Microchip Technology Incorporated

Good afternoon, ladies and gentlemen, and welcome to the Microchip Q1 Fiscal 2026 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Thursday, August 7, 2025. And I would now like to turn the conference over to Mr. Steve Sanghi, Thank you. Please go ahead.

Thank you, Operator, and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases 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 Simonsek, Microchip's CEO, Eric Bionhold, Microchip's CFO, and Sajid Dowdy, Microchip's Head of Investor Relations. I will provide a reflection on our fiscal first quarter 2026 financial results. Eric will go over our financial performance, and Rich will then review some product line updates. I will then provide an overview of the current business environment and our guidance for second quarter of fiscal year 2026. We will then be available to respond to specific investor and analyst questions. Microchip employees are often referred to as chippers. I will begin with a question for all of you, and then I will provide the answer. How many chippers does it take to deliver a good quarter? The answer is that it takes quite a few, but they all showed up to deliver an outstanding quarter like we produced in the June 2025. And that is the point I want to make. 18,000 employees of Microchip worked all last year on a pay cut, have not received a bonus or a salary increase in a year and a half, and suffered through a gut-wrenching global layoff earlier this year in March. These employees working with high morale came together to deliver an outstanding quarter. I tip my hat to all 18,000 employees of Microchip worldwide. I will highlight a few salient points of our financial results. 10.8 percent sequential sales growth. Net sales were up sequentially in all geographies. Sales from our microcontroller and analog businesses were both up in double-digit percentages sequentially. Non-GAAP gross margin was 230 basis points sequentially, and incremental non-GAAP gross margin was 76 percent sequentially. Non-GAAP operating margin was up 670 basis points sequentially, and incremental non-GAAP operating margin was 82 percent sequentially. Inventory went down by $124 million sequentially. Our target for the whole fiscal year is a $350 million reduction. so we are off to a very good start. Inventory days were 214 days. Our inventory over two quarters has gone down from 266 days to 251 days to 214 days. We expect inventory at the end of September quarter to be between 195 and 200 days. The inventory write-off in the June quarter was $77.1 million down from $90.6 million in the March quarter. The inventory write-offs are expected to decrease again in the September quarter. Underutilization in our factories in the June quarter was $51.5 million down from $54.2 million in the March quarter. We expect the underutilization will modestly decrease again this quarter with a more significant decrease in the December quarter. Adding $77.1 million of inventory write-off and $51.5 million of underutilization charge makes a total of $128.6 million of charges. Divide that by the net sales of $1.075 billion, and you get a non-GAAP gross margin impact of 12 percentage points. Adding it to the reported non-GAAP gross margin of 54.3 percent indicates that the product gross margin was 66.3 percent. The point is, as inventory write-off and underutilization charges decrease, we believe our long-term non-GAAP gross margin target of 65 percent is achievable. We have accrued about $5.5 million from the upside profits to provide a small bonus to our 18,000 employees who deserve it very much. The net impact from this accrual is less than a penny per share. And with that, I will pass it on to Eric Bionholt, who will take you through our more detailed financial performance last quarter. I will come back later to discuss the business environment and provide guidance for the second quarter. Eric.

Eric Bionholt Thanks, Steve, and good afternoon, everyone. We are including information in our press release and on 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. Net sales in the June quarter were $1.075 billion, which was up 10.8% sequentially, and $5.5 million above the high end of our updated June quarter guidance provided on May 29th. 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 54.3%, including capacity under utilization charges of $51.5 million, New inventory reserve charges of $77.1 million. Operating expenses were at 33.7% of sales, and operating income was 20.7% of sales. Non-GAAP net income was $154.7 million, and non-GAAP earnings per diluted share was $0.27, which was one cent above the high end of our updated guidance. On a GAAP basis in the June quarter, gross margins were 53.6%. Total operating expenses were $544.6 million and included acquisition and tangible amortization of $107.6 million, special charges of $22.2 million, which was primarily driven by foundry contract exit costs and our activities associated with the closure of FAB II. Share base compensation of $45.2 million and $7.5 million of other expenses. The gap net loss attributable to common shareholders was $46.4 million, or $0.09 per share. Our non-gap cash tax rate was 11.25% in the June quarter, and we expect to record a non-gap tax rate of about 9.5% in the September quarter. Our non-gap tax rate for fiscal year 2026 is expected to be about 10.25%, which is exclusive of the transition tax, and any tax audit settlements related to taxes accrued in prior fiscal years and was positively impacted by the impacts of the recently passed One Big Beautiful Bill. Our inventory balance at June 30th, 2025 was $1.169 billion and down $124.4 million from the balance at March 31st, 2025. We had 214 days of inventory at the end of the June quarter, which was down 37 days from the prior quarter's levels. by our inventory reduction actions is what drove this. Included in our June 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 June quarter was at 29 days, which was down four days from the prior quarter's level. Distribution sell through was about $49.3 million higher than distribution sell in. Our cash flow from operating activities was $275.6 million in the June quarter. Our adjusted free cash flow was $244.4 million in the June quarter. And as of June 30th, our consolidated cash and total investment position was $566.5 million. Our total debt decreased by $175 million in the June quarter, and our net debt increased by $30.2 million. Our adjusted EBITDA in the June quarter was $285.8 million and 26.6% of net sales. Our trailing 12-month adjusted EBITDA was $1.167 billion and our net debt to adjusted EBITDA was $4.22 at June 30th, 2025. Capital expenditures were $17.9 million in the June quarter And we expect capital expenditures for fiscal year 2026 to be at or below $100 million. Depreciation expense in the June quarter was $39.5 million. And I will now turn it over to Rich, who will provide some commentary on our product line innovations in the June quarter.