Micron Technology Inc (MU) — Q2 2025 Earnings Call Transcript

Thank you, and welcome to Micron Technology's Fiscal Second Quarter 2025 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 prepared remarks for this call. 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. We encourage you to visit our website at micron.com throughout the quarter for the most current information on the company, including information on financial conferences that we may be attending. You can also follow us on X at MicronTech. As a reminder, the matters we are discussing today include forward-looking statements regarding market demand and supply, including demand for our products, our market share, market pricing and cost trends and drivers, our plans for manufacturing, the impact of developing technologies such as AI, product ramp plans, technologies and market position, expected capabilities of our future products, our planned investments and expenditures, our expected results and guidance, regulatory matters and other matters. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from statements made today. We refer you to documents we file with the SEC, including our Form 10-K, Forms 10-Q and other reports and filings for a discussion of risks that may affect our future results. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements to confirm these statements to actual results. I will now turn the call over to Sanjay.

Thank you, Satya. Good afternoon, everyone. Micron is in the best competitive position in our history, and we are achieving share gains across high-margin product categories in our industry. Our strong product momentum has enabled us to build deeper customer relationships, and Micron's industry-leading products are now more firmly entrenched in our customers' high-value product roadmaps. In fiscal Q2, data center DRAM revenue reached a new record. HBM revenue grew more than 50% sequentially to a new milestone of over $1 billion of quarterly revenue. Our HBM shipments were ahead of our plans, demonstrating strong execution of our ongoing ramp. The combination of our revenue from high-capacity DRAM modules and our industry-leading LPDRAM for the data center also exceeded the $1 billion milestone for the quarter. Micron remains the only company in the world to ship low-power DRAM into the data center in high volume, showcasing our pioneering innovation and deep partnership with our customers for differentiated solutions. As we build on this momentum, we expect fiscal Q3 revenue to be another record for Micron, driven by shipment growth across both DRAM and NAND. We see the combination of AI data center demand and the ramp of HBM and its associated trade ratio contributing to tightness at the leading edge and constraining non-HBM DRAM supply. We expect supply actions announced by NAND companies to improve the dynamics in the NAND market. Micron's 1-beta DRAM technology leads the industry, and we are extending our leadership with the launch of our 1-gamma node and the industry's first shipments of 1-gamma-based D5 products last month. Micron's 1-gamma is our first DRAM node incorporating EUV, and we have achieved 20% lower power, 15% better performance, and over 30% improvement in bit density compared to our 1-beta DRAM. Micron's leading-edge Gen9 NAND technology node delivers the industry's fastest TLC-based NAND, and we are managing the ramp of this node, mindful of the supply-demand balance in the industry. Micron continues to make disciplined investments that position us to capitalize on the significant growth opportunities driven by AI. We are focused on growing HBM capacity in our existing manufacturing facilities to meet requirements through 2026. In January, we broke ground on an HBM advanced packaging facility in Singapore. This investment allows us to meaningfully expand our total advanced packaging capacity beginning in calendar 2027. Our new DRAM fab construction in Idaho completed an important construction milestone that enabled the receipt of the first disbursement of funding from our CHIPS grant for the project during the quarter. This new Idaho fab will provide meaningful DRAM output starting in fiscal 2027. Turning to our end markets. Dramatic improvements in computation hardware have reduced the per-token cost of generative AI models. These hardware improvements, along with more efficient algorithms and software, drive down the cost of inference and make generative AI-based capabilities more accessible to new applications and use cases. This broadening deployment creates a powerful growth vector for aggregate AI demand, and recent innovations and those in the pipeline from key contributors to the AI ecosystem will continue to fuel this growth trend. As GPU and custom AI accelerate, our performance capabilities continue to improve with each new generation of product. These high-performance processors are starved of memory bandwidth. HBM memory provides the bandwidth necessary to leverage these powerful processors in the most effective and efficient manner, and we are excited to see the growth opportunities ahead for this complex and high-value product category, where our customers now recognize Micron as the HBM technology leader in our industry. Recently, large hyperscale customers reiterated strong year-over-year growth for their capital investments in calendar 2025. We project mid-single-digit server unit growth in calendar 2025, with growth in both traditional and AI servers. We see strong demand for HBM and have once again increased our HBM TAM estimate for calendar 2025 to over $35 billion. We remain on track to reach HBM share similar to our overall DRAM supply share on a run-rate basis in calendar Q4 2025. As previously mentioned, Micron has sold out of our HBM output in calendar 2025. We are seeing strong demand for our HBM supply in 2026 and are in discussions with our customers on agreements for their calendar 2026 HBM demand. Micron's industry-leading HBM3E delivers a 30% power reduction compared to the competition. And our HBM3E 12-high has a remarkable 20% power advantage over competing 8-high products while providing a 50% higher memory capacity. We have begun volume production of HBM3E 12-high and are focused on ramping capacity and yield. We anticipate HBM3E 12-high will comprise the vast majority of our HBM shipments in the second half of calendar 2025. We are making good progress on additional platform and customer qualifications with HBM. Micron's HBM3E 8-high is designed into NVIDIA's GB200 system, and our HBM3E 12-high is designed into the GB300. In fiscal Q2, we initiated volume shipments to our third large HBM3E customer and anticipate additional customers over time. We expect multibillion dollars in HBM revenue in fiscal 2025. Looking ahead, we are enthusiastic about Micron's HBM4, which will ramp in volume in calendar 2026. Our HBM4 provides a bandwidth increase of over 60% compared to HBM3E. The timing of our HBM4 is aligned to our customers' requirements, and we are focused on delivering the best HBM4 products to the market across power efficiency, quality, and performance. Our proven HBM product performance, our strong HBM roadmap, and our demonstrated manufacturing excellence uniquely position Micron to capitalize on next-generation HBM4 and HBM4E solutions. Micron has led the adoption of LP in the data center. In AI servers, Micron's LP lowers memory power consumption by over two-thirds compared to D5. We expect to maintain our leadership position in LP for server as it transitions from soldered components to SOCAMM, or Small Outline Compression Attached Memory Module form factor. Micron's SOCAMM was developed in collaboration with NVIDIA to support the GB300. LPDRAM in a SOCAMM form factor enables easier server manufacturability and serviceability and helps drive broader LP adoption in the server market. We are on track to deliver multibillion dollars in revenue in fiscal 2025 from our portfolio of high-capacity D5 modules and LP products for the data center. In data center NAND, demand moderated in fiscal Q2 due to short-term customer inventory-driven impacts, and we see a return to bit shipment growth in the months ahead. In calendar Q4 2024, based on industry analyst reports, Micron achieved yet another record high market share in data center SSDs, with revenue growth in each category, including performance, mainstream and capacity SSDs. Our high-performance 9550 SSD, which is on NVIDIA GB200 NVL72-approved vendor list, completed qualifications at multiple customers. During the quarter, we announced that Micron's data center class G8 QLC-based NAND components are qualified for production in pure storage's high-capacity 150-terabyte DirectFlash module. Micron's data center class NAND components give customers the ability to leverage our industry-leading NAND design and process technology in their custom storage solutions. Micron's leadership in QLC NAND supports the transition from HDD to NAND solutions in the data center. We expect to generate multiple billions of dollars in data center NAND revenue and once again grow our data center NAND market share in calendar 2025. We expect the PC market to grow mid-single digits in unit terms in calendar 2025, with growth weighted to the second half of calendar 2025. The Windows 10 end of life in October 2025, combined with an aging installed base and the desire amongst customers to ensure that their PC hardware specs can support compelling AI applications in the future, are key catalysts that drive this growth. AI PCs required a minimum of 16 gigabytes of DRAM, with many models requiring even higher memory versus the average 12 gigabyte PC content last year. During the quarter, we sampled our 16-gigabit 1-gamma-based D5 products to PC clients. In NAND, we launched our Gen9 based 4600 performance SSDs, the fastest in the world for the client market, and completed qualifications of our 2650 mainstream SSDs at multiple PC OEMs. Turning to mobile. Our expectations for smartphone unit volume growth in calendar 2025 remain at low single-digit percentages. Smartphone customer inventory dynamics have played out as anticipated, leading to mobile DRAM and NAND bit shipment growth in our fiscal Q3. AI adoption continues to be a significant driver for increased mobile DRAM demand. AI-capable flagship phones increasingly feature DRAM capacities of 12 gigabytes or higher compared to the 8 gigabytes in last year's models. Smartphone OEMs are using Micron's industry-leading 9.6 gigabit per second LP5X DRAM to improve AI performance, delivering up to 20% more tokens per second than those using legacy speed grades on the same SoC. During the quarter, we announced that our LP5X DRAM and UFS 4.0 NAND were featured in the high end of the Samsung Galaxy S25 Series. Micron's mobile DRAM and UFS storage solutions are in high demand and will continue to launch in flagship and high-end smartphones throughout the year. Additionally, we are now sampling the industry's first mobile G9 managed NAND-based UFS 4.1 solution in densities of 1 terabyte. Automotive OEMs, industrial and consumer embedded customers are in the later stages of adjusting their inventory levels. In automotive, which comprises the largest portion of our EBU revenue, memory and storage content per car continues to increase as AI-enabled in-vehicle infotainment systems become more enriched and driver assistance functions become more capable. Advanced robotaxi platforms today contain over 200 gigabytes of DRAM, or 20x to 30x higher than the amount of DRAM in the average car. Micron is well-positioned to capitalize on this trend with our industry-leading portfolio of automotive products. During the quarter, we announced the production readiness of the industry's first automotive LP5X DRAM product that supports the 9.6 gigabits per second speed grid, addressing the increasing performance requirements of AI-driven applications in vehicles. Additionally, our 4150 SSD became the industry's first enterprise SSD product that is automotive qualified and is now sampling at target customers, further reinforcing our commitment to innovation and leadership in this important market. Now turning to our market outlook. Calendar 2024 DRAM bit demand growth was in the high teens, consistent with our prior expectations. Calendar 2024 NAND bit demand growth was approximately 10%, slightly below our previous view of low double digits. We forecast calendar 2025 DRAM bit demand growth in the mid- to high teens percentage range and NAND in the low double-digit percentage range. Over the medium term, we expect industry bit demand growth of mid-teens CAGR for both DRAM and NAND. As we have previously discussed, NAND technology transitions provide a significant increase in overall bit output. Sustained NAND industry supply-demand balance can result from increasing the time between node transitions, along with sustained reductions in NAND industry CapEx and wafer capacity. NAND industry wafer capacity underutilization can help to improve the near-term dynamics in the NAND market. We expect Micron's supply growth in calendar 2025 to be lower than industry demand growth for both DRAM and NAND. We expect our inventory days to decline as we move through calendar 2025. We expect to maintain our bit share in DRAM and NAND in calendar 2025. In DRAM, we expect a strong ramp of HBM throughout calendar 2025. As noted before, HBM3E consumes 3x the amount of silicon compared to D5 to produce the same number of bits. Looking ahead, we expect the trade ratio to increase with HBM4 and then again with HBM4E when we expect it to exceed 4:1. The sustained and significant increase in silicon intensity for the foreseeable future contributes to tightness for industry leading-edge node supply and constrains capacity for non-HBM products. In NAND, we continue to underutilize our fabs, and our wafer output is down mid-teens percentages from prior levels. We plan to reuse a portion of our underutilized NAND equipment to support capital efficient conversions to leading-edge nodes. This strategy results in over a 10% structural reduction of NAND wafer capacity exiting fiscal 2025 compared to levels exiting fiscal 2024. We will continue to prudently manage our NAND supply, including the levels of our capital investment, the pace of ramp of our new technology node, SaaS capacity and utilization, consistent with our demand growth. Our capital spending plans remain unchanged at approximately $14 billion for fiscal 2025. A significant portion of our capital investments are focused on multi-year facility investments to support our DRAM and HBM manufacturing, including our Idaho fab, Singapore HBM advanced packaging facility and Taiwan DRAM test facility. Micron will remain disciplined with our overall equipment investments to manage our supply growth consistent with demand. On tariffs, Micron serves as the U.S. importer of record for a very limited volume of products that would be subject to newly announced tariffs on Canada, Mexico and China. We continue to monitor the possibility of future tariffs and are prepared to work with our customers and suppliers to understand future tariff effects and supply chain options that may arise. Where tariffs do have an impact, we intend to pass those costs along to our customers. With that, I will now turn it over to Mark for our financial results and outlook.

Thank you, Sanjay, and good afternoon, everyone. Micron delivered fiscal Q2 EPS above the guidance range and revenue and gross margin within the range. Total fiscal Q2 revenue was approximately $8.1 billion, down 8% sequentially and up 38% year-over-year. Fiscal Q2 DRAM revenue was $6.1 billion, up 47% year-over-year, and represented 76% of total revenue. Sequentially, DRAM revenue decreased 4%, with bit shipments decreasing in the high single-digit percentage range and prices increasing in the mid-single-digit percentage range as a result of improving portfolio mix. Fiscal Q2 NAND revenue was $1.9 billion, up 18% year-over-year and represented 23% of Micron's total revenue. Sequentially, NAND revenue decreased 17%, with bit shipments modestly higher and prices decreasing in the high-teens percentage range. Fiscal Q2 bit NAND shipments were above our expectations, driven by higher consumer-oriented shipments. Now turning to revenue by business unit. Compute and Networking business unit revenue was up 4% sequentially to $4.6 billion and reached 57% of our total revenue. For the third consecutive quarter, CNBU revenue reached a new quarterly record, driven by a more than 50% sequential increase in HBM revenue. Revenue for the Storage business unit was $1.4 billion, down 20% sequentially. The decline in SBU revenue was driven primarily by lower storage investments from data center customers after several quarters of very strong growth and overall NAND industry pricing. Mobile business unit revenue was $1.1 billion, down 30% sequentially, as mobile customers continue to improve their inventory positions. Embedded business unit revenue was $1 billion, down 3% sequentially. Lower sequential revenue was primarily due to inventory improvement initiatives at automotive customers. The consolidated gross margin for fiscal Q2 was 37.9%, down 160 basis points sequentially due primarily to pricing and consumer-oriented segments of the market, especially in NAND and NAND mix shift to consumer-oriented products, as mentioned earlier. Our ongoing high-value mix shift in our DRAM portfolio partially offset some of these factors. Operating expenses in fiscal Q2 were $1 billion, flat sequentially. R&D expenses were lower than planned due to earlier product qualification and timing of certain R&D projects. We generated operating income of $2 billion in fiscal Q2, resulting in an operating margin of 24.9%, which was down approximately 260 basis points sequentially and up 21 percentage points from the year ago quarter. Fiscal Q2 adjusted EBITDA was $4.1 billion, resulting in an EBITDA margin of 50.7%, up 10 basis points sequentially and up 14 percentage points or $2 billion from the year ago quarter. Fiscal Q2 taxes were $214 million on an effective tax rate of 10.7%, lower than our guidance due to the effects of one-time items in the quarter. Non-GAAP diluted earnings per share in fiscal Q2 was $1.56, above the high end of the guidance range compared to $1.79 per share in the prior quarter and $0.42 in the year ago quarter. Turning to cash flows and capital spending. In fiscal Q2, our operating cash flows were over $3.9 billion, and our capital expenditures were $3.1 billion, net of proceeds from government incentives. As a result, free cash flows in the quarter were $857 million. Our fiscal Q2 ending inventory was $9 billion or 158 days, up as communicated previously, and an increase of 9 days from the prior quarter. On the balance sheet, we held $9.6 billion of cash and investments at quarter end and maintained $12.1 billion of liquidity when including our untapped credit facility. During fiscal Q2, we extended our debt maturities through a $1 billion 10-year senior note offering and a $1.7 billion term loan, with proceeds principally used to pay down notes maturing in 2026 and the previous term loan balance. We ended the quarter with $14.4 billion in total debt, low net leverage and a weighted average maturity on our debt of 2032. Following quarter end, we renewed and increased the size of our 5-year revolving credit facility to $3.5 billion. This provides an additional $1 billion of liquidity and further improves our financial flexibility. Now turning to our outlook for the third fiscal quarter. We forecast growth in DRAM and NAND bit shipments in fiscal Q3. We forecast sequentially lower fiscal Q3 gross margin, which includes the effects of higher consumer-oriented volumes. NAND underutilization continues to weigh on gross margins. We project operating expenses in fiscal Q3 to be approximately $1.13 billion and fiscal 2025 OpEx to increase by over 10%, reflecting planned increases to support our portfolio of high-value products, including HBM. We expect DIO to decrease in the third fiscal quarter on higher bit shipments. We continue to project ending fiscal 2025 with tight DRAM inventories. For fiscal Q3 and Q4, we estimate our non-GAAP tax rate to be approximately 14%. In fiscal Q3, we forecast CapEx to be over $3 billion. Our CapEx projection for fiscal 2025 remains approximately $14 billion. The overwhelming majority of the fiscal 2025 CapEx is to support HBM, as well as facility construction, back-end manufacturing, and R&D investments. Impacts from potential new tariffs are not included in our guidance, given the uncertainty around tariff timing, nature and implementation. With all these factors in mind, our non-GAAP guidance for fiscal Q3 is as follows. We expect revenue to be $8.8 billion, plus or minus $200 million; gross margin to be in the range of 36.5%, plus or minus 100 basis points; and operating expenses to be approximately $1.13 billion, plus or minus $15 million. As mentioned, we expect the fiscal Q3 tax rate to be around 14%. Based on a share count of approximately 1.14 billion shares, we expect EPS to be $1.57 per share, plus or minus $0.10. In fiscal Q2, Micron delivered earnings above the guidance range, achieved record revenues again in data center DRAM, ramped our leading HBM, and released the industry's most advanced DRAM process technology. For fiscal Q3, we project record quarterly revenue at the midpoint of our guidance. We are focusing our R&D resources, exercising capital discipline, and maintaining a strong balance sheet as we extend our leadership and tap into substantial growth opportunities ahead. I will now turn it back over to Sanjay.

Thank you, Mark. Micron is uniquely positioned to capitalize on the transformative growth driven by AI from data center to edge devices. And we are on track for the record revenue and significantly improved profitability in fiscal 2025. We are confident in our ability to navigate the current market dynamics with disciplined investments and a focus on our high-value portfolio mix shift. This is the most exciting time I have seen for memory and storage, and Micron's innovations are at the forefront of this revolution. We are excited about the opportunities ahead and remain committed to delivering value for all our stakeholders. Thank you for joining us today. We will now open for questions.

Back in mid-February at an investor conference, I know the team had walked us through the dynamics on a weaker gross margin profile during the May quarter. That's playing out, but you did anticipate an improved gross margin profile beyond this quarter, fiscal Q3. So is that still the case that we should see gross margin improvements maybe starting in fiscal Q4 and potentially beyond? And is that a possible data center and your consumer-related products? Is that across total DRAM and your NAND segments? Any color here would be great.

Sure, Harlan, this is Mark. I'll address that. First, I want to share some insights about the third quarter. As expected, it saw a sequential decline, mainly driven by a higher mix of consumer-oriented volumes, lower CQ1 pricing in consumer markets, and industry challenges, although this was partially balanced by increased HBM. Although the situation has worsened, we believe conditions have improved since our previous public comments, and this is reflected in today's guidance. While we are not offering guidance for the fourth quarter, we do anticipate a modest increase in gross margin. There are always factors that can positively or negatively affect this. On the positive side, we expect market conditions to improve and growth in HBM and other high-value products to enhance our mix. However, we are facing some challenges, such as NAND underutilization, which we've discussed before. Since our capacity has been reduced structurally, we will see fewer costs in the third quarter, but we will incur more as we clear out inventory in the fourth quarter. We have implemented measures to manage NAND supply, which is crucial, and that segment of the business is still recovering. We plan to adjust pricing in the second calendar quarter to ensure supply discipline. Additionally, in the fourth quarter, we will start incurring some initial costs related to construction and the new DRAM node we are developing. In summary, we expect gross margins in the fourth quarter to improve slightly compared to the third quarter.

I appreciate that. And then, Sanjay, you increased your industry bit demand outlook from mid-teens last earnings to mid- to high teens this quarter for calendar '25 for DRAM. I assume part of it is the HBM-related dynamics as you increased your TAM outlook for HBM this year. But is the team seeing any other segments within DRAM that are driving the better industry, this demand profile as the year unfolds?

We had projected that customer inventories will get in a better place by spring timeframe in the consumer side of the business. And it's turning out to be the way we had projected. And of course, the smartphone and PC markets are also seeing more and more devices that have AI implemented. That drives content growth. So as customer inventories got closer to healthier levels, we are seeing a resumption of purchases by customers, and all that plays into our guide for 2025 bit demand. And as you noted, of course, data center continues to be strong. And in data center, of course, HBM is a strong contributor towards revenue growth in terms of bit demand growth for data center, of course, high-density DIMMs, as well as LP where Micron leads the industry, all of these actually contributing towards the demand increase in 2025 as well.

Mark, can you give us a little detail on the fiscal Q3 guidance? You're guiding revenue up about $750 million. How much of that is coming from DRAM versus NAND? And I know you said that bits are up in both. But can you give us a sense of how much bits are up in each of those 2 markets? And then I had another question as well.

Yes. Tim, we've provided you the consolidated revenue number. You have the year-to-date figures on both revenue and DRAM, our revenue and bit growth and price for both DRAM and NAND. And then we've provided you a demand growth for the year in bits. So I think we've provided you the contours of the business, and you should be able to make some volume and price assumptions on the revenue outlook. We do expect bit growth in both DRAM and NAND in the third quarter.

Okay. But I guess, Mark, can you say that you expect revenue growth in both DRAM and NAND as well?

DRAM with HBM and data center exposure will show a growth trend.

Okay. Mark, everything you're doing is great. However, margins are still a bit low, especially heading into fiscal Q4. I have a two-part question. First, while I understand you don't want to guide on fiscal Q4 margins, do you think you'll be able to reach the same margins as fiscal Q2 in fiscal Q4? Second, when can we expect to see the benefits from HBM and the cost reductions on the non-HBM DRAM side reflected in a clearer gross margin number?

Tim, we're not going to provide a fourth-quarter number. We have indicated that fourth-quarter gross margins would be up somewhat from third-quarter. I think as Sanjay mentioned in the prepared remarks, we're in the best position we've ever been in on technology and market exposure products. Manufacturing is operating very well. On the cost side, maybe to help you with the modeling, our all-in DRAM costs for fiscal year '25, we expect to be flattish. Our all-in NAND cost for FY '25, in line with front-end cost reductions in the low double-digits. So we are taking supply actions on the NAND side, consists of underloading, reducing CapEx, delaying node transitions, as we talked about. And we're beginning to see some signs of improvement on that part of the business. On the DRAM side of the business, we know the continued HBM growth and broader data center. And then the lead edge on DRAM is tight, and we're, again, projecting our DIO levels to be below our target by the end of the fiscal year.

And Tim, I'll just add that, of course, we continue to be focused on increasing the mix of our revenue towards higher profit pools of the industry, both in DRAM and NAND. So in terms of our product portfolio, as we have said, it is best positioned. So continue to drive the product portfolio and mix, focusing on really strengthened profitability. And demand trends we have talked about, I mean we feel good about DRAM demand trend. And of course, in NAND, the supply discipline will be important. We, of course, are extremely focused on that. And AI is benefiting our DRAM demand across data center and edge as well. And of course, our technology position, our product position, and our cost position continues to be healthy.

I have 2 of them, first, Sanjay or Mark. You've seen some of the memory prices improve of late. I'm just wondering how much of that is true end demand versus actually tariff-related pull-ins? And how sustainable do you think the industry pricing dynamics today are?

So of course, as we have indicated, the DRAM demand drivers as well as NAND on the consumer side of the business in smartphones, particularly in smartphones as well as in PCs are improving as the customers are getting closer to their normal inventory levels in the consumer market again, along the lines of what we had projected. PC, probably more second half of this year that we start seeing greater demand trend with respect to AI PCs and increasing penetration of AI PCs. AI PCs require greater DRAM content than what was in the past, we have talked about that last year, average 12 gigabytes in PCs and AI PCs with the NPU running at 40 tops or higher requires 16 gigabytes or higher. So these are good demand trends on the PC side and same thing happening on the smartphone side. You have seen several introductions and more of these are smartphones and more of them to be rolling out with AI smartphones that too have higher DRAM content greater than 12 gigabytes versus last year at 8 gigabytes. And of course, data center demand trend in DRAM continues to be strong as well. So all of this, I mean, first of all, demand trends are in a good place. And of course, on the supply side, leading-edge supply, as we mentioned in the prepared remarks, as well as Mark just mentioned, leading-edge DRAM supply is tight. And certainly, that is happening because of increasing demand for the HBM and HBM trade ratio. And on NAND, the supply actions by various players and underutilization in the fabs certainly is improving the supply picture as well. So all of this is improving the demand/supply environment in the industry. And of course, we are well focused on driving an inflection towards higher pricing in CQ2 and we are well positioned with our products across the end market segments. And we really look forward to continue to maximize the opportunities for our business and continue to increase the mix of our business toward higher profit pools of the industry.

Got it. Got it. Thanks, Sanjay. And then a quick question on the gross margin side. Clearly, HBM3E 8-high is obviously a mature technology as you move to 12-high in HBM4. Would the yields might be lower than 8-high? Just kind of curious, does it have any negative impact on gross margins? Or is it de minimis at this point?

First of all, in HBM3E 8-high, I'm very pleased with how our team has executed. And we mentioned in the prepared remarks that we actually delivered greater volume of HBM3E versus our plans in our FQ2 and exceeded revenue for the first time, a major milestone of more than $1 billion. And HBM3E continues to do well with 8-high, our yields, our capacity ramp is going well. Our execution is going well. And all that experience of 8-high in terms of capacity ramp as well as yield ramp will, of course, help us as we ramp our 12-high. You know, we have announced before that we are now in volume production with our 12-high. Just like any other new product, and these are highly complex products, HBM is the most complex product ever made in the industry. These kind of complex products, of course, in the early stages, there is a yield ramp. We expect 12-high to, of course, have a premium over 8-high and of course, will continue to be accretive to our DRAM margins nicely as well. And we remain very focused in the second half shifting the vast majority of the second half of the calendar year, shifting the vast majority of our volume to 12-high. And as we ramp that volume, of course, yields will continue to go up as well. And with that, by the end of this calendar year, as we shared with you, we expect to reach our share to be in line with our overall industry DRAM share.

Great. I wanted to make sure I got the inventory targets right. So you're at 153 days and you'll be below the target model, which I think is 120 days in 2 quarters. And I guess if that's right that seems like a lot of reduction. Can you talk about how much volume do you need to do that? How much is the inventory kind of impacted by some of the HBM supply trends, things like that? Could you just characterize a little bit, how you reduce that much inventory?

Yes, it's Mark. So, 158 days was the Days Inventory Outstanding in the second quarter. As we discussed, the conditions in DRAM are tighter than in NAND. We've implemented supply actions in NAND and have seen good volume growth there, which is expected to continue. However, the industry conditions include underutilization, a reduction in capital expenditures, and delays in node transitions. On the DRAM side, as Sanjay mentioned, AI-driven growth, particularly in High Bandwidth Memory, is creating tightness in that market. Our target for inventories remains 120 days, and we anticipate falling below that for DRAM in our fiscal fourth quarter.

Okay. Great. Did you provide guidance on inventory for the upcoming quarter, and I assume it will start to decrease now?

We just said that on days, that will go down through the year.

I guess first question, I to follow up on gross margins, Mark, is there a point where we're thinking about the underutilization charges and the period cost into kind of May and August on the NAND side? And then is there also a way to think about the incremental construction costs as we go into August and November?

Yes. So CJ, we had lower period costs in our third quarter than we initially expected, partly because we have reduced our capacity structurally. This means that more of the underutilization charge will be accounted for in inventories, rather than as a period cost. I would say that these under-absorption costs do affect gross margins in the fourth quarter and into 2026. However, despite this, we believe that the combination of business growth, improved market conditions, and better product mix will lead to somewhat higher gross margins in the fourth quarter. Regarding start-up costs, the impact is relatively minor on a sequential basis from the third to the fourth quarter. However, as we approach wafer outs in Idaho, that figure will rise throughout 2026. We will share more details as our plans and timing are finalized.

Very helpful. And a quick follow-up. You revised your HBM industry revenue outlook higher. Curious if there's a framework on how you're thinking about kind of first half versus second half for the industry?

Of course, the revenue in the second half as you go from 8-high to 12-high continues to go up because 12-high will be carrying a certain premium over 8-high. So if we have projected more than $35 billion for calendar year 2025 and a bigger portion of that in the second half of calendar '25 versus first half. And more than $35 billion, of course, is the industry TAM for HBM that we have referred to here. And I'll just point out that, of course, with respect to HBM, there is expansion of HBM customer base taking place. Micron itself, now we are shipping to a third large customer that we have begun shipping our products to. So that also is contributing to the growth in HBM revenue in the second half as the customer base expands.

Yes. The first question is about the lower end of the market. Could you provide details on the exposure, particularly regarding DRAM, LP4, and DDR4? As you anticipate growth in HBM and normalization in some consumer markets during the second half of the year, will this have a minimal impact on revenue and margins as you proceed into that period?

So regarding D4 and LP4, last quarter we shared that our revenue from these products for the remainder of the fiscal year corresponds to about 10% of our total company revenue. We continue to see that for the rest of the fiscal year. Can you please repeat your second question?

Does this have a minimal effect on margins? The question is whether this will stop being a drag on margins as we move into the second half, assuming other parts of the business continue to grow.

It is a smaller part of the overall company revenue. We are leading in D5 and HBM, as well as D5 and LP5 based products in the data center and other consumer markets. LP4 and D4 will continue to decrease over time. Overall, industry conditions in DRAM are improving with better demand drivers and tighter supply, which can influence the dynamics of the entire DRAM market.

As a follow-up on HBM, you previously mentioned that you sold out for the year. However, your TAM assumptions have been increasing over the past several quarters. Looking ahead to next year, it seems that the higher TAM this year should lead to higher TAM assumptions for the upcoming year. Do you still have the capability to increase your capacity to maintain that market share in HBM, which corresponds to your overall share of DRAM as you enter next year?

So of course, we have said that as we exit calendar '25, our share in HBM will correspond to our industry DRAM shares. So if you look at that run rate, I mean, clearly, in calendar year 2026, our share would be higher for the full year basis versus 2025. And we remain very focused on continuing to increase our capacity of HBM. I mentioned earlier that we are doing executing quite well in terms of continuing to increase the capacity, continuing to shift from 8-high to 12-high, very much focused on bringing HBM4 into the market next year and, of course, addressing all the capacity needs related to that as well. So while we are not projecting 2026 market share at this time, we feel very good about our HBM position, our close relationships with our customers, our execution on our technology and products and our manufacturing overall.

Thanks. Looking at the May guidance and reviewing the last three quarters, your revenue is between $7.8 billion and $8.8 billion annually. The last time this occurred was about three years ago during the last upturn, but your gross margins were 10 points higher. Why are your gross margins around 10 points lower despite having a similar revenue base? Does this imply that achieving gross margins in the 50s again is out of reach? Can you provide a potential pathway for getting them back there if you think that’s possible?

Overall, our gross margins in DRAM have been strong, supported by our advanced technology and product offerings in D5, LP5, and HBM. However, NAND has been a drag on our margins due to the current industry environment and supply-demand imbalances. It's always influenced by these dynamics, but we remain committed to shifting our business mix toward high-value solutions in NAND as well. We expect that as supply discipline improves, the fundamentals of NAND in the industry will also get better. It's crucial to keep this focus on sustained supply discipline. Looking ahead, we remain dedicated to enhancing our revenue mix toward higher-margin products in both NAND and DRAM, closely managing our product portfolio, demand-supply balance, and technology development to ensure alignment of supply and demand while keeping an eye on costs. We are optimistic that there will be improvements in business fundamentals across the industry.

Thanks, Sanjay. Just one quick follow-up on that. You mentioned increasing the mix to higher-value solutions. In your commentary and the press release, you indicated that one reason the gross margin was lower was due to increased consumer exposure. You also pointed out that NAND was down significantly more than DRAM. Are you also noticing increased consumer exposure in DRAM? What is causing that, and how can you address it?

We are performing well in the data center sector, with our business mix for DRAM continuing to improve. We have leading products in DRAM for data centers, including HBM and our recently announced SOCAMM products, which are significant. In terms of DRAM, we have been facing a surplus of customer inventory on the consumer side for the past few quarters. However, as these inventories approach normalization and considering the impact of AI in consumer devices, we are witnessing a strong rebound in demand, especially in smartphones. This resurgence in consumer demand, along with tighter HBM supply, is prompting us to increase prices in the second quarter. Similarly, on the NAND side, industry supply actions and the normalization of consumer inventories are also driving a rebound in demand, which will enable us to raise prices in NAND as well during the same timeframe.