Microchip Technology Q1 Earnings Call Highlights
Key Points
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- Strong quarterly results: Microchip reported June-quarter sales of $1.485 billion, up 13.2% sequentially and 38% year over year, while non-GAAP EPS of $0.76 exceeded the midpoint of prior guidance by $0.07.
- Data-center growth is accelerating: Management forecasts data-center revenue of approximately $1 billion in calendar 2026, up about 69% from 2025, supported by PCIe Gen 6, storage, power-management, security and memory design wins.
- Outlook and balance sheet are improving: Microchip expects September-quarter sales to rise 8% sequentially and adjusted EPS to reach $0.91–$0.95. Inventory declined, bookings were strong and the company plans to prioritize debt repayment, although supply constraints and elevated leverage remain considerations.
Microchip Technology (NASDAQ:MCHP) reported fiscal first-quarter results that exceeded its prior guidance, as the semiconductor company cited strong demand across data centers, aerospace and defense, industrial and automotive markets. Management also raised its disclosure around data-center exposure and forecast continued growth for the September quarter.
For the June quarter, Microchip reported net sales of $1.485 billion, up 13.2% sequentially and 38% from the year-earlier period. On a non-GAAP basis, gross margin was 63.8%, operating margin was 35.1%, and diluted earnings per share were $0.76. CFO Eric Bjornholt said EPS was $0.07 above the midpoint of the company’s previous guidance.
On a GAAP basis, Microchip posted net income attributable to common shareholders of $202 million, or $0.37 per share. GAAP gross margin was 63.2%. The company recorded $18.9 million in special charges, primarily related to the settlement of two longstanding legal matters and activities associated with the closure of Fab 2.
Data-Center Exposure Reaches $1 Billion Forecast
CEO Steve Sanghi provided a more detailed view of Microchip’s data-center business, which includes products sold through its Data Center Solutions business unit as well as catalog products from other business units.
Microchip estimated calendar 2025 data-center revenue at approximately $591 million, or about 14% of company sales. That total consisted of $302.7 million from the Data Center Solutions unit and roughly $288 million from other products, including power-management analog products, microcontrollers, digital signal controllers, security products, FPGAs, timing products and Serial Quad I/O memory products.
For calendar 2026, the company expects total data-center sales of about $1 billion, representing growth of approximately 69% from 2025. Microchip expects both its Data Center Solutions unit and its broader catalog-product portfolio to contribute about $500 million each.
Data-center revenue rose 77.2% year over year in the March quarter and 97.8% in the June quarter. Sanghi said the company expects “significant growth” in 2027 and beyond as design wins for PCIe Gen 6 switches and retimers, storage controllers, nonvolatile-memory controllers, power-management products, security products, timing products and memory products move into production.
Microchip said it had 14 identified PCIe Gen 6 design wins as of the call, including 12 switch wins and two retimer wins. Sanghi noted that the company’s wider catalog exposure comprises hundreds of designs through suppliers of power systems, modules and other components, making it more difficult to quantify individual design wins across the full data-center portfolio.
End-Market Growth Broadens
Microchip began reporting data-center and compute revenue as separate end markets. Based on management’s estimates for the June quarter, industrial represented 32.2% of sales, followed by data centers at 17.1%, aerospace and defense at 16.7%, automotive at 15%, communications at 8.2%, consumer appliances at 7.4% and compute at 3.4%.
Year-over-year growth in the June quarter was led by data centers, up 97.8%. Communications increased 53.3%, aerospace and defense rose 45.6%, automotive increased 29.3%, industrial grew 24.3%, consumer appliances increased 19.1%, and compute rose 9.6%.
Sanghi said the company sees several factors that could extend the current recovery. He pointed to data-center demand, an emerging multiyear aerospace-and-defense buildup, and later-stage recoveries in industrial and automotive markets. However, he cautioned against extrapolating recent growth percentages, noting that comparisons are against depressed levels from the prior year.
In aerospace and defense, Sanghi said Microchip is seeing orders tied to missiles, drones, radar systems, interceptors, battle tanks and ammunition. He described current demand as the “front end” of a broader expected production ramp, though he said customers still need to provide more specific orders for the company to assess required component capacity.
September-Quarter Outlook Calls for Further Growth
For the fiscal second quarter ending in September, Microchip forecast sequential net-sales growth of 8%, plus or minus 1%. At the midpoint, that outlook would represent 40.6% year-over-year growth.
- Non-GAAP gross margin: 66% to 67% of sales
- Non-GAAP operating expenses: about 27.5% of sales
- Non-GAAP operating margin: 38.5% to 39.5% of sales
- Non-GAAP diluted EPS: $0.91 to $0.95
The midpoint of the EPS outlook implies sequential growth of 22.4% and year-over-year growth of 165.7%, according to the company.
Management attributed the projected gross-margin expansion to product mix, including an expected strong licensing quarter, recently implemented pricing actions, lower inventory write-offs and reduced factory underutilization charges. Sanghi and Bjornholt cautioned that certain factors are not recurring, including the licensing contribution and a benefit related to inventory in distribution channels. They said investors should not expect gross margin to move materially above the guided 66.5% midpoint, although the company expects to remain around that range for at least the next few quarters.
Inventory Improves, While Supply Constraints Persist
Microchip ended the June quarter with $1.047 billion of inventory, or 175 days, down 10 days from the March quarter. Distributor inventory was 25 days, down one day sequentially and near the low end of historical levels. Sanghi said the company believes the distribution inventory correction has been completed, with distributors now expected to require some replenishment.
Distribution sell-through increased 17% sequentially in the June quarter. Management said bookings were strong, with a book-to-bill ratio well above one and the strongest booking quarter in about four years.
At the same time, the company said lead times are extending for many products as die and finished-goods inventories decline. Sanghi cited constraints involving certain substrates, foundry capacity across multiple manufacturing nodes, subcontracted assembly and test capacity. He emphasized that these constraints do not cap revenue growth, as capacity allocations are increasing and Microchip has available internal manufacturing capacity.
The company does not plan to build its own 300mm fabrication facility, according to management. Instead, it expects to rely on foundry partners for 12-inch wafer technologies.
Microchip generated $511.5 million of operating cash flow and $478.6 million of adjusted free cash flow in the June quarter. Net debt declined by $170 million to about $5.2 billion, while net debt to adjusted EBITDA fell to 2.85. Management said it expects the leverage ratio to fall below 2.5 in the September quarter and intends to prioritize debt repayment over stock repurchases, dividend increases or large acquisitions for the foreseeable future.
The company also said its December quarter should perform better than its typical seasonal decline of 3% to 5%, though management did not provide a quantitative forecast for that period.
About Microchip Technology (NASDAQ:MCHP)
Microchip Technology Inc is a semiconductor company headquartered in Chandler, Arizona, that designs, develops and supplies a broad portfolio of embedded control and analog semiconductors. Its product lineup centers on microcontrollers (including the well-known PIC family), digital signal controllers and associated development tools and software, along with a range of mixed-signal and analog devices, nonvolatile memory, power management, timing, interface, wireless and security products. The company also provides integrated hardware and software solutions intended to simplify embedded design and accelerate time to market for OEMs and contract manufacturers.
Microchip's products are used across a wide range of end markets, including automotive, industrial automation, consumer electronics, communications, aerospace and defense, and Internet of Things (IoT) applications.
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