Micron Swings Into the Green on Monday on Memory Capacity Alert. More Rally Ahead?

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Micron Q3 FY2026 earnings conference call

Key Takeaways (AI-Generated)

Financial Performance

- Record Q3 revenue of $41.5 billion, up 74% sequentially and 346% year-over-year

- Record gross margin of 84.9%, up 10 percentage points sequentially

- Record non-GAAP EPS of $25.11, up 106% sequentially

- Record free cash flow of $18.3 billion in Q3

Business Highlights

- Signed 16 Strategic Customer Agreements representing ~20% of DRAM volume and 1/3 of NAND volume

- Data center revenue exceeded $25 billion in Q3 on an annualized run rate of $100 billion

- Shipped over $1 billion in HBM4 revenue with ramp tracking twice as fast as HBM3E

- Concluded multi-year EUV supply agreement with ASML

Financial Guidance

- Q4 revenue guidance: $50 billion ± $1 billion (record)

- Q4 gross margin guidance: approximately 86%

- Q4 EPS guidance: $31 ± $1 (record)

- Full year fiscal 2026 CapEx: approximately $27 billion

Opportunities

- AI driving unprecedented growth in data centers with industry DRAM and NAND bit shipments expected to more than double

- HBM4 12-high volume ramp tracking twice as fast as HBM3E

- 16 SCAs providing committed supply assurance and enhanced customer relationships across segments

- Maximizing fab output through supplier collaboration to accelerate tool acquisition and installation

Risks

- Memory supply structurally constrained due to complex Greenfield fab expansions and long construction lead times

- Technology transitions driving slower bit growth, HBM growth pressuring non-HBM supply

- Complex regulations including permitting constraints affecting fab construction pace

- Skilled worker shortages affecting memory industry expansion capabilities

Full Transcript (AI-Generated)

Operator

After today's prepared remarks, we will host a question and answer session webcast. Viewers, please note that you will be able to advance the slides as you view at your own pace. I will now hand the conference over to Satya Kumar, Corporate Vice President of Investor Relations and Treasury. Satya, please go ahead.

Satya Kumar

Thank you and welcome to Micron Technology's fiscal third quarter 2026 financial conference call. On the call with me today are Sanjay Mehrotra, our Chairman, President and CEO, and Mark Murphy, our CFO. Today's call is being webcast from our Investor Relations site at investors.micron.com, including audio and slides. In addition, the press release detailing our quarterly results has been posted on the website along with the prepared remarks for this call.

Today's discussion contains forward-looking statements that are subject to risks and uncertainties. These forward-looking statements include statements regarding our future financial and operating performance and our business model, as well as trends and expectations in our business, customers, market, industry, products, and regulatory and other matters. These statements are based on our current assumptions, and we assume no obligation to update these statements. Please refer to our most recent financial reports on Form 10-K, Forms 10-Q, and other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations.

Today's discussion of financial results is presented on a non-GAAP financial basis unless otherwise specified. A reconciliation of GAAP to non-GAAP financial measures can be found on our website. I will now turn the call over to Sanjay.

Sanjay Mehrotra

Thank you, Satya. Micron delivered an exceptional fiscal Q3. The significant records in revenue, gross margin, and EPS all exceeded the high end of our guidance, demonstrating Micron's position as a leader enabling the AI era. Our data center revenue exceeded $25 billion in fiscal Q3 on an annualized run rate of $100 billion. Our data center SSD revenue exceeded $5 billion, more than doubling sequentially.

DRAM and NAND industry demand continues to significantly exceed industry supply. We expect tight conditions to persist beyond calendar 2027 as a result of AI-driven demand across all segments coupled with structural supply constraints. We are excited to announce that we have now signed 16 strategic customer agreements, or SCAs, which we expect will fundamentally transform our business model.

The memory industry has been structurally transformed by the proliferation of AI. We are only in the early innings of the significant innovation and productivity that can be unleashed in every part of the global economy. Over time, data center-driven growth will be increasingly complemented by AI-enabled features in smartphones, high-end PCs, and new consumer devices, as well as in automotive, industrial applications, and robotics.

Exciting possibilities enabled by robotics and humanoids, as well as fully autonomous vehicles, portend a robust long-term demand environment for memory and storage. With respect to supply, our customers are recognizing that supply shortages in memory and storage will take considerable time to improve, even as we expect industry supply to improve gradually. In 2028, we currently do not have line of sight as to when memory supply will be able to catch up with increasing demand.

Memory industry supply growth is dependent on significant greenfield fab expansions. These greenfield projects are large, complex, and time-consuming. Further, the pace is constrained by several factors, including long lead times for fab construction across the world, shortages of workers with critical trade skills, complex regulations—including permitting—and the need for enhanced energy infrastructure.

Meanwhile, memory process technology—which is among the most advanced and complex to develop and manufacture in semiconductors—is becoming increasingly intricate with every new node. Technology transitions are driving slower bit growth over time. Consequently, growth requirements are significantly increasing the need for cleanroom space and Greenfield fab capacity. Additionally, HBM’s growth and its rising trade ratio with each new generation are further pressuring non-HBM supply, as the industry redirects cleanroom space from NAND to DRAM, and overall limited cleanroom availability constrains NAND bit supply growth.

Taken together, these factors mean that supply growth is structurally constrained in its ability to meet industry demand, despite our comprehensive efforts to expand output. AI systems are powered by GPU, ASIC, and CPU designs from an increasingly diverse set of suppliers. However, they all share one critical characteristic: AI system performance is architecturally dependent on the performance and capacity of the memory subsystem.

This has led to more complex memory hierarchies, creating greater differentiation opportunities for Micron than at any point in our history. It has also elevated memory’s role in the AI ecosystem to that of a strategic asset. Strong long-term demand growth, structurally constrained supply growth, and memory’s strategic importance have led customers to recognize that their product roadmaps depend on access to advanced memory technologies and a reliable, committed long-term memory supply.

Micron has been an industry pioneer in establishing a new class of Strategic Customer Agreements (SCAs) with highly robust terms. We are pleased to announce that we have finalized 16 SCAs with customers across data center, consumer, and automotive market segments. These SCAs accelerate the transformation of our business model, deepen technology and innovation partnerships, and provide customers with contracted supply assurance.

Typically, these agreements have a five-year term spanning calendar year 2026 through the end of calendar year 2030. Automotive agreements generally carry a three-year term. The 16 signed agreements represent approximately 20% of our DRAM volume and one-third of our NAND volume over this period. These SCAs include four very large customers and three medium-sized customers. The remaining agreements pertain to smaller automotive customers and reflect our commitment to this critical sector.

Once fully implemented, we expect approximately half or more of our company’s revenue to be covered under these SCAs across end markets. Our customers value U.S.-based supply facilities, and this preference is reflected in our SCAs. These agreements are structured as take-or-pay contracts with binding commitments to purchase specific volumes over the multi-year term.

The largest agreements generally include a ceiling price for existing products set at the current CQ2 market price and a floor price that applies throughout the agreement term. Several SCAs—which account for a modest portion of SCA-related revenue—either feature fixed pricing or have no price bands, meaning pricing will be subject to prevailing market conditions.

Once all planned SCAs are executed, agreements featuring either fixed prices or price ceilings at or near current CQ2 market prices are expected to account for approximately 40% of our revenue. For SCAs that do include price bands, pricing is designed to remain within the established floor-to-ceiling range throughout the term. This pricing visibility will help our SCA customers across market segments better manage their businesses and grow their demand.

For our SCAs with price bands, the floor price enables Micron to achieve a very robust gross margin—well above our peak quarterly margins in any prior cycle. Fourteen of the 16 signed SCAs have minimum-price-per-unit contracts that collectively represent approximately $100 billion in revenue over the remaining term of the agreements. These arrangements also strengthen our long-term financial outlook, including expectations for margins and free cash flow, by providing greater visibility and enhanced stability in our business performance.

Under the SCAs we have signed to date, we project receiving cash deposits and related financial commitments totaling $22 billion. This further underscores customer commitment to this new business model. Mark will provide additional details. Our SCAs—spanning data centers, consumer devices, and automotive and industrial applications—establish a new paradigm for strengthening customer relationships.

They provide committed DRAM including HBM as appropriate and NAND supply to our customers over a multi-year time horizon. In a period of significant shortage, this supply visibility is extremely beneficial to our customers. The visibility enables our customers to leverage SCA supply to make progress on their strategic plans, drive growth and enable their end consumers to benefit from their products and services.

We are very appreciative of our customers who have worked with us through this period of tight supplies with a strong collaborative spirit to create win-win outcomes for the long term for the entire ecosystem and end consumers. AI's insatiable appetite for memory bandwidth and capacity with low latency and low power is driving memory architectural choices, memory product mix and manufacturing process technology decisions, all of which increase the complexity of memory and storage roadmap for the industry.

Micron is building on its technology leadership. Our 1-gamma DRAM node and G9 NAND node are both ramping well and on track to become the highest volume nodes in Micron's history. Development of our next-generation DRAM and NAND nodes is also progressing well and is on track to begin volume production in the second half of calendar 2027.

We are leveraging our leadership DRAM and NAND nodes across our product portfolio. The HBM4 12-high volume ramp is tracking twice as fast as HBM3E 12-high, and we have already shipped over $1 billion in HBM4 revenue. We expect to reach mature yields on HBM4 12-high significantly faster than HBM3E 12-high. Please see our earnings press release for other highlights across our HBM, high-capacity DDR and LPDDR server DRAM, data center SSD, PC, smartphone, and automotive product portfolios.

We expect future memory demand will continue to skew towards higher performance and higher value products whose complexity carries higher cost per bit. Transitions like LPDDR5 to LPDDR6, DDR5 to DDR6, and newer generations of HBM all come with rising bit cost. This trend, along with the ramp of significant greenfield capacity in the years ahead, is projected to cause the blended DRAM cost per bit to rise from current levels. Our customer SCAs provide for appropriate price premiums for such new products to be negotiated in the future.

Turning to our end markets, AI is driving unprecedented growth in data centers, with industry data center DRAM and NAND bit shipments in calendar 2026 expected to more than double from two years ago. Agentic AI is structurally reshaping data center infrastructure, extending beyond accelerator-only racks to include CPU racks for the agent control plane and program execution, and storage racks for rapidly expanding context stores.

We now expect calendar 2026 industry server units to grow in the high teens percent range, above our prior expectations of low double digits, driven by mid-teens growth in traditional servers and even stronger growth in servers with AI accelerators. We estimate that this increase in our server unit growth expectation is enabled by a modest reduction in average server DRAM content growth as customers focus on maximizing unit shipments amid a very tight allocation of memory.

In NAND, AI context memory storage and HDD displacement opportunities are expanding the addressable market for SSDs. PC and smartphone industry revenue is expected to grow despite unit volume declines, reflecting resilient demand for high-end devices at higher prices across end-device categories.

Agentic AI platforms such as OpenAI and Anthropic elevate the value of edge devices, enabling improved tokenomics, greater privacy and lower latency, and more efficient orchestration of AI between the cloud and edge. Over time, we expect the value of on-device AI combined with pent-up unit replacement demand to drive memory demand growth in PCs and smartphones.

In automotive, ADAS remains a powerful driver of content growth. L2+ and above vehicles, which feature progressively increasing levels of autonomy, have over five times the memory and storage content of an average vehicle. The mix of L2+ and above vehicles is more than doubling this year to over 20% and is expected to exceed 40% by 2030. Average auto memory and storage content is expected to further increase as the mix shifts toward higher levels of autonomy with progressively higher levels of content.

In robotics, continued advances in simulation, foundation models, and integrated hardware and software stacks are accelerating physical AI. This creates a growing, content-rich opportunity for high-bandwidth, low-power memory and storage that powers real-time perception, inference, and control. Humanoid robots carry 10 times the amount of memory as an average L2+ vehicle, and we expect a sustained, substantial multi-decade memory demand cycle to begin in the latter part of this decade.

Now turning to our market outlook, we now expect supply-demand conditions for both DRAM and NAND to remain tight beyond calendar 2027. In DRAM, we expect industry DRAM bit shipments in calendar 2026 to grow in the low-to-mid 20% range, slightly above our prior outlook. In NAND, we expect industry NAND bit shipments in calendar 2026 to grow approximately 20%, unchanged from prior expectations.

We expect Micron DRAM supply to grow approximately in line with industry supply growth, while Micron NAND supply grows somewhat less than industry supply growth in calendar 2026. Our SCAs provide enhanced visibility into our long-term demand and give us greater confidence in our capital expenditure and R&D investments.

We are focused on maximizing output from our fabs, including collaborating with our suppliers to accelerate tool acquisition, fab tool installation and ramp, and tool replacements and upgrades to improve productivity. Recently, we concluded a multi-year EUV supply agreement with ASML, supporting our increased adoption of EUV at the 1D node and future generations.

We are also making good progress on expanding our global manufacturing footprint to increase supply over time. This includes our significant investment in U.S. leading-edge DRAM manufacturing with our ID1 and ID2 fabs in Idaho, whose construction is well underway, as well as the first of our New York fab cluster, where we broke ground in January this year. ID1 is on track for first wafer output in mid-calendar 2027 and ID2 in late calendar 2028.

We recently launched the first production start of our 1-alpha DDR4 technology in our Manassas, Virginia fab, which will add to our capability to support the legacy product needs of our customers in automotive, industrial, medical, aerospace, and defense markets. At our newly acquired Formosa site in Taiwan, we expect to support meaningful product shipments from the existing 300,000-square-foot fab in mid-calendar 2027, about a quarter earlier than our prior expectations.

Adding to the existing fab, we have begun construction of a second clean room of similar size at this site. This clean room will support EUV equipment. Our construction activities and timelines are on track for our other facilities in Japan and Singapore, complementing our advanced packaging capabilities in Taiwan. Our Singapore site will become another center of excellence for advanced packaging. We expect this facility will contribute meaningfully to Micron's HBM packaging capacity beginning in the first half of calendar year 2027.

As we make these investments, we will remain disciplined in our approach and will be responsive to the market environment to appropriately align our supply plans. I will now turn it over to Mark for our fiscal Q3 financial results and outlook.

Mark Murphy

Thank you, Sanjay, and good afternoon, everyone. Micron delivered exceptional fiscal Q3 results, with revenue, gross margin, and EPS exceeding the high end of our guidance. Our results and today's outlook reflect the increasing value of memory in the AI era and the structural strength of our business.

As mentioned, we have entered into 16 strategic customer agreements or SCAs with defined pricing, either fixed or subject to floor and ceiling pricing. In accordance with the revenue accounting standard, we are disclosing remaining performance obligations (RPO) starting this May quarter. RPO at the end of fiscal Q3 was over $5 billion. For the SCAs that we have entered into so far, including those executed after the end of fiscal Q3, RPO is approximately $100 billion.

RPO is determined based on minimum committed volumes and minimum pricing and reflects inherently conservative estimates. RPO is not indicative of the total revenue we expect to recognize in future periods. As such, we expect revenue to well exceed associated RPOs over the term of the agreements.

As Sanjay mentioned, we project to receive cash deposits and related financial commitments of $22 billion under the SCAs we have signed so far. The overwhelming majority of these commitments, approximately $18 billion, will be in the form of cash deposits. When all targeted SCAs are completed, we expect to have substantially higher levels of SCA customer deposits and related commitments.

These customer deposits will show up on our balance sheet more prominently in fiscal Q4. The cash flows associated with customer deposits appear in financing-related cash flows and will not affect our free cash flow. This cash will be returned to customers over time toward the latter half of the agreement term. We are excited about our progress in signing these SCAs, which will strengthen our long-term financial performance and drive enduring robust ROI for the company over time.

Total fiscal Q3 revenue was $41.5 billion, up 74% sequentially and up 346% year over year, representing our fifth consecutive quarterly revenue record. The $17.6 billion sequential increase is the largest in our history, eclipsing last quarter's $10.2 billion record.

Fiscal Q3 DRAM revenue was a record $31.3 billion, up 343% year over year and represented 76% of total revenue. Sequentially, DRAM revenue increased 67%. Bit shipments were up in the low single-digit percentage range. Prices increased in the low 60s percentage range, driven by tight industry conditions and favorable mix.

Fiscal Q3 NAND revenue was a record $9.9 billion, up 361% year over year and represented 24% of total revenue. Sequentially, NAND revenue increased 99%. Bit shipments increased in the mid-single-digit percentage range. Prices increased in the mid-80s percentage range, driven by tight NAND industry conditions and a favorable mix.

The consolidated gross margin for fiscal Q3 was 84.9%, up 10 percentage points sequentially. This improvement was driven primarily by higher pricing and also benefited from continuing strong execution and favorable mix. Fiscal Q3 gross margin more than doubled from a year ago and was a new company record.

Now turning to quarterly financial performance by business unit. Cloud Memory business unit revenue was a record $13.8 billion and represented 33% of total company revenue. CMBU revenue was up 78% sequentially, driven by higher pricing and bit shipments. CMBU gross margins were 83%, up 9 percentage points sequentially, driven by higher pricing.

Core Data Center business unit revenue was a record $11.5 billion and represented 28% of total company revenue. CDBU revenue was up 103% sequentially, driven by higher pricing and a favorable mix. CDBU gross margins were 87%, up 12 percentage points sequentially, driven by higher pricing.

Mobile and client business unit revenue was a record $11.5 billion and represented 28% of total company revenue. MCBU revenue was up 49% sequentially, driven by higher pricing, partially offset by lower bit shipments. MCBU gross margins were 87%, up 9 percentage points sequentially, driven primarily by higher pricing and helped by favorable mix.

Automotive and embedded business unit revenue was a record $4.6 billion and represented 11% of total company revenue. AEBU revenue was up 71% sequentially, driven by higher pricing and higher bit shipments. AEBU gross margins were 79%, up 11 percentage points sequentially, driven by higher pricing and favorable mix.

Operating expenses in fiscal Q3 were $1.5 billion, up $97 million quarter over quarter. The sequential increase was due to higher variable compensation expense from the strong performance of the business. We generated operating income of $33.7 billion in fiscal Q3, resulting in an operating margin of 81.2%, up 12 percentage points sequentially and 54 percentage points year over year. Fiscal Q3 taxes were $5.1 billion on an effective tax rate of 14.9%. Non-GAAP diluted earnings per share in fiscal Q3 was $25.11, up 106% sequentially.

Turning to cash flow and capital expenditures. In fiscal Q3, operating cash flows were $25.4 billion. Capital expenditures were $7.1 billion resulting in free cash flow of $18.3 billion. Fiscal Q3 free cash flow was a quarterly record for the company. Ending inventory for fiscal Q3 was $8.6 billion with days of inventory at 120. DRAM inventories are very tight and below 120 days.

We reached record levels of cash and investments of $30.2 billion at quarter end. During fiscal Q3, we reduced debt by $4.4 billion, including a cash tender offer that reduced senior notes by $4.3 billion. The weighted average maturity on our outstanding debt is April 2035. We closed the quarter with $5.7 billion of debt and a net cash balance of $24.4 billion.

This fiscal year, we received upgrades from all three major credit rating agencies, including an upgrade to Triple B Plus on the strength of our technology and product position, financial outlook and strong balance sheet. Our balance sheet has never been stronger and we project it to strengthen further even as we increase investment in technology and needed capacity.

Now turning to guidance, we expect fiscal Q4 revenue to be a record $50 billion plus or minus $1 billion, gross margin to be approximately 86% and operating expenses to be approximately $1.65 billion. Based on a share count of approximately 1.15 billion shares, we expect EPS to be a record $31 per share, plus or minus a dollar.

Our fiscal Q4 gross margin outlook reflects a meaningful moderation in the rate of price increases. We project operating expenses to increase by approximately $1 billion in fiscal 2027 as we expand R&D to support an unprecedented set of opportunities in memory and storage. We expect operating expense increases to be weighted to the second-half. We expect the fiscal Q4 and fiscal 2026 tax rate of around 15%.

Micron continues to invest in a disciplined manner across our global footprint to address customer demand. As a reminder, our CapEx is net of anticipated government incentives. In fiscal Q4, we project CapEx of around $10 billion, bringing full year fiscal 2026 capital spending to approximately $27 billion.

We expect quarterly CapEx in fiscal 2027 to be above fiscal Q4 levels with more than half the increase year over year in fiscal 2027 from construction CapEx as we pull in clean room capacity required to address long term demand. We forecast free cash flow to increase substantially again in fiscal Q4.

From December 9th, 2026, the 2nd anniversary of the signature of our definitive CHIPS agreements, we intend to increase our capital return over time. We expect to return 100% of our excess cash to shareholders. Any impacts that may occur due to trade or geopolitical developments are not included in our guidance. I'll now turn it over to Sanjay to close.

Sanjay Mehrotra

Thank you, Mark. AI has elevated the value of memory. Micron is collaborating closely with our customers and suppliers across technology, product, manufacturing and commercial teams. In this tight industry environment, strategic customer agreements are ushering in an exciting era for Micron.

We expect these SCAs to significantly enhance the durability and predictability of Micron's strong financial performance, accelerating the transformation of our business model. I'm thankful to Micron's team members worldwide whose relentless focus on execution on all fronts has positioned Micron as a leader in this new AI era as we continue to advance our mission to accelerate intelligence to enrich life for all. We will now open for questions.

Operator

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. Your first question comes from the line of Timothy Arcuri with UBS. Your line is open. Please go ahead.

Timothy Arcuri

Sanjay, I think we're all trying to figure out how much is locked in, in kind of a floor price scenario over the next five years. And there were two things you said. You said that 14 of the 16 SCAs have $100 billion in cumulative revenue. So that sort of says like $20 billion a year at like a floor price, which is way below the run rate that you just guided.

So that says that not that much would be covered, you know floor price, but then you also said that 40% of revenue will be moving inside of these SCAs. So can you maybe double click on all that and sort of help us in a floor price scenario, you know, can you help us think about how much of revenue per year would be guaranteed?

Sanjay Mehrotra

As we indicated that under these SCAs that have been completed so far at the floor price, the revenue is projected to be $100 billion, but again, as Mark noted in his remarks, we expect revenue to be much higher than that. Note that floor price that our profitability levels and the gross margins at the floor prices are higher than peak margins at any time in the past.

And so overall about 20% of DRAM and about 30% of our NAND volume is covered in these SCAs so far. So that's close to about 25% of our revenue that you can project over the term of these agreements. So again, RPO at the floor price is to be reported as an accounting measure, but we fully expect that the revenue will be much higher than that.

Timothy Arcuri

Got it. And then with respect to just how these layer in Mark, like how much of the August quarter revenue for example will be flowing under an SCA, I'm just trying to figure out how to like layer that into the model. And when you get to like a full run rate where like by next fiscal Q4 will you be at sort of a full run rate, you know what's being covered under these SCAs. Can you help us sort of fetter that in?

Mark Murphy

Yeah. And so you'll see a disclosure in the queue which will disclose the next 12 months revenue associated with each set of agreements that have an RPO. So for example, for those that closed within Q3, you'll see an RPO of $5 billion and you'll see a next 12 months associated with that of about $1.8 billion. And that is because those are some of the smaller agreements that Sanjay mentioned, automotive agreements.

Now in the fourth quarter as Sanjay mentioned, you will see an RPO reported on 14 of the 16 agreements that is going to be about $100 billion and there will be an associated next 12 months associated with those that will be disclosed in the 10-K. So you will be able to see roughly how these are feathering in and keep in mind this RPO number, it is a minimally contractually enforceable amount for the intersection of volume and price.

So you're looking at a minimum number and that's important to keep in mind. And we were clear that it doesn't reflect what we think will happen. And then also each quarter, this RPO number will change. It will change based on contracts that are added in. It may change on additional volume commitments with the determined price. It will change based on shipments and how that RPO declines after that performance obligations met.

So you'll be getting a lot of additional reporting. This is all under ASC 606. I know it's something that we, it's not a heavy standard typically in some of our reporting, but this feature of RPO you will see. I also want to emphasize as Sanjay mentioned that even at the floor price and eventually we anticipate about 40% of our revenue being under this sort of RPO related commitments that even under the floor on the floor price, we expect the margins to be significantly above prior peak margins.

Timothy Arcuri

OK. Thank you both.

Operator

Your next question comes from the line of Joseph Moore with Morgan Stanley. Your line is open. Please go ahead.

Joseph Moore

I also wanted to ask about the SCAs. Can you talk about the role of the cash deposit? Should we think of that as being sort of an escrow collateral account where if people cancel, you would have access to cash—like, it's not revenue—so what exactly is the purpose of the deposit, and what is its relationship, if any, with the RPO?

Mark Murphy

Yeah, Joe, on the deposits. So we mentioned that we have $22 billion of deposits and financial commitments associated with the agreements signed to date as of this call, and approximately $18 billion of that is cash deposits. We’ll receive those deposits. We received about $500 million in the third quarter, and we’ll receive another roughly $10 billion in the fourth quarter.

And these will be recorded as cash deposits; they’ll show up in financing cash flows. They will not affect free cash flow. We hold these deposits during the performance period of the agreements, and as those agreements are fulfilled, the deposits will be returned over time—though heavily weighted toward the latter half of the agreement terms. The difference between the $22 billion and the $18 billion, so roughly $4 billion, consists of letters of credit.

Joseph Moore

OK, but what’s the actual role? I mean, what happens to that cash? It seems like customers put down a deposit and then get it back later. What’s their incentive to commit that cash? Is it tied to a take-or-pay obligation? It’s clearly not a prepayment—can you help us understand the rationale behind it?

Mark Murphy

Yeah, thanks Joe. It's not a prepayment—it's a separate commitment by the customers and reflects the fact that we have a binding agreement. These are take-or-pay agreements, and we hold the cash, which demonstrates our shared commitment to performing under these agreements now. This is obviously good for Micron, as these agreements give us visibility into our demand. It’s committed volume that we can confidently base our investments on—significant capital investments—and fosters a closer technology relationship.

It’s also beneficial for customers because they gain supply assurance and access to leading-edge technology. So, in our view, it’s a win-win. We’re very pleased with the nature of these agreements, their positive impact on our business, and what they signal about Micron’s transformed business model.

Joseph Moore

Very helpful. Thanks for all the disclosure on this. It really helps a lot. Thanks.

Operator

Your next question comes from the line of CJ Muse with Cantor Fitzgerald. Your line is open. Please go ahead.

CJ Muse

Yeah, good afternoon. Thank you for taking the question. Maybe just a follow-up on Joe’s point—you mentioned these cash deposits. Do you view that cash as fungible and usable for CapEx? And I guess tied into that: when you think about capital returns, particularly after December 14th—the CHIPS Act end date—will you include that cash you’ve received in your gross cash considerations and your thinking around capital returns? Or, given that you’ll eventually have to return it, does that mean you’d need to hold more gross cash in a steady state?

All that said, CJ—it’s unrestricted—but does it change your view on the level of gross cash you feel comfortable holding on your balance sheet?

Mark Murphy

Not in the near term. I think we, you know, we of course are going to have what we do is adequate liquidity to support the operation of the business—that would include, over time, returning the deposits as customers and Micron perform on the contracts. And so that, of course, is important, but you know, and then we would hold liquidity to satisfy the investments we believe are important for the business.

You know, we've got a lot of—we've got large projects underway to provide supply and also R&D programs. So, and you know, and again, I'll emphasize that the customers, as I mentioned earlier, they will get this return deposit back in the latter half—latter half of the agreement.

CJ Muse

Perfect. And then maybe as a follow-up on HBM revenues, could you kind of share how you're thinking about both your market share and perhaps total revenues into calendar 2026? And you know, is there an expectation into calendar 2027 that you can bridge margins that are closer to what you're getting on DDR5? Or is that a place that will be, you know, permanently below that DDR5 level? Thanks so much.

Sanjay Mehrotra

So with respect to HBM, first of all, we’re very pleased with our HBM4 product and Micron’s shipments already of HBM4 exceeding $1 billion. Regarding HBM market share, we are strategically choosing it to be close to our DRAM share, and this is important because of the trade ratio of HBM. It consumes, as you know, a significant amount of wafers and puts pressure on non-HBM supply in the industry.

So targeting our HBM share close to our DRAM share strategically enables us to supply our diversified end-market customers across all segments—data center, consumer, automotive, industrial—the markets that need non-HBM supplies. Regarding your question on pricing for next year, we are really not commenting on pricing, but certainly HBM is a product where Micron has a strong leadership position, and we have demonstrated tremendous success.

Now with HBM3E 8-high, HBM3E 12-high, and now with HBM4—and a strong roadmap ahead—we have strong confidence in our ability to execute against that. It is a high-price product, you know, compared to non-HBM on a per-bit basis, and it is a product that is critically important for the entire AI ecosystem, from data center to edge. So strategically, it is a very important product for us, and it is also a product that provides strong ROI.

CJ Muse

Thank you.

Operator

Your next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open. Please go ahead.

Vivek Arya

Thanks for taking my question. For the first one, Sanjay, you mentioned, I think, four large and three medium-sized customer agreements, and I'm curious how many of them are related to the data center. Should we expect more data center-related announcements? And regarding the $100 billion figure, does that align with the large and medium-sized customers, or does it align with the smaller-sized customers? I guess I'm still trying to figure out what a typical SCA with a data center customer looks like—have you given us enough breadcrumbs to understand what a data center SCA might look like over the next few years?

Sanjay Mehrotra

So our large customers include, you know, data center clients, and the large and medium customers you mentioned—as well as, of course, our smaller customers—span across the data center, consumer, and automotive markets. We’ve provided some color on the largest agreements, which generally include a ceiling price and a price band that has both a floor and a ceiling, with the ceiling established at the CQ2 price levels.

And of course, those CQ2 price levels are reflected in our Q3 results as well as our Q4 guidance, delivering unprecedented levels of profitability. These price bands also include floor prices, where gross margins are well above the peaks seen in any prior cycle in the company's history. The large agreements we mentioned are multi-year contracts that give us tremendous visibility into demand and customer commitments, and they naturally come with financial commitments, including cash deposits, as Mark elaborated on earlier.

Vivek Arya

Thanks. And for my follow-up, Mark, on gross margins—you’re at 86%. Does this level kind of hold steady for a while? Is there a ceiling? And as these SCAs start to kick in, should we assume some kind of normalization between the mid-80s where you are now versus the prior peak, which I believe was in the low 60s? So, as long-term investors build their models for 2027, 2028, etc., should they be assuming a normalized gross margin range somewhere in the mid-70s—that is, a midpoint between where you are today and your historical peaks? If you could just help guide us on how to think about gross margins beyond this near-term 86% level, and longer term, what’s the right way to model how these gross margins will evolve? Thank you.

Mark Murphy

Yeah. So Vivek, we're not providing guidance beyond the fourth quarter, but we are at margin levels where, as we've discussed previously, incremental pricing yields less gross margin expansion. That said, we do see—as we mentioned—that we’ve updated our view on market conditions and now expect the market to remain tight beyond 2027.

You know, we’re also at a point where memory is being widely recognized for its strategic value and the critical role it plays in enhancing AI intelligence. There’s growing demand for higher-performance memory, and our continued deployment of bits into data center and edge device applications requiring higher performance will be beneficial as pricing moderates and price growth stabilizes.

We’re also focused on optimizing the placement of our bits with customers, including those with whom we’ve entered into supply chain agreements (SCAs). Additionally, as we’ve discussed, we’ll begin receiving additional volume starting mid-year—materially from mid-2027—and this will ramp into 2028. While there will be some startup costs associated with this, we’ll achieve cost absorption as these ramps progress.

Over time, this will generate operating leverage. So I think we feel very confident about the business trajectory, Micron’s technology leadership, our world-class product portfolio, and our strong operational execution—all of which support our ability to continue delivering solid financial performance.

Vivek Arya

Thank you.

Operator

Your final question comes from the line of Krish Sankar with TD Cowen. Your line is open. Please go ahead.

Krish Sankar

Yeah, hi, thanks for taking my question. I told them, Sanjay or Mark, congrats on the great results on the floor pricing for the SCAs. You mentioned something about the prior peak—your prior peak gross margin was somewhere in the 60% to 62% range. If I try to plug in what a 64-gigabyte server DRAM is, I can get a price of around $700 for it compared to $1,500 today, which kind of puts you at roughly $10 to $12 per gigabyte as the floor and mid-$20s per gigabyte for the current price. Is that the range we should think about for these SCAs—i.e., low teens to mid-$20s per gigabyte? It’s kind of like the pricing range for SCAs.

Sanjay Mehrotra

So Krish, we're not going to get into specific pricing discussions, but I just want to note again that I said the gross margin at the floor will be well beyond the peaks—the highs—we experienced in the past cycle. So, well beyond those, right? But obviously, we’re not going to get into specifics related to pricing.

The bottom line is, you know, these SCAs really help provide visibility, strength, and durability of demand for us, and they absolutely and fundamentally accelerate our financial performance and business transformation here.

Krish Sankar

Got it. Very helpful, Sanjay. And just a quick follow-up—you mentioned how DRAM bit growth should be in the low to mid-20s, and NAND probably around 20% this year, and clearly we are undersupplied in both. Is there a way to quantify what happens in 2027? Can we say whether the undersupply will be double what it is this year by 2027, or how should we think about the supply-demand imbalance in 2027?

Sanjay Mehrotra

You know, we see 2027 overall as tight. We’ve said we expect tightness to continue beyond 2027. We’re working hard to bring up supply, but we’ve shared with you that it takes a long time to ramp up the additional capacity needed to support customer demand—the additional wafer capacity. And of course, technology transitions and the lower bit gain per node, as well as the HBM trade ratio, put tremendous pressure on overall supply growth as well.

So even in 2028, when supply begins to improve gradually, we see that demand will continue on a robust trajectory as well, because these AI trends are very long-term. AI is still in the very early innings—the entire token economics require more memory. System performance in AI is really heavily constrained by memory capacity, memory performance, and memory bandwidth.

So, you know, as compute demand grows and our customers see the tremendous transformation opportunity ahead of them—and continue to make investments like they’ve never made before to build this infrastructure—the demand trajectory is extremely strong. Memory is at the center of it, and this is a strategic asset. Ensuring memory supply is obviously a critical priority.

As you can see in the multi year agreements that our customers have concluded with us. I mean those agreements reflect the confidence in the growth of the demand. So we are working hard to bring up supply, but we see tightness persisting beyond 2027.

Krish Sankar

Thanks very much, Sanjay. Really appreciate it.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.

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