Microchip Technology (NASDAQ:MCHP) reported December-quarter results that came in above its prior outlook and issued March-quarter guidance calling for growth well above typical seasonality, as management pointed to strengthening bookings, a higher backlog, and signs that channel inventories have largely normalized.
Quarterly results topped guidance as sales rose sequentially
CFO Eric Bjornholt said net sales for the December quarter were $1.186 billion, up 4% sequentially and “well above” the high end of the company’s original guidance. On a non-GAAP basis, Microchip posted EPS of $0.44, which Bjornholt said was $0.04 above the high end of prior guidance, with non-GAAP net income of $252.8 million.
On a GAAP basis, Microchip reported gross margin of 59.6% and net income attributable to common shareholders of $34.9 million, or $0.06 per share. GAAP operating expenses totaled $555.2 million, including acquisition and intangible amortization of $107.6 million, special charges of $4.8 million largely tied to the closure of Fab 2, and share-based compensation of $62.1 million.
Inventory and cash flow update
Microchip ended the quarter with $1.058 billion in inventory, down $37.6 million from the September quarter, representing 201 days of inventory. Bjornholt said distributor inventory was 28 days, which the company considers within a normal range, and distribution sell-through exceeded sell-in by about $11.7 million.
Cash flow from operations was $341.4 million, and adjusted free cash flow was $305.6 million. The company finished the quarter with $250.7 million in consolidated cash and investments.
Total debt declined $12.1 million sequentially, while net debt declined $26 million. Adjusted EBITDA was $402 million, or 33.9% of net sales, and trailing 12-month adjusted EBITDA was $1.23 billion. Microchip’s net debt to adjusted EBITDA ratio was 4.18 at December 31, down from 4.69 at September 30.
Capital expenditures were $22.5 million in the quarter, and the company reiterated its expectation for fiscal 2026 capex to be at or below $100 million.
Connectivity modernization: automotive and industrial momentum
Corporate Vice President Matthias Kaestner outlined what he described as meaningful momentum in Microchip’s connectivity business, driven by modernization cycles in automotive networking and “Industry 4.0” industrial upgrades.
In automotive, Kaestner said vehicles can use up to 20 different connectivity technologies today, creating complexity as data requirements rise. He said automakers are shifting toward predominantly Ethernet-based architectures, and highlighted the emerging 10BASE-T1S standard as a potential replacement for “several billion” legacy automotive connectivity nodes per year. Kaestner said Microchip has a portfolio of 10BASE-T1S products, including switches, transceivers, endpoints, and bridges, and also described complementary technologies including PCI Express connectivity and the ASA open standard for camera data transport.
Kaestner said Microchip has design wins and “serious engagements” with multiple global automotive OEMs and Tier 1 suppliers, and noted a press release announcing a strategic collaboration with Hyundai Motor Group to integrate Microchip’s 10BASE-T1S solutions into next-generation vehicle platforms.
In industrial markets, Kaestner said Ethernet already serves as the backbone, but legacy edge standards such as Industrial CAN and RS-232/RS-485 are being replaced by Ethernet solutions. He said Microchip’s portfolio, including Single Pair Ethernet, EtherCAT, industrial PCIe switches, and ASA camera connectivity, is positioned to help customers bridge legacy and advanced systems. Kaestner said typical industrial design cycles span 18–24 months, and that recent engagements align with pilot production ramps in the second half of 2026 and further ramping into 2027.
CEO cites broad-based recovery, distribution normalization, and Gen 6 PCIe wins
CEO Steve Sanghi characterized the December quarter as “excellent,” noting net sales growth of 4% sequentially and 15.6% versus the year-ago quarter. He said sales were up sequentially in the Americas and Europe and were roughly flat in Asia. Microcontroller and analog sales were “about flat” sequentially—better than typical December seasonality—while growth came primarily from networking, data center, FPGA, and licensing business units.
Sanghi also pointed to improving channel conditions. He said inventories were declining at distributors, distributor customers, direct customers, and contract manufacturers, and that the gap between distribution sell-in and sell-through narrowed to $11.7 million from $52.9 million in the September quarter, which he described as a sign that distribution inventory has “largely corrected.”
On margins, Sanghi said non-GAAP gross margin rose 379 basis points sequentially to 60.5%, reaching “a six handle” one quarter earlier than management had expected. Non-GAAP operating margin was 28.5%, up 418 basis points sequentially and 800 basis points year over year.
In data center switching, Sanghi said Microchip’s PCIe Gen 6 switch is currently sampling and described it as the only 3-nanometer-based device of its kind sampling at hyperscaler and enterprise data center customers. He disclosed three Gen 6 design wins, including:
- A small design win expected to start production in the second half of this year.
- A larger design win expected to start production in Q1 2027, which management said is forecast to bring $100 million+ in revenue in calendar 2027.
- A smaller win with a long-term customer expected to go to production in late 2027 or early 2028.
Management also discussed strength in other categories, including memory, where Sanghi said constraints in broader memory markets have led some competitors to shift capacity away from serial EEPROM, enabling Microchip to gain share. He said the company’s serial EEPROM products are largely produced in internal fabs and that the memory shortage could persist for “a couple of year” period.
March-quarter outlook: above seasonal growth, improving gross margin, and debt paydown priority
For the March quarter, management said bookings in the December quarter were significantly higher than September and that the book-to-bill ratio was “well above one,” resulting in a higher backlog entering March. Sanghi also said lead times have remained in the 4–8 week range but are “bouncing off the bottom,” with increases on some products due to substrate and subcontracting capacity challenges and some foundry constraints on advanced nodes. He said expedited shipment requests have increased, suggesting some customer inventories are running low.
Microchip guided March-quarter net sales to $1.26 billion ± $20 million, which at the midpoint implies 6.2% sequential growth and 29.8% growth year over year. The company’s March-quarter non-GAAP guidance included:
- Gross margin: 60.5% to 61.5%
- Operating expenses: 31.3% to 31.7% of sales
- Operating profit: 28.8% to 30.2% of sales
- Diluted EPS: $0.48 to $0.52
On margin drivers, Bjornholt said inventory reserve charges were expected to normalize, though he noted they can be unpredictable. Underutilization charges, however, were expected to persist and decline only gradually, with management describing a multi-year process to bring those costs down as internal factory output ramps. Sanghi and Bjornholt cautioned against assuming a rapid return to the company’s long-term gross margin target of 65%.
Regarding capital allocation, Sanghi said the company is focused on reducing debt, citing how challenging the last cycle was with high leverage. Management said it intends to keep the dividend flat and avoid share buybacks “till the debt has come down significantly,” though it did not provide a specific leverage target for when buybacks might resume.
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.
