Good morning, and again, welcome to JP Morgan's 54th Annual Technology and Media Communications Conference. My name is Harlan Sur. I'm the semiconductor analyst here for the firm. Very pleased to have Eric Bjornholt, Chief Financial Officer of Microchip, here with us today. We also have Sajid Daudi, who's Head of IR. Microchip, top five microcontroller supplier globally, number 1 market share in industrial market MCUs. 60% of the MCU portfolio is advanced 32-bit and higher architectures. Solid analog power management portfolio. Number three market share leader in FPGAs. It's been a busy earnings season, so I've asked Eric to start us off with a summary of the March quarter, June quarter outlook, an update on the nine-point recovery plan that Steve laid out in March of last year, and then we can go ahead and kick off the Q&A. Gentlemen, thank you for joining us this morning.
Eric, I will turn it over to you.
All right. Hey, everybody. Thanks, Harlan. Appreciate the introduction. During the course of this discussion, we will be making certain future forward-looking statements about the financial performance of Microchip, and I refer you to our filings with the SEC that identify important risk factors about the company. Quick summary of our March quarter results. It was fiscal 2026, which ended in March, was a very good year for Microchip. March of 2025 to March of 2026, the company was up 35% in revenue. Our EPS went from $0.11 to $0.57 on a quarterly basis, definitely turned things around. We made significant improvements in reducing the inventory overhang that we had.
Inventory came down by, I think, $320 million, something like that, from December of 2024 to March of 2026. Great progress there. We are ramping our factories as we speak because we don't want inventory to go too low. I think distribution inventory was corrected during that time period. Customer inventory is in a much better spot than what it was. Steve Sanghi kicked off this nine-point plan in March of the prior year, and we've really executed well on that. We adjusted our manufacturing footprint. We shut down a factory, one of our wafer fabs in Arizona, and we are right-sized today with plenty of capacity to grow into. Like I said, inventory's come down. Cash flow has improved significantly. Our leverage, which really went quite high during the down cycle, is now back to a much better spot.
I think we should end the June quarter with net leverage below three, which is a good milestone for us, and we'll continue to make great progress from there as we see continued significant increases in EBITDA. We're extremely focused today on getting towards our long-term operating model, which is a 65% gross margin and 40% operating margin. Our guidance for the current quarter is for revenue to grow about 11% sequentially. The gross margin target is 62.75%, so you can see that we're making good progress towards that 65% target. Our operating expenses, we still have some work to do on that. The forecast for the current quarter is about 29% versus our 25% target. Overall operating margins are trending nicely towards the 40%, and we see a clear path to get there. With that, I'll turn it over to Harlan for questions.
Mm-hmm. Thank you very much. That was a great opening commentary. Appreciate having the team here. I want to start off with some of the near-term dynamics in fundamentals. You guys, you called the bottom of your business in the March quarter of last year, when bookings inflected meaningfully in that quarter. Since then, book-to-bill has remained strongly greater than one. Backlog has continued to grow. First phase of the industry recovery is always excess inventories bottoming at your customers, chip orders improving to the level of your customers' consumption trends, right? Second phase of the recovery is restocking by customers in anticipation of continued sort of strong demand. You're starting to see restocking activity amongst your distribution customers, but are you also starting to see restocking activity in your direct customer base as well?
It's harder to track, right? In distribution, we get inventory reporting from the distributors each month, so we know what their inventory is doing, and their inventory is at levels now that are lower than they probably should be at about 26 days. We think the restocking effort is happening there, and that word alone sometimes scares investors. When we are projecting growth of the business at 11% sequentially, distributors need to restock.
That's right.
They need to build inventory just to keep up so their months of inventory don't decline again. I think that's normal behavior. In direct customers, I think it's a mix. I think we still have some customers that are likely still working through inventory, but many of them that we haven't seen purchase from us for 12 or 18 months are coming back. I think inventory is getting right-sized there. It's just a little bit harder to measure.
Okay, got it. Asia region, this is kind of interesting, which includes China, came back very strong in the March quarter. It was the fastest-growing region in your March quarter, both sequentially and year-over-year. Not sort of what we would expect, right, given Chinese New Year's holiday season. Can you talk about the demand trends post Chinese New Year's, and was the profile of demand out of that region fairly broad-based? Maybe what are you seeing so far this quarter out of the China region, Asia region?
The recovery that we saw in Asia and in China was broad-based. It was really across all of our end markets. Nothing particular to call out there. Many of the distributors that we sell through in that region are thinly capitalized, and because of that, they really took inventory down hard.
Yeah
Are now at a point where they have to be buying at least in line with where end consumption is. I think that's probably the biggest driver, but it's broad based.
Typically, post-Chinese New Year's, obviously given that the March quarter was strong, it seems like post-Chinese New Year's, you guys did see a pretty strong snapback in orders as the workforce came back to post the holidays. It sounds like sell-through was strong and therefore that led to sort of follow-through in orders out of that region post-Chinese New Year's.
That's correct. Sell-through activity was strong. We saw a nice bump in sell-through really in every geography last quarter, and that's continuing into this quarter. Bookings activity was quite strong. We had a very strong book-to-bill in the March quarter. We highlighted in our earnings call that April bookings were the highest month of bookings that we'd seen in almost four years. That trend has continued and is continuing into May.
Into May.
Bookings have continued to be quite strong. It's broad-based again. Can't call out one particular end market or one geography. It's coming back across the board.
Good to see that trend continuing. On pricing, it's clear that many of your peers are starting to take up pricing, some beginning of this year, some in the second half of this year, a combination of strong demand, but rising input costs. What I said, I think Steve talked about monitoring input costs, looking at segments where product availability is tight, customer-by-customer sort of basis. At this point, the team has not raised pricing. As you look into the second half of this year and next year, and the potential strong demand profile in front of you and your customers, is the team considering price increases?
We are not considering any sort of broad-based price increase at this point in time. We've got a clear path to get to our gross margin target with where the cost structure is today. I'm not going to sit here and say, "Hey, if there are significant supply chain cost increases, we will have to do something to pass those costs on." We've been in a mode of wanting to regain market share. We've wanted to rebuild customer relationships after some of the missteps we took in the last cycle, and we are seeing strong evidence of that with how our customers are coming back, opening up new designs for us. We want to keep that momentum going.
There's no doubt if supply chain costs continue to rise, that we will have to do something, and we want to be very fair with our customers, at least our partner customers that have opened up all these design opportunities for us, that we don't do anything to negatively impact that relationship. It's a balance, and we really want to maximize our operating margin dollars long term, and if we can gain share and keep prices relatively flat, we will do that.
The one area where pricing is going up is as your customers build their systems, looking at their bill of materials, memory pricing for them continues to increase very meaningfully, right? We do see some pullbacks in production on low- to mid-end smartphones, PCs, consumer electronics, those segments of the market. What we've heard is even big-ticket items like consumer appliances and industrial applications are being somewhat impacted by this dynamic, right? I know consumer and PC is a small part of the team's overall business, but is the team seeing some of this memory dynamic being reflected across parts of your customer base? In other words, maybe not as we look at the more seasonal second half of the year, your customers typically would be building in anticipation of that.
Maybe for some of your customers, because of some of the higher memory prices, maybe unit volume builds are a little bit lower than maybe what they've done historically. Have you seen any indications of memory pricing increases on customer build plans?
Yeah. When something is constrained, customers can't necessarily build everything that they want to build, and with that, they might not be able to complete their system, and because of that, want to have us hold back on delivering to some of them until a later date when they think they can get the entire bill of materials to build their system. Specifically for our business, we do have a serial EEPROM business. It's a small piece we reported in the other category of revenue. It's not part of the microcontroller and analog revenue, and we have seen that business pick up as others are reallocating their capacity elsewhere. We're gaining some share there and seeing good bookings and order momentum for that piece of the business, but it's small.
Got it. Can you give us a sense, like, I've been asked this question before. My response is it's like single digits percentage of Microchip's revenues. If I were to look at the PC, smartphone, sort of consumer electronics end market segments, do you have a sense of the rough contribution to your revenues for those particular end market segments? I mean, it's small. I just, you know.
Yeah. It's quite small. We break out consumer as 8%-9% of revenue overall.
Yeah.
It's really our smallest market segment.
Got it. Actually, before I turn to the mega trends, let's see if there's any questions from the audience. If you do have a question, raise your hand, and we'll get the microphone over to you. Any questions? Let's talk about the technology, the portfolio, the mega trends. In data center and AI, the team has done a great job of helping us to understand your strong position, enterprise SSD controllers, PCIe switching, signal conditioning, networking, timing, security, right? This is a subsegment of your data center and compute end market, which was 18% of your overall revenues last fiscal year. Most of your peers in MCUs and analog are driving their data center businesses currently like anywhere from 50%-100% year-over-year. Any rough quantification on the current growth profile of your AI-focused products and maybe the percentage of your data center and compute business that represents AI.
Yeah. We haven't broken that out, and we're getting a lot of investor questions on it. We are working on a way to break that out separately. Included in our end market that we break out as data center and compute, there's our standard compute, which isn't really in that category. We sell a lot of standard microcontroller timing product, security product into that segment too, that aren't going to exhibit the type of growth that you're talking about and 50% annual growth. What we've been trying to do is highlight our Data Center Solutions Business Unit.
That's right.
We've had Brian McCarson, who leads that business unit on two of our last three earnings calls, highlighting some of our product initiatives there, like our PCIe Gen 6.
that we brought to market. That's really the only product in that market that's on 3 nm from TSMC.
Yes
It brings some significant power savings to our customers, and we're seeing good momentum there. It's not shipping in volume production today. That starts to happen near the end of this fiscal year, and more significantly into next fiscal year. The momentum is behind it there. We will find a way to provide investors better insight into that, and you can see that piece of the business is growing at the rates that you're talking about.
Great. Perfect. On your Total System Solution Strategy, this has been a dynamic and an initiative that the team has been talking about and focused on for quite some time, right? The idea is to drive higher attach rates of Microchip's products to your anchor products, those anchor products being microcontrollers, your microprocessors, your FPGA products, more analog attach, more power management attach, networking chip attach per MCU/MPU design in, right? A year ago, you presented an insightful, I thought was a pretty insightful chart on anchor products, showing the attach rate that drove an average of four to five additional Microchip products per anchor product design win, right? As you look at your design win pipeline over the past 12 months, has that attach rate remained at these levels or increasing?
What programs has the team put in place, sales, marketing, channel partners, reference platforms, to drive the attach rates even higher going forward?
I think the attach rates are likely similar to that, growing modestly from there. That's a pretty decent attach rate. What we're continuing to do is roll out additional reference design with these anchor products. Educate our sales team to take those to the customer. We want to gain more and more of share of the bill of materials at a customer by using this TSS strategy. It's working quite well. It's fully ingrained in our business units working together, where there's complementary products that sell together to bring those to market effectively and make the customer's job easier as they design their system.
Yeah
Have reference designs that are working parts that work together easily and speeds their time to market. That's really important from an engineer's standpoint.
On the team's six megatrend focus, edge and IoT compute, data center, AI, sustainability, e-mobility, and networking. From fiscal 2021 to fiscal 2024, the megatrend revenues grew at a 26% CAGR. That's 2x faster than the overall franchise and represented 47% of your total revenues in fiscal 2024. I know in calendar 2024 and part of calendar 2025, the team was still working with customers on inventory work downs, but since the recovery profile started in the first half of last year and into the first half of this year, have the megatrend focus areas started to outperform again the broad-based business, and any way to quantify that?
The megatrends are all performing well, and it's still a significant focus within our company today. Megatrends are now more than 50% of our revenue, right? To think that that can continue to grow at 2x the overall rate o f the company is probably not possible. Those areas are still high growth, significant focus rate that we have from a customer engagement perspective and a product development standpoint. It's going extremely well. I think that strategy has played out as we expected and continues to be high growth for the company.
One of the other leadership areas that Microchip participates in is Aerospace and Defense, as that spending continues strong, a big part of that is your leadership in field programmable gate arrays, what we call FPGA products, right? The market share rankings are out. Your FPGA business continues to be a strong franchise. Number three global market share leader, half a billion dollar per year franchise. This business outperformed your overall business in calendar 2025. You've got your PolarFire product line, which is a leader in Aerospace and Defense applications. Outside of Aerospace and Defense, though, we've seen a very big pickup in demand for mid-range FPGA solutions across a variety of applications. It's a highly gross margin accretive product family. PolarFire, your next generation PolarFire 2 family.
How is the team doing on expanding your leadership from aerospace and defense into that sort of broad market, sort of mid-range side of the market?
Yeah. It's a good question. FPGA is an important area of focus for the company. As you say, we're the number three player there based on data that's recently been released. The company has been really focused on areas outside of A&D that has really driven that market leadership and allowed us to gain market share. Really since 2013. We bought a company called Microsemi in 2018. They had bought a company called Actel.
Yes
Where these products originated from. With PolarFire, with the upcoming introduction of PolarFire 2, we have really great capabilities across the mid-range and have areas where we can go into the low-end FPGA and the higher-end FPGAs. We are really known for our power efficiency, physical security, and really the benefits that we bring to anything that needs radiation-hardened products, which is really helpful for us in A&D, which is a fast-growing market at this point in time, with a lot of the replenishment that needs to happen in the arsenals that have been used around the world on the defense side. I know your question was really more focused on other areas like industrial-
That's right.
Where we've expanded. The company's doing well. We're continuing to double down on our investment there, and I think the opportunities are large for us going forward.
Perfect. Go ahead.
I was just going to add to it just a little bit that I think as you think beyond just the Aerospace and Defense on the industrial complex, as you think about vision capture, smart agriculture, so the use case is really expanding as you think about Industry 4.0 type of applications. FPGA kind of plays a big role there as well. Still early in its infancy stage, but certainly starting to pick up momentum.
Before I move on, I want to talk about manufacturing footprint and future expansion plans. Is there any questions from the audience? Again, if you have a question, just raise your hand and we'll get a mic over to you. Your wafer output mix is 35% internal, 65% external, even after the fab consolidation. What's the longer-term mix target associated with your new financial targets? You outlined that in your prepared remarks, right? 65% gross margin, 45% op margin targets, revenue growth at industry plus. What is embedded within that? That longer-term goal, how do you think about your wafer output mix internal versus external?
I think generally it's going to stay roughly in that 35% range, ±, for the coming years. Now, some of our faster-growing areas, when you think about the data center products. FPGA and some of the networking products, they are outsourced to the external foundries. Maybe there's a small downtick that comes from our internal factories as a percentage of the total, as we see some higher growth coming from some of these exciting areas that we've talked about. There's really nothing that's changing from how we're running the business. Really anything that is 110 nm above can be manufactured internally.
Right.
Anything 90 nm below, we use an external foundry partner for. Then on the assembly and test side, we do about 70% of that.
Yes
in-house, either in Thailand or Philippines. When we make the decision to bring something in-house is when the volume is high enough to justify the investment. Right now, that's 70% of the total. I expect over time that that percentage will inch up modestly.
Got it. Your Fab 5 in Colorado is still 6-inch diameter wafers. Do you have the capability to expand your output without any new greenfield expansion? As we look forward in time, as your demand profile continues to improve, is this an option to the Microchip team as your business continues to scale higher, upgrading Fab 5 to 8-inch wafer diameter over the next few years? Is that still an option to the team?
It is still an option. We shut down our Arizona fab.
Right.
Fab 2, which was an 8-inch fab. We expanded clean room space in both Oregon and Colorado. Oregon is our larger factory.
That's 8 inch, right?
That is 8 inch.
That's okay.
That is 8-inch. Fab 5 does have the capabilities to do 8-inch longer term. We have not made that investment as of yet, but we could in the future without having to expand and build additional clean room space.
Got it. The team does have, and we haven't revisited this in a while, but the team does have a China for China strategy, right? To serve your larger base of domestic China customers. The plan, I think, was to partner up with a lot of the China-based tests and OSAT guys out there, and ship your chips or dies to China. Your China-based OSAT partners will do the packaging, final test, and then fulfillment. Does the team already have that strategy in place, or is that something that's sort of still on the come?
We really abandoned that strategy. With what's happened on the tariff side and China really looking at the point of fab being what is declared from a tariff perspective, there wasn't a big benefit for us t o do that. Really what we're focusing on is continuing to bring cost-effective solutions that customers want to use to the marketplace. Obviously, our China customer base has chosen Microchip over the competition.
Yes
over time for those reasons.
Right
We know that there's clearly going to be demand, particularly for domestic-based China companies, to buy locally, and we can only offset by bringing products that that competition doesn't have to them and doing it in a way where they are incentivized to use Microchip because we have the best product at the right cost structure for them to use. That's really the focus.
You had talked about 70% of your assembly and tests being, I think, done in-house, right? Part of the nine-point plan was to take your Philippines and Thailand complexes. You were going to optimize those footprints as well. Are you already through that sort of optimization process. Without the China for China plan, I'm assuming that you're leveraging Philippines and Thailand for packaging and shipping across all of Asia, including China. Is that the right way to think about it?
You are correct. Really, the optimization that happened there was just headcount reduction, which was mostly through attrition, because there's higher attrition that happens in those locations. We are ramping headcount in all of those locations, particularly in Thailand today, as those are larger operations from an assembly and test perspective. There's a great workforce there to tap into, and we're being able to ramp quite efficiently. We're in a good spot in ramping assembly and test operations.
Now that inventory write-downs have normalized, you still have about, I think as of last quarter, $47 million per quarter of underutilization charges, 3.5 percentage points of gross margin goodness, right? This alone will get you to your target 65% gross margins. Given the significant acceleration of the demand profile that the team is seeing, very broad-based, is it possible that the team can wind down most of these charges exiting this year?
My anticipation is that those charges will come down significantly but won't be gone by the end of the fiscal year. We have some limitations on how fast we can ramp our internal factories. We can only ramp our internal wafer fabs by 15%-20% in a quarter. Today they are producing at a level that is well below than what we're shipping, and that's why inventory has been coming down. We are moving as fast as we can to add production specialists or direct labor force to, particularly the Oregon factory, to ramp it as quickly as we can. We will still have underutilization charges when we leave the fiscal year, but they will come down each quarter. I think last quarter it was down $6 million or something like that. It'll probably come down a little bit more than that.
Yeah
This quarter, as we're really in heavy ramp phase, but it takes time.
Got it. There was one product question that I forgot to ask, but before that, any questions from the audience? On the product side, obviously, top five supplier, global microcontroller sort of market share. You actually do have a very diversified portfolio into the embedded processor space. You've got your 32-bit microprocessor, you have a hybrid microprocessor family. In 2024, you introduced your next generation, very high-performance 64-bit embedded processor family for edge compute applications, where we are seeing a lot of activity. Your MCU and 32-bit product lines were Arm-based and PIC architecture-based, the team chose to enter the 64-bit microprocessor arena with a RISC-V based architecture. This embedded processor market is a $5 billion market opportunity.
Can you just give us an update on the team's efforts to penetrate the embedded processor market, and will the team roll out a more industry standard sort of Arm-based 64-bit processor family of products?
Yeah. We made the decision on RISC-V based on feedback from the customers that we were targeting with that particular product set. I believe that over time we will have a mix of both RISC-V and Arm-based products in the 64-bit arena, and really those decisions will choose the architecture based on the functionality of the product that is needed and which architecture suits it best. We've tended to be architecture-agnostic.
Yes
Over time. We've had a bunch of different architectures in the portfolio and then make that choice.
That's right.
based on the product, what the requirements of the customers are going to be. It is a big market opportunity for us. You mentioned it's a $5 billion TAM opportunity and we're continuing to introduce new products. We are doing quite well in the early stages of introducing products, both in 64-bit MPU and then MCUs are coming also. The team is tracking well on that trajectory. Sajid, anything that you would want to add on the high-end compute?
No. I think other than just that's maybe just a little milestone moment for us where recently NASA and JPL kind of put out a press release on a product that we'd collaborated with them w as 500 times what was set out to be originally than what the products are available. Again, small thing, but just as in the compute family, that was a good milestone for us.
Yeah. High space compute.
Yeah.
Got it. On the financials, as I think about the financial model, your focus and things like your focus on the six mega trends, your product evolution that includes augmenting the portfolio with high-performance compute, networking, storage products, our performance in aerospace and defense, really good traction in the data center segments of the market. It would seem to me that the product cost margin should be mixing higher going forward. In other words, as you look at your design win pipeline, you look at your development pipeline, your design win pipeline, over time it feels like your mix is getting richer and richer and richer, right? Any way to quantify your design win pipeline and the product gross margin profile improvements you anticipate over the next several years, as you create these more kind of higher value-added solutions for your customers?
Yeah. It's a good question. In some of these faster-growing areas, whether it's the data center products that we've talked about, our networking and connectivity products, FPGAs, these product lines tend to have higher than corporate average gross margins, and we think the growth from those product areas is also going to be higher over time. I think we have a positive mix shift there that's going to benefit us. Obviously, we're going to continue to be competitive, trying to win share and price is a factor in that. Overall, we're very comfortable in getting to the 65%. You take away the underutilization charges and we're there, and then it's just a matter of how the business mix develops over time and if we have good success in what we think are going to be our higher growth areas, margins could be in a very good spot.
We're not willing at this point to update our long-term margin profile. We are really targeting something that we can float around at 65% when the cycle is good and when the cycle is bad.
Right.
Obviously, we need to do a much better job of managing inventory. In the current cycle than we did in the last cycle for that to happen, so we don't have these large underutilization charges.
Right
We don't over-invest from a capacity standpoint. The team is focused on it and I think our margins are going to continue to improve nicely.
Perfect. Eric, Sajid, thank you very much for your participation today. Look forward to continuing to monitor the execution of the team as the year unfolds.
Great. Thanks.
Thank you very much.
Thanks everybody.