EL SEGUNDO, CA – The DRAM market finally is showing some signs of improvement, prompting iSuppli Corp. to upgrade its rating of near-term conditions for suppliers.

iSuppli is raising its DRAM rating to ‘neutral,’ up from its ‘negative’ assessment issued in November.

iSuppli’s neutral rating comes with a positive bias regarding future conditions for the market, given indications the worst is over for DRAM suppliers.

DRAM market conditions since the beginning of 2007 have been characterized by oversupply, bloated inventories and weak pricing, says the firm. The average megabyte DRAM selling price is estimated to have dropped by 17% in the first quarter, following a 31% decline in the fourth quarter. While still an above-average decline in the first quarter, the slower rate of decrease indicates the market now is bottoming out, according to iSuppli.

Amid reductions in channel inventories, and lower levels of expected capital spending among memory manufacturers, the supply/demand balance is coming into better alignment, a development that should bolster pricing. Per-megabyte DRAM prices will rise by 2% during the second quarter, iSuppli projects.

“Although the DRAM suppliers themselves are still carrying more inventory than normal, stockpiles in the channel have been reduced significantly,” said Nam Hyung Kim, chief analyst at iSuppli. “Furthermore, OEMs including the PC makers now are at optimal DRAM inventory levels, meaning their orders will increase during the critical third-quarter holiday build season.”

This is paving the way for an expected market recovery. When indications of a noteworthy decline in DRAM supplier inventories appear, iSuppli is likely to further upgrade its rating of market conditions to ‘positive.’

For the DRAM suppliers, their inventory/sales ratio is at about the 0.7 to 0.8 level, meaning that their stockpiles are equivalent to 70 to 80% of sales. This is far above the healthy range of 0.4 to 0.5.

DRAM suppliers early this year said they plan to cut their capital spending on production capacity by about 40% in 2008 compared to 2007. But due to a lack of profitability and diminishing cash reserves over the past several months, many suppliers won’t be able to afford spending even at such a reduced level, and may slash their capital outlays by an even greater margin this year. This should cause capital spending for the industry as a whole to decline by more than 50% this year compared to last, says the research firm.

“With these capital spending cuts, DRAM megabyte shipment growth for the industry as a whole is expected to slow in 2008,” Kim noted. “Originally, megabyte shipments were expected to rise by 61% in 2008, compared to an 89% rise in 2007. However, potentially reduced capital expenditures will lower iSuppli’s previously estimated 61% increase to the mid-50% level this year. This will result in a more balanced supply/demand outlook in the second half of the year, stabilizing DRAM prices and profits.”

One exception to this trend is leading DRAM supplier Samsung Electronics Co. Ltd., which is expected to actually increase its rate of megabyte production in 2008 by 87% compared to 86% in 2007.

“Everyone knows a rebound in the DRAM market is inevitable; the only question is when,” Kim said. “The DRAM market is inherently cyclical, meaning a market recovery is certain to arrive.” Kim predicted DRAM market conditions would slowly improve starting in the second quarter. “Nonetheless, the improved market conditions don’t mean suppliers can achieve profitability in the near term,” Kim said.

“The average per-megabyte price for commodity DRAM has dropped by more than 80% during the last 12 months,” Kim observed. “Thus, to return to pricing levels from a year ago, suppliers would need to increase prices by 500%, boosting them to $6, up from $1—an impossible occurrence.

“Because of this, DRAM suppliers will still face major barriers to profitability in the near future. If poor market conditions persist for a few more quarters, some suppliers may face bankruptcy risks because of cash shortages. Depending on their cost control efforts, the improving supply/demand situation will spur a return to profitability for the surviving competitors in the second half of the year.”

Although iSuppli has upgraded the near-term rating to neutral, many risks are still associated with the suppliers’ high inventory levels. Until iSuppli detects reasonable inventory reductions among suppliers, it won’t upgrade the near-term condition rating to positive.