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Microchip Technology is involved in the development, manufacturing, and sale of embedded control solutions in Europe, Asia, and the Americas. The company offers numerous products, including mixed-signal microprocessors, microcontrollers, and specialized microcontrollers for applications such as automotive, industrial, computing, communications, lighting, security, and wireless connectivity. Additionally, it provides wafer foundry and assembly, test subcontracting manufacturing services, timing systems products, application-specific integrated circuits, and aerospace products.

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Microchip Technology (MCHP): Company Profile, Stock Price, News, Rankings

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Microchip Technology

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Greetings, and welcome to the Microchip's Q4 and fiscal year 2026 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Eric Bjornholt, Chief Financial Officer. You may begin.

Thanks, Kate. 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 Steve Sanghi, Microchip's President and CEO, Rich Simoncic, Microchip's COO, Brian McCarson, VP of Microchip's Data Center Solutions Business Unit, and Sajid Daudi, 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 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 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 our 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 a year-ago March quarter. Our revenue results were above the high end of the guidance range we provided on February 5th, 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's probably a couple of percent error band due to the fact that almost 50% of our business and the long tail of customers are 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 at 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 was $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 and tangible amortization of $107.8 million, special charges of $6.4 million, which was 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, operating income was 26.3% of sales. Non-GAAP net income was $933.9 million, EPS was $1.64 per diluted share. On a GAAP basis, gross margins were 57.7%, operating expenses were 47.3% of sales, 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 the March quarter and 8.6% for fiscal year 2026. The cash taxes remitted in Q4 were lower than originally forecasted, while our free tax profit was much stronger than forecasted, driving the March quarter 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 March 31st, 2026, was $1.035 billion and down $22.3 million from the balance at December 31st, 2025. We had 185 days of inventory at the end of the March quarter, 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 lifecycle, high-margin products whose manufacturing capacity has been end-of-lifed by our supply chain partners.

Inventory at our distributors in the March quarter was at 26 days, which was down two 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 31st, 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 March 31st, 2026 and down from 4.18 at December 31st, 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 $91.1 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?

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'll summarize the progress we're 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. As AI inference and agentic AI workloads increase demand for persistent data access, demand for our products continues to grow. We've been 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 Gen 5 dual-port device is scheduled to enter production this quarter. We've 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 Gen 6 switch just two quarters ago. Since that time, we've 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 maintain its position as a leading PCIe data center switch provider while gaining share in both scale-up and scale-out market segments. Our Gen 6 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're very excited to announce we've entered the PCIe retimer market this quarter.

This retimer is architected as a companion die for our PCIe Gen 6 switches and is also designed to support the rapid growth of the active electrical cable market, with compatibility spanning Gen 1 through Gen 6 speeds. Customer feedback has been encouraging, and we have already secured a major OEM design win on an upcoming Gen 6 platform, displacing one of our competitors. Customers have been explicitly requesting that Microchip 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 Gen 6 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, the performance and stability data center customers demand, while offering world-class diagnostic and configuration tools with ChipLink. Finally, support through the entire customer journey. From initial design 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 into production ramps.

I'll pause here and turn the call over to Steve to provide an update on our business and the guidance going forward. Steve?

Thank you, Brian, and good afternoon, everyone. I will start by providing you a brief update on our nine-point recovery plan. The first item was to rightsize 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 at the end of December 2024 to 185 days at the end of March 2026. Our overall dollar value of inventory has decreased by $319 million from the December 2024 peak inventory of $1,356 million to March 2026 ending inventory of $1,037 million. We're now in a significant revenue growth mode.

We expect our inventory will come down naturally towards our goal of 130 to 150 days as revenue grows and we appropriately manage our manufacturing and foundry resources. Third was the mega trend alignment. This goal was completed by creating a mega trend for AI, replacing 5G and creating another for Network and Connectivity, replacing ADAS, which stands for Advanced Driver Assistance Systems. 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 revenue is 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 considered our network. 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 of last year.

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%. 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 8 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 that revenue growth and productivity improvements will get us the rest of the way. The 9th final one was CHIPS Act. We are essentially on hold given we are still growing into our current capacity. 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 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 was 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're also seeing customers from new designs and from our improved relationships start buying our products, adding to our bookings, revenue, and customer count. Let's get into guidance for the June quarter. In the June quarter, 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 the March quarter were significantly higher than those for the December quarter. The book-to-bill ratio for the March quarter was well above one, resulting in a much higher backlog entering the June quarter compared to when we entered the March quarter. April was the largest booking month in almost four years. A comment about lead times. While lead time 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're 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 the June quarter to be up 11% sequentially, ±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 call for questions?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask to please limit to one question and one follow-up. Thank you. Our first question comes from the line of Timothy Arcuri from UBS. Please go ahead.

Thanks a lot. Steve, thanks for the update on the nine-point plan. Another thing you were gonna 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, you know, growth rate's not as high as it, you know, truly is because you got out of a lot of businesses. I know that's something that you've been looking at. Do you have any update on that? What do you think the pro forma growth rate is for Microchip?

Well, Timothy, thanks for your question. I think we're just going through a phenomenal growth right now and trying to put a longer term growth rate in this environment, you know, I think 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. I think we'll push that, you know, out further.

Okay. Eric, did you give us inventory charges? I didn't hear that.

We didn't. You know, as we went through the quarter, we kind of implied that as we got through the March quarter, that our inventory reserve charges would normalize. That is essentially what has happened in the March quarter. You know, when you look at the new reserve charges that we've taken, the benefit that we're 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. I think we're in a good position there. When you look at our gross margins, you know, 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.

If you divide that by the revenue and, you know, kinda add that future benefit back to gross margin, we're essentially at the 65% target. We're in good shape. Inventory reserve charges have normalized. It's not really a headwind to gross margin at this point in time, we're glad to have that behind us.

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

Thanks for taking my questions. First one is kinda more near term. You know, 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? I think on the last call, you had mentioned that some direct customers or, you know, some sell-to distribution were still burning through inventory. Are they done? As we look to September, that also is usually a seasonally stronger quarter. You know, consensus has your September up 5%-6%. I don't know whether, you know, you would describe your September quarter visibility at this point?

Vivek, the way I will describe 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. They were all in, you know, 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. 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.

The other factor is, as I talked about, we have improved our relationship with thousands of customers, and in many, many of those cases, we had design wins with the customers, but we were not getting our share of the revenue. In some cases, they had duplicate designs, and they were, you know, buying somebody else's product for a different model. As we look at our overall customer count, it has increased by several thousand customers. We are seeing the customers reengage as we have improved our relationship. Finally, I think, you know, we're 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.

We are seeing the end market strengthening effect also. Combination of all those has been really well above seasonal growth for June quarter, which we hope will continue for some time.

I think the last question that Vivek asked was related to September and visibility, and I'll just comment on it real quickly. You know, our backlog is growing nicely. At this point in time, our September quarter backlog is higher than the June quarter backlog was at the same point in time. Steve spoke to the booking strength that we saw in April. Things look good, but we're not willing to make a call yet on, you know, kind of percentage of revenue growth in September. Things look good at this time.

Understood. 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-over-year, it actually showed that, you know, aerospace and defense actually came down somewhat and so did data center. I appreciate that, you know, these are kind of approximate numbers, but I would have thought that that mix would, you know, grow. Can you help us understand, right, are we doing the right apples-to-apples comparison? Are there certain, you know, 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?

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 our business, and it went up to about 18. So, you know, A&D did not drop during the post-COVID cycle as much, and that's why its percentage had increased. Now some of the others did better as they caught up. Percentage kind of plays, you know, plays games because it's a whole year number. Data center and A&D have seen very significant growth and improvement in the last 6 months or so. When you look at the overall numbers, that's where the math is.

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

Maybe the other point on Data Center is our Data Center business really kind of bottomed out in the June quarter of last year, and we've seen significant growth since then. We've been speaking about that each quarter. You know, each of these end markets had a bottoming at a different point in time.

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

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? Then you talked about the six new customer wins now for the PCIe Gen 6. Can you kind of size that opportunity in any particular wins in? I think you talked about a $100 million win last time. Any other sizing you could offer?

Yeah. Thank you for the question, Matt. A few things around your queries. One is we don't readily comment on the specific customers that we design with. We are, however, disrupting our competitors in this space, and we're seeing our design wins displace some of the other incumbents, especially in the Gen 6 area. Typically, in a product life cycle, it's uncommon to see a lot of design wins prior to production ramp. Yet our six design wins that we've already secured are prior to us doing our production volume release at the end of this quarter.

Given that fact, and that once we're 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.

All right, thank you. On the gross margin side, you guys had talked about kind of ramping utilizations in the front end and back end. Can you maybe help us understand where these levels stand today versus more optimal levels? Given the seemingly accelerated utilization push, how should we be thinking about underutilization charges declining from here? Thank you.

You know, we are ramping all of our large factories at this time. You know, we've been in serious inventory reduction mode over the last five quarters and have made great progress there. Now we're ramping our fabs as an example, and, you know, there's some limitations on what we can do there, and we don't want inventory to get too low, so we're maxing that out. Underutilization charges are gonna come down nicely, is our expectation in the June quarter. You know, they don't go away. That's gonna take, you know, multiple quarters for that to happen, but each quarter they will be reducing. We're also ramping our back-end operations in Thailand and Philippines to support what we needed from a finished goods perspective.

We actually do about 70% of our volume in-house there. We're in wafer foundry or in the fabs, we only do about 35% of that volume internally. They're all ramping. We are fortunate that in the last cycle, we put a lot of capacity in place, so it's just a matter of adding people, having the raw materials to start in the factory, and we're in a really good position to be able to respond to upside demand.

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

Yes, thank you. Good evening. Steve, based on your earlier comments, do you expect that now, you know, we're fully through, you know, customers and distributors taking inventory down and we're 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.

You know, there is nothing really ever absolute, you know. If you have 110,000 customers, you can never say every customer's inventory is corrected. Both distribution customers and our OEM customers' inventory is broadly corrected. Lots and lots of customers are coming back and buying the product based on their run rate because they no longer can reduce the inventory further. You know, are there some customers where they may be still high on SKU here and there? You know, yes, and that will continue to correct as we go. The strength of the business you see it coming back is because of thousands of customers that are returning and distributor is buying products for their customers as well as restocking because their inventory has gone too low.

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

You know, first I'll talk about our philosophy and then what we're gonna do this time. Our normal philosophy is that we engage with customers at the design location at the time of design and give customer a price which he can count on almost through 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 sort of has been the philosophy probably for 30 years. The COVID, post-COVID cycle was very unique, where there were a lot of input cost increases, and Microchip as well as everybody else raised prices.

You know, I think, we've 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. How we're dealing with it right now is, I think our gross margins are doing very well and heading very 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 a you know, indiscriminate broad-based price increase, at least to our partners, strong partner customers. Beyond that, it will be a customer by customer. We're looking at our input costs. We're 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. You know, as we speak right now, we have not increased our prices.

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

Yeah, thanks for taking the question. I was wondering if you could give us any color on just, you know, you previously talked about kind of revenue contributions from the mega trends, but it's kind of difficult to break each one down, but any sort of help on the growth of just the mega trends in general in fiscal 2026?

As a percentage of overall revenue, mega trends have increased, but we've broken them down and changed them. We didn't release a breakdown of that this year, in line with we stuck with our market review, but we've left the mega trends outside of that purview. Overall, mega trends have been increased. Data centers increased. Our communications business has increased. Our ADAS business and our networking and connectivity business continues to grow because we lead in 10BASE-T1S of a number of Ethernet products. All of those businesses continue to grow very well.

Thanks. As a follow-up, I think in the prepared remarks, you had talked about, like, actively expanding capital equipment in selective capacities. Any sort of color you could provide on just where those areas are that you're increasing capacity?

Actually, we didn't say we were increasing capacity. Like, that was not in the prepared remarks. I think we said we expect our CapEx this year to be about $100 million. Large part of that is, you know, going to be just a maintenance kind of capital. We have sufficient in-house capacity. The areas where we would be adding capacity would be, you know, testing capacity for our data center business for, you know, Gen 6 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 10BASE-T1S area. Really our capacity increase needs are going to be or capital needs are going to be modest because we have a lot of capacity.

Right. We're really mostly just growing back into capacity that was put in place in prior years in the last upcycle.

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Our next question comes from the line of Vijay Rakesh with Mizuho Securities. Please go ahead.

Hi, Steve and Eric. Just going back on that aerospace defense side, as you look out, you know, given you are one of the biggest suppliers there and given all the geopolitical tension, wouldn't you expect that business to start to accelerate into fiscal 2027, 2028 here? A follow-up.

You know, aerospace and defense business is doing very well. We're getting large orders, and it's a good business, and it will grow.

Also think about, you know, for that business to grow significantly, our primes have to grow their capacity. You know, we can provide more parts for a missile, but the missile production capacity needs to increase. We're right now talking to every major prime. We're trying to build new facilities to grow their production. It's gonna take some time from that standpoint. Secondly, the cycle time 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, burn them in for many months, and if there are no failures, then you can ship the lot. The cycle time in that sector are very long.

You know, that's why it did very well in the last year. It's doing well now, but it doesn't really go up, you know, like a hockey stick that can happen in a cell phone market or data center market. It's a very steady growth.

Got it. Back on the data center side, when you look at that portfolio of PCIe Gen 6 switches and CXL, which is star product starting to pick up here and storage controllers, how does that data center portfolio grow? You know, obviously a lot of focus on data center and spend there, but any way to size the growth or the pickup there? Thanks.

Well, there's a few important factors that are happening right now in the overall data center ecosystem. We've been experiencing a significant super cycle with respect to AI-based data centers in recent years, but that's been primarily for AI training workloads. We're now starting to see increases in agentic AI and inference-based workloads, and those require a significantly larger amount of access to components that are traditionally PCIe-based. CPU utilization, NVMe, and storage access is heavily impacted by inference and agentic AI workloads. We believe we're 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's across our customer base, which includes hyperscalers.

It includes OEMs and traditional enterprise server manufacturers as well.

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

Hey, guys. Thank you for taking my question. Congratulations on the very solid results. Maybe following up on Chris's question on pricing from earlier, I mean, your message was very clear on rebuilding relationships with customers and not raising pricing. I guess, how aggressive are you observing your competitors on pricing right now? Is it at the point where you're able to lean in and gain share as a result? I guess, is there a certain level of input costs rising where you'd have to, you know, change this philosophy a little bit in the near to medium term and raise pricing as well? Thank you.

I mean, I think you're partially answering the question in your question. We are repairing our relationship with our customers, and many of those are repaired, and we don't wanna stress them. Number 2, we are watching very carefully what every competitor is doing to the extent we have information from the market. Number 3, we have, you know, we have strong partners, and we have people that have a tactical relationship. They just buy parts. We're separating those two in a way, you know. Partners mean one thing, and the people who have just a casual relationship mean another thing. If we see any stress on our input costs, in a specific area, then we will be willing to adjust prices.

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

When we were willing to invest in 300 mm capacity, it was going to be under a license from a major partner. Without that license, we don't really have 300 mm IT. 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 edge capacity will not grow, and they were willing to give us a license. That thing is really no longer true. In the post cycle, there was plenty of capacity. Until very recently, there was plenty of capacity.

It's becoming a little tight now. The partners are adding capacity. We believe we'll have sufficient capacity available in the coming years. The major tightness would be really on the bleeding edge, like 3 nm. The rest of it, we are getting what we need. Is it tight? Yeah, it's really not horribly bad.

Your next question comes from the line of Harlan Sur with J.P. Morgan. Please go ahead.

Yeah, good afternoon, and thanks for taking my question. memory pricing continues to increase fairly meaningfully, and, you know, we do see some pullbacks in production of low-end, mid-end smartphones, PCs, consumer electronic segments of the market. I know this is a smaller part of Microchip's revenue mix, but even some of the big-ticket items like consumer appliances, industrial applications are being somewhat impacted by this dynamic, right? For example, like, we've 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're having to kind of re-qualify their systems. Is the team seeing some of this memory pricing dynamic reflected across your customer base?

Yeah. You're right. I mean, I think it fits into, you know, specific areas. Driven by, you know, AI, the DRAM capacity is very tight.

What some of the NAND flash manufacturers have done is shifted some of that capacity to DRAM. The lower end of the NAND flash capacity, some of the NOR flash manufacturers have moved into NAND flash. The NOR flash got constrained, so some of the EEPROM manufacturers in Asia shifted their EEPROM capacity to build a NOR flash. Everybody has moved upstream, and the bottom of that pile is EEPROM, which is what we make, serial EEPROM. A number of people have really basically abandoned that, 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's not a very large business for us, but I mean, it's up significantly.

That's very, very specific, you know, memory related. You know, our run-of-the-mill microcontrollers, 8, 16, 32-bit microcontroller, analog, power management, A to D converters, D to A converters, our BiCMOS, DMOS, other products, I mean, they're all, you know, they're all fine. You know, can we double any of those short term? No. Capacity is tight, but we have sufficient capacity to meet the numbers we're 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. And the business really remains looking for turns. It's not like we're turning business away because we don't have capacity.

Yeah. Thanks for that, Steve. As aerospace and defense continues strong, you know, a big part of that is the leadership that you guys have in FPGA. I think the market share rankings for last year out, your FPGA business continues 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. Outside of aerospace and defense, we're seeing that there's strong pickup for just general-purpose mid-range FPGA applications across a wide variety of end markets. It's a highly gross margin accretive product family, PolarFire 2. Like, how is the team doing on expanding their leadership in mid-range to broader market applications?

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

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

Microchip Technology (MCHP) Q4 2026 Earnings Call Transcript

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