Microchip Technology Incorporated (MCHP) Q1 2027 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Microchip's Q1 Fiscal Year 2027 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 6, 2026. I would now like to turn the conference over to Mr. Steve Sanghi, President and CEO. Please go ahead.

Thank you, operator and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press release of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Eric Bjornholt, Microchip's CFO, and Sajid Daudi, Microchip's Head of Investor Relations. I will provide a new breakout of our net sales by end markets, including further information on our total data center exposure. Eric will then go over our financial performance. I will then provide an overview of the current business environment and our guidance for second quarter of fiscal year 2027. We will then be available to respond to specific investor and analyst questions. So let us begin with providing you with a further update on our exposure to the data center market. On June 1, 2026, we provided you a breakdown of our net sales from our Data Center Solutions business unit for calendar year 2025, which we said was $302.7 million. We also said that in addition to these net sales from the Data Center Solutions business unit, we have many catalog products from various business units that also have exposure to data centers. In the last couple of months, we have worked to pull together an estimate for this additional exposure to the data center market from these catalog products from various business units. These additional products include our power management analog products, mixed-signal products, microcontrollers, digital signal controllers, security products, FPGAs, timing products and Serial Quad I/O memory products. The additional net sales from data centers for various business units for calendar year 2025 was approximately $288 million. This makes the total net sales from data centers for calendar year 2025 for all Microchip products to be approximately $591 million. And that was the $303 million approximately from Data Center Solutions business unit and $288 million from all other catalog products for a total of $591 million. This was approximately 14% of our net sales for calendar year 2025. We have also estimated the data center sales growth expected in calendar year 2026. We earlier told you that our net sales from Data Center Solutions business unit is expected to be about $500 million for calendar year 2026. Now our net sales from the products from all other business units, which also go into the data centers is expected to grow from $288 million in calendar year 2025 to about $500 million in calendar year 2026. This makes the total net sales expected in calendar year 2026 from all of Microchip products, Data Center Solutions business unit as well as all the other catalog products going into data centers as about $1 billion. So this is expected to be approximately -- up approximately 69% from $591 million net sales from data centers in calendar year 2025. So a growth of about 69% from $591 million net sales in calendar year 2025 to about $1 billion in calendar year 2026. Now a little bit about calendar Q1 and Q2. In calendar Q1 2026, which was the March quarter, our net sales from data centers was up 77.2% from calendar quarter 1, 2025. In calendar Q2 2026, the June quarter just ended, our net sales from data centers was up 97.8% from calendar Q2 2025. As our numerous new design wins on our PCIe Gen6 switch, PCIe Gen6 retimer, storage controller, NVMe controllers, power management products, mixed-signal products, security products, timing products and memory products proceed to production in calendar year 2027, we expect significant growth from data centers in 2027 and thereafter. Now here is our end market net sales breakdown for the June quarter. We remind you that these percentages are our best estimates of the end market split. However, there is probably a couple of percent error band due to the fact that about 50% of our business and the long tail of customers are serviced through distribution, which makes it difficult to track the end market. So our June quarter end market breakdown was as follows: Industrial was 32.2%, data center 17.1%, aerospace and defense 16.7%, automotive 15.0%, communication 8.2%, consumer appliances 7.4%, and compute was 3.4%. You can see that we are now breaking out end markets of data center and compute separately. So we are now breaking out our sales into seven end markets. From June quarter 2025 to June quarter 2026, so year-over-year growth, our industrial net sales grew 24.3%. Data center sales grew 97.8%. Aerospace and defense grew 45.6%. Automotive grew 29.3%. Communication grew 53.3%. Consumer appliances grew 19.1% and compute grew 9.6%. So this is the most comprehensive breakout you have heard from us, enough to unpack for you. With that, I will pass it on to Eric.

All right. Thanks, Steve, and good afternoon, everyone. We are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at www.microchip.com and included reconciliation information in our earnings press release, which we believe you will find useful when comparing GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and leverage metrics on our website. I will now go over some of the operating results, including net sales, gross margin and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation and certain other adjustments as described in our earnings press release and the reconciliations on our website. Our non-GAAP financial results were all above our guidance provided on May 7, 2026. Net sales in the June quarter were $1.485 billion, which was up 13.2% sequentially and up 38% from the June 2025 quarter. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were 63.8%, including capacity underutilization charges of $38.5 million. Operating expenses were at 28.7% of sales and operating income was 35.1% of sales. Non-GAAP net income was $438.6 million and non-GAAP earnings per diluted share were $0.76, which was $0.07 above the midpoint of our guidance. On a GAAP basis in the June quarter, gross margins were 63.2%. Total operating expenses were $602.1 million and included acquisition intangible amortization of $90 million, special charges of $18.9 million, which were primarily driven by two long-standing legal matters, which were settled during the quarter as well as our activities associated with the closure of Fab 2, share-based compensation of $66.3 million and $0.4 million of other expenses. The GAAP net income attributable to common shareholders was $202 million, or $0.37 per share. Our non-GAAP cash tax rate was 7.5% in the June quarter, and we expect to have a tax rate of about 7.5% for all of fiscal year 2027. Our tax rate is down from the prior year for a variety of reasons, including the amortization of domestic research and development experimentation expenditures capitalized in previous years and the impact of a reduction in inventory reserves. Our inventory balance at June 30, 2026, was $1.047 billion. We had 175 days of inventory at the end of the June quarter, which was down 10 days from the end of the March quarter. Included in our June ending inventory was 14 days of long-lifecycle, high-margin products whose manufacturing capacity has been end of life by our supply chain partners. Inventory at our distributors in the June quarter was at 25 days, which was down one day from the March quarter and at the lower end of what we have experienced historically. Our cash flow from operating activities was $511.5 million in the June quarter. Our adjusted free cash flow was $478.6 million in the June quarter. As of June 30, our consolidated cash and total investment position was $272.3 million. Our total debt decreased by $138 million in the June quarter, and our net debt decreased by $170 million. Our adjusted EBITDA in the June quarter was $587.8 million and 39.6% of net sales. Our trailing 12-month adjusted EBITDA was $1.798 billion. Our net debt to adjusted EBITDA was 2.85 at June 30, 2026, and we expect our net debt to adjusted EBITDA to reduce significantly as we progress through fiscal year 2027. Capital expenditures were $13.9 million in the June quarter, and we expect capital expenditures for fiscal year '27 to be about $100 million. Depreciation expense in the June quarter was $37.8 million. I will now turn it back to Steve, who will provide some additional commentary on our June quarter results and our guidance for the September quarter. Steve?

Thank you, Eric. I will now reflect a bit on our performance in the June quarter. The June quarter was an excellent quarter for Microchip across the board. We beat the high end of our guidance in net sales and our non-GAAP financial metrics like gross margin percentage, operating expense percentage, operating profit percentage and earnings per share all beat the high end of our guidance. In all of these metrics, we continue to make excellent progress towards our long-range targets. On non-GAAP gross margin percentage, we are at 63.8%, which was a sequential improvement of 222 basis points. Our non-GAAP operating margin was 35.1% in the quarter, which was a sequential improvement of 452 basis points. Our inventory and days of sales came down again last quarter. We are getting pretty close to our range of 130 to 150 days of inventory. We will now take the focus off of inventory and instead focus on handling the large growth we are experiencing and deal with various constraints in foundries, OSAT and internal production. I will now talk about our business environment. We believe that we have completed the distribution inventory correction. Our overall distribution inventory is now low and some replenishment needs to take place in the coming quarters. We saw a small decline in distribution days of inventory in the June quarter. Our distribution sell-through grew by 17% sequentially in the June quarter. This is a result of distributors' customers completing their inventory correction and starting to reengage in buying our products. Our customer count is now going up. We are also seeing customers from new designs and from our improved relationships start buying our products, adding to our bookings, revenue and customer count. Now let us get into guidance for the September quarter. Our bookings for the June quarter were very strong. The book-to-bill ratio for the June quarter was well above 1, resulting in a higher backlog entering the September quarter compared to when we entered the June quarter. The June quarter was also the strongest booking quarter in about 4 years. A comment about lead times. Lead times for majority of our standard products have been 4 to 8 weeks for some time. But now, with the die inventory and finished goods substantially reduced, we are seeing lead times stretch on many of our products. We are running into challenges on certain kinds of substrates, subcontracting capacity and foundry constraints on multiple nodes. These challenges previously were isolated to specific areas but have now spread broadly to many of our products that come from foundry. The challenges in subcontracted capacity and test capacity are also stressing our lead times from products built by our own fabs. Our customer requests for expedited shipments have increased significantly from a few quarters ago. We are receiving a large number of orders for requests inside the lead time, and many times they are going unsupported in the quarter. We are advising our customers to give us longer-term backlog to match at least our lead times and preferably matching our manufacturing cycle times. I also wanted to give you an update on the pricing. The price adjustments we discussed in early June have now been successfully implemented in the marketplace. Most pricing is effective between mid-August to early September, making a small impact to the September quarter. Taking all of these factors into account, we expect our net sales for the September quarter to be up 8% sequentially, plus or minus 1%. This at the midpoint will be up 40.6% from the year-ago quarter. We expect our non-GAAP gross margin to be between 66% to 67% of sales. We expect our non-GAAP operating expenses to be about 27.5% of sales. We expect our non-GAAP operating profit to be between 38.5% and 39.5% of sales. We expect our non-GAAP diluted earnings per share to be between $0.91 and $0.95 per share. At the midpoint, non-GAAP earnings per share would be up 165.7% over the year-ago quarter and up 22.4% sequentially. Our guidance on non-GAAP gross margin percentage obviously raises some questions because it exceeds our long-term target of 65%. There are a lot of factors impacting this guidance. First, there is some excellent product mix in there. Then there is our 100% gross margin on an expected very strong quarter for our licensing business unit. Then there is a price increase capturing the inflationary costs that we absorbed in prior quarters. Then there is a lower new inventory write-off versus prior quarters. And finally, there is lower underutilization charges as we are ramping up the factories. So as you can see, there is no single item for this gross margin. There are a lot of items that we have been improving to get to our financial model. The net result is that we are very close to our financial model with gross margin percentage above it and the operating margin percentage just a shade below the model. At this point, we will leave the long-term model unchanged. You should not expect non-GAAP gross margin percentage to continue to rise above this level. With that, operator, will you please poll for questions?

[Operator Instructions] Our first question comes from the line of Timothy Arcuri from UBS.

Steve, I wanted to ask you just your perspective on how long this upturn can last. So September is going to be the sixth quarter above seasonal. I know it's a unique time and you're coming off a big downturn. And it does sound like you think both the disties and the end customers are just beginning to rebuild inventory. But usually, you're not above seasonal for more than eight quarters. You know that better than anybody does. So how do you assess this? How do you think about how long this can go on?

So there are at least three or four factors going on that may make this last a bit longer than usual. The first is the data center. Data center exposure is going through significant growth. We just talked about growing almost 69% this year. So I think that's one that could last longer. The second one is aerospace and defense. The aerospace and defense buildup is just beginning. We're getting lots of orders for missiles and drones and radar installations and interceptors and battle tanks and ammunition and all kinds. And that's a multiyear buildup. So I think that could last for a while. The third one is, while you say that it's been above seasonal for eight quarters, I haven't counted. I don't know how many exactly. But I think the true markets, industrial and automotive, started much later. They've probably been just recovering maybe only about a couple of quarters. So I think there is a lot more to go on the industrial market as it is growing. A lot of the AI is going into industrial, and industrial is also a very broad market, our largest market segment, that could go longer. And the other is the automotive, which is probably still not extremely strong. I think the automotive market is just kind of beginning to recover. So I think those are the factors which could make this upturn last a bit longer.

And then, Eric, just super fast. So are there any inventory sale of previously written-down inventory that is inflating margins?

So I would say we're kind of, like we said last quarter, that inventory reserves have normalized at this point in time. We did reserve quite a bit of product based on our accounting policies and where the business was at during the down cycle, and there is sell-through. There's sell-through every quarter. And new reserves are coming down. So it definitely is a net benefit to margins, but we don't think that's going away, at least in the short term with where we're at.

[Operator Instructions] Your next question comes from the line of Vivek Arya from Bank of America.

Steve, I wanted to talk about the data center. What is the right way to model your data center growth for the next two to three years? Just conceptually, what are the moving pieces? And how are you benchmarking whether you are gaining share, losing share or keeping share? Like what is the served addressable market for you? How fast is that growing? And how do you expect Microchip to do relative to that market?

Vivek, our data center exposure is probably the broadest of any other company. Many companies could have exposure, let us say, on a PCIe switch or could be just in a power management going to the rack. As I read through my summary, I mean, just, it's very, very broad. It's power management, it's memory, security products, microcontrollers, analog parts, mixed-signal parts, switches, controllers and others. And it's difficult to assess what is the total TAM in each of those markets in data center and how much our competitors have and how much we have and really try to assess all that. We have done a lot of work on this one on the request of investors and analysts, and this is probably the most comprehensive breakdown we have given you, and we'll continue to give you update. But I am really not able to project it over the next two to three years and answer your question, are we gaining share or losing share. I would like to think we are gaining share.

And maybe if I could follow up on gross margins at 66.5%. I think you mentioned we should not expect more than that. But if you are putting in pricing just in this quarter, you are not really reducing inventory anymore. Mix seems to be getting better. So why shouldn't there be more upside to gross margin? If there is no more upside, is this kind of level sustainable? So just kind of the puts and takes on gross margins, right, beyond this very impressive 66.5% midpoint that you are guiding to?

Yes. So it is a good question, and we knew we would get it. So Steve provided some commentary on the various things that are impacting it. But there is a couple of things that are not really repeatable that are happening this quarter. We do expect a larger licensing revenue, which is 100% gross margin this quarter. That business tends to be lumpy, and this will be a lumpy quarter from licensing. When we do a price change, and I think you have heard others talk about this in distribution, that impacts the inventory that is sitting in the distribution channel, and that is kind of a one-time impact in terms of the revenue that will be recognized or expected to be revenue recognized from that. So there are a lot of moving parts. Obviously, we do still have things working in our favor with improving utilization and whatnot. But it's a balance and 66.5% is a very healthy margin is how I describe it.

What are those one-offs, Eric? Sorry, how much?

We haven't broken those out, Vivek, but they are definitely impacting the margin favorably this quarter.

So we think the entire quarter of increased prices, although there are some expenses, too, we are getting cost increases also from foundries and OSATs and all that. So there is a balancing on that, too. But full quarter of increased prices will balance some of these one-time costs that you talked about or one-time benefits you talked about. One is a very rich mix, product mix in licensing, and second being this one-time benefit from the inventory in distribution. Those two will be negative for the following quarter. But the full quarter of price increase will be positive, and it will probably balance and gross margin could be still in that range, but do not expect it to go higher.

Your next question comes from the line of Joe Quatrochi from Wells Fargo.

Maybe just curious on the data center business. How do you think -- when you look at your design win pipeline as you think about 2027, how should we think about just the potential for accelerating growth?

Well, like I said, we have very, very broad exposure. If you were to start to look at the design wins across our microcontrollers, memory products, power management and others. And one of the reasons it took us that long and it's more difficult to do is on Data Center Solutions business unit, which is like the Gen6 switch and retimers and others, there we engage with very large customers. We engage with hyperscalers and enterprise customers and winning large design wins. But when you look at our catalog products broad-based, there we do not win designs at hyperscalers and enterprise. We win designs at power supply companies, card stuffers and module makers, and companies like LITEON and Delta and others, which then are selling their products into the Data Center business unit. So across our entire portfolio, there will be hundreds and hundreds of designs. And it's very difficult, therefore, to answer that question. We will limit the design win information to really the Data Center Solutions business unit. And there, we could tell you that last quarter when we came to you, we had six design wins and at the end of the quarter, we had -- this quarter we had 12 design wins. And as of today, we have 14 design wins, 12 on the Gen6 switch and two on the Gen6 retimer. And there are many more in the works. So I think that one is easy to identify. But if I were to start to identify design wins on our analog catalog products or memory products or security products, they are endless.

That's helpful color. Then maybe just you talked about things increasingly getting tighter from a supply perspective. I know you guys have maybe some tools that are still yet to be installed or put into production. Are we getting close to where that might be a possibility? Or is it more the tightness, particularly on the back-end side?

We do not have shortages on our internal fab capacity. We are still not at 100% utilization on our tools. And like you said, there are many more tools available that could be readily installed. We have not yet started installing them because we still are not at a full utilization. But many of our internal products get assembled and tested at the subcontractors on advanced packages and different test platforms. And that's where we have some of the constraints for the internal fab capacity. And on the foundry, we have constraints on many nodes. And if some of the foundry wafers are coming inside for assembly and test, they were doing better. If they are going outside for assembly and test because they are on some advanced packages and test platforms, then they are getting squeezed by AI capacity that's crowding out. So it just depends on what the combination is. If it's inside assembly, inside test and inside fab, that is the best combination. Any time there is foundry involved or outside OSAT involved, then that's where some of the constraints are.

Your next question comes from the line of Christopher Rolland from Susquehanna.

Sorry, I think there was a bad connection there. Yes. So my question is just about serviceability of upside, both external and internal. If this cycle really does, like, what is the game plan here? And would we ever consider a 300-millimeter fab? Would that ever come back into the thinking here?

Yes. So when we talk about constraints, you shouldn't interpret that as there is no additional capacity available and there is no additional growth available. Constraint simply means we could use more than what we were given. If we were given more, the upside could have been a little larger. But every quarter, we have incremental capacity. Fabs and assemblies and test are growing their capacity, and we have increasing allocation. On many other products, we were constrained in March quarter too, yet in the June quarter, we were able to post substantial growth, and that's what we are planning to do for the September quarter. So yes, there is more assembly capacity available. Yes, there is more test capacity available. We are also bringing some products from outside to inside and growing our inside assembly and test capacity. And we are getting increasing allocation on a lot of the constrained nodes from this quarter to next quarter. So you should not, by any reason, interpret a word constraint to be that the revenue is capped here, not at all.

I think the second part of the question was the possibility of 300-millimeter. And that's not in our plans today. We will rely on our foundry partners to provide anything that we need on 12-inch and the technologies that it supports.

We have hundreds and hundreds of masks running on 300-millimeter, and trying to put our own 300-millimeter fab in technology, which will not be compatible with the foundry technologies because we'll have to build our own and all those parts will have to be redesigned, it is just not a practical thing to do. And so there is no plan to have our own 300-millimeter fab.

Excellent. And perhaps as a follow-up, just because AI has just been such a growth engine and you have PCIe and some other AI products here as well. Is this going to be an area of focus that you guys may be looking to bolster either organically from here or even inorganically moving forward?

So we are not looking for any large acquisition inorganically. We recently announced a small acquisition inorganically, which is a company called Hailo, which is headquartered in Israel. And that deal should close sometime in September. Its revenue is small, but its products are outstanding. The company ran into some financial troubles and they had to restructure and became available and we bought it. But the benefit it provides to our roadmap is just totally incredible. In the area of AI on the edge, it advances our roadmaps by about five years. So the products they already come to us, it was going to take us four to five years, about four years to produce those products and another year to market them and get the design wins and all that, which they already have. So significant benefit from that acquisition, but it's not a very large acquisition that moves the needle. I think it will move the needle on our clock, because its revenue should grow pretty rapidly because it's basically primed, and all the resources of Microchip selling it, we can grow it rapidly. But in the very first quarter, it's a small revenue.

Your next question comes from the line of Chris Caso from Wolfe Research.

For my first question, perhaps you could comment on December quarter seasonality. I think typically, it's down a bit for you. It looks like consensus is up a little bit in the December quarter as it stands now. But I guess the question is, with the different mix of your business, how does that affect seasonality going forward? And what are the factors that might cause this December to be different than whatever would be typical?

So I think what we are willing to say is, usually, our December quarter is down 3% to 5%. And we think the quarter would be better than seasonal. We are not willing to comment on what the long-term new seasonality would be as some of these markets we are in, data centers and aerospace and defense and others, become more mature. I think a couple of years out, maybe a different seasonality. But for now, I do not know the answer to the -- to it long term. But short term, the December quarter should be better than seasonal.

As a follow-up, it does appear that we are in the recovery part of the cycle now. Steve, I know that you've been a little cautious about cash flow and getting debt levels down and putting the company in the right place. With an apparent recovery happening now, some better cash flow going on, maybe you can update us on your view of cash return and what to do with cash that you are going to be generating.

So we still have substantial debt, about $5.5 billion.

Yes, net debt is about $5.2 billion.

Yes. So net debt is about $5.2 billion. Gross is a little higher than that, closer to $5.5 billion maybe. Even though the leverage ratio has now come below 3, we believe the debt level is still too high, and we will continue to use the entire cash that's available beyond the current dividend and use it to pay down the debt for the foreseeable future. There is just no other plan -- no plan to buy back stock and no plan to increase the dividend for foreseeable future.

We were very pleased about the progress we made last quarter on our reduction in the net debt-to-EBITDA dropped to 2.85. I would expect with our guidance, it will drop below 2.5 this quarter. So we are making good progress.

Making very good progress and hopefully heading to a number where it starts to drive different actions, but we are not there yet.

Is there a particular number you have in mind that would drive different actions?

Not that I am willing to share.

Your next question comes from the line of Vijay Rakesh from Mizuho.

Steve, just going back to the data center side, is there a way to look at what your content is like dollar per kilowatt or per rack? And in terms of the 12 design wins, any of them on the scale-up side on the rack, where do you see that -- those wins, if you can give some more color and a follow-up?

I'm just trying to understand the question.

So, we do not give any sort of direction in terms of dollar content per rack. So that was the first question. Of the 12 design wins, it is my understanding that we have both scale-up and scale-out opportunities within that. Sajid, do you confirm that?

It's mostly at the core level, the vendor level. So...

Basically, PCIe switch connects the GPUs to CPUs and CPUs to memory, and it's used if you scale out or scale up in both cases, and that's where all our design wins are. There are some hyperscalers in there. There are some enterprise customers in there. It's a pretty broad mix in those 14 design wins.

Got it. And Eric, on the gross margin side, is the assumption that we should expect it to be kind of flattish going forward?

Yes. I mean, what we said earlier is that we -- you shouldn't model in that it's going above the 66.5%, I'll call it, that we're guiding to at the midpoint of guidance. It's a really strong gross margin that's above the long-term model. We're continuing to make improvements, but there's definitely some headwinds on the cost side that we're absorbing also. So we're comfortable that we're going to be in this -- about this range for at least the next few quarters.

Your next question comes from the line of Harlan Sur from JPMorgan.

If I look at the mix of your direct versus your distribution customers, the June quarter marked the second consecutive quarter where your direct customers only grew like mid- to high single digits sequentially, whereas your disti business grew strong double digits sequentially in March and June, right? And on a year-over-year basis for both March and June, disti outgrew direct by around 2x. I know it's harder to track your direct customers' internal inventories, but are they still maybe working through some excess inventories? And does that imply direct customers are a potential future tailwind for growth when their inventories start to normalize?

I think I would look at it more of where the distribution network was coming from with very elevated inventory when you look back a year ago and working through that and now getting down to what is a very reasonable inventory level at the 25 days that we quoted. And so them kind of returning to a normalized level where now they are needing to purchase kind of in line with what the consumption is. And they've got a lot of customers that are coming back that were over inventory that now they need to support. So I view it more from that perspective. I don't know if Steve has any different view than that.

I think when the products were constrained, the direct customers got better supply than the distributors did. And when the market essentially came down and the supply became available, that's when the distribution got served. So distribution built inventory later. And that's why it took longer for distributors to correct. And as they corrected, now you're seeing the benefit. I think the OEM customers were slightly ahead of it.

I appreciate that. And then, Steve, within your Aerospace and Defense business, this segment underperformed your overall growth profile last fiscal year. But this segment is starting to drive some pretty outsized growth rate. It was up 46% year-over-year, 20% sequentially in the June quarter, as you highlighted, defense spending by the U.S. and global governments. You've got global commercial space programs are all quite strong. You guys have a very strong leadership position in rad-hard FPGAs, rad-hard MCUs, interface timing, power. Like do you anticipate growth outperformance for A&D for fiscal '27? But more importantly, does the multiyear growth profile look like continued outperformance just given some of these programs have very long program lives?

Qualitatively, yes. But quantitatively, don't dial in a 46% growth because we're talking these growth numbers are from pretty depressed levels. In March quarter 2025, our total company revenue was $970 million, and we're now guiding to $1.603 billion at the midpoint. So there has been a massive growth from the bottom in March of 2025. So when I do year-over-year comparisons, they obviously look very, very good, which is great, but just don't dial those kind of numbers going forward. But qualitatively, yes, we are very positive on growth on data center. We are positive on growth on A&D. And we think that industrial and automotive are trying to catch up. There were later recoveries and industrial is probably a little ahead of automotive, and that makes up all of our major segments. The rest are small. Communication is small, consumer is small, compute is small. The four large segments are industrial, data center, A&D and then automotive. Two out of those, data center and A&D are very strong and industrial and automotive are trying to catch up.

Your next question comes from the line of Blayne Curtis from Jefferies.

I had two. I just want to go back to the conversation about normal seasonal and if you're shipping above. Is there any way to kind of think about what pricing was as a tailwind in September? I think your seasonality is usually maybe up 4%, 5%, you did 8%. So just kind of trying to understand, I think you said it's done by September 1, but can you quantify what the impact was?

The impact of pricing on September quarter was fairly small, basically going to get less than a month out of the three months. A lot of the customers pulled some orders they had to into -- they pulled some orders prior to the higher price becoming effective. Within the quarter, they pulled in from September into August before the price increase or August into July before the price increase. So it stayed within the quarter, but many people pulled the orders in trying to really avoid the price increase for a few more days or a few more weeks. So the impact on September quarter is fairly small, but the impact on December quarter will be the full quarter.

And then I want to ask you, is this kind of a onetime thing that you're going to give us these end markets? Or are you going to break this out more regularly on a quarterly basis versus annual? And then within that, I guess, the only other segment that was up nicely was communications. Maybe talk about what's going on there.

So our intent is to provide it more regularly. And in terms of communication, we are seeing a significant recovery in the communication market from 5G, from other communication racks, the major communication customers, a lot of them in Europe, we're seeing a significant recovery in that segment. It was a pretty good growth. Now that sector was quite depressed also a year ago. So when you look at year-over-year numbers, the year ago numbers were very low. So a lot of that good number is because the prior year numbers were very low, although we're seeing a recovery, too. It's a smaller segment. It's about 8% of our business. So it's not as pronounced as the larger segments. But communication, we have seen recovery.

So I'm just going to be a little bit more clear in Steve's response on the end market breakout. It is our intention on a go-forward basis to break it out quarterly. That's what analysts and investors are asking for. We've set up a process to be able to do that. So we'll share it with you at the end of each quarter.

Your next question comes from the line of Tom O'Malley from Barclays.

You mentioned margins kind of staying at these levels on a go-forward basis, but we've been hearing from others in the space just a strengthening of input costs that are causing some margin headwinds. So could you maybe call out the areas in which you're seeing the most pressure? And then how are you able to offset those? You guys mentioned one of your line items on gross margins as obviously offsetting some of that with pricing increases. But do you feel like you have the flexibility to continue to do that on a go-forward basis if the cost environment keeps getting worse?

So we did this price increase with the intention of a onetime price increase in which we captured some of the costs we have been absorbing in the prior 6 months. So we increased the price on those parts also. We didn't set it up where we're going to do a quarterly or every 6 months price increase. There has to be another event, a major price increase by the foundries and OSATs on us. And if that happens in 2027, then we'll take a look at it again. But currently, there is no expectation we've given to the customers that this will be a routine price increase that we saw often. This is basically for now, it's one and done and a new price increase will be driven by a new set of events.

Yes. And we are continuing to ramp our factories, which will provide us better utilization, decreasing our underutilization charges, which hopefully can offset some additional cost increases that are likely to come in.

You already had knowledge of some of the price increases where we had already knowledge of, which haven't kicked in, they're kicking in even in the fourth quarter on January 1. We tried to dial in into this price increase.

Yes. Just as a follow-up, I don't want to get green here because you guys are providing a lot more color and we do appreciate it. But in terms of the growth rates of these different segments, you tried your best earlier to kind of capture data center, but some of this other stuff you now have multiple years of data that I'm sure you can see what it's been growing at. Any color on what you expect each of these segments to grow longer term? Are you going to save that for an Analyst Day or something down the road?

I think they vary widely. These things vary widely. They're very lumpy and 1 year, industrial could grow, every year, automotive could grow. They go through different cycles of inventory correction. Communication could grow based on 4G going to 5G, versus 6G. I don't really think there is anything like you can say CAGR for this segment is that going forward. We don't think it's a number we can put together. Like you said, we have really put a lot of effort in providing this breakdown. So be nice so we keep doing it.

Your next question comes from the line of Jim Schneider from Goldman Sachs.

I was wondering if you could maybe just kind of comment on the behavior you're expecting to see from distributors. You talked about 25 days being at the low end of the historical range. When you talk to what's your sense about the levels they want to get back to? What's realistic to expect over the next, say, 2 to 4 quarters in terms of a healthier channel inventory? Do you think they want to get sort of back to the normal levels or potentially even above that to build some stock?

So I personally met with some of our largest distributors only in the last 3 weeks. And what the distributors are seeing is that they know their inventory is low and they would like to get their inventory to a normal level, but they would like their customers to place the orders on them so they know what to place the order on us. And they're saying, despite the repeated warnings to their customers and all the talk that's happening in the industry where AI is crowding out everything, there are plenty of articles on longer lead time. There are various analyst reports on lead time growing. Companies are talking about it. The distributors are frustrated that their customers aren't listening and aren't giving them longer-term orders, which is that's what has happened in the past. Customers don't move until they get in trouble. They have to go some lines down and then they panic. And I think in each cycle, there are a new set of purchasing managers, they move around, the old ones retire, the new ones come in, in every cycle. And I can say the same thing about our direct customers. Some of them have to go lines down and then they ask for expedite and we say, we can't do it or it will cost money to do it, and that's when they wake up and they give you longer-term orders. So distributors are not getting orders from their customers and they're complaining. And some of them are planning to give us some orders based on their expectation of longer-running designs where they think they will get the order or they know what to order, but they're not able to order across the board because they don't know what to order.

Yes. Some things never change. And maybe as a follow-up, Steve, you provided some good commentary before about your internal capacity, both on the front end and back end. Realizing you're continuing to add capacity on margin and you had mothballed a bunch of capacity in the downturn. Can you maybe give us any kind of sense as you think about kind of re-extending that capacity from the current levels of internal capacity you have today, if you did without doing anything unnatural, how much more capacity could you support above that level? Is it 10%, 20%, 30%, et cetera?

It's higher than the numbers you're talking about. We've got substantial capacity, which is unutilized. And if you keep ramping to use all the installed equipment, we could grow significantly. And then there is $450 million of equipment that's still sitting back, some of that not even installed, and that can take the capacity a lot higher. So rather than trying to put the numbers on it, the internal capacity, fab capacity is not a constraint. In most cases, internal assembly and test isn't constrained either because we could add more capacity we're adding as we speak. Where the constraints are is one in the foundry and the second one in the OSAT. There are a lot of packages we don't do internally. We don't do PGAs internally. We don't do many of these packages that require substrates and advanced packaging and multichip and others we do outside. And AI is crowding out a lot of that capacity, and that's where we're getting constrained. Now our major suppliers are building more factories and ASE is building more factories and Amkor is building more factories and others are building more factories. So the capacity is growing, and we're getting our share of it. And that's where I said, don't think of constraint as there's no growth available, but we're not getting everything we need. We can make higher growth if we had everything.

Your next question comes from the line of Quinn Bolton from Needham & Company.

I guess, Steve, Eric, I wanted to just sort of follow up on the underutilization charges. I think you said $38 million this quarter. It's about 260 basis points. You didn't mention it as one of the margin tailwinds that was driving the gross margin to 66% to 67% next quarter. And so how should we think about those underutilization charges kind of decreasing over time? Are you kind of keeping those and they can largely offset input price increases beyond the September quarter to help you kind of keep margins in that 66% to 67% range? Or is there a different way we should be thinking about the roll-off of those underutilization charges?

You're thinking the right way. What we are asking you guys is to take that underutilization charge as it goes away and not add it to the gross margin because like we said, we got a onetime gross margin benefit in this quarter from distribution inventory on which we have taken a price reserve. And when the prices are going up, that reserve goes down. So that becomes a onetime 100% gross margin. And then there's a very, very good licensing quarter. It's lumpy. And this quarter is very good. As it goes back to normal, that 100% margin goes away. So there are lots of moving parts. And as those onetime things roll off, the utilization is improving and the number you talked about then helps to keep the gross margin in that range rather than take it higher.

Yes. And the underutilization improving was mentioned by Steve in his prepared remarks about being a help in the 66.5% midpoint guidance this quarter. And just on the underutilization charges, last quarter, I think they reduced by about $8 million sequentially. I'd expect about the same in the current quarter.

It was taking the remaining underutilization charge dividing it with the revenue coming up with 238 basis points improvement and saying why the gross margin doesn't go up. And what we're seeing is that there are a lot of onetime things and it will offset those.

Got it. I think that's pretty clear. And I just wanted to ask on auto. Most of your peers year-on-year probably growing their auto business 15% or so. I think you're up nearly 30%. So do you think that's just a function of the you're kind of early in the auto cycle coming off a pretty steep bottom. Are you feeling better about the auto end market? It certainly feels like SAAR is still pretty lumpy, but just any quick thoughts on how you see the auto demand going forward?

I think there are 2 reasons. One, we went down more than the others. Our overall reduction post-COVID inventory was higher at the customers because Microchip was less flexible. So we had more inventory at the customer. Therefore, we went down more. So our recovery has been stronger. And secondly, I think we gained share in pretty much all markets in the last 2 years.

Your next question comes from the line of Joe Moore from Morgan Stanley.

On the topic of capital allocation, how are you guys thinking about M&A and inorganic growth at this point? Is that still something that you're it seemed like you were maybe through with that, but just how are you thinking about that now that there's a little bit more activity?

We are not thinking of any large inorganic growth. The only things on our plate are some small companies, technology where you could help here and there, like Hailo is a very small acquisition that moves our road map substantially on AI on the edge products, which are products that we would have produced in the next 4 years in our business units, and we get those day 1, but it's not a lot of dollars. And eventually, when we close the acquisition, you'll know what we paid. But we're not engaged in any large acquisition today. We're going to use the money to bring down debt. We are not comfortable with $5.5 billion in debt.

Makes sense. And then on the data center, I guess it'd be great to just at some point, get I appreciate you breaking out the numbers. I can get more of a sense of breadth. You talk a lot about the PCI Express opportunity, but I know the history of the company with PMC-Sierra and Standard Microsystems and all of the IP that you have. I just not really a question, but just it would be great to get a sense of the breadth of opportunities that you guys face in that business at some point.

Noted.

Your next question comes from the line of Will Stein from Truist.

Steve, I'd like to ask about the defense end market specifically. As I recall, following one of your acquisitions years ago, there was a big supplier to the DoD. I think you're now the largest semi supplier to the DoD. And I think the reports about depletion of weapon systems has been pretty widely covered and there's an effort to rebuild those. This has been a strong end market for you for a while, I think, and I think your outlook was strong there as well. But I wonder if, from your perspective, when you see the orders on the books, has the rebuild already been sort of placed into the supply chain? Or is that something that we should consider as possible upside more sort of on the come?

It's more on the come. We are seeing only the front end of the orders on missiles and those kind of products. So we've gotten some orders to which we're delivering. That sector was up 45.6% in the June quarter over June last year. So some of it is in there. But the growth that the government and Department of War is talking about on this thing is a production increase of 4x to even 4x to 8x is a number that we're hearing from primes. But the primes don't have the capacity for everything else to ramp that much. So they are trying to get everything needed to really ramp that much. So a lot more growth is ahead. And I've spoken to the CEOs of the primes and they're asking me, are you ready to substantially ramp this? And I said, ramp what? You got to give me the order so I can figure out what components are needed. A general question, are you ready to ramp? Yes, I'm always ready to ramp. So I think that's really where it is. They're trying to figure out their own needs regarding what all the things are needed. They're contacting the suppliers, figuring out the ramp of capacity, then give the orders and we start building. So our orders are strong, but it's only a fraction of really what is needed out there.

Appreciate that. If I can follow up with a question about AI data center. I think what most companies have expressed through this earnings season is that the end market still looks quite strong and stable. I think you've said as such so far this call as well, although the stocks are sort of telling us that it seems like there are some people who are very concerned that the spend may roll over quickly or maybe there's already some while some fear is being expressed, let's say. So what are you seeing in terms of the duration of the backlog, the stability of the backlog and outlook? Are there perturbations that make you nervous about that backlog? Or has that changed for the better and that perhaps it's gotten even more stable and longer duration in the last couple of months, let's say?

Well, I would say if you take 2 pieces of it, one is our Data Center Solutions business unit; and second, you take all the catalog products. On all the catalog products, I think we're seeing a growth even slightly higher than the Data Center Solutions group. Those are going from $288 million to $500 million. And there are lots of new design wins that are still ramping. It's not a single design win. It's hundreds and hundreds of them all over the place. And they are in the rack, in the power and coming into the data center, just all over, security products, memory products, parts from the card, parts from the power management, parts from the bus, converters and all that kind of stuff. So that is really just very broad-based and very difficult to get your arms around by design wins because it's just too numerous. When you get to the Data Center Solutions group, there, like we have talked about 14 design wins, there, I think we have talked before that we were major suppliers on Gen 2, Gen 3 and Gen 4, and we were very late to market on Gen 5 during the post-COVID period, and we essentially lost all of our Gen 5 business, we got none by the time we came to market, that business was gone. Now since then, we produced our Gen 5 products, and we're getting lots of revenue in the second source position and it is ramping. And Gen 6 is just starting. The part went to production at the end of June. So we're just shipping first parts to customers as we speak. So there, we're in the early innings and it's all growth ahead because it's coming from low numbers. Does that answer your question?

The indications that you're getting from customers is the pattern of backlog or the pattern of orders, the backlog, the duration of it, is it stable and getting longer? Or are there things that are moving around fast enough to suggest there's I don't know, some lack of certainty, let's say.

And I'm saying that the customers who are shipping those parts in volume today, they can probably answer that question better. We're not shipping in volume. We have won 14 design wins on which we have shipped nothing yet.

I want to add one thing, and this is more in response to Joe Moore's question a question ago. Sajid worked with our business unit leaders and produced a data center slide at Slide 14 on the investor deck that we posted on the website. I think you guys will find it interesting. The left-hand side of that slide speaks about our data center solutions business, which we've talked about more on a public basis over the last few quarters. But the right side of that slide talks about the other products and some of the areas where that plays. So I think that might help you, Joe, and others as you look at that slide, and you can obviously follow up with Sajid if you have any questions.

On the right-hand side of that slide, it talks about 5 specific areas. One is the grid to rack and in-rack power. So that's really bringing power to the rack. Second is the system management, various Ethernet switches, USB hub controller, MCUs that are doing predictive maintenance, fan controllers, temperature sensors, those kind of parts. The third is timing and synchronization. There is a tremendous amount of accurate nanosecond accuracy of timing needed in all the systems so they can all work together, and we provide that timing and synchronization. Fourth is security, so you can't get into it and hack it and all that. And fifth is networking, routers, switches, Ethernet PHY, optical modules and other stuff. So take a look at that slide, it's useful.

Our last question comes from the line of Joshua Buchalter from TD Cowen.

Let me echo the appreciation for the incremental disclosures. Maybe a follow-up on the last one since you brought up that slide. Any way you can maybe rank order the contributions today or even a year or 2 from now on the different buckets on that Slide 14 for data center?

I don't know about a year from now, but not today. We'll take that question under advisement and take a look at what we can do.

Okay. Can't hurt to try. Anyways, I wanted to follow up on the pricing increases, and I'm sorry for picking up this. But I was wondering, any help you can give us on the scope? Was it mainly with channel partners, but was it channel plus direct customers more across different end markets? Or was it just across the board?

It was largely across the board, but there was not an equal increase on every product, and there was not an equal increase on every customer because every customer buys a different mix of various different products. So there was some correlation to whether we're producing internally or externally where the cost increases are, and there was some matching of the cost increase to the ASP increase of the product. So it was a very complex equation because we ship 100,000 SKUs, but it was very, very broad-based.

And generally well accepted by our customers, I would say.

One distribution comment to me directly was that Microchip executed the best among many of their other suppliers who have done the price increase, we were the model. We were the standard how it should be done.

This is the conclusion of our Q&A session. I will now turn the call over to Mr. Steve Sanghi, CEO and President, for closing comments.

Well, thank you very much. I think we delivered a great quarter, and we are set up to deliver another outstanding quarter with a huge increase in gross margin, EPS and everything else. There are several conferences this quarter, and Microchip management will be at those conferences. We look forward to seeing you at those conferences and continuing this dialogue. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.