Microchip Technology Inc Q1 2026 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Vivek Arya - Bank of America Securities - Analyst : Thank you for taking my question. Steve, many of us equate, better than seasonal, sequential trends as a sign of recovery. So when you look at your September quarter outlook, sales up 5% or so sequentially, would you call that seasonal above seasonal. I think basically what we're all trying to get our hands on is that yes, there is a recovery, but are we done with that stronger recovery as in a lot more above seasonal quarters. So just how would you describe September seasonal above seasonal, and then what does that kind of inform us as to how December could shape up in kind of similar terms?

Question: Vivek Arya - Bank of America Securities - Analyst : Alright. Thank you, Steve. And when we look at several of your peers, they had a strong June, they kind of guided September lineage, but they expressed some caution as they looked at December onwards, mainly because there seems to be kind of this renewed, threat about the delayed impact of tariffs and and whatnot. What's your receive of the macro Environment? Do you think that as you look beyond September, that the recovery is as strong as you thought, 33 months ago? Just how would you kind of contrast the kind of recovery you are seeing versus the slightly more conservative tone that some of your analog peers have indicated on their earnings calls? Thank you.

Question: Harsh Kumar - Piper Sandler - Analyst : Yeah. Hey Steve, I've got two as well. Steve, I was hoping that for September quarter you could help us understand the growth between the two key end markets auto and what I would call as pure industrial, and why I'm saying pure industrial is because you're in defense and defense is very strong for obvious reasons and it's queuing things for the industrial category. So I was hoping that just outside of defense, if we could just talk about, in September, which ones, how do you see auto versus pure industrial playing out?

Question: Harsh Kumar - Piper Sandler - Analyst : Okay. Fair enough. Can I ask you, Steve, at this point, you feel like sell through is equal or higher than selling at your distributors and if there's a gap, what kind of gap there are to the best of your knowledge? I know it's a difficult one to answer, what kind of gap exists, and your inventory dollars came down I think by $124 million which is a big number. How far do you think you are from where you want to be in terms of optimal inventory level?

Question: Harsh Kumar - Piper Sandler - Analyst : So, maybe I missed it, Steve.

Question: Harsh Kumar - Piper Sandler - Analyst : Understood. Thank you.

Question: Harsh Kumar - Piper Sandler - Analyst : Understood, Steve and Eric. Thank you so much.

Question: Christopher Caso - Wolfe Research - Analyst : Yes, thanks. Good evening. I guess the first question, maybe following on some of your prior comments is, just getting a sense of how far below end demand, you think you're really shipping now and recognize you have your best data, with distributors and you talked about how low point of sale is and I guess the quick math, it would seem like I guess you're about maybe 10% below point of sale and distribution. But the distributor inventory is also, not at bad levels. Do you have a sense of how much by how much you might be under shipping, real in demand that your direct customers? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 9:00PM, MCHP.OQ - Q1 2026 Microchip Technology Inc Earnings Call

Question: Christopher Caso - Wolfe Research - Analyst : Right. I mean, it sounds like and maybe if I could ask a different way which be easier to answer. Do you think that you're under shipping the direct customers by more, less, or less than the distribution customers based on the rough analysis you've been able to do?

Question: Christopher Caso - Wolfe Research - Analyst : Right. All right. That's helpful call. Thanks, Steve.

Question: Blayne Curtis - Jefferies - Analyst : Hey guys. Good afternoon. Thanks for taking my question. I wanted to, maybe I miss started. I just wanted to know the timing, you talked about lead times extending from 48, 6 to 10, 8 to 12. Is that now or is that where you expect it to go? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 9:00PM, MCHP.OQ - Q1 2026 Microchip Technology Inc Earnings Call

Question: Blayne Curtis - Jefferies - Analyst : Gotcha. So I think you kind of answered it, but you said that you had more bookings at this time versus last time the same time frame last quarter. Yeah, I guess if it leads times, kind of the duration is the part we don't know. Is the, when you look at how you set the guide, the level of turns you're looking for in the quarter the same or is it different?

Question: James Schneider - Goldman Sachs - Analyst : Good evening. Thanks for taking my question. I was wondering if you could maybe comment on any end markets that you think are materially lagging in terms of end demand. Steve, I know you talked about a number that are they're doing well, as most of them, I believe. Any of that are lagging and do you see any improvement in the ones that are lagging? The reason I asked the question is because I believe your other products didn't really grow much sequentially and think they were down slightly sequentially just trying to understand what happened there.

Question: James Schneider - Goldman Sachs - Analyst : Okay. That's helpful. Thank you. And then maybe just as a follow up, relative to the President Trump's press conference yesterday, where he talked about tariff exemptions for companies with US-based investment or increased U.S. based manufacturing investment, just wanted to confirm, is it your understanding that your existing US manufacturing investments qualify you for that exemption, or do you have to do more, or do you not know yet?

Question: James Schneider - Goldman Sachs - Analyst : Thank you very much.

Question: Timothy Arcuri - UBS - Analyst : Thanks a lot. Steve, you said bookings are the highest since July 2022, but in reference to another question, you're guiding up 5%. Yes, it is better than seasonal, but it's not that much better. And then you just said that turns are about the same in Q3 unless I misunderstood what you said. So to me that kind of implies that a lot of these bookings are filling in Q4, as in the December, rather than calendar Q3. So is it fair that you can say at this point that December should be another really good quarter?

Question: Timothy Arcuri - UBS - Analyst : Okay, thanks. And then, you did say that lead times are lengthening, and you actually said you're encouraging customers to expedite orders. I think a lot of us see what happened to last cycle and worried that we, that when we hear that it could scare customers off a little bit because of the potential to get back into like a PSP sort of a dynamic. So, lead times are already sort of doubling for some products and you barely even come off the bottom. How are you managing this messaging to customers to avoid what kind of, happened last cycle? Thanks.

Question: Timothy Arcuri - UBS - Analyst : Okay. Thank you.

Question: Harlan Sur - JPMorgan - Analyst : Hi, good afternoon. Thanks for taking my question. Steve, on the accelerated demand signals from Asia is up about 14% sequentially versus Europe and North America at about 8%. Even if I exclude the mid to high single digits, millions of dollars which may be pulled forward, Asia was still up strongly at about 12% or 13% sequentially. And then on a year to year basis, Asia in the first half was down only about half of what the US and Europe was to the first half of the year. So what's driving the relative strength in Asia both sequentially and the first half of this year?

Question: Harlan Sur - JPMorgan - Analyst : Yeah, that makes a lot of sense. Okay, and I apologize if I missed this. I think you did mention something about turn's business, but in addition to the strong rising orders that you saw in March, June, and a cyclical recovery, we typically do see stronger turns business, right orders placed and fulfilled in the same quarter. I know your turns business rose as a percentage of sales in March. Did that turns percentage grow in the June quarter? And what are you guys seeing thus far here in the September quarter?

Question: Harlan Sur - JPMorgan - Analyst : Great. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 9:00PM, MCHP.OQ - Q1 2026 Microchip Technology Inc Earnings Call

Question: Quinn Bolton - Needham & Company LLC - Analyst : Okay, just wanted to ask on the gross margin guidance, can you give us some sense, what total charges for underutilization and write offs you're assuming, in that 55% to 57% range.

Question: Quinn Bolton - Needham & Company LLC - Analyst : Understood. Okay, and then the second question I have is just on those products where you're seeing lead time stretch out to the size 6 to 12 weeks, how much of that is sort of substrate or packaging related versus wafer related? And if it's wafer related, is it mostly outsourced wafers or internal wafers because obviously wafers take probably the longest in the manufacturing cycle. So I'm kind of wondering on at least on those products where you're seeing lead times extend why you wouldn't be increasing the wafer starts now rather than waiting until December.

Question: Quinn Bolton - Needham & Company LLC - Analyst : But it sounds like it's more back end than front end, at the current point in time.

Question: Quinn Bolton - Needham & Company LLC - Analyst : Yeah, okay. Thank.You.

Question: Joshua Buchalter - TD Cowen - Analyst : Hey guys, thank you for taking my questions. Maybe to follow up on Quinn's. Can you maybe speak to us about what you're looking for that's going to give you the signal that it's all clear to raise utilization rates? Is there a certain inventory target? Is there, sell through demand that you're looking for? I guess I'm curious to hear, why there's so much conviction that December will be the right time, given you are seeing some cyclical signals improving, and while at the same time inventory levels are elevated, just curious to how you're thinking about that holistically? Thank you.

Question: Joshua Buchalter - TD Cowen - Analyst : Okay. Thank you and then. Oh, go ahead. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 9:00PM, MCHP.OQ - Q1 2026 Microchip Technology Inc Earnings Call

Question: Joshua Buchalter - TD Cowen - Analyst : Okay, thank you and I guess on that note, I understand you don't want to break out the underutilization and then write down charges by quarter, but any rules of thumb that we should think about as to how those charges should unwind? is there a certain revenue level, or any other factors that we could think of as again as we think about modeling those charges coming out or coming out of the model? Thank you.

Question: William Stein - Truist Securities - Analyst : Great, thanks for taking my questions. Product gross margin, as you highlighted was 66.3% and your long-term target is lower than that at 65%. And I wonder, does that imply that there's is, you are somehow exceeding your long term target because of mix or pricing or maybe help us reconcile why product gross margin once these unusual charges go away, would decline from where it is now.

Question: William Stein - Truist Securities - Analyst : But is, I'm really trying to ask is mix or something else going to change such that, perhaps it's the defense and market exposure that's, quite high now, and as that mix normalizes. Does that have an effect of dragging gross margins?

Question: William Stein - Truist Securities - Analyst : That helps a lot. If I can squeeze one more in. if selling and sell through sort of continue in September as they did in June, you should be pretty well aligned by the end of the quarter. Is that the right way for us to think about this such that maybe by the time we get to December, we're looking at sell in, being aligned or maybe even higher than sell through.

Question: Christopher Danely - Citibank - Analyst : Hey, thanks guys. Just real quick on the on the incremental gross margins, Eric, I think you said 76% for the September ex for the June quarter. For the December quarter, since you guys are turning the fabs back on or at least increasing utilization rates, would that incremental gross margin go up and if so, roughly how much?

Question: Christopher Danely - Citibank - Analyst : Great. Thanks, that's super helpful. And then a question for Steve. So Steve, now that you've been back in the front seat of the microchip minivan here for a good nine months, how would you describe Microchip's competitive positioning, especially on micro controllers? Have you seen any improvement? Has it been better than you thought, worse than you thought? How do you see your share going forward? Maybe talk about a path to gaining back market share? anything there?

Question: Christopher Danely - Citibank - Analyst : Alright. Thanks a lot, Steve.

Question: Tore Svanberg - Stifel Nicolaus and Company, Incorporated - Analyst : Yes. Thank you. I had a question on the pace of the decline of the, on the utilization charges. So I appreciate you're going to start increasing utilization in December quarter. And I think, right now, obviously those charges are coming down by a few million dollars, obviously because you still have inventory. But when do we see more step function, declines in the utilization charges? Is that going to be when you get to that 130, 150 even for the target, or could we potentially already see it before you get to that level?

Question: Tore Svanberg - Stifel Nicolaus and Company, Incorporated - Analyst : Yeah. That's great caller. And then on your cash flow, so great to see the cash flows are now going to be big enough to cover the dividend. You did say that any excess cash flow is going to be used to pay down debt. What's sort of the new target level for debt so that we can try and understand when the buybacks are going to start to pick up again?

Question: Vijay Rakesh - Mizuho - Analyst : Yeah. Hi Eric and Steve. Just a quick question on the underutilization. I get I think your inventory write downs and underutilization is kind of running fifty-fifty. Do you guys think most of the inventory write downs get done by the September quarter?

Question: Vijay Rakesh - Mizuho - Analyst : Got it. And still, in response, in your reply on section 232, on some of the except exemptions that Microchip could get with the, with investing in the US. Is your understanding that, but it puts you at a much better, position versus, like this ST micro and [infiian] and NSS and some of your peers there. Thanks.

Question: Christopher Rolland - Susquehanna International - Analyst : Hey, thanks for the question. Just maybe a clarification or just understanding tone here. I guess first of all, typical seasonality for December and March. I know it changed since the addition of Atmel. I think the last update was maybe down 5% in December and negligible for March but down a little bit. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 07, 2025 / 9:00PM, MCHP.OQ - Q1 2026 Microchip Technology Inc Earnings Call Maybe if you could update there us on that and then Steve, you said, you thought you'd be better than the seasonal, but you know I think the street was at plus 5% or something like that for the for the December quarter, so is that tone as much as 1,000 basis points, better than seasonal. If you could, update us there, that'd be great.

Question: Christopher Rolland - Susquehanna International - Analyst : Okay. Thank you for that. And then secondly, maybe, on AI, I know there was some stuff in the prepared remarks, but if you guys had any updates on the percentage or the dollars contributed from AI and if there were any products that are just going gangbusters just above your expectations whether they're like PCI switches or re-timers or FPGAs or timing products. Just anything that's significantly outperforming your expectations around AI that would be great.

Question: Christopher Rolland - Susquehanna International - Analyst : Yeah. Any data center products, not the AI coding tool. I apologize.

Question: Christopher Rolland - Susquehanna International - Analyst : Thanks guys.

Question: Janet Ramkissoon - Quadra Capital - Analyst : Congratulations and a nice turnaround, guys. Most of my questions have been asked, but just a couple of little things. Given the recent decline in the US dollar, how does that affect you and if we see higher budget deficits and higher need to, sell more debt and which may lead to a further decline in the dollar. How is that likely to affect you in the next couple of quarters?

Question: Janet Ramkissoon - Quadra Capital - Analyst : Okay. And secondly, if I may, any comment about the your Chinese business or trends? Any insights on what's going on in that market? Thank you.

Question: Janet Ramkissoon - Quadra Capital - Analyst : Okay. Thanks very much. Congrats again.