Microchip Technology Incorporated

Greetings and welcome to the Microchips Q4 and Fiscal Year 26 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Eric Bjornholm, Chief Financial Officer. You may begin.

Thanks, Kate, 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. Referring to our press release of today as well as our recent filings with the SEC, we that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Steve Sange, Microchip's President and CEO, Britt Simonsek, Microchip's COO, Brian McCarson, VP of Microchip's Data Center Solutions Business Unit, and Saja Dowdy, Microchip's Head of Investor Relations. I will comment on our fourth quarter and full fiscal year 2026 financial performance, Brian will provide an update on our data center business, and then Steve will provide commentary on our results and discuss the current business environment as well as our guidance. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and 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 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 March quarter were $1.311 billion, which was up 10.6% sequentially and up 35.1% over the year-ago March quarter. Our revenue results were above the high end of the guidance range we provided on February 5, 2026. We have posted a summary of our net sales by product line and geography, as well as our fiscal year 2026 revenue by end market on our website for your reference. Our end market mix did not change materially in fiscal year 2026 compared to fiscal year 2025. Industrial was 31% of sales, data center and compute was 18%, automotive was 17%, aerospace and defense was 16%, Communication was 9% and consumer was 9%. These percentages are our best estimates of the end market splits, and there's probably a couple of percent air band due to the fact that almost 50% of our business and the long tail of customers are serviced through distribution, which makes it difficult to track the end markets. On an on-gap basis, gross margins were 61.6% in the March quarter, including capacity underutilization charges of 46.6 million. Operating expenses were at 31% of sales, and operating income was 30.6% of sales. Non-GAAP net income was $327.3 million, and non-GAAP earnings per diluted share was $0.57, which was $0.07 above the midpoint of our guidance. On a GAAP basis in the March quarter, gross margins were 61%. Total operating expenses were $582.2 million. and included acquisition and tangible amortization of $107.8 million, special charges of $6.4 million, which was primarily driven by costs associated with the closure of FAB II, share-based compensation of $59.9 million, and $1 million of other expenses. The gap net income attributable to common shareholders was $116.4 million, or 21 cents per share. For fiscal year 2026, net sales were $4.713 billion and were up 7.1% from net sales in fiscal year 2025. On a non-GAAP basis, gross margins were 58.5%, operating expenses were 32.2% of sales, and operating income was 26.3% of sales. Non-GAAP net income was $933.9 million and EPS was $1.64 per diluted share. On a GAAP basis, gross margins were 57.7%, operating expenses were 47.3% of sales, and operating income was 10.4% of sales. The GAAP net income attributable to common shareholders was $118.8 million. Our non-GAAP cash tax rate was 5.8% in the March quarter and 8.6% for fiscal year 2026. The cash taxes remitted in Q4 were lower than originally forecasted while our free tax profit was much stronger than forecasted, driving the March quarter rate down. Our non-GAAP tax rate for fiscal year 2027 is expected to be about 10%, which is exclusive of any tax audit settlements related to taxes accrued in prior fiscal years. Our inventory balance at March 31st, 2026 was $1.035 billion and down $22.3 million from the balance at December 31st, 2025. We had 185 days of inventory at the end of the March quarter, which was down 16 days from the prior quarter's level, driven by our inventory reduction actions and increased revenue. Included in our March ending inventory was 15 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 March quarter was at 26 days, which was down two days from the prior quarter's level, and at the lower end of what we have experienced historically. We expect distribution restocking to occur in the near term, as distributors will likely grow their inventory holdings above current levels to support growth. Distribution sell-through increased by 11.4% during the quarter, and distribution sell-in was just modestly lower than distribution sell-through. Our cash flow from operating activities was $257 million, and our adjusted free cash flow was $228 million in the March quarter. As of March 31st, our consolidated cash and total investment position was $240.3 million. Our total debt increased by $143 million in the March quarter. The increase in debt was impacted by our refinance activities in the quarter, which included issuing a 0% four-year convertible bond, for which we paid $68 million for a 100% cap call to provide some protection from future equity dilution from stock price appreciation. Our adjusted EBITDA on the March quarter was $466.8 million and 35.6% of net sales. Our quarterly adjusted EBITDA was up 132.9% from the March 2025 quarter. Our trailing 12-month adjusted EBITDA was $1.496 billion. Our net debt to adjusted EBITDA was 3.54 at March 31, 2026 and down from 4.18 at December 31, 2025. We expect the June 2026 quarter to be an excellent cash generation quarter for us, resulting in meaningful debt reduction and also expect our net debt to adjusted EBITDA to drop below 3. Capital expenditures were $14.2 million in the March quarter and $91.9 $91.1 million for fiscal year 2026. Our expectation for capital expenditures for fiscal year 2027 is to be approximately $100 million. Depreciation expense in the March quarter was $38.7 million. I will now turn it over to Brian, who will provide some exciting insights into our data center solutions business unit. Brian.

Thank you, Eric, and good afternoon, everyone. We are seeing significant momentum across all three major product families within our data center solutions business. And I'll summarize the progress we're making in each of them. Importantly, these wins are translating into higher content per system and a longer runway of production ramps, which we expect to support durable growth as the data center architectures continue to scale. First, our storage controller products have supported some of the world's most reliable SAS, SATA, NVME, and RAID infrastructure over the past decade as a leading provider of data center storage control solutions. And as AI inference and agentic AI workloads increase demand for persistent data access, demand for our products continues to grow. We've been strengthening our product roadmap, and customers are responding positively. Most recently, our AdaptX SmartRAID NVMe Storage Accelerator received the Nimbus Innovation Award with benchmark results showing up to a 3x improvement in read and write performance versus a leading competitor's offering. This can translate into better XPU utilization in real-world data center workloads. Second, our memory controller product family has been reinvigorated by the recent launch of our next generation devices. We brought three new CXL and PCIE-based devices into production in calendar year 2025, and our next Gen 5 dual port device is scheduled to enter production this quarter. We've already secured meaningful design wins that have begun ramping and that we expect will continue to grow through fiscal 28. These next generation devices have been externally benchmarked, and our customers are reporting industry-leading performance in jitter tolerance, which is a key measure of storage controller performance. Third, our switch tech business has continued to build momentum since the announcement of our latest PCIe Gen 6 switch just two quarters ago. Since that time, we've secured a total of six significant design wins, with customers citing our product quality, our signal integrity, differentiated features, and our strong performance per watt as industry-leading. This is helping Microchip maintain its position as a leading PCIe data center switch provider while gaining share in both scale-up and scale-out market segments. Our Gen 6 switch is scheduled to begin production ramp at the end of this quarter, and many additional design wins are expected over the next year. In addition, we're very excited to announce we've entered the PCIe retimer market this quarter. This retimer is architected as a companion die for our PCIe Gen 6 switches and is also designed to support the rapid growth of the active electrical cable market, with compatibility spanning Gen 1 through Gen 6 speeds. Customer feedback has been encouraging, and we have already secured a major OEM design win on an upcoming Gen 6 platform, displacing one of our competitors. Customers have been explicitly requesting that Microchip offer a companion retimer because sourcing both the switch and the retimer from a single vendor reduces implementation complexity and risk. This is helping drive these wins and strengthening our competitive position in new designs with an even more complete PCIe connectivity platform. The wins I described across all three data center product families reflect several competitive advantages. First, power efficiency. Our Gen6 switches and retimers deliver strong power efficiency relative to alternatives, which directly benefits operating costs and data center environments. Second is feature completeness. By offering both the switch and the companion retimer, we provide customers with a more complete scale-up and scale-out PCIe solution, reducing the need to integrate products from multiple vendors. Third is quality and tools. We deliver the reliability, the performance, and stability data center customers demand while offering world-class diagnostic and configuration tools with ChipLink. And finally, support through the entire customer journey. From initial design through production ramp and beyond, customers value a partner that is invested in their success at every stage. That combination of power efficiency, feature depth, quality, and long-term partnership is helping drive these wins. We believe these factors position as well as design wins continue to convert into production ramps. I'll pause here and turn the call over to Steve to provide an update on our business and the guidance going forward. Steve?