Q2 2026 Microchip Technology Inc Earnings Call

November 6, 2025

Session will follow the formal presentation if.

So fiscal 2026 financial results conference call at this time, all participants are in a listen only mode.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, disc ops was being recorded it is now my pleasure to introduce your host Steve Sandy. Thank you Sir you may begin.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Steve Sandy. Thank you Sir you may begin.

Thank you operator, and good afternoon, everyone.

Speaker #1: A meaningful share of the committed AI infrastructure . Build out across three growth vectors hyperscale training infrastructure , enterprise AI training and inference deployments , and high performance computing applications .

Speaker #1: One .

Speaker #2: The difference between saline and sell through has to close distributor inventories are going to become normal here . You know , they've come down very significantly .

During the course of this conference call.

We will be making projections and other forward looking statements.

Thank you operator and good.

Good afternoon, everyone.

Regarding future events or the future financial performance of the company.

During the course of this conference call.

We will be making projections and other forward looking statements.

Speaker #1: I will pause here and turn the call over to Eric for comments about our financials . Eric . Thanks , Brian , and good afternoon , everyone .

We wish to caution you that such statements are predictions and.

Future events or the future financial performance of the company.

Actual events or results.

Speaker #1: We are including information in our press release and in this conference call on various GAAP and non-GAAP measures . We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at WW .

I may differ materially.

We wish to caution you that such statements are predictions.

We refer you to our press release of today.

And that actual events or results.

Well as our recent filings with the SEC.

May differ materially.

That identify important risk factors.

We refer you to our press release of today.

That may impact microchips business.

Well as our recent filings with the SEC.

Speaker #1: And included reconciliation information in our earnings press release , which we believe you will find useful when comparing our GAAP and non-GAAP results .

Speaker #1: Greetings and welcome to the microchips . Q2 fiscal 2026 Financial Results conference call . At this time , all participants are in listen only mode .

And results of operations.

That identify important risk factors.

In attendance with me today are Rick Simons sick.

May impact microchips business Andrew.

Microchip seal Eric beyond hold.

Speaker #1: We have also posted a summary of our outstanding debt and our leverage metrics on our website . I will now go through some of the operating results , including net sales , gross margin , and operating expenses .

And results of operations.

Speaker #1: A question and answer session will follow the formal presentation . If anyone should require operator assistance during the conference , please press Star Zero on your telephone keypad .

Microchip CFO.

In attendance with me today are rich Simon sick.

Brian Mckesson Microchips VP of data center business unit.

<unk> chip seal, Eric beyond hold Microchip CFO.

Speaker #1: As a reminder , this conference is being recorded . It is now my pleasure to introduce your host , Stephen Sanghi . Thank you sir .

And Sajid Doughty microchips head of Investor Relations.

Speaker #1: 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 .

Ryan Mckesson Microchips VP of data center business unit.

I will provide a reflection on our fiscal second quarter 2026 financial reserves.

Speaker #1: You may begin .

And Sajid Dowdy microchips head of Investor Relations.

Speaker #2: 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 .

Speaker #1: Share based compensation and certain other adjustments as described in our earnings press release and in the reconciliations on our website . Net sales in the September quarter were 1.14 billion , which was up 6% sequentially and 10.4 million above the midpoint of our September quarter .

Then Brian will provide an update on our data center business and.

I will provide a reflection on our fiscal second quarter 2026 financial reserves.

And Eric will go over our financial performance.

I will then provide an overview of the current business environment and our guidance for third quarter of fiscal year 2026.

Then Brian will provide an update on our data center business.

And Eric will go over our financial performance.

Speaker #2: 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 .

I will then provide an overview of the current business environment and our guidance for third quarter of fiscal year 2026.

Speaker #1: Guidance provided on August 7th . We have posted a summary of our net sales by product line and geography on our website . For your reference .

He will then be available to respond to specific investor and analyst questions.

I will now highlight a few salient points of our financial results.

Speaker #1: On a non-GAAP basis , gross margins were 56.7% , including capacity underutilization charges of 51 million and new inventory reserve charges of 71.8 million .

He will then be available to respond to specific investor and analyst questions.

6% sequential sales growth.

Speaker #2: That identify important risk factors that may impact Microchip's business and results of operations . In attendance with me today are Richard Simoncic microchip , CEO Eric Bjornholt .

I will now highlight a few salient points of our financial results.

Net sales were up sequentially in America or in Asia and flat in Europe.

Speaker #1: Operating expenses were at 32.4% of sales and operating income was 24.3% of sales . non-GAAP net income was 199.1 million , and non-GAAP earnings per diluted share was $0.35 , which was $0.02 above the midpoint of our guidance .

6% sequential sales growth.

Which is not bad for a summer quarter in Europe.

Net sales were up sequentially in America, and in Asia and flat in Europe.

Sales from our microcontroller and analog business as well.

Speaker #2: Microchip CFO Bryan Macpherson , Microchip's VP of Data Center business unit , and Sajid Dowdy , Microchip's , head of investor relations . I will provide a reflection on our fiscal second quarter 2020 financial results .

We're up sequentially.

Which is not bad for a summer quarter in Europe.

Specifically, our MCU business grew nine 7% sequentially with strong contribution from 32 bit MCU.

Sales from our microcontroller and analog business as well.

But up sequentially.

Speaker #1: On a GAAP basis , in the September quarter , gross margins were 55.9% . Total operating expenses were 549 million and included acquisition , intangible amortization of $108.1 million , special charges of 6.3 million , which was primarily driven by our activities associated with our closure of fab two share based compensation of 53.3 million and 12.3 million of other expenses .

Specifically, our MCU business grew nine 7% sequentially with strong contribution from 32 bit MCU.

Our analog business increased one 7% sequentially.

Our Gen four and Gen. Five data center products have seen strong sales growth, albeit from depressed levels.

Speaker #2: Then Brian will provide an update on our data center business , and Eric will go over our financial performance . I will then provide an overview of the current business environment and our guidance for third quarter of fiscal year 2026 .

Our analog business increased one 7% sequentially.

Our Gen four and Gen. Five data center products have seen strong sales growth, albeit from depressed levels.

Customers seem to have finished their inventory correction.

And the new products area.

Our blockbuster product announcement came on October 13 when.

Speaker #1: The GAAP net income attributable to common shareholders was 13.9 million , or $0.03 per share , and was positively impacted by our settlement of an audit with the IRS dating back to fiscal year 2007 .

Customers seem to have finished inventory correction.

Speaker #2: We will then be available to respond to specific investor and analyst questions . I will now highlight a few salient points of our financial results .

When we announced the industry's first.

And the new products area.

Three nanometer based pcie.

Our blockbuster product announcement came on October 13.

Gen six switch to power modern AI infrastructure.

When we announced the industry's first.

Speaker #2: 6% sequential sales growth . Net sales were up sequentially in Americas and Asia , and flat in Europe , which is not bad for a summer quarter in Europe .

Speaker #1: Our non-GAAP tax rate was 9.5% in the September quarter . We expect to record a non-GAAP tax rate of about 10.25% for all of fiscal year 2026 , which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years .

Three nanometer based pcie.

Brian Mckesson will comment on this later in today's call.

Gen six switch to power modern AI infrastructure.

Our non-GAAP gross margin was up 236 basis points sequentially.

Brian Mckesson will comment on this later in today's call.

Speaker #2: Sales from our microcontroller and analog businesses were up sequentially . Specifically , our MCU business grew 9.7% sequentially , with strong contribution from 32 bit MCU , while our analog business increased 1.7% sequentially .

Incremental non-GAAP gross margin was.

Our non-GAAP gross margin was up 236 basis points sequentially.

95% sequentially.

non-GAAP operating margin.

Speaker #1: Our inventory balance at September 30th , 2025 was 1.095 billion , which was down $73.8 million from the balance at June 30th , 2025 .

Incremental non-GAAP gross margin was.

Was up 364 basis points sequentially.

95% sequentially.

Incremental non-GAAP operating margin.

non-GAAP operating margin.

It was up 364 basis points sequentially.

Was 84, 6% sequentially.

Speaker #1: We had 199 days of inventory at the end of the September quarter , which was down 15 days from the prior quarter's level , driven by our inventory reduction actions included in our September ending inventory was 16 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 September quarter was at 27 days , which was down two days from the prior quarters level .

Our incremental gross and operating margins are very positive.

Incremental non-GAAP operating margin.

Speaker #2: Our Gen four and Gen five data center products are seeing strong sales growth , albeit from depressed levels , as customers seem to have finished their inventory correction in the new products area .

Was 84, 6% sequentially.

Inventory went down by $73 $8 million sequentially.

Our incremental gross and operating margins are very positive.

Calendar year to date reduction in inventory is $261 million.

Inventory went down by $73 $8 million sequentially.

Inventory days were 199 days.

Speaker #2: Our blockbuster product announcement came on October 13th , when we announced the industry's first three nanometer based PCIe Gen six switch to power .

Calendar year to date reduction in inventory is $261 million.

Our inventory over three quarters has gone down.

From 266 days.

Inventory days were 199 days.

Speaker #1: Distributions sell through was about $52.9 million , higher than distributions sell in . Our cash flow from operating activities was 88.1 million in the September quarter .

251 days.

Our inventory over three quarters has gone down.

214 days to 199 days.

Speaker #2: Modern AI infrastructure . Brian Macpherson will comment on this later in today's call . Our non-GAAP gross margin was up 236 basis points sequentially .

From 266 days.

Under utilization in our factories in September quarter was $51 million.

251 days.

214 days to 199 days.

Speaker #1: Our adjusted free cash flow was $38.3 million in the September quarter , and as of September 30th , our consolidated cash and total investment position was 236.8 million .

The product gross margin in the September quarter was 67, 4% due to a rich product mix driven by data center products.

Under utilization in our factories in September quarter was $51 million.

Speaker #2: Incremental non-GAAP gross margin was 95% sequentially . non-GAAP operating margin was up 364 basis points sequentially . Incremental non-GAAP operating margin was 84.6% sequentially .

The product gross margin in the September quarter was 67, 4% due to a rich product mix driven by data center products.

We added 71 $8 million up for new.

Speaker #1: Our total debt decreased by $82 million in the September quarter , and our net debt increased by 247.7 million . Our adjusted EBITDA in the September quarter was 341.8 million , and 30% of net sales .

We added $71 8 million of new.

We added 71 $8 million up for new England, we.

Inventory write off and $51 million of Underutilization charge make.

We added $71 $8 million of Nu.

Speaker #2: Our incremental gross and operating margins are very positive . Inventory went down by $73.8 million sequentially . Calendar year to date reduction in inventory is $261 million .

Makes a total of $122.8 million.

Inventory write off and $51 million of Underutilization charge mix.

Speaker #1: Our trailing 12 month adjusted EBITDA was 1.13 billion . And our net debt to adjusted EBITDA was 4.69 . At the end of the quarter .

Yes.

Divide that by the net sales of $1 billion $144 million and you get in non-GAAP gross margin impact.

Makes a total of $122.8 million.

Yes.

You're right that by the net sales of $1.144 billion and you get in non-GAAP gross margin.

Speaker #1: Capital expenditures were 36.5 million in the September quarter , and included approximately $20 million for a building purchase in India . Supporting our ongoing R&D activities in Bangalore .

Of 10 eight percentage points.

Speaker #2: Inventory days were 199 days . Our inventory over three quarters has gone down from 266 days to 251 days to 214 days to 199 days .

Subtracting it from the product gross margin of 67, 4%.

Of 10 eight percentage points.

Regarding non-GAAP gross margin of 56, 7%.

Speaker #1: We expect capital expenditures for fiscal year 2026 to be at or below $100 million , and depreciation expense in the September quarter was 39 million .

Subtracting it from the product gross margin of 67, 4%.

Which is what we reported.

The product gross margin remains very healthy.

We got in non-GAAP gross margin of 56, 7%.

Speaker #2: Underutilization in factories in September quarter was $51 million . The product gross margin in the September quarter was 67.4% , due to a rich product mix driven by data center products .

We still need to bring down inventory write offs and under utilization charges.

Speaker #1: I will now turn it back to Steve, who will provide some additional commentary on our September quarter results and our guidance for the December quarter.

Which is what we reported.

The product gross margin remains very healthy.

We are pleased to announce that we have entered into a purchase and sale agreement.

We still need to bring down inventory write offs and under utilization charges.

Speaker #1: Steve .

To sell our fab to wafer fabrication facility.

We are pleased to announce that we have entered into a purchase and sale agreement.

Speaker #2: Thanks , Eric . As you saw in the last quarter , our net sales continue to grow sequentially . We are continuing to see the inventory go down at distributors .

Located in Tempe, Arizona to a third party.

Speaker #2: We added $71.8 million of our new . We added $71.8 million of new inventory , write off , and $51 million of Underutilization charge makes a total of $122.8 million of charges .

The sale of this facility is part of our.

To sell ever fab to wafer fabrication facility.

Previously announced plan to restructure our wafer fabrication operations.

Located in Tempe, Arizona to a third party.

Speaker #2: At our distributors , customers , our direct customers , and contract manufacturers . The distributors sell in versus sell through GAAP did not shrink last quarter .

The sale of this facility is part of our.

Under this restructuring plan.

Previously announced plan to restructure our wafer fabrication operations.

Microchip completed the closure of fab two in May of 2025 and begin to transfer the process technologies from fab two two fab four in Gresham, Oregon, and fab five in Colorado Springs, Colorado.

Under this restructuring plan microchip completed the closure of fab two in May of 2025 and begin to transfer the process technologies from fab two.

Speaker #2: Divide that by the net sales of $1,000,000,140.4 million , and you get a non-GAAP gross margin impact of 10.8 percentage points . Subtracting it from the product gross margin of 67.4% .

Speaker #2: It was 49.3 million in the June quarter , and it was 52.9 million in the September quarter . The good thing about that is that distributor inventory went down even further .

Both of which facilities have ample clean room space for expansion there.

Fast forward in Gresham, Oregon, and Fab five in Colorado Springs, Colorado.

Speaker #2: We expect that the distribution sell in will eventually rise to meet the sell through over the next couple of quarters . Next is gross margin .

The transaction is subject to closing conditions and is expected to be completed in December 2025.

Botox, which facilities.

Speaker #2: We got a non-GAAP gross margin of 56.7% , which is what we reported . So the product gross margin remains very healthy . We still need to bring down inventory write offs and underutilization charges .

Ample clean room space for expansion.

Now, we have especially guests for you today let.

The transaction is subject to closing conditions and is expected to be completed in December 2025.

Let me introduce Brian Mckesson.

<unk> Vice President of our data Center solutions business unit.

Now, we have especially gifts for you today let.

Ryan will speak about our recent announcement of industry's first three nanometer base Pcie Gen six switch Brian.

Let me introduce Brian Mckesson.

Speaker #2: We are pleased to announce that we have entered into a purchase and sales agreement to sell our fab two wafer fabrication facility located in Tempe , Arizona , to a third party .

Vice President of our data Center solutions business unit.

Ryan will speak about our recent announcement of industries first three nanometer base Pcie Gen six switch Brian.

Thank you, Steve and good afternoon, everyone.

Speaker #2: The sale of this facility is part of our previously announced plan to restructure our wafer fabrication operations . Under this restructuring plan , microchip completed the closure of fab two in May of 2025 and begin to transfer the process technologies from fab two to Fab Four in Gresham , Oregon , and Fab Five in Colorado Springs , Colorado , both of which facilities have ample clean room space for expansion .

And the corporate Vice President and leader of the data Center solutions business unit at Microchip and today I'm excited to introduce you to the latest addition to our switch TEG family of products.

Thank you, Steve and good afternoon, everyone.

And the corporate Vice President and leader of the data Center solutions business unit at Microchip and today I'm excited to introduce you to the latest addition to our switch TEG family of products.

Our new Gen six Pcie switch announced on October 13th marks a significant milestone and micro chips technological leadership within the AI and enterprise data center infrastructure markets.

New Gen six Pcie switch announced on October 13th marks a significant milestone in microchips technological leadership within the AI and enterprise data center infrastructure markets.

The build out of AI data centers continues to accelerate with Hyperscale, there is committing to gigawatt scale deployment.

Speaker #2: The transaction is subject to closing conditions and is expected to be completed in December 2025 . Now we have a special guest for you today .

Some recent announcements of outlined single infrastructure projects in the five to 10 gigawatt range targeting completion between 2026 and 2027.

The build out of AI data centers continues to accelerate with Hyperscale is committing to gigawatt scale deployment.

Some recent announcements have outlined single infrastructure projects in the five to 10 gigawatt range targeting completion between 2026 and 2027.

Speaker #2: Let me introduce Brian McPherson , Corporate Vice President of our data center Solutions business unit . Brian will speak about our recent announcement of industry's first three nanometer based PCIe Gen six switch .

These developments are driving our current design engagement cycles.

It is critical to understand that regardless of whether our customers deploy Nvidia AMD Intel or custom Asics.

These developments are driving our current design engagement cycles.

It is critical to understand that regardless of whether our customers deploy Nvidia AMD Intel or custom Asics.

Speaker #2: Brian .

All require high performance Pcie switching infrastructure.

Speaker #3: Thank you . The build out of AI data centers continues to accelerate with hyperscalers committing to gigawatt scale deployments . Some recent announcements have outlined single infrastructure projects in the 5 to 10 gigawatt range , targeting completion between 2026 and 2027 .

This is where microchips Gen six switch tech products are designed to excel.

All require high performance Pcie switching infrastructure.

Speaker #3: today I'm excited to introduce you to the latest addition to our switch tech family of products . Our new Gen six PCIe switch announced on October 13th , marks a significant milestone in Microchip's technological leadership within the AI and enterprise data Center infrastructure markets .

Last month at the open compute project Global Summit in San Jose, California, We introduced the industry's first pcie Gen. Six switches manufactured using three nanometer process technology.

This is where microchips Gen six switch tech products are designed to excel.

Last month at the open compute project Global Summit in San Jose, California, We introduced the industry's first pcie Gen. Six switches manufactured using three nanometer process technology.

These new devices deliver four distinct competitive advantages.

First pcie six double the bandwidth to 64 Giga transfers per second per lane compared to Pcie, <unk> dato, eliminating GPU to storage memory, and CPU bottlenecks that constrained previous generations.

New devices deliver four distinct competitive advantages.

Our new Gentex switch features an industry, leading maximum of 160 lanes per device significantly increasing total data transfer capacity.

Speaker #3: developments are driving our current design engagement cycles . It is critical to understand that regardless of whether our customers deploy Nvidia , AMD , Intel or custom Asics , all require high performance PCIe switching infrastructure .

Our new Gen. Six switch features an industry, leading maximum of 160 lanes per device significantly increasing total data transfer capacity.

Second.

Our three nanometer implementation provides 15% to 20% power per lane advantage over competitors products developed on five nanometer and older technology nodes.

Second our.

Our three nanometer implementation provides 15% to 20% power per lane advantage over competitors products developed on five nanometer and older technology nodes.

Speaker #3: This is where microchip's Gen six switch tech products are designed to excel . Last month at the Open Compute Project , Global Summit in San Jose , California , we introduced the industry's first PCIe Gen six switches manufactured using three nanometer process technology .

This is critical when deploying hundreds of thousands of Gpus and switches and multi gigawatt datacenters.

Choosing microchip devices enabled customers to lower total power consumption without compromising performance.

This is critical when deploying hundreds of thousands of Gpus and switches and multi gigawatt data centers.

Third all our Gen six switch tech devices offer advanced device telemetry and multi cast capabilities, allowing a single GPU data packet to be transmitted to multiple devices simultaneously, thereby improving GPU efficiency.

Choosing microchips devices enables customers to lower total power consumption without compromising performance.

Speaker #3: These new devices deliver four distinct competitive advantages . First , PCIe six doubles the bandwidth to 64 giga transfers per second per lane , compared to PCIe 5.0 , eliminating GPU to These storage memory , and CPU bottlenecks that constrained previous generations .

And fourth.

We've implemented a secure boot based hardware root of trust that supports post quantum cryptography and is CSA two dot O. The commercial national security algorithms suite compliant meeting or exceeding both government and commercial security requirements. This represents industry leading.

And fourth we are implementing.

Speaker #3: Our new Gen six switch features an industry leading maximum of 160 lanes per device , significantly increasing total data transfer capacity . Second , our three nanometer implementation provides 15 to 20% power per lane advantage over competitors products developed on five nanometer and older technology nodes .

<unk> a secure boot based hardware root of trust that supports post quantum cryptography.

And as CSA, two dot O. The commercial National security algorithms suite compliant meeting or exceeding both government and commercial security requirements.

Device security.

We are now sampling these products to qualified customers and recent engagements have been validating both our technical approach and our market timing.

Represents industry, leading device security.

We are now sampling these products to qualified customers and recent engagements have been validating both our technical approach and our market timing.

From a financial perspective, we believe this represents a significant growth opportunity for the company.

Speaker #3: This is critical when deploying hundreds of thousands of GPUs and switches in multi gigawatt data centers . Choosing microchips devices enables customers to lower total power consumption without compromising performance .

AI servers require substantially more of pcie switching infrastructure than traditional servers to enable resource pooling and the composer both architectures that hyperscale demand.

From a financial perspective, we believe this represents a significant growth opportunity for the company.

AI servers require substantially more of pcie switching infrastructure than traditional servers to enable resource pooling and the composer both architectures that hyperscale demand.

Speaker #3: Third , all our Gen six switch tech devices offer advanced device telemetry and multicast capabilities , allowing a single GPU data packet to be transmitted to multiple devices simultaneously , thereby improving GPU efficiency .

Our total addressable market encompasses the entire data center pcie fabric not just a subset.

We are vendor agnostic selling into all data center and AI architectures.

Design win cycles, typically spanned 12 to 18 months from initial engagement to production aligning our current sampling activity with initial production starting in June 2026, and volume ramping towards the end of calendar year 2026.

Speaker #3: And fourth , we have implemented a secure boot based hardware route of trust that supports post-quantum cryptography and is CNSa 2.0 . The commercial national security algorithm suite compliant .

We are vendor agnostic selling into all data center and AI architectures.

Speaker #3: Meeting or exceeding both government and commercial security requirements , this represents industry leading device security . We are now sampling these products to qualified customers and recent engagements have been validating both our technical approach and our market timing .

Looking ahead, our Gen six switch tech devices position us to capture a meaningful share of the committed AI infrastructure buildout across three growth vectors Hyperscale training infrastructure.

Looking ahead, our Gen six switch tech devices position us to capture a meaningful share of the committed AI infrastructure build out across three growth vectors Hyperscale training infrastructure.

Enterprise AI training and inference deployments and.

Speaker #3: From a financial perspective , we believe this represents a significant growth opportunity for the company . AI servers require substantially more PCIe switching infrastructure than servers to enable resource pooling , and the composable architectures that hyperscalers demand .

In high performance computing applications.

I will pause here and turn the call over to Eric for comments about our financials Eric.

Enterprise AI training and inference deployments.

In high performance computing applications.

Thanks, Brian and good afternoon, everyone.

I will pause here and turn the call over to Eric for comments about our financials Eric.

We are including information in our press release and in this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip Dot Com and included reconciliation information in our earnings press release, which we believe you will.

Thanks, Brian and good afternoon, everyone.

Speaker #3: Our total addressable market encompasses the entire data center , PCIe fabric , not just a subset . We are vendor agnostic , selling into all data center and AI architectures , design win cycles typically span 12 to 18 months from initial traditional engagement to production , aligning

Find useful when comparing our GAAP and non-GAAP results.

We have also posted a summary of our outstanding debt and our leverage metrics on our website.

And useful when comparing our GAAP and non-GAAP results.

I will now go through some of the operating results, including net sales gross margin and operating expenses.

We have also posted a summary of our outstanding debt and our leverage metrics on our website.

Other than that sale that we'll 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 in our reconciliations on our website.

I will now go through some of the operating results, including net sales gross margin and operating expenses other.

Net sales in the September quarter were $1 4 billion, which was up 6% sequentially and $10 4 million above the midpoint of our September quarter guidance provided on August 7th.

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 56, 7%, including capacity underutilization charges of $51 million and new inventory reserve charges of $71 8 million.

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 56, 7%, including capacity underutilization charges of $51 million and new inventory reserve charges of $71 8 million.

Operating expenses were at 32, 4% of sales and operating income was 24, 3% of sales.

non-GAAP net income was $199 1 million and non-GAAP earnings per diluted share was 35.

Operating expenses were at 32, 4% of sales and operating income was 24, 3% of sales.

Which was <unk> <unk> above the midpoint of our guidance.

non-GAAP net income was $199 1 million and non-GAAP earnings per diluted share was <unk> 35.

On a GAAP basis in the September quarter gross margins were 55, 9% total operating expenses were five.

Which was <unk> <unk> above the midpoint of our guidance.

On a GAAP basis in the September quarter gross margins were 55, 9% total operating expenses were 549 million and included acquisition intangible amortization of $108 $1 million.

Special charges of $6 3 million, which was primarily driven by our activities associated with our closure of fab two.

Share based compensation of $53 3 million and $12 3 million of other expenses.

The GAAP net income attributable to common shareholders was $13 9 million or <unk> <unk> per share and was positively impacted by our settlement of an audit with the IRS dating back to fiscal year 2007.

Our non-GAAP cash tax rate was nine 5% in the September quarter.

We expect to record a non-GAAP tax rate of about 10.25% for all of fiscal year 2026, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Our.

<unk> balance at September 32025 was 1.1, 95 billion, which was down $73 $8 million from the balance at June 32025.

We had 199 days of inventory at the end of the September quarter, which was down 15 days from the prior quarter's level driven by our inventory reduction actions included in our September ending inventory was 16 days of long lifecycle and high margin products, whose manufacturing capacity has been end of life by our.

Our supply chain partners.

Inventory at our distributors in the September quarter was at 27 days, which was down two days from the prior quarter's level.

Distribution sell through was about $52 $9 million higher than distributions sell in.

Yes.

Our cash flow from operating activities was $88 1 million in the September quarter, our adjusted free cash flow was $38 $3 million in the September quarter and as of September 30th our consolidated cash and total investment position was $236 8 million.

Our total debt decreased by $82 million in the September quarter, and our net debt increased by $247 7 million.

Our adjusted EBITDA in the September quarter was $341 8 million and 30% of net sales or.

Our trailing 12 month adjusted EBITDA was 1.1 dollars 3 billion.

Our net debt to adjusted EBITDA was $4 69 at the end of the quarter.

Capital expenditures were $36 5 million in the September quarter and included approximately $20 million for a building purchase in India supporting our ongoing R&D activities in Bangalore.

We expect capital expenditures for fiscal year 2026 to be at or below $100 million.

And depreciation expense in the September quarter was $39 million.

I will now turn it back to Steve who will provide some additional commentary on our September quarter results and our guidance for the December quarter Steve.

Thanks, Alex.

As you saw in the last quarter.

<unk> net sales continued to grow sequentially.

We are continuing to see the inventory go down at the distributors.

Our distributors' customers.

Our direct customers and contract manufacturers the.

The distributors sell in versus sell through gap.

Did not shrink last quarter.

It was $49 3 million in the June quarter.

And it was $52 9 million in the September quarter.

The good thing about that is that distributor inventory went down even further.

We expect that the distributions sell in will eventually rise to meet the sell through over the next couple of quarters.

Next to gross margin.

As I described in my somebody earlier.

Other gross margins were very healthy at 67, 4%, but our inventories eidos and underutilization charges knockdown the non-GAAP gross margin to.

To 56, 7% with.

We still need stronger sales to drive down inventory write off.

And under utilization charges, however, our customers and distributors are taking advantage of short lead times and are continuing to drive down that inventory.

Now to the market environment.

We are seeing some recovery in our key end markets.

In automotive industrial and communication.

Data center, aerospace and defense and consumer.

They are all looking somewhat better.

The strongest sales performance last quarter was in the data center market, albeit from depressed levels as.

As the inventory at end customers and distributors corrected we saw a large increase in bookings and shipments.

Other gross margins were very healthy at 67, 4%.

Our inventory is eidos and underutilization charges knockdown, the non-GAAP gross margin to.

Our Gen four and Gen five products.

<unk> included PCI Pcie switches memory.

To 56, 7%, we still need stronger sales to drive down inventory write off.

Flash controllers storage and rail cars.

We believe we are extremely well positioned with our gen six pcie switch.

And under utilization charges.

However, our customers and distributors are taking advantage of short lead times.

With it being the only three nanometer based device.

Currently sampling and Hyperscale and enterprise data center customers.

Continuing to drive down that inventory.

Now to the market environment.

Beating our competition in virtually every specification metric.

We are seeing some recovery in our key end markets.

In automotive industrial and communication.

Now, let's get into our guidance for the December quarter.

Data center, aerospace and defense and consumers.

Backlog for the December quarter started lower.

And then the starting backlog for September quarter.

They are all looking somewhat better.

The strongest sales performance last quarter was in the data center market.

Bookings for July with a higher than bookings for any month in the last three years.

Albeit some depressed levels as.

August bookings were seasonally low.

As the inventory at end customers and distributors corrected.

But better than our expectations in September bookings were quite strong as expected and the best booking month in three plus years overall September quarters bookings were 10% higher.

A large increase in bookings and shipments.

Gen floater in Gen five products.

<unk> included PCI Pcie switches memory.

Flash controllers storage and rail cars.

And then those of June quarter, the book to Bill ratio for the last quarter was 1.6.

We believe we are extremely well positioned with our gen six pcie switch.

October bookings were higher than July.

With it being the only three nanometer based device.

So we have a good start to this quarter's bookings in November bookings, so far are very strong.

Currency sampling in Hyperscale and enterprise data center customers.

Embedded in these strong bookings is the observation that.

Beating our competition in virtually every specification metric.

That customers and distributors are scheduling these for March delivery.

Now, let's get into our guidance for the December quarter.

And are continuing to lower the inventories into this calendar year end.

Backlog for the December quarter started lower.

A comment about lead times.

Then the starting backlog for September quarter.

While lead times for our products had been four to eight weeks for some time.

Bookings for July with a higher than bookings for any month in the last three years.

We are continuing to experience lead times bounce off the bottom and are experiencing increases on some of our products, we're running into challenges in certain kind of substrates and subcontracting capacity and also some foundry constrains on very advanced nodes.

August bookings were seasonally low.

But better than our expectations in September bookings were quite strong as expected and the best booking month in three plus years overall September quarters bookings were 10% higher than those of June quarter. The book to Bill ratio for the last quarter was one point or <unk>.

These challenges remain isolated to specific areas.

Our customer request.

Six.

Expedited shipments have increased significantly from a couple of quarters ago, pointing to some customers inventory is running low.

October bookings were higher than July so.

So we have a good start to this quarter's bookings in November bookings, so far are very strong.

I also want to remind investors that December is seasonally our weakest sales quarter of the year Andy.

Embedded in these strong bookings is the observation that.

That customers and distributors are scheduling these for March delivery.

And it's typically down low to mid.

Single digit sequentially.

And are continuing to lower the inventories into this calendar year end.

This is mainly due to a lot of holidays in the quarter and our customers shutting down their factories during the holidays.

A comment about lead times.

All of these factors into account, we expect our net sales for the December quarter to be 112, 9 billion plus or minus $20 million.

While lead times for our products have been four to eight weeks for some time.

We are continuing to experience lead times bounce off the bottom.

Which would be down 1% sequentially at the midpoint.

And are experiencing increases on some of our products, we're running into challenges in certain kind of substrates and subcontracting capacity and also some foundry constrains on very advanced nodes.

We expect our non-GAAP gross margin to be between 57, 2% and 59, 2% of sales.

We expect our non-GAAP operating expenses.

These challenges remain isolated to specific areas.

To be between 32, 3% and 32, 7% of sales.

Our customer request for expedited shipments have increased significantly from a couple of quarters ago, pointing to some customers inventory is running low.

And we expect our non-GAAP operating profit to.

To be between 24, 5% and 26, 9% of sales, we expect our non-GAAP diluted earnings per share.

I also want to remind investors that December is seasonally our weakest sales quarter of the year.

To be between 30 <unk> and.

And it's typically down low to mid.

40.

I want to highlight the operational discipline in our business model.

Single digit sequentially.

This is mainly due to a lot of holidays in the quarter and our customers shutting down their factories during the holidays.

Despite this seasonally challenging December quarter with expected slightly lower revenues.

Taking all of these factors into account, we expect over net sales for the December quarter to.

Our operational improvements that are expected to deliver strong profit performance non-GAAP operating profit is projected to increase by over $13 million sequentially at the midpoint of our guidance.

To be 112, 9 billion, plus or minus $20 million, which would be down 1% sequentially at the midpoint.

We expect our non-GAAP gross margin to be between 57, 2% and 59, 2% of sales.

This operational discipline is evident in our business model is the ability.

To deliver significant flow through of incremental revenue to operating profit and normal business environments.

We expect over non-GAAP operating expenses.

To be between 32, 3% and 32, 7% assumes.

We are only providing one quarter of guidance and that is for this current December quarter.

And we expect our non-GAAP operating profit could.

Could be between 24, 5% and 26, 9% of sales, we expect our non-GAAP diluted earnings per share.

Which is seasonally the weakest sales quarter of the year with a lot of holidays and customer shutdowns.

We currently expect three strong quarters March June and September 2026 March quarter backlog is currently strong and we currently expect the March quarter sales to be stronger than seasonal low single digit up sequentially.

To be between 30 <unk> and.

40.

I want to highlight the operational discipline and our business model.

Despite this seasonally challenging December quarter with expected slightly lower revenues.

Finally, a comment on our capital return program for shareholders. Starting this quarter, we expect our adjusted free cash flow to be roughly even with our dividend payment driven by increasing profitability low capex and liberating cash mentality in future quarters as we have excess.

This operational discipline is evident in our business model is the ability.

Free cash flow above dividends, we intend to use this to bring down our borrowings with that operator will you. Please poll for questions.

To deliver significant flow through of incremental revenue to operating profit and normal business environments.

Thank you we will now conduct a question and answer session.

We are only providing one quarter of guidance and that is for this current December quarter.

I'd like to ask a question. Please press star one on your telephone keypad.

Which is seasonally the weakest sales quarter of the year with a lot of holidays and customer shutdowns.

Information tone will indicate your line is in the question queue.

You May press star two to remove yourself from the queue.

We currently expect three strong quarters March June and September 2026 March quarter backlog is currently strong and we currently expect a march quarter sales to be stronger than seasonal low single digit up sequentially.

Ask all callers to limit themselves to one question and one follow up for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for our first question.

The first question comes from Chris Caso with Wolfe Research. Please proceed.

Finally, a comment on our capital return program for shareholders. Starting this quarter, we expect adjusted free cash flow to be roughly even with our dividend payment driven by increasing profitability low capex and liberating cash inventory in future quarters as we have excess.

Yes, thanks, good evening.

I guess to start <unk>.

Maybe you could characterize.

What youre seeing now versus.

What you saw 90 days ago at that time.

Did talk about.

The expectations for better than seasonal growth in both the December and March quarter. It sounds like December is on the better end of normal seasonality, but.

Free cash flow above dividend, we intend to use this to bring down our borrowings with that operator will you. Please poll for questions.

Yes.

Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

How do you feel now against against what you thought 90 days ago.

So I think as.

As you have seen through the.

Information tone will indicate your line is in the question queue.

Industry announcements.

You May press star two to remove yourself from the queue. We ask all callers to limit themselves to one question and one follow up for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for our first question.

If our peers and competitors.

The total business environment.

You know it has taken a slightly softer tone.

I think you saw that through most of this earning season.

The first question comes from Chris Caso with Wolfe Research. Please proceed.

Others are really no different even though.

Yes, thanks, good evening.

Our December quarter guidance is better than seasonal.

I guess to start <unk>.

Seasonal would be minus three to minus 5% sometime minus 5%.

Maybe you could characterize.

What youre seeing now versus.

And we're only down minus one <unk>.

What you saw 90 days ago at that time.

If you go back six to nine months ago.

Did talk about.

I would have expected to continue to have small sequential growth even in the December quarter, but number one the overall softer tone in the business environment and number two some impact of.

The expectations for better than seasonal growth in both the December and March quarter. It sounds like December is.

On the better end of normal seasonality, but.

What.

How do you feel now against against what you thought 90 days ago.

Tariffs on.

Customer psyche and people don't know when to make capital investments or not and people are holding back I think combination of all those things have.

So I think as.

As you have seen through a lot of industry announcements.

Peers and competitors.

Led to this guidance we have given now if you look at the last quarter bookings.

The total business environment.

Has taken a slightly softer tone.

You ordinarily wouldn't think so bookings were 10% higher.

I think you saw that through most of this earning season.

And if you had kept getting the tons at the pace, we were getting in the prior quarter September quarter would be December quarter would be a lot higher.

And our said really no different even though.

Our December quarter guidance is better than seasonal.

But as I mentioned in my comments.

Seasonal would be minus three to minus 5% sometime minus 5% and we only down minus one I think if you go back six to nine months ago.

We observe that.

Customers scheduling these bookings for March quarter.

And are continuing to decrease the inventory on their balance sheet, leading up to their year end.

I would have expected to continue to have small sequential growth even in the December quarter, but number one the overall softer tone in the business environment and number two some impact of.

Distributors as well as the customers. So this is sort of the.

Strange push pull that's going on in the market. So we think we need to just hunker down for this one quarter, which is the weakest quarter of the year and then we have strong momentum going into March and should be.

Tariffs on.

Customer psyche and people don't know when to make capital investments or not and people are holding back I think combination of all those things have.

Back to back from several good quarters.

Led to this guidance we have given now.

Understood.

Now if you look at the last quarter bookings.

As a follow up to that.

You mentioned that the product gross margins were holding up but obviously the charges are what's weighing on the gross margins could you give us an update on what you expect from both the inventory reserve charges and Underutilization charges as you go through with with presumably those those.

Ordinarily, we wouldn't think so bookings were 10% higher.

And if we had kept getting the tons at the pace, we were getting in the prior quarter September quarter would be December quarter would be a lot higher.

But as I mentioned in my comments.

We observed that.

Next four quarters as you get into next year.

Customers scheduling these bookings for March quarter.

How quickly can some of those charges start to roll off.

And are continuing to decrease inventory on their balance sheet, leading up to their year end.

So we in general.

Don't know and don't guide.

Distributors as well as the customers. So this is sort of.

Those things for the future quarters, we just kind of look back and guide the actual that we experienced in the quarter.

Strange push full electrical hang on in the market. So we think we need to just hunker down for this one quarter, which is the weakest quarter of the year and then we have strong momentum going into March and should be.

Current quarter is sequentially down 1% so.

It's harder to make a whole lot of impact when you assume that actually.

Minus one.

Back to back from several good quarters.

We are looking for just a few days of reduction in inventory.

Understood.

And then I don't really have guidance on utilization or.

As a follow up to that.

Inventories either from the current quarter, but if I look at it over the next several quarters.

Leading into stronger quarters of March June and September.

We currently.

You expect to start.

Ramping our factories at some point in time start hiring people late in this quarter and then start ramping the factories. So as you ramp the factories, because the inventories coming down and as you ramp the factories that will lead to lower under utilization.

Next for our quarters as you get into next year, how quickly can some of those charges start to roll off.

So we in general.

Don't know and don't guide.

And regarding inventory write off.

Those things for the future quarters, we just kind of look back and guide the actual that we experienced in the quarter.

The products, we are writing off now.

Is not from excess bid if you go back a year ago year and a half ago.

Current quarter is sequentially down 1% so.

It's harder to make it a whole lot of impact when you assume that actually.

We were building lots of excess product above the fifth factory footprint was very large.

Linus one we are looking for just a few days a reduction in inventory.

And we were writing off product because this.

And then I don't really have guidance on utilization or inventory.

Even though <unk>, especially built product was really in excess of demand.

Inventories either from the current quarter, but if I look at it over the next several quarters.

<unk>, that's not happening today.

Leading into stronger quarters of March June and September.

Our utilization in our internal Fabs is quite low actually and inventories coming down.

We currently have.

Expect to start.

What's happening is.

A lot of the product we built two years ago based on customer demand.

In many cases, our mix has shifted.

And some of that product is slower moving so once it becomes two years old.

We have to write off.

And regarding inventory write off.

The rest of the products so that is what's driving.

The products, we are writing off now.

Some of these write offs in every quarter.

He is not from excess bid if you go back a year ago year and a half ago.

The sales of zero on those products, they will sell off but they are not selling it at pace, which would.

We were building lots of excess product above the factory footprint was very large.

Prevent them some of it from being written off so I think neither case we are.

And we were writing off product because just.

We are really in the eighth or ninth inning on this entire.

Even the freshly freshly built product was really in excess of demand significantly that's naturally happening today.

Inventory write off as well as the under utilization.

This one quarter, which is the weakest quarter of the year is going to hurt.

Our utilization in our internal Fabs is quite low actually and inventories coming down.

Sort of where it falls in the year.

But after this quarter.

Quite optimistic that we're going to have back to back good quarter, then we will make meaningful difference in.

What's happening is.

A lot of the product we built two years ago.

Based on customer demand.

Inventory inventory write offs and utilization.

In many cases the mix has shifted.

I think I think I'll, just add a little bit to what Steve said, So we did talk about how our plan was to ramp output out of the wafer fabs in the December quarter, we are still doing that so it is increasing.

Some of that product is slower moving so once it becomes two years old.

We have to write off.

The rest of the products so that is what's driving.

Some of these write ups in every quarter.

The sales of zero on those products, they will sell off but they are not selling it at pace, which would.

The impact on Underutilization charges in the current quarter will be will be modest there'll be down, but just ever so slightly and then yeah. Our assumption is that the inventory reserves will come down, but as Steve said it is hard to predict but we are guiding.

Prevent them some of it from being written off so I think in either case, we are.

We're really in the $8 to 90 inning on this entire.

A pretty nice sequential increase in the non-GAAP gross margins to like 58, 2% at the at the midpoint of guidance. So we are still seeing some benefit there.

Inventory write off as well as the under utilization.

This one quarter, which is the weakest quarter of the year is going to hurt.

In a tough quarter.

Thank you.

Sort of where it falls in the year.

But after this quarter.

Thank you. Our next question comes from Tim Arcuri with UBS. Please proceed.

Quite optimistic that we're going to have.

Back to back good quarter, then we will make a meaningful difference in.

Hi, Thanks, Steve So I wanted to understand just kind of what's going on I know, it's sort of this weird environment, where December soft, but that people are looking out into next year and you can kind of see it in the backlog I know you stopped giving backlog break out from the filings but in March your current backlog was very low and a lot of it's parked in.

Inventory inventory write offs and utilization.

L TSA still so what what are these <unk>, what I mean, it's coming down very slowly why why is it taking so long to bring these down.

If customers want product I would think that like what's the point of parking stuff out in March and June.

And giving you visibility in the near term.

A pretty nice sequential increase in the non-GAAP gross margins to like 58, 2% at the at the midpoint of guidance. So we are still seeing some benefit there.

We don't have any more lts is out there.

When I when I came back last year, we actually here this month.

Very rapidly we dismantled our.

In a tough quarter.

Thank you.

Of our program and essentially removed.

Thank you. Our next question comes from Tim Arcuri with UBS. Please proceed.

Many of the customers obligations on these long term projects and.

Hi, Thanks, Steve So I wanted to understand just kind of what's going on I know, it's sort of this weird environment, where December soft, but but people are looking out into next year and you can kind of see it in the backlog I know you stopped giving backlog breakouts in the filings but in March your current backlog was very low and a lot of its parking.

We took some cancellations we push outs we.

Essentially allowed the customer to reset their backlog so theres no impact on lts sit today customers are not hitting named product they do not need.

But Dave let me just let me just and certain one thing there Steve. So so that you are referring to PSP. We still have some of these <unk> in place and we've been flexible with customers in terms of pushing out their requirements. They might have put in a five year expectation with us.

L TSA still so what what are these <unk>, what I mean, it's coming down very slowly why why is it taking so long to bring these down in <unk>.

If customers want product I would think that like what's the point of parking stuff out in March and June.

And we aren't holding them accountable for taking that inventory and allowing flexibility to push that out by a year or two or two years whatever they need to keep that engagement is strong and that that's what Tim was referring to that he sees in our public filings on the <unk>. So they are coming down but coming down slowly.

And giving you know visibility in the near term.

We don't have any more lts is out there.

When I when I came back last year, we actually here this month.

Very rapidly we dismantled our.

Okay. So I was meaning that we dismantle the PSP program.

Program and essentially removed.

And on the Lts is.

We're not forcing customers to buy anything that they do not need.

Many of the customers obligations on these long term projects and.

We took some cancellations we push outs we.

We are basically being very flexible they can buy what they need and we're not forcing them to buy what they don't need.

Essentially allowed the customer to reset their backlog so theres no impact on lts. It today customers are not named product they do not need but Dave Let me just let me just and certain one thing there Steve So so that you're referring to PSP, we still have some of these LTE assays in place.

So that's not really causing any kind of problem I think this is just.

I would have hoped that with.

Where the customers inventories are low they will take <unk>.

Substantial intake had direct customers as well as distributors in the December quarter, but what we are observing is we're getting strong bookings with the scheduling it in March.

And we've been flexible with customers in terms of pushing out their requirements. They might have put in a five year expectation with us.

And just just.

And we aren't holding them accountable for taking that inventory and allowing flexibility to push that out by a year or two years two years, whatever they need to keep that engagement strong and thats, what Tim is referring to that he sees in our public filings on the <unk>. So they are coming down but coming down slowly.

Basically lead times are fairly short and they're taking chances and driving the inventory lower than ours.

I would have thought they would do.

Got it so I guess I guess just from a perspective of like what the point is have you been having these LTI change there because they are barely coming down actually so.

Okay. So I was meaning that we dismantle the PSP program.

And on the Lts is.

We're not forcing customer to buy anything that they do not need.

So really the only thing that matters is kind of the current portion of whats I mean, youre not disclosing backlog anymore, but but the current portion as of March was actually pretty small so so the LTE SaaS like what's the point of even having them if they don't provide you any.

We are basically being very flexible they can buy what they need and we're not forcing them to buy what they don't need. So that's so that's not really causing any kind of problem. I think this is just.

Coverage in a quarter like December.

I would have hoped that with.

It basically incentivize the customer to continue to design with us.

Where the customers inventories are low they will take <unk>.

If you are sitting on.

Substantial intake at direct customers as well as distributors in the December quarter, but what we are observing is we're getting strong bookings with the scheduling it in March.

A push where they can use a part of that could use <unk> nxp's part and they're equally good and places us similar.

And just just.

If they have an LTE is still with us I think that breaks the push so those kind of benefits and engagement.

Basically lead times are fairly short.

Theyre, taking chances and driving the inventory lower than ours.

But in general.

Would have talked they would do.

It's no longer providing us any extra visibility and we're not forcing the customer to take the product they don't need.

Got it so I guess.

Yes.

Just from the perspective of like what the point is have you been having these LTE assays there because they are barely coming down actually so.

Yes.

What got us into the trouble in the first place.

Right one thing I want to clarify Tim is we have not changed anything in terms of what we disclose in terms of backlog that is a requirement that we put that number in our 10-K. So we do that once a year, but it has never been disclosed.

So really the only thing that matters is kind of the current portion of whats I mean, youre not disclosing backlog anymore, but but the current portion as of March was actually pretty small so so the LTE assays like what's the point of even having them if they don't provide you any.

My recollection, and our quarterly 10-Q filings once a year thing that we do with the 10-K filing.

Coverage in a quarter like December.

Basically incentivize the customer to continue to design with us.

It wasn't the Q actually.

Last last year, but totally totally get it. Thanks. Thanks, so much.

If you are sitting on.

A push where they can use our part or they could use <unk> nxp's part and they're equally good and places us.

The next question comes from Vivek Arya with Bank of America. Please proceed.

Alright. Thank you for taking my question, Steve I'm curious, what's driving your confidence to expect the next three quarters to be above seasonal your lead times are still know there are so many macro crosscurrents and most of your peers. As you mentioned founded listen more defensive than we're hesitant to guide more than that.

<unk>.

If they have an LTE is still with us I think that breaks the push.

So those kind of benefits and engagement.

But in general.

It's no longer providing us any extra visibility and we're not forcing the customer to take the product they don't need.

Yes.

Current quarter. So I'm curious what are you seeing that theyre not seem to suggest that the next three quarters would be about season.

Eric what got us into the trouble in the first place.

One thing I want to clarify Tim is we have not changed anything in terms of what we disclose in terms of backlog that is a requirement that we put that number in our 10-K. So we do that once a year, but it has never been disclosed to my recollection, and our quarterly 10-Q filings.

So.

March quarter is driven by just the visibility of the backlog.

If you look at our backlog today.

For our March quarter.

And compare it to what the December quarter backlog was.

Once a year thing that we do with the 10-K filing.

On August.

Six I think that would be a one quarter difference right.

It wasn't the Q actually.

Last last year, but totally totally get it. Thanks. Thanks, so much.

The backlog for March quarter today is much higher than December quarter backlog of wells on August six.

Yeah.

The next question comes from Vivek Arya with Bank of America. Please proceed.

And bookings that are coming in it's turns component into the March quarter is very strong so march quarter.

Alright. Thank you for taking my question, Steve I'm curious, what's driving your confidence to expect the next three quarters to be above seasonal your lead times are still low and.

My comment is largely driven by visibility and the rate of bookings and turns now beyond that I think.

There are so many macro crosscurrents and most of your peers.

I think customers are.

Mentioned sounded a little more defensive and we're hesitant to guide more than the current quarter and so I'm curious what are you seeing that they are not seem to suggest that the next three quarters will be above seasonal.

Stretching their neck little bit distributors to buy.

Taking inventory down this quarter, which really this should not.

In many cases with the inventories low enough, but there.

So.

Physically dressing up their balance sheet for the end of the quarter.

March quarter is driven by just the visibility of the backlog.

And then once the product in March with the customers' inventory, having come down significantly and distributor inventory coming down Cigna.

If you look at our backlog today.

For our March quarter.

And compare it to what the December quarter backlog was.

Significantly there is still a $50 million gap in sell in and sell through which we think some real correcting March and the balance will connect in June probably.

On August.

Fixed so I think that would be a one quarter difference right.

The backlog for March quarter today is much higher than December quarter backlog of wells on August six.

And then the rate of bookings is likely to continue as customers replenish their inventories so my altar quarter comment.

And bookings that are coming in it's turns component into the March quarter is very strong so march quarter.

Commentary is driven by <unk>.

<unk>.

The inventory will even get lower and they will need the product for June quarter and September quarter in June and September quarter are historically, our two strongest quarters of the year.

My comment is largely driven by visibility.

And the rate of bookings and turns now beyond that I think.

I think customers.

They were both up nicely this year and.

Stretching the next little bit distributors to buy.

And many times it up usually even in softer years. So so I'm less concerned about June and September and March quarter is driven by the visibility.

Taking inventory down this quarter, which really this should not.

In many cases with the inventories low enough, but theyre physically dressing up their balance sheet for the end of the quarter.

And for my follow up gross margins are going up nicely in.

And then once the product in March with the customers' inventory, having come down significantly and distributor inventory coming down.

December is that mostly utilization driven I think on the last call or before that you had mentioned that you expected to take utilization up by 15%, 20% I'm wondering what level are you taking it up and do you.

<unk> there is still a $50 million gap in sell in and sell through.

Which we think some will correct in March and the balance will correct in June probably.

Secondly, and cleans it again in March and then like a target level of inventory.

And then the rate of bookings is likely to continue as customers replenish their inventories so my out a quarter.

In dollars our days that that we should think about.

On David's point.

Be more careful but taking utilization up further thank.

Commentary is driven by <unk>.

Thank you Eric can you take.

Yes.

Yeah.

The inventory will even get lower and they will need the product for June quarter and September quarter in June and September quarter, historically, our two strongest quarters of the year.

Sure.

We are essentially managing our manufacturing output.

On a weekly monthly basis, and so they're not going to break out the percentages that we're going to increase but we're shipping.

They were both up nicely this year and.

And many times it up.

Usually even in softer years, so so I'm less concerned about June and September and March quarter is driven by the visibility.

Out of our factories, an amount that is significantly higher than what we are producing and so we can't we can't let that get too out of whack. So because we just can't ramp of factories Super quickly. So it will be over time. So I would expect that we will continue to ramp the fabs that those are decisions that we can make as we.

And for my follow up gross margins are going up nicely in.

Go through each month, and look at the environment, and see where inventory and backlog and revenue expectations are.

To increase it again in March and then like a target level of inventory.

The second part of your question was what I'm sorry.

Do you expect to increase it again.

In dollars our days that that we should think about.

In.

March I think if you would expecting several above seasonal quarter. Then does it mean that there is an expectation that you will continue to.

On David's point.

Be more careful with taking utilization up further thank you Eric can you take.

Increasing utilization, yes, we will need to continue to ramp the factories overtime. It probably won't be a steady increase thats just going to depend on the environment, but in the case that March June and September have revenue growth, we would definitely be doing that.

Yes, I mean, we're.

We are essentially managing our manufacturing output.

On a weekly monthly basis, and so they're not going to break out the percentages that we're going to increase but we're shipping.

Okay. Thank you.

Out of our factories, an amount that is significantly higher than what we are producing and so we can't we can't let that get too out of whack. So because we just can't ramp the factories Super quickly. So it will be over time. So I would expect that we will continue to ramp the fabs that those are decisions that we can make as we.

The next question comes from Joe <unk> with Wells Fargo. Please proceed.

Yes, thanks for taking the question.

So if you could comment is there any specific end markets that you can point to that youre seeing this kind of push pull more than others.

Go through each month, and look at the environment, and see where inventory and backlog and revenue expectations are.

I don't really know if it can be.

And market specific.

But the second part of your question was what I'm sorry.

Commentary on it I think were getting bookings.

Do you expect to include it again.

Across the board on most segments bookings are fairly strong.

In.

March if you're expecting several above seasonal quarter, then does it mean that there is an expectation that you will continue to.

But bookings.

Liberty requested in the March quarter.

Increased utilization, yes, we will need to continue to ramp the factories overtime.

Leaving the December quarter as put our guidance.

It wont be a steady increase it's just going to depend on the environment, but in the case then March June and September have revenue growth.

Yes, we don't break we don't break out end markets on a quarterly basis.

Little more difficult for us to track and we break it out once a year, but it seems like this is a pretty broad based phenomenon that we're seeing.

We would definitely be doing that.

Thank you.

The next question comes from Joe <unk> with Wells Fargo. Please proceed.

Okay fair enough.

And then on the.

On the Gen six pcie switch offering.

Yes, thanks for taking the question.

Curious if you could comment is there any specific end markets that you can point to that youre seeing this kind of push pull more than others.

You talked about.

Maybe tightness at leading edge wafers.

Curious being at three nanometer, what's your kind of line of sight in terms of wafer availability as you look to ramp that in the second half of next year.

I don't really know if it can be and.

Brian.

And market specific.

Yes, so we.

Commentary on it I think were getting bookings.

We see a really healthy long term strategic relationship with our foundry supplier and three nanometer which is TSMC.

Across the board on most segments bookings are fairly strong.

But bookings are delivery requested in the March quarter.

<unk>.

We believe we have.

The line of sight to the capacity that's needed to support our customer needs.

Leaving the December quarter.

But our guidance.

Yes, we don't break we don't break out end markets on a quarterly basis, and it's a little more difficult for us to track and we break it out once a year, but it seems like this is a pretty broad based phenomenon that we're seeing.

Thank you.

The next question comes from Blayne Curtis with Jefferies. Please proceed.

Hey, good afternoon, guys I wanted to just ask maybe I had this wrong I thought that the inventory charges were supposed to go away pretty sharply and at the end of the fiscal year I guess, you're guiding to it to continue in December So I guess, what changed I guess as forecast start going up I thought that the kind of the level of inventory would match the increased forecast and you wouldn't have.

Okay Fair enough and then on the Gen six pcie switch offering.

You talked about.

Maybe tightness at leading edge wafers.

Being at three nanometer, what's your kind of line of sight in terms of wafer availability as you look to ramp that in the second half of next year.

This charge I know youre, saying the mix is now a difference or is that what's changed and kind of how.

Brian.

Obviously these inventory charges.

Yes so.

We see a really healthy long term strategic relationship with our foundry supplier and three nanometer which is TSMC.

Okay.

Could be.

With this.

Weak quarter of December we've got to get through.

But after that I think we should.

And.

We believe we have.

The stronger quarters start to sell the inventory significant inventory and have the charges really start to drop.

The line of sight to the capacity thats needed to support our customer needs.

Sure.

Honestly I expected charges through drop little more than they have.

Thank you.

The next question comes from Blayne Curtis with Jefferies. Please proceed.

And this week quarter isn't helping.

But I still feel that the inventory charges will come down rapidly.

Hey, good afternoon, guys I wanted to just ask maybe I had this wrong I thought that the inventory charges were supposed to go away pretty sharply and at the end of the fiscal year I guess youre guiding to it to continue in December So I guess, what changed I guess as forecasts are going up I thought that the kind of the level of inventory would match the increased forecast and you wouldn't have.

Year over year sales growth improve.

That's the key thing and I have talked about it before because you take the prior to one year of sales.

And multiplied by one and a half to get 18 months equivalent and then you compare your inventory to that number.

This charge I know you are seeing the mix is now a difference was that what's changed and kind of how how far obviously these inventory charges extent.

And if your inventory is higher than that number then you have to write up the balance.

So while our sales have been improving in the last two quarters our year over year sales have been negative. So every quarter. The last 12 months sales have been coming down.

I think with the.

With this.

Weak quarter of December we've got to get through.

But after that I think we should.

And therefore.

And the stronger quarters start to sell the inventory significant inventory and have the charges really start to drop.

It's 18 months equivalent has been coming down and Thats, what kind of has been driving some of the inventory charges.

Honestly I expected charges to drop a little more than they have.

And starting this December quarter that phenomenon has reversed.

And this week quarter isn't helping.

Year over year.

Starting to grow when that happens I think it will have impact on.

But I still feel that the inventory charges will come down rapidly.

The year over year sales growth improve so I think thats, the key thing and I've talked about it before.

Write offs inventory write offs coming down.

Thanks, and then just to wrap some math behind that I guess, the current impact is around call. It 5% 10 ish points of gross margin. So you said it should come down over the next several quarters, so that the right way to kind of add back that four 5% headwind.

Because you take the prior to one year of sales.

And multiplied by $1 five to get 18 months equivalent and then you compare your inventory to that number.

And if your inventory is higher than that number then you have to write off the balance so.

The 58 that you just guided to and then I'm, assuming utilization would help by a few points as well as the right way to frame gross margin over the next couple of quarters four quarters.

So while our sales have been improving in the last two quarters our year over year sales have been negative. So every quarter. The last 12 months sales have been coming down.

That's exactly the right way to frame. So if you look at for September quarter.

Add the underutilization in the inventory charges, they added up to $122 8 million.

And therefore.

It's 18 months equivalent has been coming down and Thats, what kind of has been driving some of the inventory charges.

And on the right. The <unk> revenue that was 10 eight percentage point impact.

And starting this December quarter that phenomenon has reversed.

Zinc.

As those charges come down.

Year over year.

Starting to grow when that happens I think it will have impact on.

Gross margin comes down and goes up dollar for dollar essentially and Thats had a path to a 65% gross margin should the product gross margin last quarter was 67 four.

Write offs inventory write offs coming down.

Thanks, and then just to wrap some math behind that I guess, the current impact is around call. It 5% 10 ish points of gross margin. So you said it should come down over the next several quarters. So is that the right way to kind of add back that four 5% headwind.

From a product gross margin standpoint, we'd actually ahead of.

Longer term target, but we just got to just kind of half of these charges need to come down.

And current soft quarter isn't helping but I think we will regain momentum starting in the March quarter.

The.

58 that you just guided to and then im assuming utilization would helped by a few points as well as the right way to frame gross margin over the next couple of quarters four quarters.

Thanks, Steve and we've said this publicly about that.

That $71 8 million charge, we have this last quarter that that charge never goes to zero. There is always some level of inventory reserves that are taken.

That's exactly the right way to frame. So if you look at for September quarter.

Add the under utilization and the inventory charges, they added up to $122 8 million.

We do believe that at some point in the future. We will we will start to get a benefit of selling through.

And on the right the bed revenue there was 10 eight percentage point impact.

A higher level of what's previously been written off we just don't have line of sight to that and that is hard to predict but.

I think.

As those charges come down.

There is always some level of charge.

Gross margin comes down goes up dollar for dollar essentially and that sort of path to a 65% gross margin to the product gross margin last quarter was 67 four.

Okay.

The next question comes from harsh Kumar with Piper Sandler. Please proceed.

Yes.

<unk>.

Our analog business in September quarter, the analog business was a little bit slow to catch up most of the sales came from microcontroller on the incremental side is that how you see the December quarter shaking out or do you expect a little bit more even contribution from like a similar percentage contribution from.

From a product gross margin standpoint, we're actually ahead of.

Longer term target, but we just got to just kind of help these charges need to come down.

And current soft quarter isn't helping but I think we will regain momentum starting the march quarter.

MCU and analog.

Thanks, Steve and we've said this publicly but that that $71 8 million charge. We have this last quarter that that charge never goes to zero. There is always some level of inventory reserves that are taken and that we do believe that at some point in the future. We will we will start to get the benefit of selling through.

Harsh if you look at the June quarter, those things will reverse.

Growth was stronger than the microcontroller growth was and either you or somebody else asked exact same question that analog grew more and.

Microcontroller grew less and is over 212 is that what you will see in September quarter and September quarter. The reverse microcontroller did better than analog did work for these to go back and forth. I think these are both larger product lines and thousands and thousands of customers.

A higher level of what's previously been written off we just don't have line of sight to that and that is hard to predict but there's always some level of charge.

Yes.

The next question comes from harsh Kumar with Piper Sandler. Please proceed.

Just everything is not perfectly linear and in some quarters, one is higher for the quarter different one is higher.

Yes, Hey, Steve.

<unk>.

Analog business in September quarter, the analog business was a little bit slow to catch up most of the sales came from microcontroller on the incremental side is that how you see the December quarter shaking out or do you expect a little bit more even contribution from like a similar percentage contribution from.

Fair enough. Thanks for that color, Steve and then when I think of at least I think a micro chip I don't think of it.

Three nanometer leading edge products says something that you are focused on your obviously highlighting each year on the earnings call is this a sort of a strategic shift where youre targeting more of leading edge data center products.

MCU and analog.

Harsh if you look at the June quarter, those things will reverse.

Just some color on your strategy would be helpful. Yes.

No analog growth was stronger than the microcontroller growth was.

Yes, you should absolutely take that as a strategic shift.

Either you or somebody else asked the exact same question that analog grew more than now.

We hired Brian Mckesson into microchip.

Microcontroller grew less in it over Q1, two is that what you will see in September quarter and September quarter. The reverse microcontroller did better than analog did work for this to go back and forth. I think these are both larger product lines and thousands and thousands of customers.

After I came back last year, I think Brian you joined us and when exactly.

January of this year.

January of this year as the logistic couple of months later.

Brian is focused on.

Getting our data center products to state of the art and market positioning and this one.

Just everything is not perfectly linear and in some quarters, one is higher for the quarter different money.

The three nanometer.

Fair enough. Thanks for that color, Steve and then when I think of at least I think microchip I don't think of it.

Gen six switch tack device as opposed to one.

And you'll see a series of new devices coming in from this business unit.

Three nanometer leading edge products says something that you are focused on your obviously highlighting it here on the earnings call is this a sort of a strategic shift where youre targeting more of leading edge data center products.

All state of the art products to gain significant share in the fast growing data center market now we are.

<unk>.

This is not the only place we're putting attention.

We also formed a AIA business unit I think I talked about it some time ago.

Just some color on your strategy would be helpful. Yes.

Yes, you should absolutely take that as a strategic shift.

And.

This was just a few months ago, so you'll be getting some updates on what's going to come out of that group.

We hired Brian Mckesson into microchip.

We're also putting a lot of effort into our FPGA business unit.

After I came back last year, I think Brian you joined us when exactly.

You'll be hearing some new product announcements.

January of this year.

In this coming year on our FPGA products.

January of this year as the logistical elements later.

<unk> heard of or a high performance based computing announcement I believe.

Brian is focused on.

Getting our data center products to state of the art and market positioning and this one.

We were doing.

Under the NASA contract within the next generation space computer.

The three nanometer.

So yes it is.

Gen six switch tech devices the first one.

This strategic shift towards.

Continuing to do what we're doing in microcontroller and analog and all these other products.

And you'll see a series of new devices coming in from this business unit.

<unk> state of the art products to gain significant share in the fast growing data center market now.

But in addition.

A big component of our business, which is across.

More advanced nodes high performance products lower power.

This is not the only place we're putting attention.

We also formed a AIA business unit I think I talked about it some time ago.

Market leading products with.

With a much higher growth profile.

And.

Thus pulling the overall kid of Microchip higher than you would otherwise expect that as the street strategic shift.

This was just a few months ago, so you'll be getting some updates on what's going to come out of that group.

We're also putting a lot of effort into our FPGA business unit.

Very helpful and Steve Thank you.

You'll be hearing some new product announcements.

Yeah.

The next question comes from William Stein with <unk>. Please proceed.

In this coming year on our FPGA products.

Alright. Thanks.

Yes.

<unk> heard of or a high performance based computing announcement I believe.

Any any estimate or best guess as to when the underutilization charges and inventory write downs get to sort of a normalized level, where maybe we'd see the product margins just show on the non-GAAP P&L without without a whole lot of adjustments may be well I guess that takes okay.

We were doing.

Under the NASA contract, we're doing the next generation space computer.

So yes it is.

Our strategic shift towards.

Continuing to do what we're doing in microcontroller and analog and all these other products.

Similar $2 65, your target and where you.

But in addition.

We're running now a little bit higher that is that something we should expect.

As a component of our business which is across.

Sort of in that early part of fiscal 'twenty seven do you think or will be further out.

More advanced nodes high performance products lower power.

I'm not comfortable forecasting at this point in time, especially in.

Market leading products.

With a much higher growth profile.

Well there was a soft quarter.

Thus pulling the overall kid of Microchip higher than you would otherwise expect that as the street strategic shift.

I think we will make substantial improvement in the next fiscal year.

We will make improvement in March and then again June is that sort of the next fiscal year. So youre not directionally wrong I, just don't want to put a absolute timeframe.

Very helpful and Steve Thank you.

The next question comes from William Stein with <unk>. Please proceed.

Alright. Thanks.

On an absolute figure.

Yes.

Okay.

Any any estimate or best guess as to when the underutilization charges and inventory write downs get to sort of a normalized level, where maybe we'd see the product margins just show on the <unk>.

After that I think we're confident in saying that the.

Inventory write offs normalize quicker than the Underutilization goes away both will be moving in the right direction, but underutilization will take longer as our expectation, but we're not I'm not putting a timeframe around it.

non-GAAP P&L without without a whole lot of adjustments may be well I guess that takes okay.

That's helpful. Thank you as a follow up.

Similar $2 65 your target.

Youre running now a little bit higher that is that something we should expect sort of in that early part of fiscal 2017, you think or will be further out.

When I have discussions with investors, particularly warms bullish on microchip. They look at these two charges and they say well those will go away at some point, but then also will get.

I'm not comfortable forecasting at this point in time, especially in.

We will get some leverage on.

On the gross line some gross margin leverage so we'll actually see gross margins go higher than that level and I wanted to check my understanding of this because I think the underutilization charges are designed to simulate.

There was a soft quarter.

I think we will make substantial improvement in the next fiscal year.

We will make improvement in March and then again June is that sort of the next fiscal year. So youre not directionally wrong I, just don't want to put a absolute timeframe.

90% utilization levels. So you may get higher margins for example for mix.

On an absolute figure.

Okay.

But from utilization can you correct me if I'm wrong.

After that I think we're confident in saying that the.

The higher gross margin than the product gross margins, you're referring to from utilization unless we get above 90% utilization.

Approximately correct.

Eric.

Yeah, So when Steve is quoting the 67% plus product gross margin.

That's helpful. Thank you as a follow up.

When I have discussions with investors, particularly ones bullish on microchip. They look at these two charges and they say well those will go away at some point, but then also will get.

We would not recommend that anybody puts that into their models quite honestly is that's where we're going to end up we have a 65% long term model. We just did.

Whatever it was 56.2 or excuse me $56 seven and we're guiding to $58 two at the midpoint. So we've got a long ways to go.

We will get some leverage on.

On the gross line some gross margin leverage so we will actually see gross margins go higher than that level and I wanted to check my understanding of this because I think the underutilization charges are designed to simulate.

Each of our factories has a level of what we would call normal utilization it could be 90% of the number you used in one factory it could be 75% and another factory and it's just going to be depend on how the revenue mix comes in over time.

90% utilization level. So you may get higher margins for example for mix.

Obviously in the in the up cycle, we were running at 100% plus capacity in just about every factory and at that point in time. There was other things that we're helping them expedite charges and whatnot, where we got to 68% plus gross margin, but that that is not standard by any means and.

But from utilization can you correct me if I'm wrong.

The higher gross margin than the product gross margins, you're referring to from utilization unless we get above 90% utilization.

Approximately correct.

Eric.

We're really focused on getting into the 65% and when we get closer to that number will obviously real that re evaluate and provide future guidance to you guys.

Yeah, So when Steve is quoting the 67% plus product gross margin.

We would not recommend that anybody puts that into their models quite honestly is that's where we're going to end up we have a 65% long term model. We just did.

Thank you.

Welcome the <unk>.

Question comes from Harlan sur with Jpmorgan. Please proceed.

Hey, good afternoon. Thanks for taking my question can you guys give us an update on the fab to closure right sized fab foreign sub five back in the June quarter, you guys were targeting about $115 million in cost savings annually.

Whatever it was 56.2 or excuse me 56, 7%, we're guiding to $58 two at the midpoint. So we've got a long ways to go.

Each of our factories has a level of what we would call a normal utilization it could be 90% of the number you used in one factory it could be 75% and another factory and it's just going to be patent depend on how the revenue mix comes in over time.

At the current quarterly revenue run rate, that's about 250 basis points of gross margin improvement in all of that now accounted for in your current gross margin profile.

Obviously in the in the up cycle, we were running at 100% plus capacity in just about every factory and at that point in time. There was other things that were helping and expedite charges and whatnot, where we got to 68% plus gross margin, but that that is not standard by any means and we're really.

So more on the call.

Eric.

Yes, so for for fast too specific.

Fab two specifically, we talked about $90 million of annual cash savings right and.

<unk> on getting to the 65% and when we get closer to or two that number will obviously real that reevaluate and provide future guidance to you.

We're we're on our way to accomplishing that but.

As Steve indicated with this.

Ms.

Agreement that we have in place Thats still subject to closing conditions. If that closes then in December we'll get some cash from that which isn't going to be disclosed at this point in time, but those.

Thank you.

Welcome the <unk>.

Question comes from Harlan sur with Jpmorgan. Please proceed.

Those costs really aren't impacting our non-GAAP gross margins today, the two biggest factors or the underutilization charges and the inventory write offs, but.

It's great that we've got to this point with that factory and getting it completely out of our cost structure hopefully by the end of the quarter will be a nice step for us.

At the current quarterly revenue run rate, that's about 250 basis points of gross margin improvement.

All of that in our content.

Our current gross margin profile.

Yes, thanks for that and then.

So more on the call.

Thanks for the update on Pcie switching portfolio.

Eric.

On a segment reporting basis data center continue with 19% of the total revenues in fiscal 'twenty five.

Yes, so for profound too specific.

What's the rough mix of datacenter lessons client or a PC continued I assume majority of the segment is data center focus any way to quantify it is it 60 40 70 30 I mean these products are more application specific so easier to check I assume you guys track. This next putting closely but any any way to quantify that.

For fab, two specifically, we talked about $90 million of annual cash savings rates and.

We're we're on our way to accomplishing that but.

As Steve indicated with this.

Agreement that we have in place that's still subject to closing conditions at that closer than in December.

Mixed differences.

Yes, we don't we don't break that out that to that level of degree to everyone.

We'll get some cash from that which isn't going to be disclosed at this point in time, but.

Those costs really aren't impacting our non-GAAP gross margins today, the two biggest factors or the underutilization charges and the inventory write offs, but.

The majority of that is related to data center more than anything within that bucket of 19%.

Okay. Thank you.

It's great that we've got to this point with that factory and getting it completely out of our cost structure hopefully by the end of the quarter will be a nice step for us.

The next question comes from Joshua <unk> with TD Cowen. Please proceed.

Hey, guys. Thank you for taking my question.

Yes, thanks for that and then.

I also wanted to ask about the backlog visibility. So you mentioned more customers wanting to take orders in March than December, which I understand because lead times are short and they can give.

Thanks for the update on Pcie switching portfolio.

On a segment reporting basis data center continue with 19% of the total revenues in fiscal 'twenty five.

But given the backlogs down sequentially and Youre expecting an above seasonal March after what seems like an above seasonal December and maybe you could spend a little bit of time talking about longer term, what's driving the confidence after march that youre going to see those two to four quarters of very strong results.

What's the rough mix of datacenter lessons client RPC continued I assume majority of the segment is data center focus any way to quantify it is it 60 40 70 30 I mean these products are more application specific so easier to check I assume you guys track. This next pretty closely but any any way to quantify that.

Man signals is it expectations of inventory restocking because youre nervous that.

Mixed differences yes.

Customers get nervous that things are too low just trying to understand what signals you're seeing as we get into 'twenty six thank you.

Yes, we don't we don't break that out that to that level of degree to everyone.

The majority of that is related to data center more than anything within that bucket of 19%.

So so I think as we can.

On the other side of the December quarter.

You have <unk>.

Okay. Thank you.

Several wins on the back kick in number one.

The next question comes from Joshua <unk> with TD Cowen. Please proceed.

The difference between sell in and sell through has to close.

Distributor inventories.

Hey, guys. Thank you for taking my question.

Are going to become normal here.

I also wanted to ask about the backlog visibility. So you mentioned more customers wanting to take orders in March than December, which I understand because lead times are short and they can do.

They've come down very significantly that it may be a little bit to go ahead, and the but they're largely getting corrected so when.

Correct in another quarter or so you have a $50 million sell in to sell through gap that needs to close. So there is a window in the bed and it will close by people buying more product on sell in which is a GAAP revenue.

The second is the same phenomena on IDEXX customers contract manufacturers.

Is there inventory correct.

It will start buying what they're consuming.

So it is today they are buying much less than what they're consuming so thats another wind on the back.

And third June and September are seasonally strong quarters.

In summary, the weakest quarter March's. The next better and then June and September usually is strong. So we have strong quarters coming up plus we have this inventory phenomena in distributors direct customers and contract manufacturers.

Operator: Microchip Technology mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Sanghi. Thank you, sir. You may begin.

All of that together I think will we'll have a decent financial performance.

Steve Sanghi: 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 Rich Simoncic, Microchip COO, Eric Bjornholt, Microchip CFO, Brian McCarson, Microchip's VP of Data Center Business Unit, and Sajid Daudi, Microchip's Head of Investor Relations. I will provide a reflection on our fiscal second quarter 2026 financial results, Brian will provide an update on our data center business, and Eric will go over our financial performance.

Okay. Thank you for the color there and then I also wanted to follow up on the three nanometer Pcie switch maybe.

Maybe you could give us some details on what's your expected go to market in general how mature than our commercial engagements or youre doing three nanometer your peers are at five nanometer.

There. But they're largely getting corrected. So when they correct in another quarter or so, you have $50 million selling to sell through Gap that needs to close. So that is the wind on the back.

And it will close by people buying more products on selling, which is a gap revenue.

The second is the same phenomenon on our direct customers' contracts, manufacturers.

Are you competing on performance versus cost as a result, and should we expect meaningful revenue contribution in 2027 with the part coming out at the end of 2026. Thank you.

As their inventory corrects.

They will start buying what they're consuming.

Today, they're buying much less than what they're consuming.

So that's another win on the back.

Brian.

Yes, several really good questions there.

And third, June and September are seasonally strong quarters.

um, you know, they

We are targeting this family of products at the hyper scaler.

Enterprise OEM and ODM customers, so we're covering all segments.

Both AI data center and Enterprise data center markets with these products and in addition to.

If somebody is our weakest quarter, March is the next better and then June and September usually are strong. So we have strong quarters coming up. Plus we have this inventory phenomena in Distributors, direct customers and contract. Manufacturers. Uh, all of that together, I think will will have a decent financial performance

The customers that I mentioned.

We see a sizable market, we think the total available market for <unk>.

Our switched tact family of devices that we serve.

Steve Sanghi: I will then provide an overview of the current business environment and our guidance for the third quarter of fiscal year 2026. We will then be available to respond to specific investor and analyst questions. I will now highlight a few salient points of our financial results. 6% sequential sales growth. Net sales were up sequentially in Americas and Asia, and flat in Europe, which is not bad for a summer quarter in Europe. Sales from our microcontroller and analog businesses were up sequentially. Specifically, our MCU business grew 9.7% sequentially, with strong contribution from 32-bit MCU, while our analog business increased 1.7% sequentially. Our Gen 4 and Gen 5 data center products are seeing strong sales growth, albeit from depressed levels, as customers seem to have finished their inventory correction. In the new products area, our blockbuster product announcement came on 13 October 2026, when we announced the industry's first.

Should exceed $2 billion per year today.

And while there is a lot of variation in different.

Expectations for growth were expecting greater than 10% CAGR on that total available market through 2035.

Good, thank you for the caller there. And then I also wanted to follow up on the 3, nanometer pcie switch. Um, maybe you could, you know, give us a few some details on on what's your expected. Go to market and sort of how mature the commercial engagements are. Um you know, you're doing 3 nanometer, your peers are at 5 nanometer. Um are you you know you're competing on performance versus cost as a result and and you know, should we expect meaningful Revenue contribution in 2027 with the part coming out at the end of 2026. Thank you.

Ron.

So given that we expect to release to production by June 2026.

And typical design win cycles with customers.

2027 in the latter part of 2026 is when first revenues should be appearing.

Uh, yeah, several really good questions there. We are targeting this family of products at the hyperscaler, the Enterprise OEM, and ODM customers. So we're covering all segments at both the AI Data Center and Enterprise Data Center markets with these products.

Okay. Thank you.

The next question comes from Chris Daly with Citibank. Please proceed.

Hey, Thanks, guys.

So Steve just going back to your earlier comments, you said that.

and in addition to, um, uh, the, the customers that I mentioned, uh, you know, we see a, a sizable Market, we think the total available market for

You expected the December quarter to be a little better and things seem to get a little softer at some point in September.

September quarter can you just talk about I guess when that happened.

Our switch Tech family of devices that we serve should Exceed 2 billion dollars per year today.

And did any particular areas like geos or product lines or anything.

Standout on the softer side and why you think that happened do you think that there was some tariff related Poland's earlier in the year is something else happening.

Steve Sanghi: 3-nanometer-based PCIe Gen 6 switch to power modern AI infrastructure. Brian McCarson will comment on this later in today's call. Our non-GAAP gross margin was up 236 basis points sequentially. Incremental non-GAAP gross margin was 95% sequentially. Non-GAAP operating margin was up 364 basis points sequentially. Incremental non-GAAP operating margin was 84.6% sequentially. Our incremental gross and operating margins are very positive. Inventory went down by $73.8 million sequentially. Calendar year-to-date reduction in inventory is $261 million. Inventory days were 199 days. Our inventory over three quarters has gone down from 266 days to 251 days to 214 days to 199 days. Underutilization in our factories in September quarter was $51 million. The product gross margin in the September quarter was 67.4% due to a rich product mix driven by data center products. We added $71.8 million of our new inventory write-off and $51 million of underutilization charge.

And while there's a lot of variation in different expectations for growth, we're expecting greater than 10% CAGR on that total available market through 2035.

Yes.

So I think our bookings remained strong July was one of the best booking months in three years.

so, given that we expect to release to production by June 2026,

And then August was.

Slower, but still better than expected and I've talked about the August was always slow because of the holidays and vacations and all that but it was better than expected in September was very very strong vis booking months in three plus years and the book to Bill ratio was positive the bookings were up 10% sequentially.

Uh and typical design win Cycles with customers, uh, 2027 and the latter part of 2026 is when first Revenue should be appearing.

Thank you.

The next question comes from Chris Danley with City Bank. Please proceed.

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Hey, uh, thanks guys. Um, so Steve, just going back to your, uh, your earlier comments. You said that.

The reason why I say.

You expected the December quarter.

December is a little softer and disappointing.

The customer decided to give us strong bookings, but schedule them in January.

And essentially existed balance sheet for.

Or calendar year end.

So therefore, the terms component of that.

Wasn't as strong as I would have expected.

Feel better, and things seem to get a little softer at some point in the September quarter. Uh, can you just talk about? I guess when that happened and did any particular areas, like GEOS or product lines or anything? Uh, stand out on the softer side and and why you think that happened? Do you think that there was some Terror flitted pull-ins earlier in the year, or is something else?

Thanks.

With the inventory conducted ipod customers and distributors will restock.

They decided to restart.

So I think our bookings remain strong. July was one of the best booking months in three years.

Three weeks later.

And then orders was, um,

Not restock on.

Slower. But

December 26th but restock on January 15.

That's kind of the difference we're talking about therefore.

The backlog for March looks good on certain product lines.

The March quarter backlog is stronger than December quarter backlog.

Not across the board, but.

Hum.

Still better than expected. And I have talked about the August was always slow because of the holidays, you know, vacations and all that, but it was better than expected in September was very, very strong best booking months in 3 plus years. And the book to build ratio was positive, the bookings were up, 10% sequentially, the only

Some key product lines. So this is the.

reason why I say,

Observation.

Which changed what I thought would happen in an ipod.

Steve Sanghi: Makes a total of $122.8 million of charges. Divide that by the net sales of $1,140.4 million, and you get a non-GAAP gross margin impact of 10.8 percentage points. Subtracting it from the product gross margin of 67.4%, we got a non-GAAP gross margin of 56.7%, which is what we reported. The product gross margin remains very healthy. We still need to bring down inventory write-offs and underutilization charges. We are pleased to announce that we have entered into a purchase and sales agreement to sell our Fab 2 wafer fabrication facility located in Tempe, Arizona, to a third party. The sale of this facility is part of our previously announced plan to restructure our wafer fabrication operations. Under this restructuring plan, Microchip completed the closure of Fab 2 in May of 2025.

All of this inventory correction.

Bookings.

Remember quarter would be lot stronger low single digit up cause other than minus one but this phenomenon that they decided to buy that product in January.

But schedule them in January.

And essentially dress their balance sheet.

For calendar year end.

So, therefore, the terms component of that,

Rather than buy it in December has change that equation.

Wasn't as strong as I would have expected.

Okay. Thanks.

And just my follow up so you mentioned some constraints it sounds like there is still mostly on the backend are those constraints getting worse. When do you think you can get them under control and is it causing you to miss out on any sales.

With the inventory, correct till I thought customers and distributors will restart.

Well, they decided to restart, you know, three weeks later.

Not restart on.

December 26th, but restart on January 15th.

Uh, and that's kind of the difference we're talking about, therefore,

So.

The backlog for March looks good on certain product lines.

You know.

The March quarter backlog is stronger than the December quarter backlog.

Tom It's.

Nothing is disastrous we are managing it but the.

Not across the board, but

Did the substrate capacity is the one that well.

On, on, on some key product lines. So, this is the

observation.

It is extremely constrained if you remember a couple of years ago three years ago.

Now as these advanced products have come in all the.

AI products and products from all of these.

Steve Sanghi: We began to transfer the process technologies from Fab 2 to Fab 4 in Gresham, Oregon, and Fab 5 in Colorado Springs, Colorado. Both of these facilities have ample clean room space for expansion. The transaction is subject to closing conditions and is expected to be completed in December 2025. Now, we have a special guest for you today. Let me introduce Brian McCarson, Corporate Vice President of our Data Center Solutions Business Unit. Brian will speak about our recent announcement of industry's first 3-nanometer-based PCIe Gen 6 Switch. Brian.

And going into high end data centers and all that they all require substrate capacity.

In the last quarter, we would also competing with.

Which, which changed what? I thought would happen. I thought with all this inventory correction, the December quarter would be a lot stronger, low single digit up, rather than minus 1. But this phenomenon that they decided to buy that product in January, rather than buy it in December, has changed that equation.

Cellphone bills for the December quarter, because they all require substrates. So we were.

Competing with some significant demand now that.

As for new product launch and that is over now so some of those constraints have.

Okay, thanks. Um, and just for my follow-up. Uh, so you mentioned some constraints; sounds like they're still mostly on the back end. Are those constraints getting worse? When do you think you can get them under control, and is it causing you to miss out on any sales?

And less so, but it's still really touch and go I think.

Yes in certain cases customers wanted the product.

so,

you know, um,

In September and December and we're shipping at a quarter later, yes.

And then sort of hundreds of millions of dollars, but it's meaningful.

But in some, it's not, you know, nothing is disastrous. We are managing it, but the...

Brian McCarson: Thank you, Steve, and good afternoon, everyone. I'm the Corporate Vice President and leader of the Data Center Solutions Business Unit at Microchip, and today I'm excited to introduce you to the latest addition to our switch tech family of products. Our new Gen 6 PCIe switch, announced on 13 October 2023, marks a significant milestone in Microchip's technological leadership within the AI and enterprise data center infrastructure markets. The build-out of AI data centers continues to accelerate, with hyperscalers committing to gigawatt-scale deployments. Some recent announcements have outlined single infrastructure projects in the 5 to 10 gigawatt range, targeting completion between 2026 and 2027. These developments are driving our current design engagement cycles. It is critical to understand that regardless of whether our customers deploy NVIDIA, AMD, Intel, or custom ASICs, all require high-performance PCIe switching infrastructure. This is where Microchip's Gen 6 switch tech products are designed to excel.

Thanks, Steve.

The next question comes from Joe Moore with Morgan Stanley. Please proceed.

Um, the substrate capacity is the one that was extremely constrained. If you remember a couple of years ago, three years ago,

Yes. Thank you I'm wondering if you can just help us.

And now, as these advanced products have come in, all the...

Try to triangulate, where the demand actually is.

Looking at our bookings levels, one six is pretty good but your revenues about half of what it was at the peak and I guess.

The real consumption is somewhere between that peak number and where you are now but just as you look at the bookings pattern do you have any updated sense on.

You know, AI products and products from all these companies going into high-end data centers and all that, they all require substrate capacity. In the last quarter, we were also competing with...

Um, cell phone bills for the December quarter because they all required substrate. So we were.

Where we're going to get when we get the consumption levels.

You know, competing with some significant demand. Now that

Hi, Ken.

Cannot help for you or anybody else.

To figure it out with the exact consumption level would get to.

Um, demand is for the new product launch, and that is over now. So some of those constraints have, uh, gotten less so, but it's still really touch and go, I think, um,

I would agree with you that it's somewhere between the peak and where we are.

Yes, in certain cases, customers wanted the product.

Which one it is closer to where it is I think thats a million dollar question.

In September or in December, and we're shipping it a quarter later. Yes.

I mean, it's not hundreds of millions of dollars, but it's, uh, it's meaningful.

Honestly this entire recovery has been.

Okay. Thanks. Steve.

Large slower than anybody would have expected I think.

The next question comes from Joe Moore with Morgan Stanley. Please proceed.

I think all of these tariffs and customer concerns about capital investments in automotive to EV to gasoline shift and there've been a lot of.

Yes, thank you. I'm wondering if you can just help us.

Brian McCarson: Last month, at the Open Compute Project Global Summit in San Jose, California, we introduced the industry's first PCIe Gen 6 switches manufactured using 3-nanometer process technology. These new devices deliver four distinct competitive advantages. First, PCIe 6 doubles the bandwidth to 64 gigatransfers per second per lane compared to PCIe 5.0, eliminating GPU to storage, memory, and CPU bottlenecks that constrained previous generations. Our new Gen 6 switch features an industry-leading maximum of 160 lanes per device, significantly increasing total data transfer capacity. Second, our 3-nanometer implementation provides 15% to 20% power per lane advantage over competitors' products developed on 5-nanometer and older technology nodes. This is critical when deploying hundreds of thousands of GPUs and switches in multi-gigawatt data centers. Choosing Microchip's devices enables customers to lower total power consumption without compromising performance.

Those that had been thrown at this market.

And the overall progress has been less than I personally would have wanted.

So we will continue to make that progress I can pick up pace in the March quarter.

But I'm not willing to guide, where we eventually reach equal to consumption of 19 debt.

Try to triangulate where the demand actually is, you know, looking at your booking levels. 1.06 is pretty good, but you know, your revenue is about half of what it was at the peak. I guess, you know, the real consumption is somewhere between that peak number and where you are now. But just as you look at the bookings pattern, do you have any updates on, you know, where we're going to get, and when we get to consumption levels?

Remains a challenging exercise.

Okay Fair enough. Thank you and then my follow up.

We can help. I cannot help for you or anybody else.

The data center products, when you talk about the new switch and things like that.

to figure out where the exact consumption level would get to.

Do you guys stand in terms of height.

Hyperscale cloud relationships do you have partnerships, there, where they're coming to you and saying here's the product we need can you help us to develop that I know you have a lot of data center businesses that were acquired when they were sort of enterprise centric can you just update us on where you are with going to market with these bigger cloud customers.

Uh, I would agree with you that it's somewhere between the peak and where we are.

Um,

But which one is it closer to where it is? I think that's a million-dollar question.

um,

You know, honestly, this entire recovery has been...

A lot slower than anybody would have expected. I think, uh,

Brian.

This was all of them wanting to take that question.

Yes, so we.

We have active engagements.

With.

All of the hyper scaler and Oems you would expect across this broad both enterprise and AI data center market.

I think all these tariffs and customer concerns about, you know, capital investments and automotive to EV to gasoline shift, and there have been a lot of...

Uh, you know, curves that have been thrown at this market.

We do not.

Work on.

Brian McCarson: Third, all our Gen 6 switch tech devices offer advanced device telemetry and multicast capabilities, allowing a single GPU data packet to be transmitted to multiple devices simultaneously, thereby improving GPU efficiency. Fourth, we've implemented a secure boot-based hardware root of trust that supports post-quantum cryptography and is CNSA 2.0, the Commercial National Security Algorithm Suite, compliant, meeting or exceeding both government and commercial security requirements. This represents industry-leading device security. We are now sampling these products to qualify customers, and recent engagements have been validating both our technical approach and our market timing. From a financial perspective, we believe this represents a significant growth opportunity for the company. AI servers require substantially more PCIe switching infrastructure than traditional servers to enable resource pooling and the composable architectures that hyperscalers demand. Our total addressable market encompasses the entire data center PCIe fabric, not just a subset.

And the overall progress has been less than I personally would have liked it. Um, so we'll continue to make that progress. I think we'll pick up pace in the March quarter.

Custom ASIC products as our main business.

So we instead of focus on understanding the workloads that our customers are.

But I'm not willing to guide where we eventually reach equal to consumption. I think that remains a challenging exercise.

Most interested in accelerating and optimizing within the data center and build the right competitive features to best meet their needs.

And I think this latest announcement around our first to market three nanometer Gen. Six pcie switch demonstrates that with <unk>.

Industry, leading security features industry, leading telemetry and industry leading power.

In terms of, you know, hyperscale cloud relationships, do you have partnerships where they’re coming to you and saying, here’s the product we need, can you help us to develop that? I know you have a lot of data center businesses that were acquired when they were sort of enterprise-centric. Can you just update us on where you are with going to market with these bigger cloud customers?

So, Brian, we do business with all of them. Want to take that question?

Performance per lane.

So we will continue to build our products with the hyperscale or OEM ODM and enterprise data center markets directly in mind.

Yeah, so, uh, we have active engagements with all the hyperscalers and OEMs you would expect across this broad, both Enterprise and AI Data Center Market.

Great. Thank you.

Thank you at this time I would like to turn the call back over to Mr. Steve. Thank you for closing comments.

Uh, we do not, uh, work on, uh, custom ASIC products as our main business.

Yes, thank you very much everybody for hanging in there.

As I said after this this quarter I think we should get back strong momentum and.

Uh, so we instead focus on understanding the workloads that our customers are.

Brian McCarson: We are vendor-agnostic, selling into all data center and AI architectures. Design win cycles typically span 12 to 18 months from initial engagement to production, aligning our current sampling activity with initial production starting in June 2026 and volume ramping towards the end of calendar year 2026. Looking ahead, our Gen 6 switch tech devices position us to capture a meaningful share of the committed AI infrastructure build-out across three growth vectors: hyperscale training infrastructure, enterprise AI training and inference deployments, and high-performance computing applications. I will pause here and turn the call over to Eric for comments about our financials. Eric.

And we will see some of you on the conference circuit this quarter.

Thank you very much.

Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Uh, most interested in, uh, accelerating and optimizing within the data center and building the right competitive features to best meet their needs.

And I think this latest announcement around our first-to-market 3 nanometer Gen 6 PCI Express switch demonstrates that.

Industry-leading security features, industry-leading telemetry, and industry-leading power and performance per lane. We will continue to build our products with the hyperscaler, OEM, ODM, and enterprise data center markets directly in mind.

Great. Thank you.

Eric Bjornholt: Thanks, Brian, and good afternoon, everyone. We are including information in our press release and in this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the investor relations page of our website at www.microchip.com, and included reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation, and certain other adjustments as described in our earnings press release and in the reconciliations on our website.

Thank you at this time. I would like to turn the call back over to Mr. Stephen Sanghi for closing comments.

Yes, thank you very much, everybody, for, you know, hanging in there.

And as I said, after this quarter, I think we should get back strong momentum.

And we'll see some of you on the conference circuit this quarter.

Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect at this time. Thank you for your participation, and have a great day.

Eric Bjornholt: Net sales in the September quarter were $1.14 billion, which was up 6% sequentially, and $10.4 million above the midpoint of our September quarter guidance provided on 7 August 2023. 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 56.7%, including capacity underutilization charges of $51 million, and new inventory reserve charges of $71.8 million. Operating expenses were at 32.4% of sales, and operating income was 24.3% of sales. Non-GAAP net income was $199.1 million, and non-GAAP earnings per diluted share was $0.35, which was $0.02 above the midpoint of our guidance. On a GAAP basis in the September quarter, gross margins were 55.9%. Total operating expenses were $500.

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