Microchip Technology Incorporated Q3 FY2026 earnings call

• Eric discussed net sales of $1.186 billion in December, up 4% sequentially, with non-GAAP gross margins at 60.5% and operating income at 28.5% of sales. Inventory at distributors improved with sell-in vs sell-through gap narrowing to $11.7 million in December.
• Matthias provided an update on connectivity business, highlighting momentum in automotive and industrial sectors driven by Ethernet standards, with design wins and strategic collaborations with Hyundai Motor Group.
• Steve highlighted strong December financials, net sales growth of 4% sequentially and 15.6% year-over-year, recovery in end markets, and growth in networking, FPGA, and licensing business units. Non-GAAP gross margin reached 60.5%, achieved earlier than expected.

Net sales in December were $1.186 billion, up 4% sequentially. On a product line basis, microcontroller and analog segments were flat sequentially, while networking data center, FPGA, and licensing business units drove growth. Revenue contribution: Microcontroller and analog segments contributed flat, while other segments (networking, FPGA, licensing) were the primary drivers of growth.

• Net sales for March expected to be $1.26 billion ± $20 million, representing 6.2% sequential growth.
• Non-GAAP gross margin expected to be between 60.5% and 61.5% of sales.
• Non-GAAP operating expenses expected to be between 31.3% and 31.7% of sales, operating profit between 28.8% and 30.2% of sales, and non-GAAP diluted EPS between $0.48 and $0.52 per share.
• Focus on reducing debt, prioritizing debt reduction over buybacks due to balance sheet concerns from the previous cycle.

• Lead times still short with challenges in substrates, subcontracting capacity, and foundry constraints on advanced nodes.
• Inventory reserves and underutilization charges continue to impact gross margin, with underutilization charges expected to take time to reduce.

Q: When thinking about the above seasonal guide for March and growth beyond, how should we be thinking about continued strength versus seasonality?

A: Eric stated it's a variety of factors including strong backlog, bookings, and distribution inventory correction. Confidence in growth heading into strong quarters like June and September.

Q: On the gross margin front, update on inventory reserve and utilization charges rolling off?

A: Eric said inventory reserves are normalizing, underutilization charges will be modestly down but take time to reduce, with growth in high-margin segments like data center and connectivity helping gross margin.

Q: For December, controller and analog segments were flattish. What drove December upside versus original guidance?

A: Steve said upside came from products (microcontrollers, analog, FPGA, etc.) being stronger than seasonal expectations.

Q: Thoughts on fab utilizations and OpEx?

A: Steve said fab utilization is complex with mixed processes, OpEx increasing due to investments in people, bonuses, and raises to retain talent, but focused on reducing OpEx as a percentage of sales.

Q: Growth in FPGA and PCI Express switching?

A: Steve said FPGA is seeing strong growth and gaining share, while PCI Express Gen 6 switch has design wins with growth potential in Gen 7 and beyond.