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Microchip Technology is involved in the development, manufacturing, and sale of embedded control solutions in Europe, Asia, and the Americas. The company offers numerous products, including mixed-signal microprocessors, microcontrollers, and specialized microcontrollers for applications such as automotive, industrial, computing, communications, lighting, security, and wireless connectivity. Additionally, it provides wafer foundry and assembly, test subcontracting manufacturing services, timing systems products, application-specific integrated circuits, and aerospace products.

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Microchip Technology (MCHP): Company Profile, Stock Price, News, Rankings

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Microchip Technology

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Good afternoon, ladies and gentlemen, and welcome to the Microchip Q1 Fiscal twenty twenty six 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. Please press 0 for the operator. This call is being recorded on Thursday, 08/07/2025.

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 COO Eric Bjornholt, Microchip's CFO and Sajid Dowdy, Microchip's Head of Investor Relations.

I will provide a reflection on our fiscal first quarter twenty twenty six 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 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 a 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% 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 two thirty basis points sequentially. And incremental non GAAP gross margin was 76% sequentially. Non GAAP operating margin was up six seventy basis points sequentially, and incremental non GAAP operating margin was 82% sequentially. Inventory went down by $124,000,000 sequentially.

Our target for the whole fiscal year is a $350,000,000 reduction. So we are off to a very good start. Inventory days were two fourteen days. Our inventory over two quarters has gone down from two sixty six days to two fifty one days to two fourteen days. We expect inventory at the September to be between one hundred and ninety five and two hundred days.

The inventory write off in the June was $77,100,000 down from $90,600,000 in the March. The inventory write offs are expected to decrease again in the September. Under utilization in our factories in the June was $51,500,000 down from $54,200,000 in the March. We expect the under utilization will modestly decrease again this quarter with a more significant decrease in the December. Adding $77,100,000 of inventory write off and $51,500,000 of underutilization charge makes a total of $128,600,000 of charges.

Divide that by the net sales of $1,075,000,000 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% indicates that the product gross margin was 66.3%. The point is, as inventory write off and underutilization charges decrease, we believe our long term non GAAP gross margin target of 65% is achievable. We have accrued about $5,500,000 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 Bianhold, 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?

Thanks Steve, 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 described in our earnings press release and in the reconciliations on our website. Net sales in the June were $1,075,000,000 which was up 10.8% sequentially and $5,500,000 above the high end of our updated June guidance provided on May 29. 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 underutilization charges of $51,500,000 new inventory reserve charges of $77,100,000 operating expenses were at 33.7% of sales and operating income was 20.7% of sales. Non GAAP net income was $154,700,000 and non GAAP earnings per diluted share was $0.27 which was $01 above the high end of our updated guidance.

On a GAAP basis in the June, margins were 53.6%. Total operating expenses were $544,600,000 and included acquisition intangible amortization of $107,600,000 special charges of $22,200,000 which was primarily driven by foundry contract exit costs and our activities associated with the closure of Fab two, share based compensation of $45,200,000 and $7,500,000 of other expenses. The GAAP net loss attributable to common shareholders was $46,400,000 or $09 per share. Our non GAAP cash tax rate was 11.25% in the June, and we expect to record a non GAAP tax rate of about 9.5% in the September. Our non GAAP tax rate for fiscal year twenty twenty six 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 06/30/2025 was $1,169,000,000 and down $124,400,000 from the balance at 03/31/2025. We had two fourteen days of inventory at the end of the June, which was down thirty seven days from the prior quarter's levels by our inventory reduction actions is what drove this. Included in our June ending inventory was sixteen 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 was at twenty nine days, which was down four days from the prior quarter's level. Distribution sell through was about $49,300,000 higher than distribution sell in.

Our cash flow from operating activities was $275,600,000 in the June. Our adjusted free cash flow was $244,400,000 in the June. And as of June 30, our consolidated cash and total investment position was $566,500,000 Our total debt decreased by $175,000,000 in the June and our net debt increased by $30,200,000 Our adjusted EBITDA in the June was $285,800,000 and 26.6% of net sales. Our trailing twelve month adjusted EBITDA was $1,167,000,000 and our net debt to adjusted EBITDA was 4.22 at 06/30/2025. Capital expenditures were $17,900,000 in the June and we expect capital expenditures for fiscal year twenty twenty six to be at or below $100,000,000 Depreciation expense in the June was 39,500,000.0 And I will now turn it over to Rich, who will provide some commentary on our product line innovations in the June. Rich?

Thank you, Eric, and good afternoon, everyone. I am pleased to share our operational progress this quarter, highlighting strong momentum across aerospace, defense, AI applications, and network connectivity. As a leading semiconductor supplier to the Department of Defense and our NATO allies, our aerospace and defense business continues to strengthen amid increased global defense spending, driven by geopolitical tensions and NATO monetization. With over sixty years of aerospace and defense heritage, including from our acquisitions, we have recently achieved significant defense industry device qualifications and continue to expand our product portfolio to support commercial aviation, defense systems, and space application. Microchip plays a key role supporting products to many modern defense platforms.

Also, our radiation tolerant FPGA solutions can deliver up to 50% power savings while maintaining the highest levels of security and reliability. We have recently expanded our FPGA portfolio by introducing cost optimized solutions that deliver up to 30% cost reduction while maintaining industry leading performance and security. This positions us firmly across both high reliability defense applications and broader industrial markets. Microchip continues to be a leader in the microcontroller industry and enabling customers with our AI coding assistant, aiding customers to achieve up to a 40% productivity improvement in programming our microcontroller devices. At Masters, our major technical conference this week, we previewed further advancements for the attendees with the inclusion of AI agents into the AI Coding Assistant that will be released into the market in September, further improving productivity and reducing time to market for our customers.

The AI build out continues to create substantial opportunities across our portfolio. We have secured design wins in data center infrastructure, spanning AI acceleration, storage, and network infrastructure with tier one cloud providers and enterprise leaders. We have strategically expanded our connectivity, storage, and compute offerings for AI and data center applications, as well as intelligent power modules for AI at the edge. Security remains paramount as defense and AI deployments proliferate. We have made significant advances with embedded controllers that feature immutable post quantum cryptography support, which was recently mandated by the NSA.

This support enhances the security of platforms using our digital signing for secure boot and secure firmware over the air updates. These capabilities are essential enablers to protect our defense, industrial, and AI applications well into the future in compliance with critical standards such as CNSA two point zero and the European Cyber Resiliency Act. With that, I will pass the call to Steve for comments about our business and guidance going forward. Steve?

Thank you, Rich. During the last quarter's earnings conference call, I talked about a trifecta effect on our revenue growth. We saw that effect in action last quarter. First, our distributors' customers' inventory is getting corrected, and we saw the first sequential increase after two years in distribution sales out last quarter. Second, the distributors' sell in versus sell through GAAP shrunk from $103,000,000 in the March to only $49,300,000 in the June.

So distribution sell in is rising to meet the sell through. And we believe there is more to go. And third, our direct customers inventory is getting corrected and we saw the first sequential increase in direct sales in two years. This trifecta effect led to a 10.8% sequential growth in our net sales in the June. We believe that this dynamic is still in effect.

Importantly, we believe we are seeing, represents structural demand recovery as we remain below normalized end market demand levels. After two years of correction, we believe we are feeling a supply chain deficit rather than experiencing any significant pull forward activity. The second effect I have spoken about is the impact on gross margins. As the inventory comes down, our inventory write off will decrease, thus growing our gross margin percentage. And as the inventory comes down, and we start to grow the factories again, our underutilization charge will decrease and will further grow the gross margin.

We saw these two effects in action last quarter. Our inventory write off decreased from $90,600,000 in the March to $77,100,000 in the June. Our factory underutilization charge dropped from $54,200,000 in the March to $51,500,000 in the June. This combined effect is adding to our gross margin. We expect the increase in gross margin percentage will continue as the inventory write off continues to decrease, and we ramp the factories, which will lower the underutilization charge.

We currently plan to start increasing wafer starts in the December. Now, the market environment. We are seeing some recovery in our key end markets Automotive, industrial, communication, data center, aerospace and defense markets, and consumer are all looking somewhat better. While we have not seen any material tariff related pull ins in April and May, we saw some selective acceleration of orders from Asia which appear to be tariff related. We believe that such pull ins amounted to only mid to high single digit millions.

However, it is important to provide context on pull ins more broadly. We are still shipping below normalized end market demand across most of our markets after two years of inventory correction, this deficit to normal demand level means that any pull in we are seeing represents underlying demand where the inventory has run out at the customers rather than borrowing from future quarters. Now let's go into our guidance for the September. We believe substantial inventory destocking has occurred at our customers, channel partners, and downstream customers, and the trifecta effect is in play. Our backlog for the September started higher than the starting backlog for June, And as of this time, the backlog for September is comfortably higher than the backlog for June at the same point in time.

The bookings for July were higher than bookings for any month in the last three years. I will make a comment about lead times. While lead times for products have been four to eight weeks for some time, we are experiencing a lead time bounce off the bottom and increases on some of our products. While we have sufficient inventory, it is mostly held in the die form. We still have to package and test the products.

We're running into challenges on certain kind of lead frames, substrates, and subcontracting capacity. While these challenges are isolated to specific areas, we expect them to broaden and lead times go from the four to eight weeks range to more like six to ten weeks range. Out in time and on certain products, they're likely to go to eight to twelve weeks range. The customer and distributor inventories have begun to run low on many products. We are increasing increasingly getting short term shipment requests and pull ins of the prior orders.

Our customers will be well advised to manage their backlog, and have twelve to sixteen weeks of their needs on backlog, so they are not caught short. The emerging lead time pressures and increasing customer requests for expedited shipments reflect the reality that inventories have run too low on certain products. This dynamic supports our view that we are seeing demand normalization from a severely corrected starting point rather than speculative buying on any significant pull forward activity. Taking all of these factors into account, we expect our net sales for the September to be $1,130,000,000 plus or minus $20,000,000 We expect our non GAAP gross margin to be between 5557% of sales. We expect our non GAAP operating expenses to be between 32.432.8% of sales.

We expect our non GAAP operating profit to be between twenty two point two percent and twenty four point six percent of sales. We expect our non GAAP diluted earnings per share to be between $0.30 and $0.36 per share. I want to again highlight the leverage in our business model. With a 54,500,000 sequential increase in net sales at the midpoint, we would expect to see approximately 77% of such amount go to the bottom line as non GAAP operating profit. As the inventory drains further and inventory write offs decrease, we expect our gross margin recovery will accelerate, and with the incremental profits going to the bottom line, we will have tremendous leverage.

Finally, a comment on our capital return program for shareholders. After this September, we expect our adjusted free cash flow to exceed our dividend payment, driven by increasing revenue and profitability, low CapEx, and liberating cash from the inventory. Therefore, we do not expect to have to borrow money to pay our dividend after this quarter. In future quarters, we intend to use this excess adjusted cash flow to bring down our borrowings. With that, operator, will you please poll for questions?

Thank you. Ladies and gentlemen, we will now begin the question and answer session. And should you wish to cancel your request, please press star for beta two. I would like to advise everyone to have a limit of one question and a brief follow-up. If anyone have an additional question, you can put yourself back in the queue by pressing star one again.

Thank you. And your first question comes from the line of Vivek Arya. Thank you. Please go ahead.

Thank you for taking my question. Steve, many of us equate better than seasonal sequential trends as a sign of recovery. So when you look at your September outlook, sales up 5% or so sequentially, would you call that seasonal, above seasonal? I think basically what we are all trying to get our hands on is that yes, there is a recovery, but are we done with that stronger recovery as in lot more above seasonal quarters. So just how would you describe September seasonal, above seasonal? And then what does that kind of inform us as to how December could shape up in kind of similar terms?

So thanks, Vivek. September guidance of 5.1 up sequentially would be considered well above seasonal. You know, our seasonal increase usually per quarter are really in the 3% range, in the September quarter. And December quarter usually is the weakest quarter of the year. Ordinary times, totally normal inventory times, December quarter will be sequentially slightly down, and March quarter will be up again.

So we were strongly above seasonal in the June quarter, We're strongly above seasonal in the September quarter. And I would expect that we'll continue to be above seasonal in December and March.

Alright. Thank you, Steve. And, you know, when we look at several of your peers, they had a strong June. You know, they kind of guided September line ish, but they expressed some caution as they looked at December onwards, mainly because there seems to be kind of this renewed threat about the delayed impact of tariffs and whatnot. What's your read, Steve, of the macro environment? Do you think that as you look out beyond September that the recovery is as strong as you thought three months ago? Just how would you kind of contrast the kind of recovery you are seeing versus the slightly more conservative tone that some of your analog peers have indicated on their earnings calls? Thank you.

Vivek, you know, our sales went down much more significantly than others because of really excessive inventory at the direct customers as well as channels, driven by our PSP program, which was launched during the COVID years and continued well afterwards. Many of our competitors and peers got off the non cancellable, non returnable treadmill, I think a year earlier than Microchip did, and therefore we continue to ship large amount of products to our customers and distributors in accordance with the PSP rules. So therefore, when we eventually corrected, our sales went down much much harder than others. So what we're seeing right now is the trifecta effect we talked about. Inventory is going down at our distributors customers.

They're going down at distributors. Our sales in are catching to sales out from distributors. Our direct customer inventory is going down. So we believe the dynamics that are taking place at microchip are more driven by those kind of factors and not any kind of tariff related pull in. We have done substantial analysis on the tariff question.

Part of our normal process each quarter is to ask our distributors to explain any significant fluctuations in their customers quarterly sales. This is done at a very forensic level, so covering a large percentage of our customer base. We did this and we identified a small number of customers that identified tariffs as a reason for the sequential change in their revenue. When we extrapolated this data, we believe the impact came out to be only mid to high single digit, $7.08, $9,000,000 range. We have no direct customers that indicated that tariffs were the reason for their increase in revenue.

I also want to remind investors that a very high percentage of our direct customer exposure in China actually is manufactured in free trade zones that are not impacted by tariffs. So therefore, the phenomena we're seeing at microchip is really related to inventory digestion than any kind of tariff plan activity.

Thank you. And your next question comes from the line of Harsh Kumar. Thank you. Please go ahead.

Yes. Hey, Steve. I've got two as well. Steve, I was hoping that for September, you could help us understand the growth between the two key end markets, auto and what I would call as pure industrial. Why I'm saying pure industrial is because you're in defense, and defense is very strong for obvious reasons, and it's queuing things for the industrial category.

So I was hoping that just outside of defense, if you could just talk about in September, which ones, you know, how do you see auto versus pure industrial playing out?

So, you know, with such a strong growth of 10.8% sequentially, which you annualize it, it's a phenomenal enormous rate of growth. So with a very, very strong June, we actually saw growth across all of our product lines, end markets, microcontrollers, analog. So it was very, very broad based in all geographies. So therefore, I think my my simple answer would be we saw recovery pretty much in all end markets.

Okay. Fair enough. Can I ask you, Steve, if at this point, you feel like sell through is equal or higher than selling at your distributors? And if there's a gap, what kind of gap there are, you know, to the best of your knowledge, I know it's a difficult one to answer, what kind of gap exists? And your inventory dollars came down, I think by 124,000,000, which is a big number.

How far do you think you are from where you wanna be in terms of optimal inventory level.

Well, I think we gave you the number in our prepared remarks. Let me pull it out again.

Sell sell through and distribution was $49,300,000 higher than what sell in was. And you know, that's just the distribution piece of our business, which is a little less than 50%. We absolutely believe that our direct customers are draining inventory too and consuming more that we're shipping to them, but we just don't have real time data to show you. That 49,300,000.0 compares to $103,000,000 the quarter before. So the gap is shrinking, but there's still a gap.

There's still a $49,300,000 gap. So selling is rising to meet sell through. Now we closed half the gap last quarter and, you know, we don't know. It could take a couple of more quarters to close the rest of the gap.

Yep. Progress we're making towards inventory. Right? The inventory target overall. And Steve, do wanna address it or do you want me to?

Yeah. So I'll I'll address it. So we we are bringing inventory down in days of sales in pretty heavy chunks. It was two hundred sixty six days of inventory at the December. That came down to two hundred fifty one days at the March.

Came down to two hundred fourteen days, very large drop, at the June. And we are forecasting that we'll break the 200 and be between one hundred ninety five and two hundred at the September. In dollars of inventory reduction, we reduced inventory last quarter by $124,400,000. So we're making massive progress by shutting down one of our fab, the Tempe fab two, and a substantial scaling down of our other fabs. We are producing products in our factories which is well well below the rate of consumption.

That's why the inventories are dropping by a very large amount. That essentially will continue. We will start growing wafer starts in December, as I said in my remarks. Not that our inventory has fully come down, but if we wait till our inventory is totally normal to then start growing the fabs, we're gonna have to grow the fabs by 40% in a single quarter. And that's not possible.

It you know, so therefore, we have to start early and asymptotically reach the number where the fabs need to run.

Understood, Steve and Eric. Thank you so much.

Thank you. And your next question comes from the line of Chris Caso from Wolfe Research. Please go ahead.

Yes. Thanks. Good evening. I guess the first question, maybe following on some of your prior comments is, you know, just getting a sense of how far below end demand, you you think you're really shipping now. And recognize you have your best data with distributors.

And you talked about how low point of sale is. And I guess the quick math, it would seem like, I guess you're about maybe 10% below point of sale and distribution, but the distributor inventories also not at bad levels. Do you have a sense of how much by how much you might be under shipping real end demand at your direct customers?

We have a sense, but the sense is not audit proof and really can't be discussed outside. The number that we could share and we have shared is the gap between sell in and sell out, because those are two actual numbers. Other than that, how much inventory our distributor customers have is very anecdotal. By asking our distributors, by asking some of the customers that we jointly visit, and since the customer base is so broad, having 110,000 plus customers, you know, if you do the analysis based on larger customers, it's really, you know, it's not audit audit proof. And then when you get to your direct customers, the analysis is even more difficult.

Many of our large industrial customers buy, 900 different line items and produce the product in 26 different factories around the world. And and some products have inventory and some products are short, and they're expediting those products. So to get a total feel for it is very difficult. Anecdotally, as we do the analysis, we know many, many line items that have a run rate, and and they're not buying because they still have inventory. And on other line items, they were not buying two months ago or three months ago, and they're buying now, which means the inventory is running low.

So I think when I put it all together, I I believe inventory correction will continue for some time, and our sales will continue to grow towards the more normalized levels. Exactly how far are we and when will that end, I don't think I can put a number with very high confidence.

Right. I mean, it sounds like and and maybe if I could ask a different way, which would be easier to answer. Do you think that you're under shipping the direct customers by more or lesser, more or less than than than the distribution customers based on the rough analysis you've been able to do?

Again, just directionally, during the go go days, we prioritized shipping to direct customers more than to distributors. So direct customers got a more than fair share of the product. And therefore, direct customers in most cases build higher amount of inventory, you know, than the distributors were able to do. So, you know, I think just by, you know, by that statement, I would say the inventory at direct customers is probably higher than the inventory at distributors.

Right. Alright. That's helpful color. Thanks, Steve.

Thank you. And your next question comes from the line of Blayne Kirkland from Jefferies. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking my question. I wanted to maybe I missed it. I just wanted to know the timing.

You talked about lead times extending from four to eight, six to ten, eight to twelve. Is that now or is that where you expect it to go?

So lead times, broadly on most of our products, times are four to eight weeks. But on certain products, like I said, in certain pockets, the lead times have gone longer. And some of them are six to ten weeks, and some are even headed towards eight to twelve weeks. And those are cases where we are short of lead frames, short of substrates, in a given pocket, given package type, our subcontractors are overbooked, we're trying to find and negotiate a place. So this always starts partly like this, we have a substantial recovery to go through in our sales still because we're shipping so much below the end consumption.

So this is just a warning shot to our customers, you know, to really bring their backlog healthy because lead time being short, you get very short term bookings, you get very short term visibility. So it's it's a message to our investors, but more than that, it's a message to our customers to make sure that they look at their demand for twelve to sixteen weeks and give us that backlog so we can buy lead frames and substrates and start wafers and do everything in the right mix to be able to meet their needs.

Got you. So I think you kind of answered it, but you said that you had more bookings at this time versus last time, the same time frame last quarter. I guess, lead times kind of the duration is the part we don't know. Is the when you look at how you set the guide, is the level of churns you're looking for in the quarter the same? Or is it different?

Yeah, July bookings were the largest bookings for any month in the last three years. Any month of June quarter, but any month of the prior three years. So we had a very, very strong month of July. Now, bookings every quarter are different based on how much backlog you begin with and what the lead times are. If the lead times are short, you get higher terms.

If the lead times are longer, you get less terms. And our backlog started in September stronger than June. And the turns requirement is about the same. And with the same kind of turns requirement roughly, I think we'll have a good quarter.

Thank you. And your next question comes from the line of James Schneider from Goldman Sachs. Please go ahead.

Good evening. Thanks for taking my question. I was wondering if you could maybe comment on any end markets that you think are materially lagging in terms of end demand. Steve, I know you talked about a number that are they're doing well as most of them, I believe. Any that are lagging?

And do you see any improvement in the ones that are lagging? The reason I asked the question is because I believe your other products didn't really grow much sequentially and think they were down slightly sequentially. Just trying to understand what happened there.

This is Rich Simonteck. I would say automotive is still lagging more than any of our other markets today, if you wanted to be specific about that. AI data centers or data centers are doing very well and recovering. Industrial, some of the smaller and medium sized customers are starting to recover. It seems that the one that's probably lagging the most is automotive at this point in time.

Yeah, and that other category of revenue that you're referring to is everything other than the microcontrollers and analog and includes licensing and some other things that tend to be a little bit more lumpy. That can drive some of that fluctuation quarter to quarter, Jim.

Okay. That's helpful. Thank you. Then maybe just as a follow-up, relative to the President Trump's press conference yesterday, where he talked about tariff exemptions for companies with U. S.-based investment or increased U.

S.-based manufacturing investment. Just wanted to confirm, is it your understanding that your existing US manufacturing investments qualify you for that exemption? Or do you have to do more or do you not know yet?

Yeah, I think anything President Trump says is never clear, and often changes a week or two weeks later. But the way we understand what he said is it's not by products that are made in US and the products that are made overseas. So we make some products here and we make some products overseas in TSMC and other places. So it's not that you have to pay a tariff on the products that are made overseas, but you qualify as a company. Now as a company, we make large amount of manufacturing in US, and then we also buy wafers from foundries outside. So because we make so many investments in US, and large amount of our manufacturing in US, our interpretation is that we will qualify to be exempt from tariffs.

And if that is the case and if that holds, then I think we are okay. And maybe in better shape than some of our competitors, like the Japanese competitors and others.

Thank you. And your next question comes from the line of Timothy Arcuri from UBS. Please go ahead.

Thanks a lot. Steve, you said bookings are the highest since July 2022. But in reference to a you know, another question, you're guiding up 5%. Yes. It is better than seasonal, but it's not that much better.

And then you just said the turns are about the same in q three, unless I misunderstood what you said. So to me, that kind of implies that a lot of these bookings are filling in q four, as in as in the December, you know, rather than, you know, calendar q three. So is it fair that you can say at this point that December should be another really good quarter?

Yeah. I think I'm not willing to get that far. I think I said in my commentary that I expect us to continue to be above seasonal in September, December, and even into March. Know, good quarter is anybody's definition. I don't know without numbers what that means.

But what happened in on on July 1, our our backlog for the September was meaningfully higher than our backlog for the June quarter on April 1. And if we get about the same amount of turns this quarter as we got last quarter, then we'll have a good September quarter. Having said that, there are strong bookings this quarter, summer turns and summer going into the calendar fourth quarter.

Okay. Thanks. And then you did say that lead times are lengthening and and you actually said you're encouraging customers to expedite orders. I think a lot of us see what happened to, you know, last cycle and worry that we that when we hear that, that it could scare customers off a little bit because of the potential to get back into, a PSP sort of a dynamic. So if lead times are already sort of doubling for some products and you barely even come off the bottom, how are you managing this messaging to customers to avoid what kinda happened last cycle? Thanks.

So first of all, we're not asking any customers to expedite orders. We're simply asking them to place the order with a scheduled backlog. So today, a lot of the orders are very short term orders because lead times are very short. And what they need in q four, they think they can place the order in late September and still get the product. And we're simply saying, look a little bit farther ahead and lay it in the backlog for every month going out four months, which is not the same as expediting orders.

We're not asking them to take the product early, we're not trying to ship above demand. We're simply asking them to place the orders. Secondly, we're not changing the rules of cancellation. So if they give us a higher visibility and their demand changes, higher or lower, or they wanna change the product, the product is cancelable. It's not non cancelable order.

So they have complete flexibility. Therefore, there is no comparison to a PSP environment here.

Right. The other thing that we are seeing from customers, and Steve kind of alluded to this earlier, is we are seeing them, they'll have an order already on the books and then they ask to pull that in. And sometimes that can be challenging without visibility to be able to meet their new requested dates. So having better backlog visibility helps us better service the customer. So that's really all we're saying here.

Yeah, and at least having the extended backlog, even if they do wind up pulling that in, that is still better for us because it allows us to plan capacity and purchase materials that we may need to build that product.

Thank you. And your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.

Microchip Technology (MCHP) Q1 2026 Earnings Call Transcript

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