Micron Technology, Inc Q2 2026 Earnings Call Transcript

Micron Technology, Inc (NASDAQ: MU) Q2 2026 Earnings Call dated Mar. 18, 2026

Presentation

Operator

Ladies and gentlemen, thank you for joining us and welcome to Micron Technology’s Fiscal Second Quarter 2026 Financial Conference Call. After today’s prepared remarks, we will host a question-and-answer session.

I will now hand the conference over to Satya Kumar, Investor Relations. Satya, please go ahead.

Satya Kumar — Investor Relations

Thank you and welcome to Micron Technology’s fiscal second 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 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 report on Forms 10-K, Forms 10-Q and our 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’ll now turn the call over to Sanjay.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

Thank you, Sathya. Micron delivered an exceptional fiscal Q2 with stellar records in revenue, gross margin, EPS and free cash flow. Quarterly revenue nearly tripled versus one year ago and revenue for DRAM, NAND, HBM and each business unit reached new highs. Our fiscal Q3 single quarter revenue guidance exceeds the full year revenue for every year in our company’s history through fiscal 2024. For fiscal Q3 we anticipate exceptional records across revenue, gross margin, EPS and free cash flow. Reflecting confidence in the sustained strength of our business, I’m pleased to announce that our board has approved a 30% increase in our quarterly dividend. The step up in our results and outlook are the outcome of an increase in memory demand driven by AI, structural supply constraints and Micron’s strong execution across the board.

Our memory and storage solutions are at the heart of this AI revolution. Memory makes AI smarter and more capable, enabling longer context windows, deeper reasoning chains and multi agent orchestration. As AI evolves, we expect compute architectures to become more memory intensive. This is why we strongly believe that Micron is one of the biggest beneficiaries and enablers of AI. AI hasn’t just increased demand for memory, it has fundamentally recast memory as a defining strategic asset in the AI era.

We continue to work with customers on strategic customer agreements or SCAs that are different from prior LTAs and have specific commitments over a multi year time horizon for improved visibility and stability in our business model. These SCAs also provide customers greater certainty to plan their businesses while reinforcing long-term engagement across our broad product portfolio. We are excited to have signed our first five year SCA.

We are making excellent progress ramping our industry leading 1-gamma, DRAM and G9 NAND technology nodes. We expect 1-gamma to become the highest volume node in Micron’s history. Our 1-gamma node was already the fastest ramp to mature yields, is ramping volumes faster than all prior nodes in our history and is on track to become a majority of our DRAM bit mix by mid calendar 2026. We plan to increase EUV adoption at the 1-delta DRAM node utilizing the latest generation EUV tools. These more advanced EUV tools will help us optimize both clean room space efficiency and patterning when scaling to 1-delta and beyond.

In NAND, our G9 node also remains on track to constitute a majority of bits by mid calendar 2026. We also achieved a record mix of QLC bits in the quarter. Looking ahead, we expect co-location of R&D and high volume manufacturing at our Boise and our Singapore sites to speed up time to market for our leading-edge products. We see an unprecedented set of opportunities for memory and storage to enable the AI era across market segments and expect to meaningfully increase our R&D investments in fiscal 2027.

Micron’s technology leadership, product excellence, and manufacturing execution is being recognized in quality scores from our customers. I am pleased to report that a clear majority of our customers rank Micron number one in quality.

Turning to our end markets. AI demand is driving DRAM and NAND data center bits TAM to exceed 50% of the industry TAM for the first time in calendar 2026. Traditional server demand is robust, driven by a combination of demand from workloads initiated by agentic AI as well as broad-based server refresh. AI server demand continues to be strong. Both AI and traditional server demand are constrained by lack of adequate DRAM and NAND supply. We expect server units to grow in the low-teens percentage range in calendar 2026, driven by growth in both AI and traditional servers. We expect server DRAM content to continue to grow in calendar 2026 with the introduction of new platforms.

At NVIDIA’s GTC, we announced that Micron has begun volume shipment of its HBM4 36 gigabyte 12-Hi in first quarter of calendar year 2026 and is designed for NVIDIA Vera Rubin. With our HBM4 production ramp and volume shipments underway, we expect to reach mature yields faster than HBM3E. We have also sampled our HBM4 16-Hi product, which provides 48 gigabyte of HBM capacity in each HBM cube, a 33% increase in the HBM capacity compared to HBM4 12-Hi.

Development of HBM4E, our next-generation HBM product, is well underway and we expect to ramp volume in calendar 2027. Our HBM4E will leverage Micron’s production-proven industry-leading 1-gamma DRAM technology node and is set to deliver another step-function improvement in performance, enabling a whole new generation of AI compute platforms across the industry. Additionally, HBM4E customization options offer us further differentiation opportunities and even deeper R&D engagement with customers.

Micron pioneered the development of LPDRAM for the data center, which consumes one-third the power of DDR DRAM server modules. Building on this leadership, we sampled the industry’s first 256 gigabyte LP SoC-M2 product, which is built using our 1-gamma node and enables a massive 2 terabites of capacity per CPU, quadrupling the content from just a year ago. We see expanding use of LPDRAM in the data center in the years ahead, and we are excited to maintain an industry-leading innovative product roadmap in this market. Rapid growth in AI inference is driving the emergence of new architectures optimized for the token economics of specific workloads.

Micron’s broad portfolio of HBM, LP, DDR, and SSD is a critical enabler across these architectures. At GTC, the recent announcement of NVIDIA Grok three LPX implements up to 12 terabytes of DDR5 in a rack-scale architecture. We are seeing an acceleration in NAND-based demand in the data center due to AI use cases such as vector database and KV cache offload, and due to growing share of SSDs in capacity storage tiers.

Micron’s data center SSD product portfolio, enabled by our technology leadership and vertical integration, covers the spectrum from highest performance to highest capacity. We are now in high-volume production of our G9 NAND-based PCIe Gen6 high-performance data center SSDs. Our 122 terabytes high-capacity SSD is seeing strong adoption, and delivers 16 times the sequential read throughput per watt of a capacity-matched HDD configuration. Our strategy and execution are delivering results. Our data center SSD market share increased for the fourth consecutive calendar year in 2025 to a new record.

In fiscal Q2, data center NAND revenues more than doubled sequentially, reaching a substantial new record, and we expect further growth in the quarter ahead. Micron’s data center SSD portfolio is industry-leading, and we have secured a robust set of design wins across our customer base. We are now seeing NAND demand significantly in excess of our available supply for the foreseeable future. In calendar 2026, a number of factors including DRAM and NAND supply constraints could cause PC and smartphone units to decline in the low double-digit percentage range. Over time, we expect the value of on-device AI to drive strong memory content growth in PCs and smartphones.

In PCs, there has been exciting innovation recently with agentic AI applications, such as OpenClaw, where AI agents can perform tasks independently on the host PC and also initiate workloads in the cloud. PCs with on-device agentic AI capabilities have recommended memory configurations of at least 32 gigabyte, twice as much as the average PC. Additionally, the fast-growing new category of personal AI workstation, such as NVIDIA DGX Spark and AMD Ryzen AI Halo, come in 128 gigabyte configurations, ideal for using large language models on device.

Likewise, in smartphones, OEMs have recently announced new flagship devices such as Samsung Galaxy S26 and Google Pixel 10 with agentic AI integrated into their mobile operating systems. The mix of flagship smartphones shipping with 12 gigabyte or more of DRAM increased to nearly 80% in calendar Q4, up from under 20% a year ago. Micron is well positioned to accelerate the opportunities in these markets with our industry-leading portfolio of products. In PC, Micron completed qualifications for LPCAM2 at a major OEM. At CES, we launched the industry’s first Gen5 QLC client SSD, based on G9 NAND.

Micron’s LPDDR5X is now designed into leading personal AI workstations, expanding our addressable market, with high volumes shipped to key customers. In smartphones, Micron continues to receive strong interest and feedback from OEM and ecosystem partners on our 1-gamma based LPDDR6 samples. We built momentum with additional qualifications and mass production of our 10.7 gigabit per second 1-gamma LPDDR5X 16 gigabit product. We saw continued pricing improvement across automotive, industrial, and embedded markets. Total AEBU’s revenue reached a record, with automotive and industrial revenue together exceeding $2 billion in the quarter.

In automotive, OEMs are deploying Level two plus ADAS across their fleets at an accelerating pace. The average car today has less than L2 ADAS capability, containing approximately 16 gigabyte of DRAM, while vehicles with L4 autonomy require over 300 gigabytes. As more advanced ADAS and smart cabin adoption scales, we expect robust long-term growth in automotive memory demand. We have shared samples of the industry’s first automotive-grade 1-gamma LPDDR5 DRAM, and in NAND, we were first in the industry with a G9-based UFS 4.1 automotive solution, further reinforcing our technology leadership in this market.

Rapid improvements in AI are supercharging the capabilities of robots. We believe we are on the cusp of a 20-year growth vector in robotics and expect robotics to become one of the largest product categories in the technology world. Humanoid robots will be AI-enabled and will be powered by a compute platform that rivals that of a high-end L4-capable automobile, thus requiring significant memory and storage capacity. We expect this exciting new category of growth to further underpin the long-term favorable dynamics that shape our industry environment. Micron is very well positioned to leverage this opportunity in close partnership with our customers, enabled by our industry-leading technology, product solutions, and operational capabilities.

Now turning to our market outlook. We expect both DRAM and NAND industry bit demand in calendar 2026 to be constrained by supply. We continue to expect supply and demand conditions for both DRAM and NAND to remain tight beyond calendar 2026. We expect industry DRAM bit shipments in calendar 2026 to grow in the low-20s percentage range, slightly above our prior outlook. In DRAM, cleanroom constraints and long construction lead times, higher HBM trade ratio, higher HBM growth rates, and declining bits per wafer growth from node migration constrain bit supply growth. We expect industry NAND bit shipments in calendar 2026 to grow approximately 20%. In NAND, some industry suppliers redirect cleanroom space for DRAM, and overall limited cleanroom space constrains bit supply growth. We expect Micron DRAM and NAND supply to grow approximately in line with the industry in calendar 2026.

Micron is working to address the unprecedented gap between supply and demand, and we achieved several important milestones in expanding our global manufacturing footprint this past quarter. In DRAM, earlier this week, we announced the successful closing of the acquisition of the Tongluo site from Powerchip Semiconductor, completing the transaction ahead of schedule. We expect this site to support meaningful product shipments from the existing fab beginning in fiscal 2028. Adding to the existing fab, we plan to begin construction of a similar-sized second cleanroom at this site by end of fiscal 2026. We continue to expect initial wafer output at our first Idaho fab in mid-calendar 2027, and ground preparation has begun for our second Idaho fab.

We broke ground on our first fab at the New York site, and initial ground preparation activities are ahead of plan. In Japan, we are making good progress on ground preparation for our cleanroom expansion to enable future technology transitions in our Hiroshima site. In NAND, the combination of a higher demand outlook and our decision to colocate R&D cleanroom in our manufacturing fab underpins our decision to break ground for a new NAND fab at our Singapore site. We expect initial wafer output from this fab in the second half of calendar 2028.

In assembly and test, we commenced commercial shipments from our new facility in India. The state-of-the-art facility will be among the largest single-floor assembly and test cleanrooms in the world. Our Singapore advanced packaging facility for HBM is on track to contribute meaningfully to Micron’s HBM supply in calendar year 2027. We expect fiscal 2026 capex to be above $25 billion. From our last earnings call estimate, the majority of the increase is driven by cleanroom facility-related capex, of which the largest factor is Tongluo, followed by construction spend increase in our US fab projects. We project our fiscal 2027 capex to step up meaningfully to support HBM and DRAM-related investments. We expect construction-related capex to increase by over $10 billion year-over-year in fiscal 2027 as we build out our global manufacturing sites to address long-term demand opportunities.

In addition, we expect higher equipment spend year-over-year in fiscal 2027. As we make these investments, we will continue to be responsive to the market environment and our customer demand to appropriately align our supply plans.

I will now turn it over to Mark for our fiscal Q2 financial results and outlook.

Mark Murphy — Chief Financial Officer

Thank you, Sanjay. Good afternoon, everyone. Micron delivered strong financial results for the fiscal second quarter, with revenue, gross margin, and EPS all exceeding the high end of our guidance. In fiscal Q2, we generated record free cash flow, reduced our debt, and closed the quarter with the highest net cash position in our history. Total fiscal Q2 revenue was $23.9 billion, up 75% sequentially and up 196% year-over-year, representing our fourth consecutive quarterly revenue record. The $10.2 billion sequential increase is the largest in our history. Fiscal Q2 DRAM revenue was a record $18.8 billion, up 207% year-over-year, and represented 79% of total revenue. Sequentially, DRAM revenue increased 74%. Bit shipments were up mid-single-digits. Prices increased in the mid-60s percentage range, driven by tight industry conditions, and included favorable mix.

Fiscal Q2 NAND revenue was a record $5 billion, up 169% year-over-year, and represented 21% of Micron’s total revenue. Sequentially, NAND revenue increased 82%. NAND bit shipments increased in the low-single-digit percentage range. Prices increased in the high-70s percentage range, driven by tight NAND industry conditions, and included favorable mix. The consolidated gross margin for fiscal Q2 was 75%, up 18 percentage points sequentially. This improvement was driven primarily by higher pricing and also included favorable mix and cost performance. Fiscal Q2 gross margin nearly doubled from a year ago and was a company record.

Now turning to quarterly financial performance by business unit. Cloud Memory Business Unit revenue was a record $7.7 billion and represented 32% of total company revenue. CMBU revenue was up 47% sequentially, driven by an increase in prices and favorable mix. CMBU gross margins were 74%, higher by 9 percentage points sequentially, driven by higher pricing and cost execution. Core Data Center Business Unit revenue was a record $5.7 billion and represented 24% of total company revenue. CDBU gross margins were 74%, up 23 percentage points sequentially, driven by higher pricing and favorable mix. Mobile and Client Business Unit revenue was a record $7.7 billion and represented 32% of total company revenue. MCBU revenue was up 81% sequentially, driven by higher pricing, partially offset by lower bit shipments. MCBU gross margins were 79%, up 25 percentage points sequentially, driven primarily by higher pricing and favorable mix. Automotive and Embedded Business Unit revenue was a record $2.7 billion and represented 11% of total company revenue. AEBU revenue was up 57% sequentially, driven by higher pricing, partially offset by lower bit shipments. AEBU gross margins were 68%, up 23 percentage points sequentially, driven primarily by higher pricing.

Operating expenses in fiscal Q2 were $1.4 billion, up $87 million quarter-over-quarter. The sequential increase was driven by higher R&D expenses. We generated operating income of $16.5 billion in fiscal Q2, resulting in an operating margin of 69%, up 22 percentage points sequentially and 44 percentage points year-over-year. Fiscal Q2 taxes were $2.5 billion on an effective tax rate of 15.1%. Non-GAAP diluted earnings per share in fiscal Q2 was $12.20, with 155% sequential growth and 682% growth versus the year-ago quarter.

Turning to cash flow and capital expenditures. In fiscal Q2, operating cash flows were $11.9 billion. Capital expenditures were $5 billion, resulting in free cash flow of $6.9 billion. Fiscal Q2 free cash flow was a quarterly record for the company, exceeding our prior record in fiscal Q1 2026 by 77%. Ending inventory for fiscal Q2 was $8.3 billion, up $62 million sequentially, with days of inventory at 123. DRAM inventory days remain especially tight and below 120 days. We reached record levels of cash and investments of $16.7 billion at quarter end and had liquidity over $20 billion when including our untapped credit facility. In fiscal Q2, we repurchased $350 million of shares as permitted by the terms of the CHIPS agreement.

During the quarter, we also reduced debt by $1.6 billion, including redemption of senior notes maturing in 2029 and 2030. The weighted average maturity on our outstanding debt is August 2034. We closed the quarter with $10.1 billion of debt and a net cash balance of $6.5 billion. Reinvesting in the profitable growth of our business across R&D, capex, and other strategic investments remains our top priority for capital allocation. We are committed to maintaining a strong balance sheet, have reduced our total debt by over $5 billion in the last three quarters, and are at our strongest net cash position ever. Reflecting the sustained strength of our technology leadership and cash generation, as Sanjay mentioned, the Board has approved a 30% increase in our quarterly dividend to $0.15 per share.

Now turning to our guidance. We expect fiscal Q3 revenue to be a record $33.5 billion, plus or minus $750 million, gross margin to be approximately 81%, and operating expenses to be approximately $1.4 billion. Based on a share count of 1.15 billion shares, we expect EPS to be a record $19.15 per share, plus or minus $0.40. We expect higher price, lower cost, and favorable mix to all contribute to gross margin expansion in Q3.

As mentioned in the last quarter, Micron’s fiscal Q4 2026 opex will also reflect the effect of an additional work week in this 53-week fiscal year. We expect to increase our fiscal 2027 opex as we ramp R&D investments in support of an unprecedented set of long-term opportunities in memory and storage. We expect the fiscal Q3 and fiscal year 2026 tax rate of around 15.1%.

Micron continues to invest in a disciplined manner across our global footprint. To address customer demand as mentioned earlier, we now project our capital spending in fiscal 2026 to be above $25 billion. In fiscal Q3, we project capex of approximately $7 billion while delivering significantly higher free cash flow and stronger operating cash flow. Due to the need for cleanroom capacity, we expect our construction spend growth rate to outpace equipment spend growth in both fiscal 2026 and fiscal 2027. Any impact that may occur due to trade or geopolitical developments are not included in our guidance.

I will now turn it over to Sanjay to close.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

Thank you, Mark. Decades of investment, innovation, and execution have established Micron as a technology leader in memory and storage and as one of the semiconductor industry’s biggest beneficiaries and enablers of AI. As the only US-based manufacturer of advanced memory products, Micron is uniquely positioned to capitalize on the unprecedented opportunities ahead.

I want to thank our team members worldwide whose execution made this outstanding quarter possible. As strong as these results are, I am even more excited about what is ahead for Micron.

We will now open for questions.

Question & Answers

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Krish Sankar — Analyst, TD Cowen

The 81% gross margin guide is very impressive. Just kind of curious how to think about the sustainability of gross margins, especially as you bring more HBM4 into the mix. If you can give some thought on how to think about gross margins in the August quarter and beyond, that will be very helpful. Then I have a follow-up for Sanjay.

Mark Murphy — Chief Financial Officer

So, Krish, this is Mark. We provide a strong guide up, up 600 basis points sequentially into the third quarter. We are not going to provide the fourth quarter gross margin guidance. However, we have indicated that we expect the market conditions to remain tight beyond ’26. So clearly beyond the fourth quarter, what you are seeing reflected in our gross margin is the benefits of AI driving a multiyear investment cycle, most of which is ahead of us. AI requires more memory and more high-performance memory, and that is reflected in the margins. Also, we have talked about supply factors, and those are going to continue beyond 2026. The 81% contemplates a growth in HBM4, but we expect, as I mentioned, market conditions to be strong. Now keep in mind that at these gross margin levels, incremental increases in price are going to have less of an effect on gross margin. But beyond that, we are not providing a fourth quarter gross margin.

Krish Sankar — Analyst, TD Cowen

Got it. And then a quick question for Sanjay on the SCA. Congrats on your first five-year SCA. How different is it from an LTA? Is this a multiyear volume and price commitment, or does the price get negotiated every year? And also how to think about cancellation terms in the SCA in case the cycle slows down during the time frame. Thanks, Sanjay.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

So thank you for recognizing us for the first SCA that we have completed here. And, as you noted, SCA is a multiyear agreement, and we noted that in our remarks as well. LTAs have tended to be typically one-year agreements. And, of course, in this environment of extremely tight supply outlook in the foreseeable time frame as well, our customers are very motivated, for their own planning purposes and for their better predictability, to have these structural strategic agreements with us. These agreements are really meant to bring stability and greater visibility into our business model as well.

We have completed one SCA, so we are not going to be getting into the specifics here of these agreements. I am sure you can appreciate that these SCAs are confidential in nature. But these SCAs are meant to achieve the objectives for the customers in terms of their ability to plan and be able to count on supply commitments that are in the agreements, but also for us to be able to count on specific commitments that are there from the customers. These are meant to go across periods when the industry is very tight versus other parts of the industry environment as well. That is why they are long-term agreements, and they have robust terms in them. So the terms have robust provisions in them for us as well as for our customers.

Krish Sankar — Analyst, TD Cowen

Got it. Thank you very much.

Operator

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

Joseph Moore — Analyst, Morgan Stanley

Allocation questions by end market. Obviously, AI is the area that has the most urgency. But do you worry about demand destruction for things like PCs and smartphones? Are you trying to balance big customer, small customer? Just how are you thinking about that allocation process?

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

I mean, clearly, supply is extremely tight across all end markets. Demand trends are strong across the end markets, while price-sensitive markets such as the consumer example that you gave may have some demand that is getting impacted due to the higher prices. But overall demand in those markets as well stays pretty strong. Our goal and strategy always is to be a diversified supplier to our various end markets. I think that is very important for us. Of course, data center is becoming a bigger and bigger part of the industry TAM. So a bigger portion of the supply goes there. That is the main driver of growth for the industry as well as for Micron.

But other parts of the markets are important to us, such as PCs, smartphones, automotive, industrial, and we want to maintain that well-diversified mix for our end markets. I would just like to point out that overall, whether in data center or in the consumer parts of the markets, such as smartphones or PCs, the AI trend is continuing to drive greater and greater requirements for memory content. Customers are working in this tight supply environment to manage the mix of their products. But overall, we are very much working with customers across our end markets.

Joseph Moore — Analyst, Morgan Stanley

Great. Thank you. And I think in the past, you have said that some customers are getting 70% of what they are asking for. Is that still kind of the ballpark of what you are dealing with? Are there customers higher or lower than that than they were three months ago?

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

What we have said in the last earnings call is that some of our key customers, we are able to fulfill only 50% to two-thirds of their demand in the medium term. And yes, that still remains the case.

Joseph Moore — Analyst, Morgan Stanley

Great. Thank you. Great quarter.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Timothy Arcuri. Your line is open. Please go ahead.

Timothy Arcuri

Thanks a lot. Sanjay, I also wanted to ask about the SCAs. I think we are all trying to think to the other side of the cycle and hope that these SCAs provide some mechanism that will kind of limit your gross margin on the downside to a certain number. So I know you do not want to give too many details, but is it fair to say that there is a mechanism in these SCAs that would limit your gross margin on the downside when things do finally roll back over?

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

We are certainly not getting into the specifics of these SCAs for the obvious reasons of confidentiality of these agreements. We have successfully completed one SCA. We are in discussions with multiple other customers. If and when we complete these agreements and as appropriate, we will, of course, share further details with you. What I want to highlight is that these SCAs are multiyear and they have specific commitments in them. These are robust agreements, and of course these are meant to give us the visibility and stability toward our business model. Beyond that, really I cannot get into any specifics at this point.

Timothy Arcuri

Okay. Thanks. And then, Mark, I just had a question about cash. You are going to generate, I do not know, $35 billion to $40 billion in free cash flow this fiscal year. You are going to probably have more than $50 billion in cash by the end of the calendar year. So what do you do with this? Are you planning to set aside a bunch of it to buy back a bunch of stock on the other side? And I guess, with respect to that, you do have restrictions on the repo from the money you took from the CHIPS Act. Is there any way to get that reworked? Thanks.

Mark Murphy — Chief Financial Officer

Yeah, Tim. We are thrilled with the performance of the business and the improvement in the balance sheet. In the second quarter, it was record net cash and record free cash flow, beating the previous quarter’s record by 77%. Our third quarter guide, when you take those numbers and consider the capex we gave, we could see cash flow roughly double sequentially. We are going to continue to build on the balance sheet strength and improve our net cash position. We are continuing to delever and pay down debt. Noteworthy that we received two credit upgrades in the quarter, so we are now a solid BBB. We are getting stronger, while, as you can see, we have talked about increasing our capex investment and increasing our R&D investment.

Now to your specific question on balance sheet priority or capital allocation, balance sheet is always going to be a priority along with organic investment in our business to advance technology and to put in capacity for value-add bits, which we certainly see now. We are generating return on capital at this point over 30%, headed towards 50%. We are going to remain disciplined there, though. And then you saw today we are pleased to announce a dividend increase of 30%. It reflects the confidence we have in our business outlook, stability of the business, and cash returns in the future. And then, as you said, we believe we will have significant capacity for returning cash to shareholders through repurchase, a combination of offsetting dilution from stock comp and then opportunistically repurchasing.

Timothy Arcuri

Thanks, Mark.

Operator

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

CJ Muse — Analyst, Cantor Fitzgerald

Yeah, good afternoon. Thanks for taking the question. One follow-up, again the SCA question. So you have had an evolution here, LTAs, binding, now SCAs. I am curious if you could discuss the breadth of the different customers that you are speaking with. Is it only hyperscale, or are there others that are interested? And I know you do not want to go into specific details on the contract. But just to follow up on the last question, is there any capex forward requirements tied to these agreements? Are there pricing tied to an ROIC on those investments? Any help there would be helpful. Thank you.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

We shared with you that the SCA that we have just signed is with a large customer. These agreements are very much focused on allowing us to invest with confidence in our future supply plans and also having specific terms that enable us to have overall better visibility into future demand and, as I said earlier, enable stability around the business model as well. Beyond that, we are not commenting on the SCAs other than to say that, as I mentioned earlier, these SCA discussions are proceeding with multiple customers. And yes, these are across multiple markets as well.

CJ Muse — Analyst, Cantor Fitzgerald

Very helpful. And then I guess as a quick follow-up for HBM. I think you guided last quarter 40% growth CAGR, which would suggest roughly $50 billion in revenues for the market this year. Has that number changed? And are you seeing any sort of preference for perhaps moving bits to DDR5 over HBM by any industry players given, today, the higher margins that we see there? Thanks so much.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

Yes, it is correct that the margins for non-HBM today are higher than HBM margins. Demand for HBM, of course, continues to be strong. We have not updated the numbers that we had provided last in terms of the outlook for the HBM TAM. The demand for DDR5, LP, and HBM all continue to be strong in the data centers. We, of course, continue to manage the mix of the business as the data center AI demand continues to grow. As I said earlier, outside of data center, we are very much focused on making sure that we are maintaining relevant share in our other key market segments as well.

Overall, in this environment of strong AI demand trends across data center to the edge, we are very much focused on continuing to manage our portfolio, and we see strong growth opportunity for the full portfolio of Micron Technology, Inc. in the data center. I will just point out there that this portfolio is about HBM, it is about LP, it is about SoC-M, it is about DDR5, as well as our data center SSDs. We have made tremendous strides in terms of our market share in data center SSDs over the course of the last few years.

CJ Muse — Analyst, Cantor Fitzgerald

Thank you.

Operator

Your next question comes from the line of Harlan Sur from JPMorgan. Your line is open. Please go ahead.

Harlan Sur — Analyst, JPMorgan

Good afternoon, and congratulations on the solid results and strong quarterly execution. Maybe, Sanjay, to carry on from where you left off on your commentary on SSD. In November of last year, I estimated that your enterprise SSD business was almost half of your total flash business. I think it was up 60% sequentially. Obviously, a very favorable mix shift from a margin perspective for the Micron team. And as you mentioned, you remain a strong top-three global supplier of the ESSD. Off of that strong number, it looks like your ESSD business doubled sequentially in February, still 50% of the NAND mix. Looking forward, with the G9 node continuing to ramp your next-generation ESSDs, performance-optimized, capacity-optimized, mainstream, all on G9 does this give the team a runway to continue to drive sequential growth in ESSD through the remainder of this calendar year and into next year? And then I just wanted to get your thoughts on this new proposed memory tier of high-bandwidth flash. Is this an area where the Micron team might start to focus on R&D resources?

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

Regarding your question on data center SSDs, this is an area of strong growth ahead. NAND supply is very tight, demand for NAND stays strong, and data center SSDs are a big driver of NAND growth as well. Micron is well positioned with our portfolio of SSDs going across the requirements in terms of capacity as well as performance across various customers using TLC as well as QLC with respect to our data center mix.

We are very well positioned with this, and as part of our strategy of continuing to shift our portfolio — our revenue mix toward higher profit pools of the industry and high-value parts of the market, we will continue to address opportunities for growing our SSD business. We feel really good about the trajectory that we have been on with data center SSD and the trajectory that is planned ahead for us as well. Regarding your question on HBF, high-bandwidth flash, high-bandwidth flash has some positive attributes, such as capacity, but it has the limitations that NAND has, such as write speed as well as power and retention. Therefore, there will be potentially some workloads where this may be a possible solution, but it is really early, and what is needed is engagement with the customers in terms of really understanding the business value proposition of HBF. We, of course, continue to study this.

Harlan Sur — Analyst, JPMorgan

I appreciate that. And then how much of these multiyear SCA agreements is due to the inherent requirements for earlier and longer-term engagement with your GPU/XPU chip customers, just due to the customization of their next-generation HBM architectures especially around the base die? Given the 12 to 18-month design cycle times for these custom base dies, the sharing of IP between you and your chip customers, and optimizing the base die to your process flow, it does imply that they have to engage with you much earlier in the design phase for their GPUs and XPUs. Is this another factor driving these multiyear SCAs?

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

Again, we are not getting into the specifics, not getting into the specific type of customers here as well. But what I will definitely tell you is that yes, these SCAs really bring us closer to the customer in terms of partnership. That partnership extends into bringing us closer in terms of R&D collaboration and roadmap planning, both ours as well as for customers. That is definitely one of the benefits of these SCAs as well.

Harlan Sur — Analyst, JPMorgan

Thank you.

Operator

Your next question comes from the line of Tom O’Malley from Barclays. Your line is open. Please go ahead.

Tom O’Malley

Hey, guys. Thanks for taking the questions and really nice results. So at GTC and at OCP this week, I think there is a lot of conversation around the LPU architecture and the increased use of SRAM. Could you talk about your view on the memory market longer term as you see more workloads rely on other types of memory outside of the HBM that you are already using? And then, as a broader question, with so much of the demand coming in these longer-term agreements, being associated with data center and just a few number of customers that can actually acquire and build these products, how are you benchmarking when you are adding capacity? Do you have an internal forecast for accelerators? Are you talking customer by customer and building bottoms-up forecasts, just so that you know in year three, year four, year five, that you are offering enough supply to the industry and not getting into a situation in which we are in an oversupply? Thank you very much.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

First of all, on your question on the SRAM and LPU-based architectures, I would just like to point out that these kinds of architectures make the AI infrastructure more efficient. Any architecture that makes AI infrastructure more efficient is good for AI; they help the pie grow faster. Keep in mind that this LPU architecture works in conjunction with Vera Rubin, which utilizes a tremendous amount of HBM as well as DRAM. The NVIDIA Grok LPX, this LPU-based architecture, actually, per rack, uses 12TB of DRAM as well. All of this is addressing the workloads in a more efficient manner.

This helps with the token economics, the token speed, and the scale-up of AI across inference, and helps with the power. Every bit that helps overall is good for further scaling up and acceleration of AI demand as well. We look at this as complementing what already exists with respect to HBM and DRAM and continuing to grow the TAM and accelerate the deployment of AI. Just keep in mind that today, the enterprises’ AI deployment as a percentage is still very, very low, and across all verticals, across all industries, across the economies, there is a lot of opportunity ahead.

We are excited about all of these opportunities for our full portfolio of HBM, LP, DRAM, SoC-M, and SSD in addressing these future market requirements. Ultimately, all of this just points to how strategic of an asset memory is for AI. Without more memory, without faster memory, AI just cannot scale up. AI just cannot deliver the capabilities, whether it is in training or in inference. Just look at from last year to this year: the DRAM requirement in the advanced AI accelerators has now doubled. These are some of the factors that are contributing to the supply shortage. These trends of AI deployment apply on the edge devices, smartphones, and PCs as well. We are excited about the opportunities ahead, and we absolutely continue to see strong opportunities for our full portfolio ahead.

Operator

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

Vivek Arya — Analyst, Bank Of America Securities

Thanks for taking my questions. Sanjay, on HBM share, do you think you can be in the 20% to 25% range right off the bat? Or do you think you will build towards it over time? Just conceptually, how do you see the puts and takes in terms of whether you can actually expand your HBM share in this upcoming Vera Rubin generation?

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

We have shared before that in CQ3 of last year, we reached our HBM target which we had targeted for calendar 2025, to bring our HBM share in line with DRAM share. We had also said that going forward, we are going to manage our HBM as part of the mix of our total portfolio and are not going to break out the share quarter by quarter. What I can tell you is that we feel very good about our HBM product positioning and feel very good about overall HBM product. The market is there for both HBM4 as well as HBM3E in calendar 2026, and we will be supplying both of these products and feel good about our overall position here and our ability to fully manage the mix of the business.

Vivek Arya — Analyst, Bank Of America Securities

And for my follow-up, Mark, I wanted to revisit this 81% gross margin guidance. I appreciate you are not giving a specific forward view, but in prior historical peaks where Micron Technology, Inc.’s margins, I think, peaked in the low 60s, what is the difference between the prior situations versus now? What do those historical precedents indicate to you about how the trajectory of gross margins can be over the next several quarters? How do customers start to react when they see these levels of gross margins in what is a very important input into their AI silicon? Thank you.

Sanjay Mehrotra — Chairman, President and Chief Executive Officer

Before Mark answers that question, I want to point out that I accidentally said that we targeted to reach our HBM share in Q3 2026. Of course, I said it wrong by mistake. I meant that we had targeted to get to our HBM share in 2025, and we achieved our HBM share in line with our DRAM share in 2025. Beyond that, in Q3 ’25, we had said we are not going to be providing any further mix of HBM share. I just wanted to correct that I accidentally said 2026 instead of 2025.

Mark Murphy — Chief Financial Officer

Vivek, I would say that keep in mind that the industry is supply constrained, and conditions will remain very tight beyond ’26. That certainly supports the near-term and medium-term pricing. We have discussed how we are working with customers to allocate best we can to their businesses and work with them on adding capacity, on supply assurance, on working with them with new products, and so forth. Your question about reverting to some historical mean is the thing that should be revisited. We have a situation where AI is a transformational secular driver. As Sanjay mentioned, AI requires more and higher-performance memory, and this memory helps with driving the token cost down. It helps lower the energy cost per token.

It increases the number of tokens. It increases intelligence overall of AI, which drives harder problem sets and agent use, which drives more tokens and needs more memory. The margins are reflecting recognition that memory is a lot more valuable and an efficient way to monetize AI. That is from data center to the edge. On top of that, we have been clear for a year or more that there are supply constraints that exist on a number of fronts that will take time. There are low inventory levels. There is declining bits-per-wafer on node advances. HBM trade ratio is increasing. Any new capacity really needs to be greenfield, which is a physical constraint that takes a lot of time.

These are both durable factors: both the value of memory and the structural challenge of bringing on supply. We are working both those issues. We are investing in capacity, and we are also increasing R&D to continue to advance the technology and improve the value of memory. We believe that these will help with margins over time. I think customers are recognizing that and entering into these agreements.

Vivek Arya — Analyst, Bank Of America Securities

Thank you.

Operator

[Operator Closing Remarks]