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DATE

Thursday, May 7, 2026 at 5 p.m. ET

CALL PARTICIPANTS

  • President and CEO — Steve Sanghi
  • Chief Operating Officer — Richard J. Simoncic
  • Chief Financial Officer — Eric Bjornholt
  • Vice President, Data Center Solutions — Brian McCarson
  • Head of Investor Relations — Sajid Dowdy

TAKEAWAYS

  • Revenue -- $1.311 billion for the quarter, up 10.6% sequentially and 35.1% year over year, above the high end of prior guidance.
  • Non-GAAP gross margin -- 61.6% for the quarter, including $46.6 million in capacity underutilization charges.
  • Non-GAAP EPS -- $0.57 per diluted share, $0.07 above the prior guidance midpoint.
  • GAAP net income -- $116.4 million, or $0.21 per share for the quarter.
  • Fiscal year net sales -- $4.713 billion, up 7.1% from the prior fiscal year.
  • Inventory -- $1.035 billion at period end, declining $22.3 million sequentially; inventory days at 185, down 16 days from the prior quarter.
  • Distribution inventory -- 26 days at period end, at the historical low end, down two days from the previous quarter, with distribution restocking expected soon.
  • Adjusted free cash flow -- $228 million generated for the quarter.
  • Total debt -- Increased by $143 million, influenced by a 0% four-year convertible bond issuance and a $68 million cap call purchase.
  • Adjusted EBITDA -- $467 million for the quarter, 35.6% of net sales, up 132.9% year over year; trailing twelve-month adjusted EBITDA was $1.5 billion.
  • Net debt to adjusted EBITDA -- 3.5, improved from 4.2 in the previous quarter, with expectations to fall below 3 in the coming quarter.
  • Capital expenditures -- $14.2 million for the quarter; fiscal year total of $92 million; fiscal 2027 capex expected to be approximately $100 million, driven mostly by maintenance.
  • Distribution sell-through -- Increased 11.4% during the quarter, with sell-in only modestly lower, signaling potential channel restocking.
  • Data center solutions -- "Significant momentum across all three major product families" reported, including six design wins for PCIe Gen6 switches and entry into the PCIe retimer market with a major OEM customer secured.
  • Business unit realignment -- Company executed a transition from two primary product pillars to five (microcontrollers, analog, networking and connectivity, high performance compute, and artificial intelligence on the edge) to align with major market trends.
  • Nine-point recovery plan -- Completion cited on footprint, inventory reduction, megatrend, business unit, and distribution realignment, with significant progress on operating metrics and only further margin improvement, operating expense targets, and inventory reduction outstanding.
  • Backlog and order trends -- March bookings "significantly higher" than December; April described as the largest booking month in nearly four years; book-to-bill ratio for March reported as "well above one," leading to a "much higher backlog" entering June.
  • Lead times -- Reported as lengthening and described as a broadening issue for "many of our products," with rising customer expedite requests and challenges now spreading beyond previously isolated areas.
  • June quarter guidance -- Net sales expected to increase 11% sequentially (±1%), non-GAAP gross margin guided to 62.25%-63.25%, non-GAAP opex to 28.75%-29.25% of sales, non-GAAP operating profit to 33%-34.5%, and non-GAAP diluted EPS to $0.67-$0.71.

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RISKS

  • Steve Sanghi stated, "We are constrained on substrates," and cited tightness affecting data center, networking, and automotive businesses, with increased delinquency but "not at a crisis level."
  • Foundry capacity described as "very tight," with Steve Sanghi noting, "70% to 80% of the process technology nodes are constrained," requiring active management to secure additional wafers.
  • Lead times are expanding broadly, and multiple speakers indicated that this trend could further accelerate as inventory levels decline in coming quarters, potentially impacting shipment timing.
  • Dependence on maintenance capital and existing capacity may limit the company's ability to respond rapidly to unexpected, significant upside in demand, as indicated by Steve Sanghi: "can I grow a business 50% in one quarter? No."

SUMMARY

Microchip Technology (MCHP 1.30%) reported revenue growth above guidance, rapid improvement in operating metrics, and strong cash generation, driven by broad-based end-market recovery and execution on its multi-year transformation plan. Management highlighted new design wins in data center solutions, expansion into the PCIe retimer market, and improvements in distribution and customer relationships. Bookings and backlog increased, with lead times extending as supply constraints intensified, prompting management to forecast continued sequential top-line expansion and further progress toward long-term margin targets.

  • Non-GAAP operating profit more than doubled from cycle trough levels, reflecting successful cost reductions and operational leverage as revenue rebounded.
  • Distribution inventory remained at historical lows, and management expects near-term restocking to support additional channel throughput.
  • Strong bookings in April, the highest in almost four years, support management's outlook for sustained sequential revenue growth into the next quarter.
  • Management reported that gross margin headwinds from underutilization are normalizing, supporting progress toward their 65% long-term target.
  • Capital expenditures are expected to remain mostly maintenance focused, with select incremental investments targeting data center testing equipment and fast-growing niche segments.
  • Leadership maintained a cautious stance on price increases, aiming to rebuild and sustain customer relationships while monitoring input costs and competitor actions.
  • Despite rising supply chain and substrate constraints, management expressed confidence in meeting near-term demand forecasts, while acknowledging the need for ongoing mitigation actions in sourcing and allocation.

INDUSTRY GLOSSARY

  • Cap call: An equity derivatives contract purchased alongside a convertible bond issuance to limit dilution from potential stock price appreciation by capping conversion value beyond a set price.
  • Gen6 (PCIe Gen6): The sixth generation of the PCI Express interface standard, offering increased data rates and improved power efficiency for high-bandwidth data center connectivity.
  • CXL: Compute Express Link, a high-speed CPU-to-device interconnect protocol enabling efficient communication between processors and memory devices in modern data center architectures.
  • PolarFire: A proprietary family of midrange field-programmable gate arrays (FPGAs) from Microchip Technology, optimized for low power and used in various aerospace, defense, and industrial applications.
  • 10BASE-T1S: An Ethernet physical layer standard designed for single-pair wiring, enabling cost-effective and robust connectivity solutions in automotive and industrial networking.

Full Conference Call Transcript

Eric Bjornholt: Thanks, Kate, 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 Technology Incorporated’s business and results of operations. In attendance with me today are Steve Sanghi, Microchip’s President and CEO; Richard J.

Simoncic, Microchip’s COO; Brian McCarson, VP of Microchip’s Data Center Solutions business unit; and Sajid Dowdy, Microchip’s Head of Investor Relations. I will comment on our fourth quarter and full fiscal year 2026 financial performance, Brian will provide an update on our data center business, and then Steve will provide commentary on our results and discuss the current business environment as well as our guidance. We will then be available to respond to specific investor and analyst questions. 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 page of our website at microchip.com, and included reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through 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 acquisition activities, share-based compensation and certain other adjustments as described in the earnings press release, and in the reconciliations on our website. Net sales in the March quarter were $1.311 billion, which was up 10.6% sequentially and up 35.1% over the year-ago March. Our revenue results were above the high end of the guidance range we provided on February 5, 2026. We have posted a summary of our net sales by product line and geography, as well as our fiscal year 2026 revenue by end market on our website for your reference.

Our end market mix did not change materially in fiscal year 2026 compared to fiscal year 2025: Industrial was 31% of sales; Data Center and Compute was 18%; Automotive was 17%; Aerospace and Defense was 16%; Communication was 9%; and Consumer was 9%. These percentages are our best estimates of the end market splits, and there is probably a couple of percent error band due to the fact that almost 50% of our business in the long tail of customers is serviced through distribution, which makes it difficult to track the end markets. On a non-GAAP basis, gross margins were 61.6% in the March quarter, including capacity underutilization charges of $46.6 million.

Operating expenses were 31% of sales, and operating income was 30.6% of sales. Non-GAAP net income was $327.3 million and non-GAAP earnings per diluted share were $0.57, which was $0.07 above the midpoint of our guidance. On a GAAP basis in the March quarter, gross margins were 61%. Total operating expenses were $582.2 million and included acquisition intangible amortization of $107.8 million, special charges of $6.4 million which were primarily driven by costs associated with the closure of Fab 2, share-based compensation of $59.9 million and $1 million of other expenses. The GAAP net income attributable to common shareholders was $116.4 million, or $0.21 per share.

For fiscal year 2026, net sales were $4.713 billion and were up 7.1% from net sales in fiscal year 2025. On a non-GAAP basis, gross margins were 58.5%, operating expenses were 32.2% of sales, and operating income was 26.3% of sales. Non-GAAP net income was $933.9 million and EPS was $1.64 per diluted share. On a GAAP basis, gross margins were 57.7%, operating expenses were 47.3% of sales, and operating income was 10.4% of sales. The GAAP net income attributable to common shareholders was $118.8 million. Our non-GAAP cash tax rate was 5.8% in March, and 8.6% for fiscal year 2026.

The cash taxes remitted in Q4 were lower than originally forecasted while our pretax profit was much stronger than forecasted, driving the March rate down. Our non-GAAP tax rate for fiscal year 2027 is expected to be about 10%, which is exclusive of any tax audit settlements related to taxes accrued in prior fiscal years. Our inventory balance at 03/31/2026 was $1.035 billion and down $22.3 million from the balance at 12/31/2025. We had 185 days of inventory at the end of March, which was down 16 days from the prior quarter’s level driven by our inventory reduction actions and increased revenue.

Included in our March ending inventory was 15 days of long life cycle high margin products whose manufacturing capacity has been end-of-life by our supply chain partners. Inventory at our distributors in March was at 26 days, which was down 2 days from the prior quarter’s level and at the lower end of what we have experienced historically. We expect distribution restocking to occur in the near term as distributors will likely grow their inventory holdings above current levels to support growth. Distribution sell-through increased by 11.4% during the quarter, and distribution sell-in was just modestly lower than distribution sell-through.

Our cash flow from operating activities was $257 million and our adjusted free cash flow was $228 million in the March quarter. As of March 31, our consolidated cash and total investment position was $240.3 million. Our total debt increased by $143 million in the March quarter. The increase in debt was impacted by our refinance activities in the quarter which included issuing a 0% four-year convertible bond for which we paid $68 million for a 100% cap call to provide some protection from future equity dilution from stock price appreciation. Our adjusted EBITDA in the March quarter was $466.8 million and 35.6% of net sales. Our quarterly adjusted EBITDA was up 132.9% from the March 2025 quarter.

Our trailing twelve-month adjusted EBITDA was $1.496 billion. Our net debt to adjusted EBITDA was 3.54 at 03/31/2026, down from 4.18 at 12/31/2025. We expect the June 2026 quarter to be an excellent cash generation quarter for us, resulting in meaningful debt reduction and also expect our net debt to adjusted EBITDA to drop below three. Capital expenditures were $14.2 million in the March quarter, and $91.9911 million for fiscal year 2026. Our expectation for capital expenditures for fiscal year 2027 is to be approximately $100 million. Depreciation expense in the March quarter was $38.7 million. I will now turn it over to Brian, who will provide some exciting insights into our Data Center Solutions business unit.

Brian McCarson: Thank you, Eric, and good afternoon, everyone. We are seeing significant momentum across all three major product families within our Data Center Solutions business, and I will summarize the progress we are making in each of them. Importantly, these wins are translating into higher content per system and a longer runway of production ramps, which we expect to support durable growth as the data center architectures continue to scale. First, our storage controller products have supported some of the world’s most reliable SAS, SATA, NVMe, and RAID infrastructure over the past decade.

As a leading provider of data center storage control solutions, and as AI inference and agentic AI workloads increase demand for persistent data access, demand for our products continues to grow, strengthening our product roadmap, and customers are responding positively. Most recently, our Adaptec SmartRAID NVMe storage accelerator received the Nimbus Innovation Award with benchmark results showing up to a 3x improvement in read and write performance versus a leading competitor’s offering. This can translate into better XPU utilization in real-world data center workloads. Second, our memory controller product family has been reinvigorated by the recent launch of our next-generation devices.

We brought three new CXL and PCIe-based devices into production in calendar year 2025, and our next Gen5 dual-port device is scheduled to enter production this quarter. We have already secured meaningful design wins that have begun ramping and that we expect will continue to grow through fiscal 2028. These next-generation devices have been externally benchmarked, and our customers are reporting industry-leading performance in jitter tolerance, which is a key measure of storage controller performance. Third, our Switchtec business has continued to build momentum since the announcement of our latest PCIe Gen6 switch just two quarters ago.

Since that time, we have secured a total of six significant design wins, with customers citing our product quality, our signal integrity, differentiated features, and our strong performance per watt as industry-leading. This is helping Microchip Technology Incorporated maintain its position as a leading PCIe data center switch provider while gaining share in both scale-up and scale-out market segments. Our Gen6 switch is scheduled to begin production ramp at the end of this quarter, and many additional design wins are expected over the next year. In addition, we are very excited to announce we have entered the PCIe retimer market this quarter.

This retimer is architected as a companion die for our PCIe Gen6 switches and is also designed to support the rapid growth of the active electrical cable market, with compatibility spanning Gen1 through Gen6 speeds. Customer feedback has been encouraging, and we have already secured a major OEM design win on an upcoming Gen6 platform, displacing one of our competitors. Customers have been explicitly requesting that Microchip Technology Incorporated offer a companion retimer because sourcing both the switch and the retimer from a single vendor reduces implementation complexity and risk. This is helping drive these wins and strengthening our competitive position in new designs with an even more complete PCIe connectivity platform.

The wins I described across all three data center product families reflect several competitive advantages. First, power efficiency: our Gen6 switches and retimers deliver strong power efficiency relative to alternatives, which directly benefits operating costs in data center environments. Second is feature completeness: by offering both the switch and the companion retimer, we provide customers with a more complete scale-up and scale-out PCIe solution, reducing the need to integrate products from multiple vendors. Third is quality and tools: we deliver the reliability, performance, and stability data center customers demand, while offering world-class diagnostic and configuration tools with ChipLink.

And finally, support through the entire customer journey from initial designs through production ramp and beyond; customers value a partner that has invested in their success at every stage. That combination of power efficiency, feature depth, quality, and long-term partnership is helping drive these wins. We believe these factors position us well as design wins continue to convert to production ramps. I will pause here and turn the call over to Steve to provide an update on our business and the guidance going forward. Steve?

Steve Sanghi: Thank you, Brian, and good afternoon, everyone. I will start by providing you a brief update on our nine-point recovery plans. The first item was to right-size our manufacturing footprint. This was completed. The remaining item left is selling our Tempe fab. We have several interested parties, but the deal has not closed yet. The second was to bring the inventory down. We have brought the inventory down from 266 days in December 2024 to 185 days in March 2026. Our overall dollar value of inventory has decreased by $319 million from the December 2024 peak inventory of $1.356 billion to March 2026 ending inventory of $1.037 billion. We are now in a significant revenue growth mode.

We expect our inventory will come down naturally towards our goal of 130 to 150 days as the revenue grows and we appropriately manage our manufacturing and foundry resources. Third was the megatrend alignment. This goal was completed by creating a megatrend for AI replacing 5G and creating another for networking and connectivity replacing ADAS, which stands for advanced driver assist system. The fourth item was business unit alignment. This goal was completed by realigning business units. We used to have essentially two pillars: microcontrollers and analog. We have now created five pillars, which are microcontrollers, analog, networking and connectivity, high performance compute, and artificial intelligence on the edge.

We know of your request for us to break out the revenue for some of these growth segments. We are thinking through this as some of the revenues are intertwined and challenging to break out. We will provide more visibility as we complete our analysis. The fifth was to look at our distribution programs. This goal was completed by realigning our distribution program and how we compensate our distributors for various levels of demand creation and fulfillment. We also consolidated our network by terminating several small underperforming distributors. Number six was customer relationship improvement. We undertook a major effort to improve our relationships with a large number of customers where the relationship had deteriorated during the COVID cycle.

We now consider our relationship with our customers to be good, but it is still an ongoing process. Number seven was the new business model. We unveiled a new business model in March. The model contained long-term non-GAAP targets of 65% gross margin, 25% operating expense, and 40% operating margin. At the bottom of this last down cycle in March 2025, we had a non-GAAP gross margin of 52%, which has now improved to 61.6%. At the bottom of the cycle, we had a non-GAAP operating expense of 38%, which has now improved to 31%. And at the bottom of the cycle, we had a non-GAAP operating profit of 14%, which has now more than doubled to 30.6%.

The improvements are ongoing towards our long-term business model. Number eight was the operating expense percentage. This was simply putting a plan together to achieve our long-term non-GAAP operating expense target of 25%. We have come down from 38% to 31%. We believe the revenue growth and productivity improvements will get us the rest of the way. And the ninth and final one was chipset. We are essentially on hold, given we are still growing into our current capacity. So this was a comprehensive update on our nine-point plan. The only main items that remain are further reduction of inventory and making further improvements in our gross margin, operating expense percentage, and operating profit percentage.

The nine-point plan has been an extremely successful program that was very well executed. Next, I will talk about our business environment. We are seeing recovery in all of our end markets. Automotive, industrial, communication, data center, aerospace and defense, and consumer are all looking better. The strongest sales performance last quarter was in the aerospace and defense sector. From a business unit perspective, the strongest performance was in FPGA products. We believe that we have completed the distribution inventory correction. Our overall distribution inventory is now somewhat lower than normal. The distribution sell-in and sell-through were close to even last quarter. We are starting to see large orders from distribution which show some restocking happening in the distribution channel.

The distributors’ customers’ inventory has also come down significantly after using up the excess inventory. We are seeing thousands of customers reengage in buying our products. Our customer count has started to go up. We are also seeing customers from new designs and from an improved relationship start buying our products, adding to our bookings, revenue, and customer count. Now let us get into guidance for the June quarter. In June, we expect strong growth from data center, A&D sector, industrial, and automotive end markets. From a business unit perspective, we expect nearly all business units to participate in the growth, thus broadening out this recovery. Our bookings for March were significantly higher than those for December.

The book-to-bill ratio for March was well above one, resulting in a much higher backlog entering June compared to when we entered March. And April was the largest booking month in almost four years. A comment about lead time: while lead times for our products have been four to eight weeks for some time, we are continuing to see lead times increase on many of our products. We are running into challenges on certain kinds of substrates and subcontracting capacity, and also foundry constraints on multiple nodes. These challenges previously were isolated to very specific areas but are now starting to spread more broadly.

Our customer requests for expedited shipments have increased significantly from a couple of quarters ago, pointing to some customers’ inventories running very low. Taking all of these factors into account, we expect our net sales for June to be up 11% sequentially, plus or minus 1%. This, at the midpoint, would be up 35.3% from the year-ago quarter. We expect our non-GAAP gross margin to be between 62.25% and 63.25% of sales. We expect our non-GAAP operating expenses to be between 28.75% and 29.25% of sales. We expect our non-GAAP operating profit to be between 33% and 34.5% of sales, and we expect our non-GAAP diluted earnings per share to be between $0.67 and $0.71 per share.

With that, Kate, will you please poll for questions?

Operator: Thank you. We will now be conducting a question and answer session. Star 2 if you would like to remove your question from the queue. Before pressing the star keys, we ask to please limit to one question and one follow-up. Our first question comes from the line of Timothy Michael Arcuri from UBS. Please go ahead.

Timothy Michael Arcuri: Thanks a lot. Steve, thanks for the update on the nine-point plan. Another thing you were going to try to give us was you were thinking about what the pro forma growth rate was for the company. I know if you pro forma, you know, everything, the growth rate is not as high as it truly is because you got out of a lot of businesses. So I know that is something that you have been looking at. Do you have any update on that? What do you think the pro forma growth rate is for Microchip Technology Incorporated?

Steve Sanghi: Well, Timothy, thanks for your question. I think we are just going through a phenomenal growth right now, and trying to put a longer-term growth rate in this environment, I think it is challenging. Any number I give you, the growth rate in fiscal 2027, which started on April 1 here, would be substantially higher than that growth rate. So I think we will push that out further.

Timothy Michael Arcuri: Okay. And then, Eric, did you give us inventory charges? I did not hear that.

Eric Bjornholt: So we did not. As we went through the quarter, we kind of implied that as we got through March that our inventory reserve charges would normalize, and that is essentially what has happened in March. And when you look at the new reserve charges that we have taken, the benefit that we are getting from previously written-off inventory are kind of netting to a number that is, in a range of what we would expect on a go-forward basis. So I think we are in a good position there.

You look at our gross margins, the biggest thing keeping us away from our 65% target at this point in time is our underutilization charges, which were $46.6 million last quarter. And if you divide that by the revenue, and, you know, kind of add that [inaudible] future benefit back to gross margin, we are essentially at the 65% target. So we are in good shape. Inventory reserve charges have normalized. It is not really a headwind to gross margin at this point in time, and we are glad to have that behind us.

Operator: Your next question comes from the line of Vivek Arya with Bank of America Securities. Please go ahead.

Vivek Arya: Thanks for taking my questions. First one is kind of more near term. March and June are both well above seasonal. What is driving that upside? Is it a specific end market? Is it more distribution? Is it more direct? And I think on the last call, you had mentioned that some direct customers or some parts of distribution were still burning through inventory. Are they done? As we look to September, that also is usually a seasonally stronger quarter. Consensus has your September up 5% to 6%. How would you describe your September quarter visibility at this point?

Steve Sanghi: So the way I will describe it is I think there are three things happening. One is we have been telling you for a long time that the distributors are burning their inventory, direct customers are burning their inventory, and distributors’ customers are burning inventory. And they were all in various innings, but everybody was pretty much in the ninth inning. We have seen the distribution inventory now fully corrected, actually to be below normal, and are seeing some restocking orders from distribution as they prepare for the huge growth. Distributors are also seeing their customers come back in droves because they have completed their inventory reduction.

So distributors are placing large orders to serve their customers who have not been buying a lot of product in the last year because of inventory. And the other factor is, as I talked about, we have improved our relationship with thousands of customers, and in many of those cases, we had design wins with the customers but were not getting our share of the revenue. In some cases, they had duplicate designs, and they were buying somebody else’s product for a different model. As we look at our overall customer count, it has increased by several thousand customers. So we are seeing the customers reengage as we have improved our relationship.

And finally, we are seeing a meaningful improvement in end markets. A&D is very strong. Data center is very strong. Industrial is very strong. Automotive is coming back. A lot of the automotive designs we have incubated in the last couple of years are going to production. So we are seeing the end market strengthening effect also. The combination of all those has been really well above seasonal growth for June, which we hope will continue for some time.

Eric Bjornholt: I think the last question that Vivek asked was related to September and visibility, and I will just comment on it quickly that our backlog is growing nicely. At this point in time, our September backlog is higher than the June backlog at the same point in time. Steve spoke to the booking strength that we saw in April. So things look good, but we are not willing to make a call yet on percentage of revenue growth in September, but things look good at this time.

Vivek Arya: Understood. And for my follow-up, I think you described aerospace and defense and data center. What is interesting, though, is that when I look at your change in end market mix year-on-year, it actually showed that aerospace and defense came down somewhat and so did data center. I appreciate that these are approximate numbers. But I would have thought that mix would grow. Can you help us understand, are we doing the right apples-to-apples comparison? Are there certain traditional or older things in the data center that we should not be focusing as much on? Why did that mix come down in fiscal 2026, and how do you see that mix evolving in fiscal 2027? Thank you.

Steve Sanghi: I think if you look at the A&D sector, there was a huge increase in A&D sector percentage from 2024 to 2025. I think it used to be about 10% of business, and it went up to about 18%. So A&D did not drop during the post-COVID cycle as much, and that is why its percentage had increased. Now some of the others did better as they caught up. So percentage kind of plays games because it is a whole-year number. And data center and A&D have seen very significant growth and improvement in the last six months or so. But when you look at the overall numbers, that is where the math is.

They are still the stronger sectors if you look at the last couple of quarters, and especially A&D had grown huge the year before.

Eric Bjornholt: Maybe the other point on data center is our data center business really kind of bottomed out in June, and we have seen significant growth since then. We have been speaking about that each quarter, but each of these end markets had a bottoming at a different point in time.

Operator: Your next question comes from the line of Matthew Prisco with Cantor Fitzgerald. Please go ahead.

Matthew Prisco: Hey, guys. Thanks for taking the question. I guess first, on the data center side, can you help breaking down the sizing of that market today and perhaps the exposure across those three buckets that you talked about? And then you talked about the six new customer wins now for the PCIe Gen6. Do you have a sense to size that opportunity in any particular wins? I think you talked about a $100 million win last time. So any other sizing you could offer?

Brian McCarson: Thank you for the question, Matt. A few things around your queries. One is we do not readily comment on the specific customers that we design with. We are, however, disrupting our competitors in this space, and we are seeing our design wins displace some of the other incumbents, especially in the Gen6 area. Typically, in a product life cycle, it is uncommon to see a lot of design wins prior to production ramp. Yet our six design wins that we have already are prior to us doing our production volume release at the end of this quarter.

So given that fact and that once we are in production, we expect to see a steady increase in design wins, we should see a ramp in revenue and then hitting our stride from a volume perspective in production in the next fiscal year.

Matthew Prisco: And then on the gross margin side, you have talked about ramping utilizations in the front end and back end. So maybe help us understand where these levels stand today versus more optimal levels? And with the seemingly accelerated utilization push, how should we be thinking about underutilization charges declining from here?

Eric Bjornholt: We are ramping all of our large factories at this time. We have been in serious inventory reduction mode over the last five quarters and have made great progress there. Now we are ramping our fabs, as an example. There are some limitations on what we can do there, and we do not want inventory to get too low. So we are maxing that out. Underutilization charges are going to come down nicely is our expectation in the June quarter, but they do not go away immediately. That is going to take multiple quarters for that to happen. Each quarter, they will be reducing.

We are also ramping our back-end operations in Thailand and the Philippines to support what we need from a finished goods perspective. We actually do about 70% of our volume in-house there. In wafer foundry or in the fabs, we only do about 35% of that volume internally. So they are all ramping. We are fortunate that in the last cycle, we put a lot of capacity in place. It is just a matter of adding people, having the raw materials to start in the factory, and we are in a really good position to be able to respond to upside demand. Thanks.

Operator: Your next question comes from the line of Christopher Caso with Wolfe Research. Please go ahead.

Christopher Caso: Yes, thank you. Good evening. So Steve, based on your earlier comments, do you expect that now we are fully through customers and distributors taking inventory down and we are now shipping in line with end demand? I recognize that may not be the same answer for every market segment, just interested in your view overall and by particular segments.

Steve Sanghi: There is nothing really ever absolute. If we have 110 thousand customers, you can never say every customer’s inventory is corrected. But both distribution, distribution customers, and our OEM customers’ inventory is broadly corrected. Lots of customers are coming back and buying the product based on their run rate because they no longer can reduce the inventory further. Are there some customers where they may be still high on a SKU here and there? Yes, and that will continue to correct as we go. But the strength of the business you see coming back is because thousands of customers are returning, distributors are buying products for their customers, as well as restocking because their inventory has gone too low.

Christopher Caso: Understood. The next question is with regard to pricing. We have heard from some others in the space, from distributors and such, that at least in some areas, we are starting to see some signs that pricing is moving higher. In some cases, it is about the tight supply you spoke about. In some cases, it is about input costs coming up. Can you talk about what Microchip Technology Incorporated is seeing and what you are planning on doing with pricing as we go into the second half of the year?

Steve Sanghi: First, I will talk about our philosophy and then what we are going to do this time. Our normal philosophy is that we engage with customers at the design location at the time of design and give a customer a price which he can count on almost for the life of the design, and then comfortably design with us and then be able to buy the parts at that kind of price. That has been the philosophy probably for 30 years. The COVID/post-COVID cycle was very unique with a lot of input cost increases, and Microchip Technology Incorporated as well as everybody else raised prices.

We have also talked about during that time we hurt our relationship with many of our customers, and we have worked very hard in the last year to reestablish good relationships with thousands of customers. So how we are dealing with it right now is our gross margins are doing very well and heading well towards the longer-term target as this underutilization goes away in the coming quarters as we are ramping the factories. We are trying very hard to really stay on the good side of the customers and not do an indiscriminate broad-based price increase, at least to our strong partner customers. Beyond that, it will be customer by customer. We are looking at our input cost.

We are looking at pricing. In many cases, pricing is adequate. In certain cases, if the price that we got was very aggressive and input costs have gone up, then we may adjust it. But as we speak right now, we have not increased our prices.

Christopher Caso: Understood. Thank you.

Operator: Your next question comes from the line of Joseph Quatrochi with Wells Fargo. Please go ahead.

Joseph Quatrochi: Yes, thanks for taking the question. I was wondering if you could give us any color on—you previously talked about revenue contributions from the megatrends, and it is kind of difficult to break each one down. But any sort of help on the growth of the megatrends in general in fiscal 2026?

Richard J. Simoncic: So as a percentage of overall revenue, megatrends have increased. But we have broken them down and changed them. So we did not release a breakdown of that this year. In line with that, we stuck with our market review, but we have left the megatrends outside of that purview.

Joseph Quatrochi: Overall, megatrends have increased—

Richard J. Simoncic: Data center has increased. Our communications business has increased. Our ADAS business and our networking and connectivity business continue to grow because we lead in 10BASE-T1S and a number of Ethernet products. All of those businesses continue to grow very well.

Joseph Quatrochi: Thanks. And as a follow-up, I think in the prepared remarks, you had talked about actively expanding capital equipment in selective capacities. Any sort of color you could provide on where those areas are that you are increasing capacity?

Steve Sanghi: Actually, we did not say we were increasing capacity. That was not in the prepared remarks. I think we said we expect CapEx this year to be about $100 million, and a large part of that is going to be just maintenance capital. We have sufficient in-house capacity. The areas where we would be adding capacity would be testing capacity for our data center business for the Gen6 switch as it starts to ramp and retimers and all that. There could be some capacity increase for FPGA where we see significant growth. There could also be some in the Ethernet T1S area.

But our capacity increase needs, or capital needs, are going to be modest because we have a lot of capacity.

Eric Bjornholt: Right. We are really mostly just growing back into capacity that was put in place in prior years in the last up cycle.

Joseph Quatrochi: Thanks.

Operator: You may press star 2 if you would like to remove your question from the queue. Our next question comes from the line of Vijay Raghavan Rakesh with Mizuho Securities. Please go ahead.

Vijay Raghavan Rakesh: Hi, Steve and Eric. Just going back on that aerospace side, as you look out, given you are one of the bigger suppliers there and the geopolitical tension, would you not expect that business to start to accelerate into fiscal 2027 and 2028 here? And I have a follow-up.

Steve Sanghi: The aerospace and defense business is doing very well. We are getting orders, and it is a good business, and it will grow. But you also have to think about our clients having to grow their capacity for that business to grow significantly. We can provide more parts for a missile, but the missile production capacity needs to increase. We are right now talking to every major prime. They are trying to build new facilities to grow their production. So it is going to take some time from that standpoint. Secondly, the cycle times to produce parts for that sector are very long.

Sometimes it can be as long as nine months of cycle time because you build parts and then you park the lot and take a sample, bring them in for many months, and if there are no failures, then you can ship the lot. So the cycle times in that sector are very long. That is why it did very well in the last year. It is doing well now. But it does not really go up like a hockey stick that can happen in a cell phone market or data center market. It is a very steady growth.

Vijay Raghavan Rakesh: Got it. And back on the data center side, when you look at that portfolio of PCIe Gen6 switches and CXL, which is probably starting to pick up here, and storage controllers, how does that data center portfolio grow? Obviously, there is a lot of focus on data center and spend there. Any way to size the growth or the pickup there? Thanks.

Eric Bjornholt: There are a few important factors that are happening right now in the overall data center ecosystem. We have been experiencing a significant super cycle with respect to AI-based data centers in recent years, but that has been primarily for AI training workloads. We are now starting to see increases in agentic AI and inference-based workloads. Those require a significantly larger amount of access to components that are traditionally PCIe-based. So CPU utilization, NVMe, and storage access are heavily impacted by inference and agentic AI workloads. We believe we are positioned to grow well with the market in the coming years as we see that become more of the predominant growth area in the data center market in the future.

That is across our customer base and includes hyperscalers, OEMs, and traditional enterprise server manufacturers as well.

Vijay Raghavan Rakesh: Got it. Thank you.

Operator: Your next question comes from the line of Joshua Louis Buchalter with TD Cowen. Go ahead.

Joshua Louis Buchalter: Hey, guys. Thank you for taking my question and congratulations on the very solid results. Maybe following up on Chris’ question on pricing from earlier. The message was very clear: rebuilding relationships with customers and not raising pricing. How aggressive are you observing your competitors on pricing right now? Is it at the point where you are able to lean in and gain share as a result? And is there a certain level of input costs rising where you would have to change this philosophy a little bit in the near to medium term and raise pricing as well? Thank you.

Steve Sanghi: Partially answering the question in your question: we are repairing our relationship with our customers and many of those are repaired, and we do not want to stress them. We are watching very carefully what every competitor is doing to the extent we have information from the market. We have strong partners, and we have people that have a technical relationship, and others who just buy parts. We are separating those two in a way—partners mean one thing and the people who have just a casual relationship mean another thing. If we see any stress on our input cost in a specific area, then we will be willing to adjust prices.

Joshua Louis Buchalter: Got it. Okay. You mentioned some growing areas of tightness in the supply chain, and you made the decision a couple of years ago to not invest in 300-millimeter fab and are investing in a more targeted way now. Given we are still not that far away in the grand scheme of things from the shortages a few years ago, I was hoping you can maybe reflect on your confidence that there is enough foundry capacity and investment going on right now that you, and the industry as a whole, have enough room to run in what seems like a growing upcycle. Thank you.

Steve Sanghi: When we were willing to invest in 300-millimeter capacity, it was going to be under a license from a major partner. Without that license, we do not really have 300-millimeter IP, and starting standalone—building a fab, developing a process, and then developing thousands of mask sets on it—is really just not a very cost-effective exercise. We were doing it when a major foundry partner had told us that they will grow capacity largely on the bleeding edge, and therefore the trailing-edge or medium-inch capacity would not grow, and they were willing to give us a life license. That is no longer true. In the post cycle, there was plenty of capacity until very recently. There was plenty of capacity.

It is becoming a little tight now, but the partners are adding capacity. We believe we will have sufficient capacity available in the coming years. The major tightness would be really on the bleeding edge, like 3-nanometer. The rest of it, we are getting what we need. Is it tight? Yes. But it is not horribly bad.

Joshua Louis Buchalter: Okay. Very interesting color. Thank you.

Operator: Your next question comes from the line of Harlan L. Sur with JPMorgan. Please go ahead.

Harlan L. Sur: Memory pricing continues to increase fairly meaningfully, and we do see some pullbacks in production of low-end and mid-end smartphones, PCs, consumer electronics segments of the market. I know this is a smaller part of Microchip Technology Incorporated’s revenue mix, but even some of the big-ticket items like consumer appliances and industrial applications are being somewhat impacted by this dynamic. For example, we have heard of some of the industrial customers having to scramble for memory, not because of pricing but because of end of life of older DDR4 memory, and now they are having to requalify their systems. Is the team seeing some of this memory pricing dynamic reflected across your customer base?

Steve Sanghi: You are right. It fits into a specific area. Driven by AI, the DRAM capacity is very tight. What some of the NAND flash manufacturers have done is shifted some of that capacity to DRAM. Then at the lower end of NAND flash, some of the NOR flash manufacturers have moved into NAND flash. So the NOR flash got constrained. Some of the EEPROM manufacturers in Asia shifted their EEPROM capacity to build NAND flash. So everybody has moved upstream. The bottom of that pile is EEPROM, the serial EEPROM we make. A number of people have basically abandoned it—they doubled the price, which really means they have abandoned it—because they converted the capacity to something else.

We are seeing significant opportunity in that business. It is not a very large business for us, but it is up significantly.

Harlan L. Sur: Appreciate that.

Steve Sanghi: That is very, very specific memory-related. But our run-of-the-mill microcontrollers—8-, 16-, 32-bit microcontrollers—analog power management, A/D converters, D/A converters, or BiCMOS, DMOS, other products—they are all fine. Can we double any of those short term? No. Capacity is tight, but we have sufficient capacity to meet the numbers we are giving you, even create the upside if the demand and backlog were to come in. That capacity will continue to increase in the coming quarters. The business really remains looking for turns. It is not like we are turning business away because we do not have capacity.

Harlan L. Sur: Thanks for that, Steve. As aerospace and defense continue strong, a big part of that is the leadership that you have in FPGA. I think the market share rankings for last year out of your FPGA business continue to be a strong franchise, number three global market share leader. This business outperformed your overall business in calendar 2025. Obviously, PolarFire is a leader in aerospace and defense applications. But outside of aerospace and defense, we are seeing strong pickup for just general purpose midrange FPGA applications across a variety of end markets. It is a highly gross-margin accretive product. PolarFire, PolarFire 2—how is the team doing on expanding your leadership in midrange to broader market applications?

Steve Sanghi: We are. We absolutely are. The PolarFire 2 is in the fab and shortly coming out, and we are very excited to be launching the PolarFire 2 later this year. Its software ecosystem is already out. We have customers waiting for those parts. In fact, all the initial runs that we are doing even for samples are already spoken for. There is strong demand for that part, even outside the A&D sector as well as in the A&D sector. We are already doing that. We are selling lots of those devices in the markets outside of A&D.

Harlan L. Sur: I appreciate that. Thanks, Steve.

Operator: Your next question comes from the line of Tore Egil Svanberg with Stifel. Please go ahead.

Tore Egil Svanberg: Yes, thank you and congrats on the results. Steve, you talked about lead times starting to extend. I was hoping maybe you could give us a bit more color there. Is it more broad based? Is it specific products? Based on the current environment, do you expect lead times to continue to extend as we go into the second half of the year?

Steve Sanghi: In general, lead times are broadly expanding. In another quarter or so, there could be nothing available in four to six weeks. It is entirely possible. Today, we still have—when we say we have 185 days of inventory—even though a lot of that inventory we keep in die form, if the demand comes up in the exact mix where we have the die, we can still assemble, test, and ship it in four to five weeks. That is not going to last very long. Over the next two quarters, the inventory goes down significantly into the range of our long-term model, and many products’ die inventory would be fairly low.

So the lead times could see a broad-based expansion in the coming quarters.

Tore Egil Svanberg: Very good. As my follow-up, you talked about the two pillars moving to five pillars. I appreciate you are still doing all the work there. I just want to make sure I understand some of the compositions. Obviously, networking is straightforward. But you mentioned HPC and Edge AI. Edge AI is pretty clear. But HPC—would that primarily be storage for infrastructure, or is there anything else that goes into that pillar? Thank you.

Steve Sanghi: The high performance compute pillar has our microprocessor business, our FPGA business, and our timing business. Those are most of the products in there.

Tore Egil Svanberg: Right. Thank you.

Operator: Your next question comes from the line of Nathaniel Quinn Bolton with Needham and Company. Please go ahead.

Nathaniel Quinn Bolton: Thanks for taking my question. You mentioned a couple of times in the script that you are starting to see the disties come back with larger orders. In the guidance for June, are you assuming some level of restocking, or do you think that restocking happens later in the calendar year? And then I have a follow-up.

Eric Bjornholt: We are expecting some level of restocking, but you should think about that as not necessarily meaning that the months of inventory or days of inventory in distribution will go up. We are guiding 11% up in revenue. If you take a distributor and say they have $50 million of Microchip Technology Incorporated product, and they are growing at that rate of, call it, 10%, they have to grow their inventory by $5 million just to keep their MOI flat if their sell-through is increasing at that rate. So yes, we are expecting some restocking. The level of that is hard to predict, but it is needed.

Distribution inventory is really low at this point in time, and in a growth environment they have to position themselves to be able to support their customers.

Nathaniel Quinn Bolton: I have another quick follow-up for Steve. It sounds like, Steve, you feel pretty comfortable you can get the external foundry wafers. But any tightness on either OSAT or substrates, especially as you think about the PCIe and the memory and storage controller business? Is there any tightness there?

Steve Sanghi: Of course. Like I said, there is tightness everywhere. Our foundries—all major foundries we do business with—probably 70% to 80% of the process technology nodes are constrained. When I say constrained, I would say they are very tight. If I need a couple hundred more wafers, can I work the system and be able to get it? The answer is yes. But it is not like they are sitting at 80% utilization and if I wanted more wafers, I have them right away. You have to work the system and make the calls high up, escalate it, and request it. If somebody else in the system has a downside, then you get it.

You may not get it today, but you may get it three weeks from now. Everything is basically full. We have a higher allocation as the future quarters come in because foundries are adding capacity. We have increased allocation from them. With that, the business will continue to grow. But like I said earlier, can I grow a business 50% in one quarter? No. But can I grow at the rate we are talking about? Yes. There is even room for upside. When you come to the most advanced capacity, like the 3-nanometer node, that is a totally different equation. The capacity is less than half of what the world requires.

Nathaniel Quinn Bolton: On substrates?

Steve Sanghi: In wafer.

Nathaniel Quinn Bolton: Oh, sorry. You said advanced packaging substrates—any impact on the data center business?

Steve Sanghi: We are constrained on substrates. We are qualifying additional substrate suppliers. We are working with the existing suppliers to get more allocation. It is just like the wafers: substrates are very tight. One problem with the substrate is they have a shelf life.

Richard J. Simoncic: Twelve months.

Steve Sanghi: Yes. They have a shelf life, and therefore you cannot build a whole bunch in the down cycle thinking you can use them a year, year and a half from now. They have a shelf life, so you have to really buy it in time. Are substrates constrained? Yes. Is it impacting our data center business? Yes. Is it impacting our connectivity and networking and automotive business? Yes. We have delinquency—our non-supported dollar volume has gone up significantly. But it is not at a crisis level, not like it was post-COVID. We are working through it, and there are no real screaming customers so far. We are working through them.

Nathaniel Quinn Bolton: Thank you, Steve.

Operator: Your next question comes from the line of Joseph Moore with Morgan Stanley. Please go ahead.

Joseph Moore: Yes, thank you. You talked about your discussions with customers and kind of rebuilding relationships that had been strained during COVID. Can you give us some color on what those conversations are like? Some of the strain was enforcement of LTAs, price increases, things like that. How does that inform how you are going to deal with those same considerations in the next upturn?

Steve Sanghi: Conversations in the last year have been very good. We visited a lot of customers. A lot of customers visited us, and we met them at events around the world from CES to our Masters Conference to other industry conferences. We owned up to some of the mistakes we made in the past. Customers’ engineers always like us. We have very good products. We are a high-quality, reliable supplier, but we used some policies that turned off purchasing managers and manufacturing people and others. We made commitments to really work with them, and I think that has gone well. People have given us a chance.

Now what is happening is we are seeing our competitors hurt them with large price increases and all that. So they are even coming more to us, and since we have not increased the prices, we are gaining share. All that is working well. Our competitors are actually helping us right now.

Joseph Moore: That is very helpful. Thank you.

Operator: Your next question comes from the line of Janet Ramkissoon with Quarto Capital. Please go ahead.

Janet Ramkissoon: Hi, guys. Steve, thanks for the update on the nine-point plan. My question about substrates has already been asked. But on the business unit realignment, if you look at the three markets that you have added to the basic business—microcontrollers and analog—most of those businesses have pretty large TAMs. Given what is going on with AI and data center growth, those markets would present significantly larger opportunities. At what point do you think that you might have to revisit your margin targets, or am I being too optimistic about the growth prospects of these three new areas?

Steve Sanghi: When you say that, Janet—first of all, thanks for asking the question—when you say we have to revisit our margin target, are you concerned our margin targets are too low or too high?

Janet Ramkissoon: Too low.

Steve Sanghi: Well, that would be a high-class problem. When I came back a year and a half ago, our gross margin was 52%. When we gave a target of 65%, I have been getting a lot of flak for a year and a half—why is our target so high, how will we get there, we were so low, and competitors are doing this and that. Now it is in the striking range. If you take our underutilization and add it back, I think we get there. So let us get there, and then—

Janet Ramkissoon: The reason—alright, I will just add this. We look at a company like Anthropic. They went from $1 billion in revenues and now they are talking about potentially exiting the year $45 billion. This whole AI business has just taken off like a rocket and we have never seen growth in any market like this, ever. If you look at AI on the edge—

Steve Sanghi: No—

Janet Ramkissoon: They are one of the large language model providers. If you look at the growth there, and you look at the growth in OpenAI, it just seems to me that you might need to be preparing to keep up with a higher level of growth rate than you have been used to historically. Just being a long-term shareholder, I thought I would throw that out there.

Steve Sanghi: We welcome that opportunity.

Richard J. Simoncic: We are working on it. We are developing the products. We see the market. We see the opportunity. That is what you heard from Brian now. In two out of the last three meetings, we talked about T1S. We are engaged. But I think it is premature for us to sign up to anything different than what we are signing up for.

Janet Ramkissoon: Okay. I was not asking you to sign up. I was just trying to think outside the box to figure out where your head might be. Thanks so much, Steve. Great job. Appreciate it.

Operator: Your last question comes from the line of Blayne Peter Curtis with Jefferies. Please go ahead.

Blayne Peter Curtis: Hey, thanks for squeezing me in. I wanted to go back to a couple of the prior data center comments. I think you broke out at one point that within Data Center and Compute, data center was about 80%. I wanted to make sure that is the right way to think about it for the fiscal year. And when you look at a lot of the analog peers with exposure to data center, that business is growing substantial double digits for the last couple quarters. I know you probably do not want to give exact numbers, but is that the kind of growth you are seeing? And is there any headwind still in that segment that are going down?

Eric Bjornholt: I will start by saying I think we have given a percentage of our Data Center and Compute and what data center makes up, but it is the larger piece for sure. Within that, there are various different areas that make that up. Brian’s business unit, Data Center Solutions, is one of those, which we have high expectations for. We are also seeing high growth in our digital power control for many of the power supplies that exist within data centers within our power group.

Steve Sanghi: If you look at our data center business unit—Brian’s business unit—year over year, it has had huge growth. But we are not willing to break it out unless we do that as part of the overall breakout that we have talked to you about and we are analyzing it. The problem is the data center one is not as much of a challenge; some of the others are a significant challenge, like connectivity and networking and timing business and others, because some business units have some parts which are analog, some have a microcontroller core, so the portion goes into microcontroller. It is something IoT or it is something networking. What is the difference? They look very close.

Is it a data center business unit, or is it a part that goes into data center but it is a power management part that comes from analog? We have content in data center market or data center servers which are microcontrollers, power management parts, Ethernet, USB—so there are various business units, probably seven or eight, contributing to our content inside the data center. Brian is just one part of it with storage controllers, PCI Express, and memory/CXL. It is a complicated breakout and we are somewhat concerned about confusing you and not really helping the cause. We are trying to figure that out and put it all together so we can share with you.

Blayne Peter Curtis: Thanks. And then just a quick one for Eric. I know you have a big piece of variable in your OpEx. I am curious how to think about OpEx for the fiscal year.

Eric Bjornholt: You are right on that. When the business is doing well, we have quarterly bonus programs for our employees, which were very low in the down cycle. Now that we are coming back, those programs are coming back nicely. Guiding 11% up, we are expecting it to be another good quarter for our employees from a bonus perspective. That is why you are seeing that, along with other compensation elements that were pent up, that we are bringing back to employees, drive our OpEx dollars up in the current quarter. I think at the midpoint of guidance, it is about a $15 million growth quarter-on-quarter in OpEx.

The nice thing about these plans is they are quarterly and we can modulate them in good times and bad times, high growth quarters, lower growth quarters, to keep operating expenses in check. We are showing good progress there, but we are making investments that we think are important to reward and incentivize our employees to stay with us and continue to produce great work.

Blayne Peter Curtis: Thanks, Eric.

Operator: This now concludes our question and answer session. I would like to turn the floor back over to Steve Sanghi for closing comments.

Steve Sanghi: Well, thank you all for joining us today and hanging in there with us. We will be attending several conferences coming up this quarter, starting in early June.

Eric Bjornholt: We will see you on that circuit. The first one, I think, is the JPMorgan conference in two weeks and then a number after that. We look forward to seeing everybody.

Brian McCarson: Thank you.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines. Have a wonderful day.