Microchip Technology (NASDAQ:MCHP) executives said the company is seeing signs of strengthening demand and a more normalized channel environment, while reiterating that near-term financial priorities have shifted toward debt reduction following the recent downturn.
Channel normalization and improving demand indicators
Matthias Kaestner, corporate vice president of Auto, Data Center, and Networking at Microchip, said the most significant change in the December quarter was that the distribution channel “largely normalized.” He noted that the sell-through versus sell-in gap narrowed substantially and was down to about $12 million for the quarter, which management views as evidence the channel has “largely corrected.”
While Microchip said it is seeing conditions normalize, Kaestner cautioned that visibility into true end demand remains limited given a customer base of roughly 10,000 and significant exposure to distribution. He said some customers are buying “to consumption” in certain products, while others are still working through inventory in select areas, though he characterized those pockets as not representing the majority.
March-quarter outlook and lead time commentary
In response to questions about “better-than-seasonal” growth, Microchip pointed to its March-quarter outlook of 6.2% growth, which Kaestner said compares with a typical seasonal pattern of 2% to 3% growth in the March quarter. He added that the company’s best visibility remains about one quarter out, and while momentum is improving, the company was not making additional forecasts beyond March other than expecting the recovery to continue if current trends persist.
On supply dynamics, Kaestner said Microchip still has about 200 days of inventory and does not face issues on wafers produced in its internal fabs, where it maintains short lead times in most cases. Lead time extension, he said, is primarily tied to the most advanced external foundry nodes “all the way to 3 nanometers,” as well as certain assembly-related inputs such as substrates and OSAT-supplied components.
Margins, utilization, and the path toward 65%
Microchip executives discussed manufacturing mix and how it affects profitability. Kaestner said the company’s footprint is roughly 37% to 40% internal manufacturing and about 60% external. Products made on 110-nanometer and larger nodes are mostly internal, while 90-nanometer and below is largely external.
He said current momentum in aerospace and defense, networking, and data center is tied to “richer mix” and higher-margin products that are predominantly produced at outside foundries. Meanwhile, Microchip reported internal underutilization as “the only headwind to gross margins today after the March quarter,” quantified at about $50 million to $51 million.
Microchip’s March-quarter gross margin guidance calls for 61%. Executives noted that the March-quarter improvement includes the elimination of inventory reserve charges. Kaestner added that previously written-off inventory could provide additional benefit if it sells through, but emphasized that the magnitude and timing are not predictable.
Management reiterated confidence in achieving a long-term 65% gross margin target, but said the timeline is gradual and likely extends through this calendar year into next year. Kaestner referenced Microchip’s “nine-point recovery plan” and said the company has already recovered roughly 1,000 basis points from a gross margin low around 52%.
Data center exposure and product pillars
Executives described data center as one of Microchip’s larger segments and said it has increased in share of the company’s revenue portfolio over the past year, while automotive declined somewhat but is “coming back.” Microchip reported compute and data center represented roughly 19% of the prior fiscal year’s revenue, and management said additional end-market color is expected in the next quarter as the company updates its annual end-market rollup.
Kaestner outlined three main pillars of Microchip’s data center business:
- PCI Express switching and retimers: Microchip supports PCIe generations 3 through 6. Kaestner said the company has introduced a Gen 6 PCIe switch built on 3-nanometer technology, which he said offers a power advantage and is generating customer interest.
- Flash controllers and software stack: Microchip provides controllers for large flash storage systems along with a “complete software stack,” which Kaestner described as complex and gaining traction as speeds increase generation to generation.
- HDD controllers: Kaestner said hard disk drives remain relevant due to cost-effective storage and are expected to have a long lifetime, with hyperscalers continuing to use HDDs for certain content where maximum access speeds aren’t required.
He also cited feature development such as security enhancements and Post-Quantum Cryptography as areas being embedded into products to help data center deployments be “future-proof.”
Discussing PCIe, Kaestner said it remains a standard interface used across server processors and GPUs, and that the pace of PCIe generation cycles has compressed from roughly three to four years to about 18 to 24 months. He said Microchip increased development efforts to stay at the forefront of those cycles and that deployments can span both scale-up and scale-out architectures depending on customer designs.
Automotive connectivity, China commentary, and capital allocation priorities
In automotive, Kaestner said Microchip’s presence extends beyond microcontrollers into areas such as touch controllers, car access systems (including key fobs and hands-free entry), and in-vehicle networking products spanning LIN, CAN, MOST, and early automotive Ethernet. He described a trend toward consolidating numerous in-vehicle communication standards into Ethernet-based systems and said Microchip is positioned with automotive switches and transceivers ranging from 10BASE-T1S to gigabit speeds.
Kaestner also highlighted PCIe as an emerging automotive connectivity pillar, describing automotive PCIe switches derived from the company’s PCIe Gen 4 data center switch design and adapted with automotive safety and security features and fewer lanes to reduce cost. Additionally, he discussed an acquisition completed in April of the prior year related to camera-to-compute and compute-to-display connectivity and said Microchip is involved in the Automotive SerDes Alliance (ASA) alongside OEMs including BMW, with products in market and proof-of-concept activity underway.
On China, executives said the market remains volatile but characterized many Chinese customers as pragmatic and willing to buy U.S. semiconductor products if price and features align. They noted stronger competitive pressure at the low end (microcontrollers and some analog), while citing continued design momentum in automotive for complex features that local competitors do not yet offer. Management said a “high single digit” portion of Microchip revenue stays within China and is not re-exported, and described restrictions affecting some advanced products tied to certain infrastructure-related entities, but said the impact to Microchip has not been dramatic.
Finally, Investor Relations executive Sajid Daudi said Microchip’s near-term financial focus has shifted toward reducing debt after the downturn drove EBITDA lower and pushed net debt-to-EBITDA higher. He said the company completed a $1.5 billion mandatory convertible offering to address leverage concerns. Daudi said net debt-to-EBITDA was 4.18x last quarter, down from 4.69x, and reiterated a longer-term target discussed previously of 1.5x, noting “anything sub-2” remains the direction of travel.
Daudi said Microchip’s dividend remains intact, but indicated buybacks are unlikely in the near term as the company prioritizes deleveraging. He added that the most recent quarter was the first in several quarters where cash flow covered the dividend, rather than requiring borrowing.
About Microchip Technology (NASDAQ:MCHP)
Microchip Technology Inc is a semiconductor company headquartered in Chandler, Arizona, that designs, develops and supplies a broad portfolio of embedded control and analog semiconductors. Its product lineup centers on microcontrollers (including the well-known PIC family), digital signal controllers and associated development tools and software, along with a range of mixed-signal and analog devices, nonvolatile memory, power management, timing, interface, wireless and security products. The company also provides integrated hardware and software solutions intended to simplify embedded design and accelerate time to market for OEMs and contract manufacturers.
Microchip’s products are used across a wide range of end markets, including automotive, industrial automation, consumer electronics, communications, aerospace and defense, and Internet of Things (IoT) applications.
