Microchip Q1 Earnings Call Highlights Broad Recovery & Data Center Growth

MCHP Sees the Recovery Broadening

President and CEO Steve Sanghi said that the distribution inventory correction is complete. Distributor inventory ended June at 25 days, while sell-through increased 17% sequentially and customer activity strengthened.

A UBS analyst asked how long above-seasonal growth can continue. Sanghi, Microchip's president and CEO, said that data center and aerospace and defense demand could extend the cycle, while industrial and automotive entered recovery later.

Sanghi also said that June produced Microchip's strongest bookings in about four years, with book-to-bill well above 1 and higher backlog entering September.

Microchip Raises Data Center Visibility

Sanghi said that total data center sales are expected to reach about $1 billion in calendar year 2026, up about 69% from $591 million in 2025. Data center represented 17.1% of June-quarter sales and grew 97.8% year over year.

Microchip had 14 PCIe Gen6 design wins, including 12 switch programs and two retimer programs. Sanghi said that Gen6 production began at the end of June and initial shipments were starting.

A BofA Securities analyst asked about two- to three-year growth and market share. Sanghi declined to forecast either, emphasizing Microchip's broad exposure across data center solutions and catalog products.

MCHP Guides to Another Sequential Step-Up

Sanghi guided September-quarter sales to rise 8% sequentially, plus or minus 1%, to $1.589 billion-$1.618 billion. Non-GAAP earnings are projected to be in the range of $0.91-$0.95 per share.

Sanghi said that non-GAAP gross margin should reach 66%-67%, with operating margin at 38.5%-39.5%, supported by mix, licensing, pricing, lower inventory write-offs and declining underutilization charges.

A BofA Securities analyst pressed on margin sustainability. Corporate senior vice president and CFO Eric Bjornholt said that licensing and a distribution-related pricing benefit are not recurring, while gross margin should remain around this range for at least the next few quarters.

Microchip Works Through External Supply Tightness

Sanghi said that lead times are stretching as constraints spread across substrates, foundry nodes, outsourced assembly and test. Requests for expedited shipments have also increased.

Wells Fargo and Susquehanna analysts pressed management on capacity. Sanghi said that internal fabs are not the constraint and Microchip is receiving incremental external allocation.

Bjornholt said that Microchip has no plan to build a 300-millimeter fab and will continue relying on foundry partners for those technologies.

MCHP Keeps Deleveraging Ahead of Buybacks

A Wolfe Research analyst asked whether improving cash generation could change capital allocation. Sanghi said that cash beyond the current dividend will continue going toward debt, with no buybacks or dividend increase planned for now.

Bjornholt said that net debt was about $5.2 billion and net debt to adjusted EBITDA was 2.85 as of June 30, 2026. He expects the measure to fall below 2.5 in September.

Sanghi also ruled out large acquisitions, describing the planned Hailo transaction as a small technology deal that advances Microchip's edge-AI roadmap by about five years.

Microchip Stays Focused on Recovery Execution

Steve Sanghi said December should perform better than Microchip's normal seasonal decline of 3%-5%. He added that the broad price increase will have a small September impact but a full-quarter effect in December.

Management's priorities are serving stronger demand amid external constraints, improving factory utilization, protecting margins and reducing debt. He kept the long-term gross-margin model unchanged rather than extending September's elevated level.

MCHP's Zacks Signals Favor Growth Over Value

Presently, MCHP carries a Zacks Rank #2 (Buy). Its Growth Score of B is favorable, while the Value Score of D is weaker and the Momentum Score of C and VGM Score of C are middle-tier readings. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Style Scores run from A through F, with A and B the preferred grades, especially alongside a Rank #1 or #2. MCHP therefore combines a favorable rank and growth score with less supportive value and composite readings. The Zacks Rank can change as earnings estimates are revised after the reported results.

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