Micron Technology, Inc. (MU) Earnings

Management highlights

- **Industry and Market Dynamics** - AI-driven memory demand across all segments combined with structural supply constraints has created tight supply-demand conditions that are expected to persist beyond calendar 2027. Industry supply is projected to gradually improve in 2028, but there is no current visibility for when supply will catch up to growing demand. - Supply growth is constrained by long lead times for greenfield fab construction, shortages of skilled trade workers, complex permitting/regulations, insufficient energy infrastructure, increasing manufacturing complexity for new technology nodes (which slows bit growth), and HBM production that pressures non-HBM supply. In NAND, suppliers redirecting clean room space to DRAM further limits bit supply growth. - Memory has become a strategic asset for AI systems, which are increasingly dependent on high-performance memory subsystems, creating greater product differentiation opportunities for Micron. - **Strategic Customer Agreements (SCAs)** - Micron has signed 16 binding 5-year (3-year for automotive) take-or-pay SCAs covering calendar 2026 to 2030, representing ~20% of DRAM volume and ~33% of NAND volume over the term. When all planned SCAs are complete, roughly half or more of total company revenue will be under these agreements. - 14 of the 16 signed SCAs have cumulative minimum revenue of $100 billion over the remaining term, with projected cash deposits and related financial commitments of $22 billion (~$18 billion in cash deposits). The floor price for SCAs delivers gross margins well above any prior peak quarterly margin for the company. - When fully executed, ~40% of total company revenue will be under SCAs with fixed prices or price ceilings at/near current market prices, providing customers with supply certainty and Micron with stable, predictable long-term financial performance. - **Technology and Product Progress** - The 1 gamma DRAM node and G9 NAND node are ramping well and on track to become Micron's highest-volume nodes ever. Next-generation nodes are on track to begin volume production in the second half of calendar 2027. - HBM4 12-high volume ramp is proceeding twice as fast as the prior HBM3E 12-high ramp, with over $1 billion in HBM4 revenue already shipped. Mature yields for HBM4 12-high are expected to be achieved significantly faster than the prior generation. - **End Market Trends** - Calendar 2026 industry data center DRAM and NAND bit shipments are expected to more than double from 2024, with server unit growth forecast to hit the high teens percentage range (up from prior guidance of low double digits), driven by strong growth in AI accelerator-enabled servers. - PC and smartphone industry revenue is expected to grow despite unit volume declines, with long-term demand growth driven by on-device AI and replacement cycles. In automotive, ADAS L2+ and higher autonomy vehicles have more than 5x the memory content of average vehicles, with the L2+ mix expected to exceed 40% by 2030. Humanoid robots carry 10x the memory content of an L2+ vehicle, creating a multi-decade demand cycle starting in the late 2020s. - **Manufacturing Expansion** - A new multiyear EUV supply agreement with ASML has been concluded to support expanded EUV adoption for current and future technology nodes. U.S. fabs ID1 (Idaho) is on track for first wafer output in mid-2027, ID2 (Idaho) in late 2028, and the first New York fab cluster construction is progressing. Production has started at the Manassas, Virginia fab for legacy products. The newly acquired Tongluo, Taiwan site is expected to begin shipments in mid-2027, a quarter ahead of prior schedule. The Singapore advanced packaging site will contribute to HBM capacity starting in the first half of 2027.

Guidance

- Fiscal Q4 2026 guidance: Revenue is expected to be a record $50 billion ± $1 billion, gross margin approximately 86%, operating expenses approximately $1.65 billion, and non-GAAP diluted EPS a record $31 ± $1, based on 1.15 billion diluted shares. The gross margin outlook reflects a meaningful moderation in the rate of price increases. - Full year fiscal 2026 capital expenditures are expected to reach approximately $27 billion, with fiscal Q4 CapEx projected at ~$10 billion. Quarterly CapEx in fiscal 2027 will be above fiscal Q4 levels, with over half of the year-over-year increase coming from construction CapEx for new clean room capacity to meet long-term demand. - The fiscal 2026 effective tax rate is expected to be around 15%. Operating expenses are projected to increase by $1 billion in fiscal 2027, with the increase weighted to the second half, to expand R&D for memory and storage opportunities. - Free cash flow is forecast to increase substantially again in fiscal Q4 2026. Starting December 9, 2026 (the second anniversary of the CHIPS Act definitive agreement signing), Micron intends to increase capital returns, with a long-term target of returning 100% of excess cash to shareholders.

Segment performance

Total company fiscal Q3 2026 revenue was $41.5 billion, growing 74% sequentially and 346% year over year, marking the fifth consecutive quarterly revenue record. 1. **DRAM**: Revenue hit a record $31.3 billion, up 343% year over year, representing 76% of total revenue. Sequentially, DRAM revenue grew 67%, with low-single-digit percentage bit shipment growth and low-60s percentage price growth. 2. **NAND**: Revenue hit a record $9.9 billion, up 361% year over year, representing 24% of total revenue. Sequentially, NAND revenue grew 99%, with mid-single-digit percentage bit shipment growth and mid-80s percentage price growth. 3. **Cloud Memory Business Unit (CMBU)**: Revenue was a record $13.8 billion, representing 33% of total revenue. It grew 78% sequentially, with a gross margin of 83% (up 9 percentage points sequentially). 4. **Core Data Center Business Unit (CDBU)**: Revenue was a record $11.5 billion, representing 28% of total revenue. It grew 103% sequentially, with a gross margin of 87% (up 12 percentage points sequentially). 5. **Mobile and Client Business Unit (MCBU)**: Revenue was a record $11.5 billion, representing 28% of total revenue. It grew 49% sequentially, with a gross margin of 87% (up 9 percentage points sequentially). 6. **Automotive and Embedded Business Unit (AEBU)**: Revenue was a record $4.6 billion, representing 11% of total revenue. It grew 71% sequentially, with a gross margin of 79% (up 11 percentage points sequentially). Consolidated gross margin hit a new company record of 84.9%, up 10 percentage points sequentially and more than double year-over-year levels. Operating income was $33.7 billion with an 81.2% operating margin, up 12 percentage points sequentially and 54 percentage points year over year. Non-GAAP diluted EPS was $25.11, up 106% sequentially. Operating cash flow was $25.4 billion, capital expenditures were $7.1 billion, and free cash flow hit a quarterly record of $18.3 billion.

Risks & headwinds

- The structural supply-demand imbalance relies on long-term greenfield fab expansion, which faces multiple constraints including long construction lead times, skilled labor shortages, complex permitting and regulations, and insufficient energy infrastructure that could delay capacity additions. - New memory technology nodes are growing increasingly complex to develop and manufacture, which can slow bit growth and create additional production and cost pressures. - Rising HBM production increases wafer consumption, which puts persistent pressure on non-HBM supply that could leave Micron unable to meet demand from other end market segments. - Forward-looking financial and operating performance is subject to risks and uncertainties that could cause actual results to differ materially from current expectations, including unanticipated changes in market conditions, regulatory changes, and trade policy developments (which are excluded from current guidance).

Analyst Q&A

• Q: How much annual revenue is guaranteed at floor price under the current signed SCAs, and how much of fiscal Q4 2026 revenue will come from SCAs? /

  A: The $100 billion RPO is the minimum contractually required revenue at floor price across the full 5-year term of 14 of the 16 SCAs, and actual revenue will be much higher than this conservative accounting figure. Currently, the 16 signed SCAs cover 20% of DRAM volume and 33% of NAND volume, equal to ~25% of total annual revenue over the term. A full breakdown of 12-month expected revenue under existing SCAs will be disclosed in upcoming regulatory filings, with the RPO updated each quarter as new agreements are added and existing obligations are fulfilled. Even at the floor price, margins for these agreements are well above Micron's prior peak gross margins. (575 characters)

• Q: What is the purpose of customer cash deposits for SCAs, how do they work, and can they be used for CapEx? /

  A: The deposits are not prepayments; they are binding financial commitments that reflect the take-or-pay nature of the agreements, demonstrating customer commitment to contracted volumes and giving Micron certainty to make large capital investments in capacity to meet demand. $18 billion of the $22 billion in total committed deposits/financial commitments are cash deposits, with ~$10 billion expected to be received in fiscal Q4. Deposits are held as unrestricted cash through the term of the agreements and returned to customers in the latter half of the contract term, so they do not impact free cash flow and are classified as financing cash flows. While the deposits are unrestricted, Micron will hold sufficient liquidity to cover future obligations to return deposits as it invests in capacity and plans capital returns. (646 characters)

• Q: How should investors model long-term gross margins after the current near-term peak? What is HBM's expected market share and margin profile? /

  A: Micron does not provide guidance beyond fiscal Q4, but notes that supply conditions will remain tight beyond 2027, and the continued shift to higher-performance, higher-value memory applications will support strong margins. While the rate of price increases is moderating, new capacity coming online starting mid-2027 will deliver operating leverage as it ramps, supporting continued strong financial performance. For HBM, Micron is targeting market share close to its overall DRAM market share, which is a strategic choice to avoid excessive wafer consumption that would constrain supply for other end markets. HBM is a higher-price per bit product with strong ROI, and management did not comment on specific long-term pricing relative to other DRAM products. (548 characters)