently warmed up to the idea that the severe oversupply and sharp price erosions that have devastated the sector would gradually ease if one or more major DRAM, NAND and NOR semiconductor suppliers abandoned the market.

That's where the agreement ends.

Which companies should abandon the troubled memory market is a more contentious point and it appears all of the industry players are actively taking steps to conserve cash and cut costs while waiting to see which rivals would blink first.

Weathering the turbulence
"I think that the industry needs to still have some consolidation," said Steve Appleton, chairman and CEO of Micron Technology Inc. "The longer the industry is in a downturn, the [greater the] probability for a consolidation and the more candidates would become a part of the consolidation."

Of course, Appleton doesn't see Micron exiting the memory market and neither does he expect the company to be acquired by a rival. Rather, Micron, he said, is "interested in consolidation if the opportunity were to exist."

Although the company continues to post huge lossesmore than $1 billion for the fiscal half-year ended Feb. 28Appleton believes Micron has the financial reserves to weather the current market turbulence.

"We have about $1.9 billion in cash," Appleton said during a conference call with analysts last week. "We don't see any near-term need to raise any money. Really, we think we're in pretty good shape."

Micron may be in a slightly better financial position than many of its rivals but few would agree with Appleton that the company is in "pretty good shape." While it's annual revenue has grown consistently over the last few years as memory bit shipments increased across the industry its gross profit margins have been eroding and fell to 19 percent in the fiscal year ended Aug. 30, 2007 from as high as 23.5 percent in fiscal 2005.

Furthermore, despite efforts by Micron to trim costs, gross profit margins slid to minus 3 percent in the three months ended Feb. 28, meaning that the company, like many of its rivals, sold DRAM and NAND flash products below production cost.

"While we had another quarter of strong operational execution and associated costs of goods sold reductions, the unfavorable pricing environment overwhelmed operational efficiencies," said Mike Sadler, VP of worldwide sales at Micron.

Tough luck
That unfortunately is the trend in the memory market as a whole. Over the last three years, memory semiconductor manufacturers have thrown everything any seasoned executives can conjure up at the industry's intractable problems of savagely depressed pricing and severe demand and supply imbalances.

They have slashed operating costs, improved their production efficiencies and embraced the latest technology nodes to gain additional leverage.

These steps have failed to stem the losses or even help the companies regain any pricing leverage. OEMs are in many cases still getting memory products at prices significantly below the manufacturers' production costs.

In fact, double-digit quarterly pricing declines have become the norm for the industry in all product segments, including DRAM and NAND flash. Declines in production costs failed to make up the difference, according to industry executives.

In the capital-intensive memory IC market, positive cash flow is critical to sustaining capital expenditure requirements either through share sales or through borrowings, according to analysts. Eventually, DRAM and other memory IC companies that aren't able to maintain lending agreements may be forced to liquidate, merge with stronger rivals or diversify their product offerings away from the problematic market, they said.

Additionally, investors worried about the continued carnage in the market have driven down the market value of most memory manufacturers sharply over the last six months cutting off or limiting their ability to raise funds through share sales.

Over at Taiwan
Many Taiwan-based memory manufacturers are in this category, said Frank Wang, an analyst with Morgan Stanley Research, who contends that several Asian DRAM makers are already in violation of their lending terms.

"All Taiwan DRAM companies (except Winbond) will likely risk debt covenants of a 150 percent debt/equity ratio in the second quarter," Wang said in a research report. "With rising interest rates and low equity multiples, Taiwan DRAM companies have already lost equity market access and will lose debt market access."

Wang said he believes companies like Nanya, Inotera and Powerchip "are long-term survivors on scale and technology partners," and suggests companies that are trading below replacement cost like Promos "should consider memory exit."

He also suggested Winbond "swap out its 12-inch fab assets for shareholdings in other DRAM makers" and evolve into "a fabless memory design house like Eltron/EliteMT."

That option is available to other similarly pressured DRAM vendors like Qimonda, which has experienced such a sharp decline in share price that its market value fell to $1.43 billion as of last week, less than a quarter of where it was about one year ago.

With a market value of approximately $4.86 billion and sufficient cash for now, Micron executives believe the company should be able to survive until the memory IC pricing revival everyone expects would follow the demise of one or more weaker competitors.

- Bolaji Ojo
EE Times

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