Micron's Q1 2026: Contradictions Emerge on HBM Production, Margins, and Supply-Demand Dynamics

Date of Call: None provided

Financials Results

• Gross Margin: 68%, described as record-setting and expected to increase from Q2 (further expansion to be more gradual)

Guidance:

• Micron targets ~20% bit shipment growth in fiscal 2026 via fab efficiencies and node transitions (1-gamma, Gen9).
• Q1 saw modest sequential bit shipment growth; management expects more bit growth in Q2.
• OpEx: Q3 flattish vs Q2; Q4 higher, including the additional week in the quarter.
• CapEx: fiscal 2027 CapEx expected higher than 2026; construction CapEx roughly doubled from FY25 to FY26; Q2 CapEx as % of sales in mid-20s.
• HBM: sold out for 2026 with agreed volumes/prices; HBM4 shipments starting early calendar Q2 '26.
• Free cash flow strong: ~30% FCF margin in Q1 and expected to increase; priority is reinvestment, de-levering, dividend growth and buybacks.

Business Commentary:

* Supply and Demand Mismatch: - Micron experienced a significant mismatch between supply and demand for DRAM, NAND, and HBM products, with supply falling short of customer needs across all segments. - The primary reasons for this were a marked increase in demand from the data center customer base and the industry's structural constraint in meeting the demand surge.

• CapEx Investments and Expansion:
• The company is increasing CapEx investments, with a plan to double construction CapEx from fiscal year 2025 to 2026, focusing on expanding capacity in Idaho, Japan, Singapore, and India.

• These investments aim to enhance supply capabilities in response to sustained high demand, anticipating ongoing tight supply conditions in the near term.

• Strong Cash Flow and Debt Reduction:

• Micron reported record free cash flow margin in Q1 2026, achieving nearly 30% and reducing debt by $2.7 billion in the same quarter.
• This strength was due to the current high demand for memory products and the company's financial discipline in managing debt and generating cash.

• Gross Margin and Pricing Trends:
• Micron reported record gross margins at 68% in Q1 2026, driven by strong demand for AI and data center products and structural supply constraints.

• The company anticipates that gross margins can improve further, with increases expected beyond Q2 2026, despite the slowdown in margin expansion due to pricing dynamics.

• Product Allocation and Strategic Focus:

• Micron is prioritizing allocation towards high-margin data center products, driven by increasing demand, particularly for AI workloads like KV cache.
• This strategic shift aims to balance customer needs across segments while focusing on strategic long-term deals to improve supply and revenue diversification.

Sentiment Analysis:

Overall Tone: Positive

• Management cited a record-setting 68% gross margin, industry supply constraints driving favorable pricing, ~20% bit shipment growth target for fiscal 2026, near 30% free cash flow margin in Q1, $2.7B debt paydown and $300M buyback, and net cash position — indicating strong operational and financial momentum.

Q&A:

• Question from Aaron Rakers (Wells Fargo): Did non-HBM DRAM bits grow sequentially this quarter? How is your guide factored between bit shipments for NAND and flash this quarter?
  Response: Modest sequential DRAM bit growth in Q1; Micron expects more bit growth in Q2 and is targeting ~20% bit shipment growth in fiscal 2026 via fab efficiencies and node transitions (1-gamma, Gen9).

• Question from Aaron Rakers (Wells Fargo): How should we think about the OpEx trajectory over the next couple of quarters?
  Response: OpEx is guided to be flat in Q3 versus Q2, and up in Q4 (including the additional week).

• Question from Vijay Rakesh (Mizuho): How do you decide capacity allocation between conventional DRAM and HBM given improving conventional DRAM profitability?
  Response: Industry-wide supply is constrained; Micron allocates to minimize customer impact, prioritize strategic/data-center deals while maintaining diversification—mix will tilt more toward data center over time.

• Question from Vijay Rakesh (Mizuho): What attach-rate trends are you seeing for SSDs on AI servers versus last year and how do you see it growing?
  Response: SSD attach rates to AI servers are increasing; Gen6 high-performance SSDs and Micron's QLC leadership are driving share gains and an SSD business now above $1B with expected accelerating growth.

• Question from Vivek Arya (Bank of America): You're at ~68% gross margin — conceptually where can margins go in the cycle and what business model supports that?
  Response: Margins are record-high due to AI-driven demand, supply constraints, strong cost/yield performance and premium product mix; management expects margins can rise from Q2 but further expansion will be more gradual.

• Question from Vivek Arya (Bank of America): When you say HBM is sold out, does that mean no ability to upside production or is there flexibility?
  Response: HBM is sold out for 2026 with agreed volumes and prices; small upside supply can be placed quickly at good terms, but aggregate demand far exceeds supply so small increases won't materially close the gap.

• Question from Kevin Cassidy (Rosenblatt): Will HBM4 be on 1-gamma or 1-beta and how does yield/qualification cadence change?
  Response: HBM4 is on 1-beta; yields should ramp faster than prior HBM3E 12-high due to shared architectures and learnings, and customer platform cadence remains ~12 months.

• Question from Kevin Cassidy (Rosenblatt): How quickly can you change wafer allocation between HBM, low-power and high-performance products?
  Response: Reallocation requires roughly a single process cycle — about 5+ months (≈3–3.5 months front-end plus 6–8 weeks back-end) to implement design changes.

• Question from Steven Fox (Fox Advisors LLC): Any sense for CapEx breakdown between facilities, equipment and construction and how it changes between '26 and '27?
  Response: Construction CapEx roughly doubled from FY25 to FY26; fiscal '27 CapEx will be higher driven by multiple construction/equipment projects (Idaho, Japan, Singapore); Q2 CapEx as % of sales is expected in the mid-20s.

• Question from James Schneider (Goldman Sachs): Can you give a floor level for legacy/embedded production and how much data-center exposure you're comfortable having?
  Response: Portfolio is shifting toward data center for higher ROI but Micron will continue supporting automotive/embedded via investments (e.g., Manassas 1-alpha modernization) to preserve long-life-cycle product supply.

• Question from James Schneider (Goldman Sachs): When will the Hiroshima clean room expansion turn into volume production capability?
  Response: The Hiroshima clean room is being provisioned for future-generation DRAM nodes but will not be volume-ready in 2026.

• Question from Joseph Moore (Morgan Stanley): How do you balance allocations across PCs, mid-tier OEMs and higher-margin customers?
  Response: Allocation decisions are difficult and not solely margin-driven; Micron aims to price by value, preserve customer relationships, support strategic customers and encourage diversified sourcing where possible.

• Question from Joseph Moore (Morgan Stanley): What are the priorities for the substantial cash generation — dividends, buybacks, debt paydown?
  Response: Priority is reinvestment to fund capacity and tech leadership, reduce debt (paid $2.7B in Q1), grow the dividend over time, and resume opportunistic buybacks (repurchased $300M in Q1) within existing program limits.

• Question from Thomas O'Malley (Barclays): As a mix of CapEx this year, how much was construction CapEx or trends on a normalized basis?
  Response: Construction CapEx is materially higher year-over-year — management reiterated construction CapEx doubled from FY25 to FY26, indicating a higher base level going forward.

Contradiction Point 1

HBM Production and Supply Chain Constraints

It directly impacts expectations regarding the production timeline and delivery capabilities of a key product, potentially influencing company revenue and investor expectations.

How does the HBM4 yield ramp compare to HBM3E? - Kevin Cassidy (Rosenblatt Securities)

20251218-2026 Q1: We have a good understanding of our supply. We're always trying to improve that. We have a significant amount of unmet demand in our models... We are more than sold out. - Sumit Sadana(CBO)

好的，我现在需要处理用户的这个请求。用户希望我作为专业的金融文章作者，总结并精简来自美股上市公司财报电话会议中的问题。具体来说，用户给了一个例子，原问题是如何思考2月季度之后的毛利，而我需要将其简化。首先，我要理解用户的需求。他们需要的是简洁、精准的问题，去掉冗长和装饰词，同时保留原意，并且符合美式英语习惯。输出只能是简化后的问题，且必须以问号结尾。用户还特别指出，因为是问题，所以不能改变问题的结构，比如不能把疑问句改成陈述句。接下来，我需要分析原问题：“How should we think about gross margins beyond the February quarter?” 这里的“beyond the February quarter”指的是2月季度之后的时间段。用户可能希望知道公司未来的毛利趋势或预期。原问题已经相对简洁，但可能有进一步简化的空间。考虑到用户要求去除冗长和装饰词，可能需要将“beyond the February quarter”替换为更简洁的表达，比如“post-February quarter”或者“after the February quarter”。但“beyond”在这里已经很直接，可能不需要改。另外，“How should we think about”可以简化为“How will”或者“What are the expectations for”，但需要保持原意。原问题已经很简洁了，可能用户希望更直接的表达。例如，“How will gross margins perform after the February quarter?” 但用户提供的例子中，原问题已经被简化为“How should we think about gross margins beyond the February quarter?”，可能用户希望保持“think about”这个短语，因为它传达了询问未来预期的意思。再检查是否符合美式英语习惯。原问题中的“beyond the February quarter”是正确的，因为季度通常用“quarter”表示，而“February quarter”指的是财年中的某个季度，可能具体指公司财年的第二季度（假设财年从十月开始）。但如果是自然季度，可能指的是第一季度，但用户可能不需要改变这一点，因为原问题中已经使用了这个术语。最后，确保输出只有简化后的问题，没有其他内容，并且以问号结尾。原问题已经符合要求，但用户可能希望更简短的表达。例如，“How should we think about gross margins beyond Q2?” 但用户例子中的回答是保留“February quarter”，所以可能不需要缩写季度为Q2，除非原问题中有明确缩写。但原问题中用的是“February quarter”，所以保持原样更准确。综上所述，原问题已经相对简洁，可能不需要进一步简化，但用户可能希望更直接的表达。比如将“How should we think about”改为“What are the expectations for”，但原问题中的“think about”更偏向于询问分析方法，而“expectations”更直接。不过用户可能希望保持原意，所以可能保持原结构更好。因此，最终的简化问题可能是“How should we think about gross margins beyond the February quarter?”，但用户提供的例子中已经给出这个作为原问题，而简化后的版本可能更短。比如“How will gross margins look after the February quarter?” 但需要确保不改变原意。或者更简短的“How will gross margins perform beyond the February quarter?”不过用户提供的示例中，原问题已经被简化为“How should we think about gross margins beyond the February quarter?”，可能用户希望保持这个结构，但更简短。可能用户希望去除“How should we think about”中的冗余，比如改为“What are gross margins expected to be beyond the February quarter?” 但这样改变了原问题的语气，从询问分析方法变为询问具体预期。因此，可能最佳的简化方式是保持原问题的结构，但更简短。例如，“How should we think about gross margins beyond Q2?” 但需要确认用户是否接受季度缩写。如果原问题中用的是“February quarter”，可能需要保留全称，但如果是自然季度，可能Q2更合适。但原问题中用的是“February quarter”，可能是指财年中的某个季度，所以保留“February quarter”更准确。最终决定，原问题已经足够简洁，可能用户希望保持原结构，所以输出与原问题相同。但用户可能期望更简短的版本，比如“How will gross margins perform after the February quarter?” 但需要确保不改变原意。因此，可能最佳简化是“How should we think about gross margins beyond the February quarter?”，但用户可能已经提供了这个作为例子，所以可能需要确认是否还有更简短的表达方式。可能用户希望将“How should we think about”简化为“What are the expectations for”，所以简化后的问题为“What are the expectations for gross margins beyond the February quarter?” 但这样改变了原问题的结构，从询问分析方法到询问预期，可能不符合原意。原问题更偏向于询问如何分析或看待未来的 - Sreekrishnan Sankarnarayanan (TD Cowen)

2026Q1: We expect it will take a couple quarters for the ramp to be complete. - Mark Murphy(CFO)

Contradiction Point 2

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

How does HBM4 yield ramp compare to HBM3E? - Kevin Cassidy (Rosenblatt Securities)

20251218-2026 Q1: We do expect that margin can go up from second quarter because we believe market conditions that should remain positive beyond '26... We expect margins can go up. - Mark Murphy(CFO)

How should we expect gross margins to perform beyond Q2? - Sreekrishnan Sankarnarayanan (TD Cowen)

2026Q1: We expect margins to expand gradually beyond Q2 due to strong market conditions and cost management. - Mark Murphy(CFO)

Contradiction Point 3

HBM Supply and Demand Dynamics

It highlights inconsistencies in the reported supply and demand dynamics for HBM, which are crucial for understanding the company's production capabilities and market positioning.

Can your HBM production capacity exceed expectations? - Vivek Arya (Bank of America Securities)

20251218-2026 Q1: We have a significant amount of unmet demand in our models... We are more than sold out. - Sumit Sadana(CBO)

Can you estimate HBM supply potential in 2026 if fully sold out by mid-2024? How feasible is transitioning between in-house and TSM dies? - Sreekrishnan Sankarnarayanan (TD Cowen)

2025Q4: HBM supply is fixed for HBM3E, and agreements for HBM4 are in progress. We have flexibility to manage portfolio mix, with fungibility in wafer allocation. - Sanjay Mehrotra(CEO)

Contradiction Point 4

DRAM and NAND Supply and Demand

It involves the company's ability to manage supply and demand for DRAM and NAND components, which are crucial for overall revenue and market positioning.

How can we reasonably expect the gross margin trajectory to develop? - Vivek Arya (Bank of America Securities)

20251218-2026 Q1: We expect that margin can go up from second quarter because we believe market conditions that should remain positive beyond '26... We expect margins can go up. - Mark Murphy(CFO)

What is the expected growth rate for DRAM and NAND in the next quarter? Will you update the TAM for HBM by 2028 considering AI investments? - Timothy Arcuri (UBS Investment Bank)

2025Q4: Our long-term HBM TAM is expected to reach $100 billion by 2030. HBM bit CAGR will grow faster than DRAM CAGR. We see strong long-term growth for HBM with significant data center infrastructure spend. - Sanjay Mehrotra(CEO)

Contradiction Point 5

Gross Margin Trajectory

It involves differing expectations for gross margin performance, which directly impacts financial forecasts and investor expectations.

How should we view the path forward for gross margins? - Vivek Arya(Bank of America Securities)

20251218-2026 Q1: We do expect that margin can go up from second quarter because we believe market conditions that should remain positive beyond '26... We expect margins can go up. - Mark Murphy(CFO)

What is driving the sequential gross margin improvement, and what are the risks and opportunities for future quarters? - Vivek Arya(BofA Securities)

2025Q3: Moving forward, favorable mix and strong market conditions should support margins. We are focused on pricing and expect tight inventories to support pricing. - Mark J. Murphy(CFO)