Date: May 7, 2026 | Source: Motley Fool (fool.com) / company press release
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Eric Bjornholt (CFO): Thanks, Kate, and good afternoon, everyone. In attendance with me today are Steve Sanghi, Microchip's President and CEO; Richard J. Simoncic, Microchip's COO; Brian McCarson, VP of Microchip's Data Center Solutions business unit; and Sajid Dowdy, 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.
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. Our revenue results were above the high end of the guidance range we provided on February 5, 2026. 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%.
On a non-GAAP basis, gross margins were 61.6% in the March quarter, including capacity underutilization charges of $46.6 million. Operating expenses were 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 were $0.57, which was $0.07 above the midpoint of our guidance. On a GAAP basis in the March quarter, gross margins were 61%. The GAAP net income attributable to common shareholders was $116.4 million, or $0.21 per share.
For fiscal year 2026, net sales were $4.713 billion, 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.
Our non-GAAP cash tax rate was 5.8% in March, and 8.6% for fiscal year 2026. Our non-GAAP tax rate for fiscal year 2027 is expected to be about 10%. Our inventory balance at 03/31/2026 was $1.035 billion, down $22.3 million from the balance at 12/31/2025. We had 185 days of inventory at the end of March, which was down 16 days from the prior quarter's level. Inventory at our distributors in March was at 26 days, which was down 2 days. Distribution sell-through increased by 11.4% during the quarter.
Our cash flow from operating activities was $257 million and our adjusted free cash flow was $228 million in the March quarter. Our total debt increased by $143 million in the March quarter, impacted by our refinance activities including issuing a 0% four-year convertible bond for which we paid $68 million for a 100% cap call. Our adjusted EBITDA in the March quarter was $466.8 million and 35.6% of net sales, up 132.9% from the March 2025 quarter. Our trailing twelve-month adjusted EBITDA was $1.496 billion. Our net debt to adjusted EBITDA was 3.54 at 03/31/2026, down from 4.18 at 12/31/2025. We expect the June 2026 quarter to be an excellent cash generation quarter, resulting in meaningful debt reduction, and expect our net debt to adjusted EBITDA to drop below three. Capital expenditures were $14.2 million in the March quarter, and $91.99 million for fiscal year 2026. Our expectation for capital expenditures for fiscal year 2027 is to be approximately $100 million. I will now turn it over to Brian.
Brian McCarson (VP, Data Center Solutions): Thank you, Eric, and good afternoon, everyone. We are seeing significant momentum across all three major product families within our Data Center Solutions business. First, our storage controller products have supported some of the world's most reliable SAS, SATA, NVMe, and RAID infrastructure. As AI inference and agentic AI workloads increase demand for persistent data access, demand for our products continues to grow. Our Adaptec 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.
Second, our memory controller product family has been reinvigorated by the launch of our next-generation devices. We brought three new CXL and PCIe-based devices into production in calendar year 2025, and our next Gen5 dual-port device is scheduled to enter production this quarter. We have secured meaningful design wins that have begun ramping and that we expect will continue to grow through fiscal 2028.
Third, our Switchtec business has continued to build momentum since the announcement of our latest PCIe Gen6 switch just two quarters ago. Since that time, we have secured a total of six significant design wins, with customers citing our product quality, signal integrity, differentiated features, and performance per watt as industry-leading. Our Gen6 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 are very excited to announce we have entered the PCIe retimer market this quarter. This retimer is architected as a companion die for our PCIe Gen6 switches and is also designed to support the rapid growth of the active electrical cable market. We have already secured a major OEM design win on an upcoming Gen6 platform, displacing one of our competitors.
These wins reflect several competitive advantages. First, power efficiency: our Gen6 switches and retimers deliver strong power efficiency. Second, 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. Third, quality and tools, with world-class diagnostic and configuration tools with ChipLink. And finally, support through the entire customer journey. I will pause here and turn the call over to Steve.
Steve Sanghi (President & CEO): Thank you, Brian, and good afternoon, everyone. I will start by providing you a brief update on our nine-point recovery plans. The first item was to right-size our manufacturing footprint. This was completed; the remaining item is selling our Tempe fab, and we have several interested parties. The second was to bring the inventory down. We have brought inventory down from 266 days in December 2024 to 185 days in March 2026, with dollar inventory down $319 million from the December 2024 peak of $1.356 billion to $1.037 billion. We are now in a significant revenue growth mode and expect inventory to come down naturally towards our goal of 130 to 150 days.
Third was the megatrend alignment, completed by creating a megatrend for AI replacing 5G, and another for networking and connectivity replacing ADAS. Fourth was business unit alignment, completed by realigning into five pillars: microcontrollers, analog, networking and connectivity, high performance compute, and artificial intelligence on the edge. Fifth was distribution programs, completed by realigning how we compensate distributors and consolidating our network. Number six was customer relationship improvement. Number seven was the new business model, unveiled in March with long-term non-GAAP targets of 65% gross margin, 25% operating expense, and 40% operating margin. At the bottom of the cycle in March 2025, non-GAAP gross margin was 52%, now improved to 61.6%. Operating expense was 38%, now 31%. Operating profit was 14%, now more than doubled to 30.6%. Number eight was operating expense percentage, and number nine was chipset, essentially on hold as we grow into current capacity.
We are seeing recovery in all of our end markets. Automotive, industrial, communication, data center, aerospace and defense, and consumer are all looking better. The strongest sales performance last quarter was in the aerospace and defense sector. We believe that we have completed the distribution inventory correction. We are starting to see large orders from distribution which show some restocking happening. The distributors' customers' inventory has also come down significantly. We are seeing thousands of customers reengage in buying our products.
Now let us get into guidance for the June quarter. In June, we expect strong growth from data center, A&D sector, industrial, and automotive end markets, and we expect nearly all business units to participate. Our bookings for March were significantly higher than those for December. The book-to-bill ratio for March was well above one, and April was the largest booking month in almost four years. While lead times for our products have been four to eight weeks for some time, we are continuing to see lead times increase on many products. We are running into challenges on certain kinds of substrates and subcontracting capacity, and also foundry constraints on multiple nodes.
We expect our net sales for June to be up 11% sequentially, plus or minus 1%. At the midpoint, that would be up 35.3% from the year-ago quarter. We expect non-GAAP gross margin between 62.25% and 63.25%, operating expenses between 28.75% and 29.25%, operating profit between 33% and 34.5%, and diluted EPS between $0.67 and $0.71 per share. With that, Kate, will you please poll for questions?
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Timothy Arcuri (UBS): Do you have an update on the pro forma growth rate for the company?
Steve Sanghi: We are just going through a phenomenal growth right now, and trying to put a longer-term growth rate in this environment is challenging. The growth rate in fiscal 2027, which started April 1, would be substantially higher than that growth rate. So we will push that out further.
Vivek Arya (BofA): March and June are both well above seasonal. What is driving that upside? Is the distribution correction done?
Steve Sanghi: Three things are happening. One, distributors and their customers were all in the ninth inning of burning inventory, and that's now fully corrected — actually distribution inventory is below normal, and we're seeing restocking orders. Two, we improved relationships with thousands of customers, and in many cases we had design wins but weren't getting our share — our customer count has increased by several thousand. Three, end markets are strengthening: A&D is very strong, data center very strong, industrial strong, automotive coming back. The combination has been really well above seasonal growth for June.
Eric Bjornholt: Our September backlog is higher than the June backlog at the same point in time. Things look good, but we are not willing to make a call yet on September revenue growth.
Brian McCarson (on Gen6 design win sizing): We do not readily comment on specific customers. We are disrupting competitors in this space, and our design wins displace incumbents, especially in Gen6. It's uncommon to see a lot of design wins prior to production ramp, yet our six design wins are prior to our production volume release at the end of this quarter. Once in production, we expect a steady increase in design wins and a ramp in revenue, hitting our stride in production next fiscal year.
Christopher Caso (Wolfe): Are you fully through inventory correction, and what are you planning on pricing?
Steve Sanghi: Distribution, distribution customers, and our OEM customers' inventory is broadly corrected. The strength you see is because thousands of customers are returning and distributors are restocking. On pricing, our normal philosophy is to give customers a price they can count on for the life of the design. Our gross margins are heading well toward the long-term target as underutilization goes away. We are trying very hard to stay on the good side of customers and not do an indiscriminate broad-based price increase, at least to our strong partner customers. In certain cases where input costs have gone up, we may adjust. As we speak right now, we have not increased our prices.
Harlan Sur (JPMorgan): On the memory-pricing-driven dynamic — NOR/EEPROM tightness, and FPGA progress?
Steve Sanghi: Driven by AI, DRAM capacity is very tight. Some NAND manufacturers shifted capacity to DRAM, some NOR manufacturers moved into NAND, some EEPROM manufacturers shifted to NAND flash. The bottom of that pile is the serial EEPROM we make — a number of people have basically abandoned it (doubled the price), and we are seeing significant opportunity in that business. On FPGA, the PolarFire 2 is in the fab and shortly coming out — we are very excited to launch PolarFire 2 later this year. Its software ecosystem is already out, and all initial runs, even samples, are already spoken for. There is strong demand for that part, even outside the A&D sector.
Tore Svanberg (Stifel): Are lead times continuing to extend into the second half?
Steve Sanghi: In general, lead times are broadly expanding. In another quarter or so, there could be nothing available in four to six weeks. Today, even with 185 days of inventory (a lot in die form), we can still assemble and ship in four to five weeks. That is not going to last very long. Over the next two quarters, inventory goes down significantly toward our long-term model, and lead times could see broad-based expansion.
Joseph Moore (Morgan Stanley): How do conversations with customers about rebuilt relationships inform how you deal with the next upturn?
Steve Sanghi: Conversations have been very good. We owned up to some of the mistakes we made in the past. Customers' engineers always like us; we used some policies that turned off purchasing managers. We made commitments to work with them. Now we are seeing our competitors hurt them with large price increases, and since we have not increased prices, we are gaining share. Our competitors are actually helping us right now.