Market Watch

DRAM Losses Widen in the Third Quarter for Besieged Suppliers

Weak PC demand, coupled with soft commodity DRAM pricing, pulls down the market

December 06, 2012

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The market for dynamic random access memory (DRAM) took another beating in the third quarter, as downward pressure on pricing caused by a weak PC market dragged down industry profitability for all DRAM players, according to an IHS iSuppli DRAM Dynamics market brief from information and analytics provider IHS.

The cash balance in the third quarter for the industry, excluding Samsung—the only one to post positive profit margins during the period—fell to $4.5 billion, down 13.5 percent from $5.2 billion in the second quarter. Operating losses widened to $671.5 million from $348.4 million, after the industry had managed to trim the deficit from -$1.1 billion in the first quarter, as shown in Figure 4.

Overall, industry operating profit margins decreased to -10.7 percent on third-quarter revenue of $6.4 billion, down sequentially from -5.1 percent, in an indication of worsened performance for DRAM players.

Samsung’s cash balance at the end of the third quarter was $26.8 billion, compared to $21.0 billion in the earlier quarter—levels that would dwarf the numbers of the other memory companies. Also, memory is only a part of Samsung's overall business, whereas memory is the sole business concern for the other DRAM suppliers, so a strict apples-to-apples sort of comparison cannot be made.

The troubled results in the third quarter came on the heels of a strong second quarter that had shown signs of recovery. DRAM prices were stabilizing after a long period of decline, and PC original equipment manufacturers had been building up their inventory of DRAM in anticipation of a stronger second half. But the hoped-for demand did not turn out as expected in the third quarter, bringing down commodity DRAM pricing. And then, in order to defend average selling prices, DRAM suppliers held onto some inventory, which negatively impacted shipment volumes.

Operating profit margins measure, in percentage, the proportion of a company’s revenue left over after it pays for costs such as labor and raw materials. A healthy operating profit margin is necessary in order for a company to pay its fixed costs, such as debt and interest.

The ability of DRAM companies to manage risk during the current downturn in the PC market is reflected in the wide variance between the operating profit margins of individual companies. The best performers in the current market have been companies that enjoyed a more diversified product mix—heavily weighted toward mobile on the one hand, or to specialty markets on the other, like servers and networking. Both the mobile and specialty DRAM space include products  that command a price premium and, as a result, are relatively unaffected by the pressures of oversupply.

Using this same more profitable diversified model, Samsung has managed to consistently turn a double-digit profit on its DRAM business, despite an industrywide downturn. And while operating profit margin for the South Korean electronics giant contracted, it was still at an unheard-of 15 percent. Moreover, the decline on its average selling prices—a normal occurrence for everyone—was mostly offset by lower costs in production because of the company’s migration to 3x-nanometer technology. And because PC DRAM accounted for only 20 percent of Samsung’s overall DRAM revenue, those relatively small holdings mitigated what could have been bigger losses if the percentages had been larger.

In contrast to Samsung, the other DRAM players haven’t fared as well.

Fellow South Korean supplier SK Hynix Semiconductor, for instance, reported operating profit margins dipping into the negative single digits. Despite having more than 70 percent of sales originating from non-PC DRAM, SK Hynix reported an 8 percent decline in quarterly revenue on the back of weak commodity DRAM pricing.

U.S.-based Micron Technology’s DRAM Solutions Group also reported an operating loss of $118 million, widening from $76 million in the second quarter. The company’s operating profit margin declined to 17.4 percent from 10.4 percent. But like other suppliers, Micron was able to offset some of its losses in the commodity DRAM space by increasing its non-PC mix, mainly in networking and storage, as well as in the graphics and consumer segments.

The Taiwanese DRAM suppliers continue to be in dire straits, with losses mounting for Powerchip Technology, Nanya Technology and Inotera. Collectively, the three companies had operating losses amounting to $545 million, with operating profit margins declining to -70.4 percent from an already steep -46.1 percent. The cash balance for the three also dwindled to $375 million, down from $512 million. With cash balances now perilously low and top-tier DRAM rivals accelerating their technology migration to 30-nanometer, the Taiwanese are in the difficult position of having to come up with the cash necessary to remain competitive.

All told, the third quarter delivered a dose of reality to the DRAM industry, with weak demand pulling down prices and profitability after what seemed like a turnaround in the second quarter. Given that demand visibility continues to be limited, and with the recovery of the PC market riding on a yet untested product—Microsoft’s recently released Windows 8 operating system overhaul—DRAM suppliers are anxiously focusing on growing the non-PC DRAM product portfolio of their business, at the same time decreasing individual exposure to commodity DRAM.

The coming quarters will continue to bring significant changes, IHS iSuppli believes, with DRAM companies realigning their product mix to better match market dynamics.

Read More >> DRAM Turnaround Thwarted by Weak PC Market

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