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    MCHP
    Earnings call· Sep 2025(Q2 FY26)

    MICROCHIP TECHNOLOGY INC MCHP

    Nov 6, 2025 Source

    Executive summary

    Microchip Technology Q2 FY26 — Strong Data Center Growth and Strategic Shift to Advanced Nodes

    Microchip Technology reported sequential sales growth in Q2 FY26, driven by strong microcontroller and data center product performance, alongside significant non-GAAP margin expansion. The company is strategically shifting towards advanced nodes and high-performance products, exemplified by its new 3-nanometer PCIe Gen 6 switch. While facing near-term headwinds from customer inventory adjustments and a softer macro environment, management anticipates a return to strong sequential growth in the March 2026 quarter and beyond, supported by closing inventory gaps and seasonal strength.

    Highlights

    5

    • Sequential sales grew 6% in Q2 FY26.

    • Microcontroller business grew 9.7% sequentially, with strong 32-bit MCU contribution.

    • Non-GAAP gross margin increased 236 basis points sequentially, with 95% incremental non-GAAP gross margin.

    • Non-GAAP operating margin expanded 364 basis points sequentially, with 84.6% incremental non-GAAP operating margin.

    • Book-to-bill ratio was 1.06 in Q2 FY26, with September bookings being the best in over 3 years.

    Concerns

    4

    • Inventory write-off and underutilization charges totaled $122.8 million in Q2 FY26, impacting non-GAAP gross margin by 10.8 percentage points.

    • December quarter net sales are expected to be down 1% sequentially at the midpoint, reflecting a softer overall business environment and customer inventory management.

    • The distributor sell-in vs. sell-through gap remained at $52.9 million in Q2 FY26, indicating continued inventory reduction by distributors.

    • Lead times are increasing on some products due to constraints in substrates, subcontracting capacity, and advanced foundry nodes.

    Guidance & targets

    10
    CategoryTargetConfidence
    Net Sales
    $1.129 billion, plus or minus $20 million
    high materiality
    High
    Non-GAAP Gross Margin
    57.2% and 59.2% of sales
    high materiality
    High
    Non-GAAP Operating Expenses
    32.3% and 32.7% of sales
    medium materiality
    High
    Non-GAAP Operating Profit
    24.5% and 26.9% of sales
    high materiality
    High
    Non-GAAP Diluted EPS
    $0.34 and $0.40
    high materiality
    High
    Non-GAAP Tax Rate
    about 10.25%
    medium materiality
    High
    Capital Expenditures
    at or below $100 million
    medium materiality
    High
    Adjusted Free Cash Flow
    roughly even with our dividend payment
    medium materiality
    Medium
    March Quarter Sales
    stronger than a seasonal low single digit up sequentially
    high materiality
    Medium
    Sales
    3 strong quarters
    high materiality
    Medium

    Segment performance

    6
    SegmentRevenueYoYQoQMargin
    Americas
    Sales were up sequentially.
    		——up sequentially—
    Asia
    Sales were up sequentially.
    		——up sequentially—
    Europe
    Sales were flat sequentially, which is considered not bad for a summer quarter in Europe.
    		——flat sequentially—
    Microcontroller business
    Experienced strong sequential growth, driven by 32-bit MCUs.
    32-bit MCU contribution: strong
    		——9.7% sequentially—
    Analog business
    Increased sequentially.
    		——1.7% sequentially—
    Data Center
    Saw strong sales growth from depressed levels, as customers finished inventory correction. Large increase in bookings and shipments of Gen 4 and Gen 5 products, including PCIe switches, memory, flash controllers, storage, and rate cards.
    Bookings: large increaseShipments: large increase
    		——strong sales growth—

    Operational metrics

    30
    Non-GAAP Gross Margin
    56.7%up 236 basis points sequentially
    Q2 FY26

    Includes capacity underutilization charges of $51 million and new inventory reserve charges of $71.8 million.

    Non-GAAP Operating Margin
    24.3%up 364 basis points sequentially
    Q2 FY26

    Operating expenses were 32.4% of sales.

    Non-GAAP Net Income
    $199.1 million
    Q2 FY26

    Reported for the September quarter.

    Non-GAAP EPS
    $0.35$0.02 above midpoint of guidance
    Q2 FY26

    Diluted earnings per share for the September quarter.

    Non-GAAP Cash Tax Rate
    9.5%
    Q2 FY26

    For the September quarter.

    Inventory Balance
    $1.095 billiondown $73.8 million from prior quarter
    Q2 FY26

    Balance at September 30, 2025.

    Inventory Days
    199 daysdown 15 days from prior quarter
    Q2 FY26

    At the end of the September quarter, driven by inventory reduction actions.

    Inventory Reduction (CYTD)
    $261 million
    CYTD

    Calendar year-to-date reduction in inventory.

    Underutilization Charges
    $51 million
    Q2 FY26

    In the September quarter.

    New Inventory Write-off
    $71.8 million
    Q2 FY26

    In the September quarter.

    Total Inventory Charges
    $122.8 million
    Q2 FY26

    Sum of new inventory write-off ($71.8 million) and underutilization charge ($51 million).

    Product Gross Margin
    67.4%
    Q2 FY26

    Due to a rich product mix driven by data center products. This is the underlying gross margin before inventory charges.

    Distribution Inventory Days
    27 daysdown 2 days from prior quarter
    Q2 FY26

    At the end of the September quarter.

    Distribution Sell-through vs. Sell-in Gap
    $52.9 millionhigher sell-through than sell-in
    Q2 FY26

    Sell-through was $52.9 million higher than sell-in in the September quarter. This gap was $49.3 million in the June quarter.

    Cash and Investments Balance
    $236.8 million
    Q2 FY26

    Consolidated cash and total investment position as of September 30, 2025.

    Total Debt Decrease
    $82 million
    Q2 FY26

    In the September quarter.

    Net Debt Increase
    $247.7 million
    Q2 FY26

    In the September quarter.

    Adjusted EBITDA
    $341.8 million
    Q2 FY26

    In the September quarter.

    Adjusted EBITDA Margin
    30%
    Q2 FY26

    Of net sales in the September quarter.

    Trailing 12-month Adjusted EBITDA
    $1.103 billion
    TTM

    At the end of the quarter.

    Net Debt to Adjusted EBITDA
    4.69
    Q2 FY26

    Ratio at the end of the quarter.

    Capital Expenditures
    $36.5 million
    Q2 FY26

    In the September quarter, supporting R&D activities in Bangalore.

    Depreciation Expense
    $39 million
    Q2 FY26

    In the September quarter.

    Acquisition Intangible Amortization
    $108.1 million
    Q2 FY26

    Included in GAAP total operating expenses.

    Special Charges
    $6.3 million
    Q2 FY26

    Primarily driven by activities associated with the closure of Fab 2.

    Share-based Compensation
    $53.3 million
    Q2 FY26

    Included in GAAP total operating expenses.

    Other Expenses (GAAP)
    $12.3 million
    Q2 FY26

    Included in GAAP total operating expenses.

    Fab 2 Annual Cash Savings Target
    $90 million
    Annual

    Targeted annual cash savings from the Fab 2 closure.

    Peak Gross Margin
    68% plus
    Prior up cycle

    Achieved during an up cycle when running at 100% plus capacity, aided by expedite charges.

    Normal Fab Utilization
    90% in one factory, 75% in another
    Ongoing

    Each factory has a level of what is considered normal utilization.

    Industry KPIs

    10
    MetricValueDetails
    Lead times4 to 8 weeks
    Backlog order bookStrong
    Book to bill ratio1.06
    Ai data center revenueStrongest sales performance
    Fab capacity utilizationQuite low
    Bookings net order intake10% higher%
    Design wins socket pipelineSampling
    Inventory channel inventoryOwn inventory: $1.095 billion; Distributor inventory: 27 daysUSD
    Node platform ramp schedule3-nanometer process technology
    End market segment revenue mixAmericas: up sequentially; Asia: up sequentially; Europe: flat sequentially

    Orderbook & backlog

    3
    Bookings10% higherQ2 FY26

    Sequential increase from June quarter

    July bookings were highest in 3 years; August seasonally low but better than expected; September very strong, best in 3+ years. October bookings higher than July; November bookings very strong so far.

    Book-to-bill ratio1.06Q2 FY26
    March quarter backlogStrongNovember 6, 2025

    Much higher than December quarter backlog on August 6

    Customers scheduling bookings for March delivery, continuing to lower inventories into calendar year-end.

    Product announcements

    1
    ProductTypeDetails
    3-nanometer-based PCIe Gen 6 switchlaunch

    Deals & partnerships

    1
    A third partySale of Fab 2 wafer fabrication facility located in Tempe, Arizona.

    The sale is subject to closing conditions. Fab 2 closure was completed in May 2025.

    Capital programs

    2
    Fab 2 wafer fabrication facility saleunderway
    Start: May 2025 (closure completed)

    Benefit: Part of restructuring wafer fabrication operations, transferring process technologies to Fab 4 and Fab 5. Expected annual cash savings of $90 million.

    Sale of Fab 2 in Tempe, Arizona to a third party. Fab 2 closure was completed in May 2025, with process technologies being transferred to Fab 4 in Gresham, Oregon and Fab 5 in Colorado Springs, Colorado.

    R&D activities building purchase in Indiacompleted
    Period spend: $20 million
    Spent to date: $20 million
    Start: Q2 FY26

    Benefit: Supporting ongoing R&D activities in Bangalore.

    Included in capital expenditures for the September quarter.

    Risks & headwinds

    5
    Softer overall business environmentNear-term (December quarter)

    December quarter net sales guidance down 1% sequentially at midpoint (seasonal is typically -3% to -5%).

    Mitigation: Operational discipline to deliver strong profit performance despite lower revenue; expectation of stronger quarters ahead.

    Impact of tariffs on customer capital investmentsOngoing

    Unquantified, but contributing to a softer business environment and customers holding back on capital investments.

    Mitigation: N/A (implied by strategic shift and product innovation).

    Customer and distributor inventory reductionDecember quarter

    Distributor sell-in vs. sell-through gap of $52.9 million in Q2 FY26; customers scheduling strong bookings for March delivery instead of December to manage year-end balance sheets.

    Mitigation: Expectation that the gap will close and inventory will normalize in coming quarters, driving increased sell-in.

    Inventory write-offs and underutilization chargesOngoing, but expected to decrease in future stronger quarters.

    $122.8 million in Q2 FY26, impacting non-GAAP gross margin by 10.8 percentage points.

    Mitigation: Ramping factory output, selling through slower-moving older inventory, improving year-over-year sales growth. Management believes they are in the 'eighth or ninth inning' of this issue.

    Constraints in supply chain (substrates, subcontracting capacity, advanced foundry nodes)Current

    Causing lead times to increase on some products; 'meaningful' missed sales (unquantified dollar amount).

    Mitigation: Managing constraints, but still 'touch and go.' Strategic relationships with foundry suppliers (e.g., TSMC for 3nm).

    What to watch in Q3 FY26

    5

    Non-GAAP Gross Margin

    Next quarter (Q3 FY26)
    Current56.7% (Q2 FY26)
    Target58.2% (Q3 FY26 midpoint)

    Why it matters

    Improvement in gross margin is key to profitability, especially as inventory charges are expected to decrease.

    We expect our non-GAAP gross margin to be between 57.2% and 59.2% of sales.

    Q&A highlights

    6

    Why is December softer than previously expected, given earlier comments about better than seasonal growth?

    The overall business environment has softened, and tariffs are impacting capital investment decisions. While December guidance is better than seasonal (down 1% vs. typical 3-5%), customers are scheduling strong bookings for March 2026 to lower year-end inventory, creating a 'strange push-pull.'

    “Even though our December quarter guidance is better than seasonal, seasonal would be minus 3% to minus 5%, sometimes minus 5%, and we're only down minus 1%. I think if you go back 6, 9 months ago, I would have expected to continue to have small sequential growth even in the December quarter. But number one, the overall softer tone in the business environment; and number two, some impact of tariffs on customer psyche and people don't know when to make capital investments or not and people are holding back.”

    asked by Christopher Caso · answered by Steve Sanghi

    2 min read5 chapters

    Detailed Narrative

    01

    Strategic Shift to Advanced Technologies

    Microchip is making a strategic shift towards advanced nodes and high-performance products, particularly in the data center market. This includes the introduction of the industry's first 3-nanometer-based PCIe Gen 6 switch and increased focus on AI and FPGA business units. This strategic pivot aims to elevate the company's overall growth profile, moving towards more advanced nodes, high-performance, lower-power, and market-leading products.

    02

    Data Center Business Momentum

    The data center market showed the strongest sales performance in Q2 FY26, albeit from depressed levels, with large increases in bookings and shipments for Gen 4 and Gen 5 products, including PCIe switches, memory, flash controllers, storage, and rate cards. The new 3-nanometer PCIe Gen 6 switch is currently sampling to qualified customers, with initial production expected in June 2026 and volume ramping towards the end of calendar year 2026. This product targets a total addressable market exceeding $2 billion per year, with an expected CAGR greater than 10% through 2035.

    03

    Inventory Dynamics and Gross Margin Impact

    While product gross margins remained healthy at 67.4% in Q2 FY26, non-GAAP gross margin was significantly impacted by $71.8 million in new inventory write-offs and $51 million in underutilization charges, totaling $122.8 million or 10.8 percentage points. Management expects these charges to decrease rapidly in the stronger quarters of March, June, and September 2026 as sales improve and inventory is consumed. The company believes it is in the 'eighth or ninth inning' of these inventory-related issues.

    04

    Customer Inventory Correction and Booking Trends

    Customers and distributors are continuing to drive down their inventories, leading to a $52.9 million gap between distribution sell-in and sell-through in Q2 FY26. Despite this, September quarter bookings were the best in over 3 years, with a book-to-bill ratio of 1.06. However, many customers are scheduling strong bookings for March 2026 delivery to manage year-end balance sheets, impacting the December quarter's revenue.

    05

    Fab Restructuring and Cost Savings

    Microchip is progressing with its wafer fabrication operations restructuring, including the sale of its Fab 2 facility in Tempe, Arizona, expected to close in December 2025. This initiative involves transferring process technologies from Fab 2 to Fab 4 and Fab 5, which have ample clean room space. The restructuring is expected to generate $90 million in annual cash savings, contributing to the company's long-term financial health.

    AI-generated summary of the company’s earnings call. Not investment advice.