Micron (MU) reported blowout third quarter results after the bell on Wednesday, easily beating Wall Street's expectations on the top and bottom lines, as well as gross margins, as demand for its memory and storage chips continues to soar.
The company also provided a better-than-anticipated outlook for its current quarter, sending Micron stock rocketing 15% higher.
While the AI-driven chip shortage shows no sign of ending this year or next, which should continue to pad Micron's sales, the company is taking early steps to ensure it doesn't fall back into the memory market's traditional boom-bust cycle. Memory companies regularly vacillate between periods of strong sales where there's a dearth of chips, followed by a bust as manufacturing capacity catches up to demand, leading to a glut of memory components.
Micron is attempting to insulate itself from that with a new business model that locks customers into long-term contracts.
"We feel like we have a transformation of our business that is happening in front of our eyes, and it's really being driven by … the demand trajectory that is incredibly strong and durable," Micron chief business officer Sumit Sadana told Yahoo Finance.
"These customer agreements are very different [from] the agreements we have done in the past. We used to have one-year agreements at most. Here we have … most of our large agreements are like five-year agreements that go till the end of 2030," he explained.
According to Sadana, customers who sign so-called strategic customer agreements (SCAs) commit to purchasing a certain quantity of Micron's chips each year during the contract, while paying a large upfront cash payment.
The deals also establish a floor for component costs, ensuring Micron isn't left out in the cold if memory prices begin to decline.
"The focus of these agreements is to create the visibility and the durability of strong financial results, and these price bands enable us to create that durability and visibility. This floor itself is … well above the previous peaks of previous cycles," Sadana added.
Micron said it will take quite some time to bring more capacity online to build enough chips to meet demand. The company said there are no available clean rooms to produce the components, forcing it to construct entirely new factories, which will take years.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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