SAN FRANCISCO -- If Micron ( MU) knows any arm-twisting bill collectors, now might be a good time to call them. The chipmaker's tally of money that it's owed swelled more than 18% in the most recent quarter, leaving Micron carrying roughly $1 billion in accounts receivable. True, it's not unprecedented for Micron to run up big receivables at this time of year: In two of the previous five years, Micron's accounts receivables in its fiscal fourth-quarter have experienced similar jumps. But with the DRAM memory market proving stubbornly depressed, the ballooning receivables may pack a more pernicious payload for Micron this time around. And with Micron's shares off 25% so far this year, and trading near their 52-week low, the unpaid bills represent another overhang that could weigh the stock down. Shares of Micron were up 1.8% at $10.80 in midday trading Friday. One potential reason for concern about Micron's receivables lies in Taiwan, where many of the so-called module makers -- companies that buy DRAM memory and assemble the chips onto circuit boards -- are currently under severe financial strain. A recent report by Digitimes, a Taiwanese trade publication, noted that certain second-tier and third-tier memory module makers in Taiwan are having trouble paying the bills, with checks bouncing and banks cutting off funding.
Doug Ashton, an analyst with FTN Midwest Securities, notes that it's possible that some of the smaller, Taiwanese module makers won't survive the current downturn in the memory chip market, which has resulted in sharp declines in DRAM prices. Many module makers bought loads of DRAM chips, hoping to ride on the coattails of Microsoft's ( MSFT) Vista operating system. Their hope was that Vista, which requires more memory to operate smoothly on PCs, would entice consumers to buy new computers. When the Vista bump proved less robust than expected, module makers found themselves holding large inventories of DRAM, purchased at prices well above current market levels. While many of the Taiwanese module makers are privately held, Irvine Calif.-based Netlist ( NLST) provides some sense of the brutal conditions at play. The memory module company swung to a loss in August, as its quarterly sales plunged 68% year over year. On the other hand, Freemont, Calif.-based Smart Modular Technologies ( SMOD), one of the larger memory module players -- and a Micron customer, according to its 2006 annual report -- reported a decent fiscal fourth quarter Wednesday. The company actually managed to improve its gross margin in the challenging environment. Whether Micron's receivables are tied to any of the smaller, less-stable module makers is not entirely clear. "The overwhelming majority of our customers, to the tune of 90%-plus, are the major OEMs," said Micron spokesman Dan Francisco, referring to large PC makers like Hewlett-Packard ( HPQ).
According to Francisco, the recent rise in receivables is simply a function of Micron's increased DRAM and NAND flash memory production, which the company said was up more than 20% and 50%, respectively, during the quarter. The real danger in rising accounts receivable, of course, is that some of them ultimately become worthless, forcing the company take a write-off. And as anyone in the debt-collection game will attest, the longer a bill remains unpaid, the smaller the chances of actually collecting on it. ThinkEquity Partners analyst Robert Burleson says the big leap in Micron's receivables was probably lost to investors in the smoke of the quarter's other fires. In the three months ended Aug. 30, Micron
lost $158 million and saw its gross margin cut in half . Executives said the company is cutting operating expenses, but also noted that the average prices for DRAM and flash memory were both on track for double-digit declines in the current quarter. "There are so many other reasons to be concerned," says Burleson. In particular, he said Micron needs to pray for a strong sales season over the holidays. But if Micron doesn't reel in its IOUs, the company's balance sheet may become more of an issue to investors. "If we were to see a similar increase next quarter, then I think it would be a problem," says Burleson.