Good afternoon, ladies and gentlemen, and welcome to Microchip's Q1 Fiscal Year 2027 Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call, you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, August 6, 2026. I would now like to turn the conference over to Mr. Steve Sanghi, President and CEO. Please go ahead.

Thank you, Operator. And good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. we wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press release of today, as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Eric Bionholt, Microchip CFO, and Sajid Dowdy, Microchip's Head of Investor Relations. I will provide a new breakout of our net sales by end markets, including further information on our total data center exposure. Eric will then go over our financial performance. I will then provide an overview of the current business environment and our guidance for second quarter of fiscal year 2027. We will then be available to respond to specific investor and analyst questions. So let us begin with providing you with a further update on our exposure to the data center market. On June 1, 2026, we provided you a breakdown of our net sales from our data center solutions business unit for calendar year 2025, which we said was $302.7 million. We also said that in addition to these net sales from the data center solutions business unit, we have many catalog products from various business units that also have exposure to data centers. In the last couple of months, we have worked to pull together an estimate for this additional exposure to the data center market from these catalog products from various business units. These additional products include our power management analog products, mixed signal products, microcontrollers, digital signal controllers, security products, SPGAs, timing products, and serial eSquare memory products. The additional net sales from data centers for these various business units for calendar year 2025 was approximately $288 million. This makes the total net sales from data centers for calendar year 2025 for all microchip products to be approximately $591 million. And that was the $303 million approximately from data center Solutions Business Unit and $288 million from all other catalog products for a total of $591 million. This was approximately 14% of our net sales for calendar year 2025. We have also estimated the data center sales growth expected in calendar year 2026. We earlier told you that our net sales from data center solutions business unit is expected to be about $500 million for calendar year 2026. Now, our net sales from the products from all other business units, which also go into the data centers, is expected to grow from $288 million in calendar year 2025 to about 500 million dollars in calendar year 2026. This makes the total net sales expected in calendar year 2026 from all of microchip products, data center solutions business unit, as well as all the other catalog products going into data centers as about $1 billion. So this is expected to be approximately, up approximately 69% from $591 million net sales from data centers in calendar year 2025. So a growth of about 69% from $591 million net sales in calendar year 2025 to $1 billion in calendar year 2026. Now a little bit about calendar Q1 and Q2. In calendar Q1 2026, which was the March quarter, our net sales from data centers was up 77.2% from calendar quarter 1, 2025. In calendar Q2, 2026, the June quarter just ended, our net sales from data centers was up 97.8% from calendar Q2, 2025. As our numerous new designs wins on our PCI Gen 6 switch, PCI Gen 6 re-timer, storage controller, NVM controllers, power management products, mixed signal products, security products, timing products, and memory products proceed to production in calendar year 2027. We expect significant growth from data centers in 2027 and thereafter. after. Now, here is our in-market net sales breakdown for the June quarter. We remind you that these percentages are our best estimates of the in-market splits. However, there is probably a couple of percent error band due to the fact that about 50% of our business and the long tail of customers are serviced through distribution, which makes it difficult to track the end market. So our June quarter end market breakdown was as follows. Industrial was 32.2 percent. Data center 17.1 percent. Aerospace and defense 16.7 percent. Automotive 15 percent. communication, 8.2%, consumer appliances, 7.4%, and compute, 3.4%. You can see that we're now breaking out end markets of data center and compute separately. So we're now breaking out our sales into seven end markets. From June quarter 2025 to June quarter 2026, so year-over-year growth. Our industrial net sales grew 24.3%. Data center sales grew 97.8%. Aerospace and defense grew 45.6%. Automotive grew 29.3%. Communication grew 53.3%. Consumer appliances increases grew 19.1 percent, and compute grew 9.6 percent, so this is the most comprehensive breakout you have heard from us, enough to pack for you, unpack for you. With that, I'll pass it on to Eric.

Thanks, Steve, and good afternoon, everyone. We are including information in our press release on this conference call on various gap and non-gap measures. We have posted a full gap to non-gap 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 gap and non-gap results. We have also posted a summary of our outstanding debt and leverage metrics on our website. I will now go over some of the operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation, and certain other adjustments as described in our earnings press release and the reconciliations on our website. Our non-GAAP financial results were all above our guidance provided on May 7, 2026. Net sales in the June quarter were $1.485 billion, which was up 13.2% sequentially. and up 38 percent from the June 2025 quarter. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were 63.8 percent, including capacity underutilization charges of $38.5 million. Operating expenses were at 28.7 percent of sales, and operating income was 35.1 percent of sales. Non-GAAP net income was $438.6 million, and non-GAAP earnings per diluted share were 76 cents, which was 7 cents above the midpoint of our guidance. On a GAAP basis in the June quarter, gross margins were 63.2%. Total operating expenses were $602.1 million and included acquisition and tangible amortization of $90 million, dollars, special charges of $18.9 million, which were primarily driven by two long-standing legal matters, which were settled during the quarter, as well as our activities associated with the closure of Fab 2, share-based compensation of $66.3 million, and $0.4 million of other expenses. The gap net income attributable to common shareholders was $202 million, or $0.37 per our non-gap cash tax rate was seven and a half percent in the june quarter and we expect to have a tax rate of about seven and a half percent for all of fiscal year 2027 our tax rate is down from the prior year for a variety of reasons including the amortization of domestic research and development experimentation expenditures capitalized in previous years and the impacts of a reduction in inventory reserves our inventory balance at june 30th 2026 was 1.047 billion we had 175 days of inventory at the end of the june quarter which was down 10 days from the end of the march quarter included in our june ending inventory was 14 days of long life cycle high margin products whose manufacturing capacity has been end of life by our supply chain partners Inventory at our distributors in the June quarter was at 25 days, which was down one day from the March quarter, and at the lower end of what we have experienced historically. Our cash flow from operating activities was $511.5 million in the June quarter. Our adjusted free cash flow was $478.6 million in the June quarter. As of June 30th, our consolidated cash and total investment position was $272.3 million. Our total debt decreased by $138 million in the June quarter, and our net debt decreased by $170 million. Our adjusted EBITDA in the June quarter was $587.8 million and 39.6% of net sales. Our trailing 12-month adjusted EBITDA was $1.798 billion. Our net debt to adjusted EBITDA was $2.85 at June 30th, 2026. We expect our net debt to adjusted EBITDA to reduce significantly as we progress through fiscal year 2027. Capital expenditures were $13.9 million in the June quarter, and we expect capital expenditures for fiscal year 27 to be about $100 million. Depreciation expense in the June quarter was $37.8 million. I will now turn it back to Steve, who will provide some additional commentary on our June quarter results and our guidance for the September quarter. Steve?

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

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press star followed by the number one on your touchstone phone. You will hear a three-tone prompt acknowledging your request. If you would like to cancel your request, please press star 2. As a reminder, please limit yourselves to one question. If you wish to do a follow-up question, please recue by pressing star 1. Our first question comes from the line of Timothy Arcuri from UBS. Please go ahead.

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

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

Thanks. And then, Eric, just super fast. So are there any inventory, you know, scale of, you know, previously written down inventory that is inflating margins?

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

Okay. Thank you. Your next question comes from the line of Vivek Arya from Bank of America.

Please go ahead. thanks for taking my question um steve i wanted to talk about uh the data center what is the right way to model your data center growth for the next two to three years you know just conceptually what are the moving pieces and how are you benchmarking um you know whether you are gaining share losing share keeping share like what what what is the uh served addressable market uh for you how fast is that growing, and how do you expect Microchip to do relative to that market?

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

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

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

What are those, Buenos Aires? Sorry, how much?

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

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

Thank you. Your next question comes from the line of Joe Quattroni from Wells Fargo. Please go ahead.

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

Well, you know, like I said, we have very, very broad exposure. If you were to start to look at the design wins across microcontrollers, memory products, power management, and others, and one of the reasons it took us that long and it's more difficult to do is, you know, on data center solutions business unit, which is like, you know, the Gen 6 switch and retimers and others, there we engage with very large customers. We engage with hyperscalers and enterprise customers in winning large design wins. But when you look at our catalog products broad base, there we don't win designs at hyperscalers and enterprise. We win designs at power supply companies and card stuffers and module makers and, you know, companies like Lighton and Delta and others, which then are selling their products into data center business units. So, you know, across our entire portfolio, there will be hundreds and hundreds of designs. And it's very difficult, therefore, to answer that question. We will limit the design win information to really the data center solutions business unit. And there we can tell you that last quarter when we came to you, we had six design wins. And at the end of the quarter, we had, this quarter, we had 12 design wins. And as of today, we have 14 design bins, 12 on the Gen 6 switch and two on the Gen 6 re-timer, and many more in the works. So I think that one is easy to identify. But if I were to start to identify design bins or analog catalog products or memory products or security products, they're endless.

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

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

Your next question comes from the line of Christopher Rowland from Susquehanna. Please go ahead.

Come on, guys.

Hey, Chris, you're on.

Christopher Rowland from Susquehanna. Your line is now open.

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

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

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

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

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

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

Thanks so much.

Your next question comes from the line of Chris Queso from Wolf Research. Please go ahead.

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

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

Thank you.

As a follow-up, you know, it does appear that we're in the recovery part of the cycle now. Steve, I know that you've been a little cautious about cash flow and getting debt level down and putting the company in the right place.

With an apparent recovery happening now, some better cash flow going on, maybe you could update us on your view of cash return and what to do with cash that you're going to be generating. so you know we still have substantial debt about five and a half is it yeah that's about 5.2 billion so net debt is about 5.2 billion gross is a little higher than that closer to five and a half maybe even though the leverage ratio has now come below three we believe the debt level is still too high. And we will continue to use the entire cash that's available beyond the current dividend and use it to pay down the debt for a foreseeable future. There's just no other plan, no plan to buy back stock and no plan to increase the dividend for a foreseeable future.

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

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

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

Not that I'm willing to share.

Understood. Okay.

Thank you. Your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.

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

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

It's mostly at the core level.

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

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

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

All right, thanks.

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

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

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

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

I appreciate that. And then, Steve, within your aerospace and defense business, you know, this segment underperformed your overall growth profile last fiscal year. But this segment is starting to drive some pretty outsized growth rate. It was up 46% year-over-year, 20% sequentially in the June quarter, as you highlighted. Defense spending by the U.S. and global governments. You've got global commercial space programs are all quite strong. You guys have a very strong leadership position in RADHARD FPGAs, RADHARD MCUs. interface timing power like do you anticipate growth out performance for a and d for fiscal 27 but more importantly does the multi-year growth profile look like continued out performance given some of these programs have very long program lives well you know qualitatively yes but quantitatively don't dial in a 46 growth because we're talking about you know these growth numbers are from pretty depressed levels.

You know, in March quarter 2025, a total company revenue was $970 million, and we're now guiding to $1603 at the midpoint. So there has been a massive growth from the bottom in March of 2025. So when I do year-over-year comparisons, you know, they obviously look very, very good, which is great, but just don't dial those kind of numbers going forward. But qualitatively, yes, we are very positive on growth on data center. We are positive on growth on A&D, and we think that, you know, industrial and automotive are trying to catch up. You know, there were later recoveries, and industrial is probably a little ahead of automotive, and that makes up all of our major segments. The rest are small. communication is small, consumer is small, computer is small. You know, the four large segments are industrial, data center, A&D, and then automotive. So two out of those, data center and A&D are very strong, and industrial and automotive are trying to catch up.

Got it.

Thanks, Steve. Steve.

Your next question comes from the line of Blaine Curtis from Jefferies. Please go ahead.

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

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

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

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

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

Amazing. Appreciate that.

Thanks.

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

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

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

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

Some of the price increases we already had knowledge of, which haven't kicked in. They're kicking in either in the fourth quarter or on January 1. We tried to dial in into this price increase.

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

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

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

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

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

Yeah I guess some things never change and maybe as a follow-up you know Steve you provide some good commentary before about your internal capacity both on the front end and back end realizing you're continuing to add capacity on margin and you had mothballed a bunch of capacity in the downturn can you maybe give us any kind of sense You know, as you think about kind of re-expanding that capacity from the current levels of internal capacity you have today, you know, if you did – without doing anything unnatural, how much more capacity could you support above that level? Is it 10 percent, 20 percent, 30 percent, et cetera?

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

That's helpful.

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

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

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

Yeah, and the underutilization improving was mentioned by Steve in his prepared remarks about being a help in the 66.5 midpoint guidance this quarter. And just on the underutilization charges, last quarter, I think they reduced by about $8 million sequentially.

I'd expect about the same in the current quarter he was taking the remaining under utilization charge dividing over the revenue yeah yeah coming up with 238 points improvement and saying why the gross margin doesn't go up and what we're seeing is that there are a lot of one-time things and it will offset those got it no that I think that's pretty clear I just wanted to ask on auto most to be your peers year on year probably grow in their auto business 15 or so percent.

I think you're up nearly 30 percent. So just do you think that's just you know a function of the you're kind of early in the auto cycle coming off a pretty steep bottom? Are you feeling better about the auto end market? I mean certainly feels like SAR is still pretty lumpy but just any quick thoughts on how you see the auto demand going forward?

I think there are two reasons. One we went down more than the others our overall reduction post-COVID inventory was higher at the customers because microchip was less flexible so we had more inventory at the customers therefore we went down more so our recovery has been stronger and secondly I think we gained share in pretty much all markets in the last two years Thank you Steve Your next question comes from the line of Joe Moore from Morgan Stanley.

Please go ahead.

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

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

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

from Truist. Please go ahead.

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

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

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

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

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

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

Well, got it. Thanks, Steve.

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

On the right-hand side of that slide, it talks about five specific areas. One is grid-to-rack and in-rack power, So that's really bringing power to the rack. Second is a system management, you know, various Ethernet switches, USB hub controllers, MCUs that are doing predictive maintenance, fan controllers, temperature sensors, those kind of parts. The third is timing and synchronization. synchronization, there is a tremendous amount of accurate nanosecond accuracy of timing needed and all the systems so they can all work together, and we provide that timing and synchronization. Fourth is security, so you can get into it and hack it and all that. And fifth is networking, routers, switches, Ethernet files, optical modules, and other So, take a look at that slide. It's useful.

Our last question comes from the line of Joshua Buchalter from TD Cowan. Please go ahead.

Hey, guys. Thanks for squeezing me in and let me echo the appreciation for the incremental disclosures. Maybe follow up on the last one since you brought up that slide. Any way you can maybe rank order the contributions today or even a year or two from now on the different buckets on that slide 14 for data center?

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

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

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

Well executed and generally well accepted by our customers, I would say.

I mean, one distribution comment to me directly was that, you know, microchip executed it the best among many of the other suppliers who have done the price increase. We were the model. We were the standard how it should be done.

Thank you both.

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

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

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