Microchip Technology Incorporated

This 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, Eric Bjornholt, CFO. Thank you, Eric. You may begin.

Thank you 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 MicroTIPS business and results of operations. In attendance with me today are Steve Sange, Microchip's President and CEO, Rich Simonsek, Microchip's COO, Matthias Kastner, Microchip's VP of Networking and Connectivity Business Units, and Saja Dowdy, Microchip's Head of Investor Relations. I will comment on our third quarter fiscal year 2026 financial performance. Matthias will provide an update on our networking and connectivity business. And Steve will then provide commentary on our results and an overview of the current business environment and our guidance for the fourth quarter of fiscal year 2026. We will then be available to respond to specific investor and analyst questions. 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 leverage metrics on our website. I will now go over some of the operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share-based compensation, and certain other adjustments as described in our earnings press release and in the reconciliation on our website. Net sales in the December quarter were $1.186 billion, which was up 4% sequentially and well above the high end of our original guidance provided on November 6th. 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 60.5%, including capacity under utilization charges of $51.7 million and new inventory reserve charges of $58.4 million. Operating expenses were at 32% of sales and operating income was 28.5% of sales. Non-GAAP net income was $252.8 million and non-GAAP earnings per diluted share was $0.44, which was $0.04 above the high end of our original guidance. On a GAAP basis in the December quarter, gross margins were 59.6%, total operating expenses were 555.2 million, and included acquisition and tangible amortization of 107.6 million, special charges of 4.8 million, which were primarily driven by activities associated with our closure of FAB II, share-based compensation of 62.1 million, and 1.1 million of other expenses, Gap net income attributable to common shareholders was $34.9 million, or six cents per share. Our non-GAAP cash tax rate was 9.6% in the December quarter. We expect to record a non-GAAP tax rate of about 10% 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 inventory balance at December 31st, 2025 was 1.058 billion, which was down 37.6 million from the balance at September 30th, 2025. We had 201 days of inventory at the end of the December quarter. Included in our December quarter ending inventory was 17 days of a long life cycle, high margins products, whose manufacturing capacity has been end of life by our supply chain partners. Inventory order distributors in the December quarter was at 28 days, which is in the range of what we would consider to be normal. Distribution sell-through was about $11.7 million higher than distribution sell-in. Our cash flow from operating activities was $341.4 million in the December quarter. Our adjusted free cash flow was $305.6 million in the December quarter. And as of December 31st, our consolidated cash and total investment position was 250.7 million. Our total debt decreased by 12.1 million sequentially in the December quarter and our net debt decreased by 26 million sequentially. Our adjusted EBITDA in the December quarter was 402 million and 33.9% of net sales. Our trailing 12-month adjusted EBITDA was 1.23 billion. Our net debt to adjusted EBITDA ratio was 4.18 at December 31st, 2025 and was down from 4.69 at September 30th, 2025. Capital expenditures were 22 and a half million in the December quarter. We expect capital expenditures for fiscal year 2026 to be at or below $100 million. Depreciation expense in the December quarter was 37.8 million. I will now turn it over to Matthias, who will provide an update on our efforts in the Ethernet T1S emerging standard for connectivity in the automotive and industrial space.

Matthias? Thank you, Eric, and good afternoon, everyone. I'm Matthias Kästner, Corporate Vice President and Leader of the Data Center Networking Connectivity and Automotive Business Units at Microchip. Today, I want to report on the meaningful momentum in our connectivity business driven by two primary architecture modernization cycles. Let's have a look at the automotive market segment first. In today's cars, up to 20 different connectivity technologies are used to transmit data between electronic control units, while the amount of data is increasing exponentially. The resulting complexity is a major roadblock to implementing higher levels of self-driving capabilities, over-the-air updates, and advanced infotainment systems in a cost and time efficient manner. Therefore, car manufacturers are moving away from the multitude of legacy connectivity standards towards networking architectures that are predominantly Ethernet-based. This in turn reduces software complexity and improves software reusability. Ethernet, in particular the new 10BST1S standard, has the potential to replace several billion automotive legacy connectivity nodes per year. Microchip has developed automotive Ethernet solutions to support this transition. including a market-leading portfolio of 10BASE T1S products, switches, transceivers, endpoints, and bridges. Automotive Ethernet is complemented by PCI Express connectivity for the highest-speed data communication needs in the main vehicle computer, and by ASA, a new open standard that transfers high-speed raw camera data to the main vehicle computer efficiently. We derived automotive-grade PCIe solutions from our leading PCIe switches for data centers, and we were first to market with Acer MotionLink for standards-based high-speed ADAS camera and display connectivity. We believe Microchip is well-positioned across these new connectivity standards. We have design wins and serious engagement with multiple leading global automotive OEMs and Tier 1 suppliers. Today, we issued a press release in which we announced a strategic collaboration with Hyundai Motor Group to integrate our Tempest T1S solutions into next-generation vehicle platforms. Designs are moving from sample evaluation and validation phases, representing platform commitments and next-generation vehicle architectures. The second growth driver for modern connectivity is Industry 4.0. an industrial modernization cycle across factories, robotics, automation systems, and autonomous logistics networks that all require real-time, mission-critical connectivity. The industrial backbone is already Ethernet-based. However, many devices and systems at the edge are connected to legacy connectivity standards such as industrial CAN, RS-232, RS-485. These legacy standards are now being replaced by Ethernet solutions. Like in the automotive segment, our comprehensive Ethernet portfolio, including single-pay Ethernet and EtherCAT, industrial PCIe switches, and AESA camera connectivity solutions are well positioned to capture this opportunity and are already helping customers bridge legacy and advanced industrial connectivity. In both segments, automotive and industrial, we are tracking numerous design wins. We believe that our competitive advantage is straightforward. We offer a complete portfolio spanning multiple connectivity speeds integrated with microcontrollers and analog solutions. Customers deploy a unified microchip system, including silicon and firmware, rather than assemble components from multiple vendors, reducing complexity, cost, and time to market. Industrial connectivity design cycles typically span 18 to 24 months from architecture decision to production revenues. Our recent engagement aligns with pilot production ramps expected in the second half of 2026 and ramping further into 2027. We feel that our market opportunity is substantial. While industry estimates vary, research suggests that the temp for automotive and industrial Ethernet connectivity together represents tens of billions of dollars by 2030, reflecting a once in several decades modernization cycle. Looking ahead, we expect our connectivity business to be a significant contributor to company growth as these modernization cycles accelerate. I will pause here and turn the call over to Steve to provide an update on our business and the guidance going forward. Steve.