Firm cuts NAND forecast, ups DRAM outlook

Not long ago, NAND flash was hot, while DRAMs were in the tank. Now, NAND flash memory sales will rise more slowly than expected in 2006, while the DRAM market will show surprising strength, causing the combined segments to expand by nearly 13 percent for the year, according to iSuppli (El Segundo, Calif.).

DRAM and NAND, which represent the two largest segments of the semiconductor memory market, together are expected to achieve revenue of $40.2 billion in 2006, up 12.9 percent from $35.6 billion in 2005. This compares to 7.5 percent growth in 2005, according to iSuppli.

But citing a slowdown in the MP3 market and other factors, iSuppli has cut its NAND flash market revenue forecast to $13.8 billion this year, down from its previous prediction of $16 billion.

While growth will fall short of iSuppli’s previous forecast of a 49 percent expansion, the global NAND market still will rise by 28 percent in 2006, up from $10.7 billion in 2005, according to the firm.

“Recent price declines have spurred pessimism regarding NAND flash pricing and revenue growth in 2006,” said Nam Hyung Kim, principal analyst with iSuppli, in a statement.

“The main reason iSuppli is maintaining a positive view is that growth in the NAND flash market is not driven by trends in pricing, but rather by the explosive expansion in unit shipments,” Kim noted. “For example, average selling prices (ASPs) for NAND parts declined by about 55 percent in 2005 — yet the NAND industry as a whole generated an estimated $3.7 billion in operating profits last year, representing an operating margin of 35 percent for suppliers. That’s a whole lot of profitability.”

Kim said that he expects another 55 percent ASP decline this year, making it likely that suppliers will be profitable once again in 2006. However, operating margins will decline as competition intensifies.

The first-quarter NAND slowdown had been expected, due to the highly-seasonal nature of demand from the consumer-electronics market, especially MP3 players.

U.S. retailers in mid-December held zero inventory of Apple Computer Inc.’s iPod nano player, due to soaring sales during the holiday season. However, with holiday demand having ended, retailers have built up significant stockpiles of the NAND-based iPod nano. This has caused Apple’s shipments to slow and its demand for NAND flash to fall short of expectations in the first quarter.

In contrast, DRAM enjoyed price increases in early 2006. Unfortunately, the price rally fizzled this month, which will make it difficult for suppliers to raise prices in April, according to the firm.

Still, reflecting improved business conditions, iSuppli has raised its forecast of DRAM sales so that revenue now is expected to rise for the year. Worldwide DRAM revenue is expected to rise to $26.4 billion in 2006, up 6.2 percent from $24.8 billion in 2005. iSuppli previously expected a 5 percent contraction in DRAM revenue for the year.

The recently-announced delay in Microsoft Corp.’s Vista will not impact iSuppli’s 2006 DRAM forecast, given that we previously had predicted the new operating system would arrive at the end of the fourth quarter, and thus would not have much influence on the memory market until 2007.