Microchip Technology (MCHP) Q2 FY2027 Earnings Call: Q&A Summary

Q: Timothy Arcuri of UBS asked for an explanation of the puts and takes regarding lower December revenue and utilization despite strong bookings.

A: Steve Sanghi explained that the September quarter had noise from licensing and pricing, and the December quarter is seasonally weak. He noted that the backlog for the March quarter is better than the December quarter was at this point, and current supply constraints are pushing some orders into the March quarter.

Q: Timothy Arcuri of UBS asked when PCIe Gen6 wins will become significant revenue and if the incremental revenue can be sized.

A: Steve Sanghi stated they cannot dollarize the wins, but shipments started last quarter and will increase every quarter. He noted that by the start of 2028, all 24 designs should be in production, and Eric Bjornholt clarified that the 24 wins include both PCIe and retimers.

Q: Matthew Prisco of Cantor Fitzgerald asked about order linearity through October and November and booking trends across end markets.

A: Eric Bjornholt and Steve Sanghi reported that bookings were strong through September and October. Sanghi added that if the $53 million in infrequent items from the September quarter are removed, the December quarter guidance represents growth of 2.3%, which is better than normal seasonality.

Q: Matthew Prisco of Cantor Fitzgerald asked for color on foundry and OSAT constraints and how the company expects the situation to evolve in 2027.

A: Steve Sanghi explained that capacity allocation is increasing, but demand exceeds it, pushing some orders to future quarters. He noted that if AI demand cools, it will free up capacity for broad-based business.

Q: Joe Quatrochi of Wells Fargo asked about industrial demand acceleration and the company's exposure to data center infrastructure outside of the AI bubble.

A: Steve Sanghi described industrial as a broad market including factories, robotics, and medical. He noted that data center is an early-stage opportunity for Microchip, and if data center demand slows, it has limited impact on the company compared to peers.

Q: Joe Quatrochi of Wells Fargo asked if the improvement in underutilization charges is linear.

A: Eric Bjornholt and Steve Sanghi stated it is not linear and no big improvement is expected this quarter, as they are slowing assembly and test operations while ramping wafer fabs.

Q: Chris Caso of Wolfe Research asked about the pricing impact on the December quarter and if supply improvements will lead to margin benefits in 2027.

A: Steve Sanghi explained that pricing benefits were offset by the inability to ship high-margin products. He noted that industry costs are rising and the long-term gross margin target remains 65%.

Q: Vivek Arya of Bank of America asked if the volatility in semiconductor stocks signals earnings cuts or peak demand.

A: Steve Sanghi stated that non-data center markets are fine, while data center demand was explosive and is now correcting, which he described as predictable.

Q: Vivek Arya of Bank of America asked if above-seasonal growth is still possible for Microchip.

A: Steve Sanghi confirmed that non-data center demand is normal and the data center segment is only 16.7% of the business, meaning the company is not as exposed to a potential data center slowdown.

Q: Vijay Rak of Mizuho asked when aerospace and defense orders will return and about the visibility.

A: Steve Sanghi noted that the segment grew 41% year-over-year and primes are building capacity, meaning growth will be consistent rather than a hockey stick.

Q: Vijay Rak of Mizuho asked about the flexibility to pass through foundry and OSAT price increases.

A: Steve Sanghi stated that margins are healthy and they are not planning a price increase now, preferring to absorb the costs.

Q: Harlan Sur of JPMorgan asked why front-end utilization would not increase given the strong demand.

A: Eric Bjornholt and Steve Sanghi explained that the back-end is not fully utilized and internal products also face OSAT constraints.

Q: Harlan Sur of JPMorgan asked about the adoption of embedded NPU accelerators in MCUs.

A: Steve Sanghi explained that internal MCUs lacked hardware AI, so the Hailo acquisition accelerated their roadmap by 5 years, leading them to cancel internal NPU development.

Q: Jim Schneider of Goldman Sachs asked about customer willingness to build inventory.

A: Steve Sanghi stated there is no desire to build inventory, and customers only react when they get in trouble with lead times.

Q: Jim Schneider of Goldman Sachs asked if the margin reset is due to input costs.

A: Steve Sanghi confirmed they backed off from the 66% assumption and reiterated that 65% is the long-term target.

Q: Blayne Curtis of Jefferies asked about the trigger to pull back utilization.

A: Steve Sanghi described the equation as complex across 40 factories and noted that AI deceleration would help.

Q: Blayne Curtis of Jefferies asked about restocking in the auto channel.

A: Steve Sanghi reported that auto was up 19.3% with good design wins, and while they do not expect 100% growth, it remains a steady contributor.

Q: William Stein of Tourist Securities asked about the impact of the two acquisitions on COGS or OpEx.

A: Eric Bjornholt and Steve Sanghi noted an OpEx impact from Hailo R&D, while Vorago is profitable but contributes small revenue.

Q: William Stein of Tourist Securities asked if the AI data center bubble is problematic for Microchip.

A: Steve Sanghi stated it is not, as data center is only 16.7% of the business and their broad-based exposure is their strength.

Q: Joshua Buchalter of TD Cowen asked about the company's philosophy on pricing versus competitors.

A: Steve Sanghi said they are careful with increases, noting they are a premium price company with high operating margins.

Q: Joshua Buchalter of TD Cowen asked when the company will return cash to investors.

A: Eric Bjornholt stated the board wants to reduce leverage first.

Q: Christopher Rolland of Susquehanna asked when the cycle might end.

A: Steve Sanghi said the non-data center cycle continues and the data center segment is currently in a retooling phase.

Q: Christopher Rolland of Susquehanna asked if the company would reconsider its internal versus external mix or build a new fab.

A: Steve Sanghi and Eric Bjornholt stated there will be no new fab, as the current issues are short-term and internal production also faces constraints.

Q: Tore Svanberg of Stifel asked about visibility into OSAT capacity.

A: Steve Sanghi explained they are qualifying new OSATs, with some capacity coming next quarter and more in June.

Q: Tore Svanberg of Stifel asked for confidence in Gen6 production.

A: Steve Sanghi confirmed that the 24 design wins will go to production.