Microchip Technology Inc Q2 2026 Earnings Call Transcript

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

Question: Chris Caso - Wolfe Research LLC - Analyst : Yeah. Thanks. Good evening. I guess to start, maybe you could characterize what you're seeing now versus what you saw 90 days ago. At that time, you did talk about the expectations for better than seasonal growth in both the December and March quarter. It sounds like December is on the better end of normal seasonality. But what -- how do you feel now against what you thought 90 days ago? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 06, 2025 / 10:00PM, MCHP.OQ - Q2 2026 Microchip Technology Inc Earnings Call

Question: Chris Caso - Wolfe Research LLC - Analyst : Understood. As a follow-up to that, you mentioned that the product gross margins were holding up, but obviously, the charges are what's weighing on the gross margins. Could you give us an update on what you expect from both the inventory reserve charges and underutilization charges, as you go through with presumably those next strong quarters as you get into next year. How quickly can some of those charges start to roll off?

Question: Timothy Arcuri - UBS AG - Analyst : Hi, thanks. Steve, so I wanted to understand just kind of what's going on. I know it's sort of this weird environment where December is soft, but but people are looking out into next year. And you can kind of see it in the backlog. I know you stopped giving backlog breakouts in the filings. But in March, your current backlog was very low and a lot of it's parked in LTSA still. So what are these LTSAs?, What -- I mean, it's coming down very slowly. Why is it taking so long to bring these down? And I mean if customers want product, I would think that like what's the point of parking stuff out in March and June and giving you no visibility in the near term?

Question: Timothy Arcuri - UBS AG - Analyst : Got it. So I guess, just from the perspective of like what the point is of even having these LTSAs there because they're barely coming down, actually. So really, the only thing that matters is kind of the current portion of what's -- I mean, you're not disclosing backlog anymore, but the current portion as of March was actually pretty small. So the LTSA is like what's the point of even having them if they don't provide you any coverage in a quarter like December?

Question: Timothy Arcuri - UBS AG - Analyst : It was in the Q actually last year but totally get it. Thank you so much.

Question: Vivek Arya - Bofa Merrill Lynch Asset Holdings Inc - Analyst : Steve, I'm curious, what's driving your confidence to expect the next three quarters to be above seasonal? Your lead times are still low. There are so many macro crosscurrents and most of your peers, as you mentioned, found it a little more defensive and we're hesitant to guide more than the current quarter. So I'm curious, what are you seeing that they are not seeing to suggest that the next three quarters would be above seasonal?

Question: Vivek Arya - Bofa Merrill Lynch Asset Holdings Inc - Analyst : Understood. And for my follow-up, gross margins are going up nicely in December. Is that mostly utilization driven? I think on the last call or before that, you had mentioned that you expected to take utilization up by 15%, 20%. I'm wondering what level are you taking it up? And do you expect to increase it again in March? And is there like a target level of inventory in dollars or days that we should think about until which point you will be more careful with taking utilization up further.

Question: Vivek Arya - Bofa Merrill Lynch Asset Holdings Inc - Analyst : Yeah, sorry, do you expect to increase it again, Eric, in March, right? If you're expecting several above seasonal quarters then does it mean that there's an expectation that you'll continue to increase utilization?

Question: Joe Quatrochi - Wells Fargo Securities LLC - Analyst : Yeah. Thanks for taking the question. I was curious if you could comment, is there any specific end markets that you can point to that you're seeing this kind of push-pull more than others?

Question: Joe Quatrochi - Wells Fargo Securities LLC - Analyst : Okay. Fair enough. And then on the Gen 6 PCIe switch offering, you talked about maybe tightness at leading-edge wafers. Curious, being a 3-nanometer, what's your kind of line of sight in terms of wafer availability as you look to ramp that in the second half of next year?

Question: Blayne Curtis - Jefferies - Analyst : Good afternoon, guys. I wanted to just ask because maybe I had this wrong, I thought that the inventory charges were supposed to go away pretty sharply into the end of the fiscal year. I guess you're guiding it to continue in December. So I guess what changed? I guess, as forecasts start going up, I thought that the kind of the level of inventory would match the increased forecast and you wouldn't have this charge. I know you're saying the mix is now different. So is that what's changed? And kind of how far out should these inventory charges extend? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 06, 2025 / 10:00PM, MCHP.OQ - Q2 2026 Microchip Technology Inc Earnings Call

Question: Blayne Curtis - Jefferies - Analyst : And then just to wrap some math behind that, I guess the current impact is around, call it, [5% percentage-points] to gross margin. So you said it should come down over the next several quarters. So is that the right way to kind of add back that 4% to 5% headwind to the 58% that you just guided to? And then I'm assuming utilization would help by a few points as well. Is that the right way to frame gross margin over the next couple of quarters, four quarters?

Question: Harsh Kumar - Piper Jaffray Inc - Analyst : Hey Steve, the analog business -- in September quarter, the analog business was a little bit slow to catch up. Most of the sales came from microcontroller on the incremental side. Is that how you see the December quarter shaking out? Or do you expect a little bit more of an even contribution from -- like a similar percentage contribution from MCUs and analog? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 06, 2025 / 10:00PM, MCHP.OQ - Q2 2026 Microchip Technology Inc Earnings Call

Question: Harsh Kumar - Piper Jaffray Inc - Analyst : Fair enough. And then when I think of at least -- I think a Microchip, I don't think of 3-nanometer leading-edge products, is something that you're focused on. You're obviously highlighting it here in the earnings call. Is this a sort of a strategic shift where you will target more of leading edge data center products? Just some color on your strategy would be helpful here.

Question: William Stein - Truist Securities, Inc. - Analyst : Great. Thanks. Steve, any estimate or best guess as to when the underutilization charges and inventory write-downs get to sort of a normalized level where maybe we'd see the product margins just show on the non-GAAP P&L without a whole lot of adjustments? Maybe what -- I guess that takes us to somewhere to 65% your target and where you're running now a little bit high on that. Is that something we should expect sort of in the early part of fiscal '27, do you think or will it be further out?

Question: William Stein - Truist Securities, Inc. - Analyst : Okay. As a follow-up to that --

Question: William Stein - Truist Securities, Inc. - Analyst : That's helpful. Thank you. As a follow-up, when I have discussions with investors, particularly ones bullish on Microchip, they look at these two charges, and they say, well, those will go away at some point, but then also, we'll get some leverage on the gross line, some gross margin leverage, so we'll actually see gross margins go higher than that level. And I wanted to check my understanding of this because I think the underutilization charges are designed to sort of simulate 90% utilization level. So you may get higher margins for example, for mix. But from utilization, can you correct me if I'm wrong, that we shouldn't see higher gross margins than the product gross margins you're referring to from utilization unless we get above 90% utilization. Is that approximately correct?

Question: Harlan Sur - JPMorgan Chase & Co - Analyst : Hey good afternoon. Thanks for taking my questions. Can you guys give us an update on the Fab 2 closure, rightsizing of Fab 4 and Fab 5 back in the June quarter? You guys were targeting about $115 million in cost savings annually at that -- at the current quarterly revenue run rate, that's about 250 basis points of gross margin improvement. Is all of that now accounted for in your current gross margin profile or is there still more on the comp?

Question: Harlan Sur - JPMorgan Chase & Co - Analyst : Thanks for that. And then -- thanks for the update on your PCIe switching portfolio. On a segment reporting basis, data center in compute was 19% of your total revenues in fiscal '25. What's the rough mix of data center versus client or PC compute? I assume majority of the segment is data center focused. Any way to quantify it? Is it 60-40, 70-30? I mean, these products are more application specific, so easier to track. I assume you guys track this mix pretty closely, but any way to quantify the mix differences? Brian McCarson - Microchip Technology Inc - Corporate Vice President and General Manager of the Data Center Solutions Business Unit Yeah. We don't break that out to that level of degree to everyone. Majority of that is related to data center more than anything within that bucket of 19%.

Question: Joshua Buchalter - Cowen and Company LLC - Analyst : Hey guys. Thank you for taking my questions. I also wanted to ask about the backlog visibility. So you mentioned more customers wanting to take orders in March than December, which I understand because lead times are short and they can. But given the backlogs down sequentially, and

Question: Joshua Buchalter - Cowen and Company LLC - Analyst : Thank you for the color there. And then I also wanted to follow up on the 3-nanometer PCIe switch. Maybe you could give us a few -- some details on what's your expected go-to-market and sort of how mature the commercial engagements are? You're doing 3-nanometer, your peers are at 5-nanometer. Are you competing on performance versus cost as a result? And should we expect meaningful revenue contribution in 2027 with the part coming out at the end of 2026? Thank you.

Question: Christopher Danely - Citibank Cameroon SA - Analyst : Hey, thanks guys. So Steve, just going back to your earlier comments, you said that you expected the December quarter to be a little better and things seem to get a little softer at some point in the September quarter. Can you just talk about, I guess, when that happened? And did any particular areas like geos or product lines or anything stand out on the software side? And why you think that happened? Do you think there was

Question: Christopher Danely - Citibank Cameroon SA - Analyst : Okay. Thanks. And just my follow-up. So you mentioned some constraints. It sounds like they're still mostly on the back end. Are those constraints getting worse? When do you think you can get them under control? And is it causing you to miss some if any sales?

Question: Joseph Moore - Morgan Stanley - Analyst : I wonder if you can just help us try to triangulate where the demand actually is looking at your bookings levels, 1.06 is pretty good, but your revenue is about half of what it was at the peak. And I guess the real consumption is somewhere between that peak number and where you are now. But just as you look at the bookings pattern, do you have any updated sense on where we're going to get when we get to consumption levels?

Question: Joseph Moore - Morgan Stanley - Analyst : Okay. Fair enough. Thank you. And then with my follow-up, the data center products, when you talk about the new switch and things like that, where do you guys stand in terms of hyperscale cloud relationships? Do you have partnerships there where they're coming to you and saying, Here's the product we need, can you help us to develop that? I know you have a lot of data center businesses that were acquired when they were sort of enterprise-centric. Can you just update us on where you are with going to market with these bigger cloud customers?