Microchip Technology Incorporated Q2 FY2026 earnings call

• Net sales were up 6% sequentially, with Americas and Asia seeing growth and Europe flat. - Non-GAAP gross margin was up 236 basis points sequentially, non-GAAP operating margin up 364 basis points sequentially. - Inventory went down by $73.8 million sequentially, with calendar year-to-date reduction of $261 million. - Announced sale of Fab 2 wafer fabrication facility in Tempe, Arizona. - Launched industry's first 3-nanometer-based PCIe Gen 6 switch for AI infrastructure. - Product gross margin in Q2 was 67.4% due to rich product mix, but inventory write-offs and underutilization charges impacted non-GAAP gross margin.

Net sales in Q2 Fiscal 2026 were $1.14 billion, up 6% sequentially. Microcontroller business grew 9.7% sequentially with strong contribution from 32-bit MCU. Analog business increased 1.7% sequentially. Gen 4 and Gen 5 data center products saw strong sales growth. The microcontroller segment's 9.7% sequential growth and analog's 1.7% sequential increase are key absolute performance metrics for these segments.

• Q3 Fiscal 2026 net sales expected to be $1.129 billion ± $20 million, down 1% sequentially at midpoint. - Non-GAAP gross margin expected to be between 57.2% and 59.2% of sales. - Non-GAAP operating expenses expected to be between 32.3% and 32.7% of sales. - Non-GAAP operating profit expected to be between 24.5% and 26.9% of sales. - Non-GAAP diluted EPS expected to be between $0.34 and $0.40. - Expect strong quarters in March, June, and September 2026.

• Softer business environment impacting expectations. - Tariff impacts on customer psyche and capital investment decisions. - Constraints on substrate and subcontracting capacity, as well as foundry constraints on very advanced nodes. - Inventory write-offs and underutilization charges remaining a factor until sales improve.

Q: Characterize what's seen now versus 90 days ago?

A: Overall business environment softer, December quarter guidance better than seasonal but not as strong as expected 90 days ago due to customers scheduling bookings for March.

Q: Update on inventory reserve and underutilization charges?

A: Don't guide future quarters' charges, but expect improvement in stronger quarters ahead as sales start growing year-over-year.

Q: LTSAs and backlog?

A: LTSAs are being managed with flexibility, customers not forced to buy unnecessary product, backlog for March quarter stronger on key product lines.

Q: Confidence in next 3 quarters above seasonal?

A: March quarter driven by backlog visibility and strong bookings turns, June and September historically strong, inventory correction also contributing.

Q: Gen 6 PCIe switch wafer availability?

A: Have line of sight to capacity needed with TSMC for 3-nanometer production.

Q: When underutilization and inventory charges normalize?

A: Substantial improvement expected in next fiscal year, but exact timing uncertain in soft quarter.

Q: Data center segment mix?

A: Majority of data center and compute segment is data center focused, but specific breakdown not detailed.

Q: Backlog visibility and demand?

A: Distributor and customer inventory correction, sell-in to sell-through gap to close, strong quarters ahead due to seasonal patterns and inventory phenomena.

Q: Constraints and sales miss?

A: Substrate capacity constrained but managed, causing some sales to be delayed but not disastrous.

Q: Demand triangulation and data center partnerships?

A: Bookings pattern uncertain, but active engagements with hyperscalers and OEMs for 3-nanometer PCIe switch and other data center products.