NAND Flash Market Posts Glowing 3Q12 Results

The NAND flash market staged a successful turnaround in the third quarter, as improved demand and significant production cuts brought the industry’s supply and demand balance into better alignment, according to an IHS Flash Memory Market Brief from information and analytics provider IHS iSuppli.

NAND revenue rose to $4.5 billion, up 5% from $4.3 billion in the second quarter, with industry wide operating profits nearly doubling from $159.2 million to $350.9 million. The strong results marked a satisfying reversal of the sharp downturn suffered in the earlier quarter, when revenue had tumbled from $5.0 billion at the beginning of the year in the January to March period. Results from the most recent quarter also showed industry operating profit margin rising to 7.6%, up from 3.6%.

The turnaround after a lackluster second quarter can be attributed to two factors:

• greater demand for NAND flash, and
• concerted effort by major suppliers to manage overall supply.

On the one hand, the growth of smartphones and other mobile devices like tablets requiring NAND flash memory translated into improved demand. Moreover, increased adoption in client and enterprise applications of SSDs – electromagnetic storage disks with no moving parts that also use NAND flash for memory – helped lift NAND fortunes in the third quarter.

The other helpful boost to the industry was engineered by NAND flash suppliers. Manufacturers everywhere in the flash memory market cut back on production or pushed out expansion plans, bringing supply and demand into greater balance. Inventory in the channel, which had become bloated in the first half of the year, then tightened to normal levels, resulting in stabilized prices. The overall effect was a streamlined market that showed up on suppliers’ financials in the form of higher revenue and profitability.

Among the suppliers that took drastic action were Toshiba of Japan, which slashed production by 30%; and Samsung Electronics of South Korea, which shut down NAND production at its fab in Austin, Texas.

For Samsung, the largest memory manufacturer overall, its NAND operating margin rose from 11 to 13%. The company’s decline in average selling prices also narrowed, moderating from the negative high teens to just a single-digit deficit. A large part of the reason was a product mix that emphasized NAND solutions such as eMMC and multichip packages (MCP) over raw wafers and chips. Coupled with a blockbuster quarter in its smartphone division because of the success of the Galaxy S III, Samsung reported that its cash holdings ballooned to 30 trillion Korean won (approximately $26 billion) at the end of the third quarter, up from 24 trillion won.

For its part, Toshiba confirmed that its NAND business turned a profit in the first half of the fiscal year. While the company posted losses of 2 billion yen ($25 million) in its first fiscal quarter, it generated operating profits of more than 10 billion yen in the second quarter. Toshiba’s inventory build-up from the first half will come down to normal levels by the end of the year, and it expects to continue production cuts until December.

Two other NAND manufacturers reported improved financials. U.S.-based Micron Technology said its NAND Solutions Group posted an operating profit of $8 million compared to a loss of $1 million the previous quarter, while SK Hynix Semiconductor of South Korea saw NAND margins cross over to the single positive digits from a decline of 3%.

With all suppliers basking in positive operating profit territory, expectations for the end of the year remain optimistic. There are risks to be seen, however, for 2013, as demand for SSDs thus far has not lived up to expectations. As a result, NAND manufacturers will need to keep supply under tight management and control.