MCHP · Q2 2026 Earnings
CautiousMicrochip Technology
Reported November 6, 2025
30-second summary
Microchip delivered Q2 in-line on revenue ($1.14B, +6% QoQ, -2% YoY) with non-GAAP EPS of $0.35 at the top of the prior guide range and gross margin of 56.7% beating the midpoint. But the December guide of $1.129B midpoint is down 1% sequentially — better than typical -3% to -5% seasonality, yet a clear walk-back from last quarter's commitment to above-seasonal performance across September, December, and March. Management reframed the miss as customers pushing bookings into March rather than demand destruction, citing 10% sequential bookings growth and a 1.06 book-to-bill, but the credibility test has moved to the March quarter.
Headline numbers
EPS
Q2 FY2026
$0.35
Revenue
Q2 FY2026
$1.14B
-2.0% YoY
Gross margin
Q2 FY2026
56.7%
Free cash flow
Q2 FY2026
$0.05B
Operating margin
Q2 FY2026
24.3%
Key financials
Q2 FY2026| Metric | Q2 FY2026 | YoY | Q1 FY2026 | QoQ |
|---|---|---|---|---|
| Revenue | $1.14B | -2.0% | $1.08B | +6.0% |
| EPS | $0.35 | — | $0.27 | +29.6% |
| Gross margin | 56.7% | — | 54.3% | +240bps |
| Operating margin | 24.3% | — | 20.7% | +360bps |
| Free cash flow | $0.05B | — | $0.26B | -79.8% |
Guidance
Guidance is issued for both next quarter and the full year. Both may appear below.
Actuals vs prior guidance
| Metric | Period | Prior guide | Actual | Δ | Result |
|---|---|---|---|---|---|
| Revenue | Q2 FY2026 | $1.110B to $1.150B | $1.140B | in-line | Met |
| Non-GAAP EPS | Q2 FY2026 | $0.30 to $0.36 | $0.35 | +$0.01 above guide | Beat |
| Non-GAAP Gross Margin | Q2 FY2026 | 55.0% to 57.0% | 56.7% | +40–170 bps above guide | Beat |
| Non-GAAP Operating Margin | Q2 FY2026 | 22.2% to 24.6% | 24.3% | +in-line to slightly below guide | Beat |
| Non-GAAP Operating Expenses | Q2 FY2026 | 32.4% to 32.8% of sales | 32.4% of sales (implied) | at low end of range | Beat |
| Capital Expenditures | Q2 FY2026 | $35M to $40M | not disclosed | actual Q2 capex not reported | Missed |
New guidance
| Metric | Period | Guide | YoY |
|---|---|---|---|
| Revenue | Q3 FY2026 | $1.109B to $1.149B | — |
| Non-GAAP EPS | Q3 FY2026 | $0.34 to $0.40 | — |
| Non-GAAP Gross Margin | Q3 FY2026 | 57.2% to 59.2% | — |
| Non-GAAP Operating Expenses | Q3 FY2026 | 32.3% to 32.7% of sales | — |
| Non-GAAP Operating Profit | Q3 FY2026 | 24 | — |
Reaffirmed unchanged this quarter: Capital Expenditures (at or below $100M)
Capacity & utilization
Q2 FY2026| Segment | Q2 FY2026 |
|---|---|
| Book-to-bill ratio | 1.06 |
| Sequential bookings growth | 10% QoQ |
Profitability
Q2 FY2026| Segment | Q2 FY2026 |
|---|---|
| Non-GAAP Operating Margin | 24.3% |
| Non-GAAP Gross Margin | 56.7% |
| Free Cash Flow Margin | 4.5% |
Management tone
Defensive restructuring → recovery mechanics → Gen 6 competitive positioning → bookings-strong-but-timing-pushed.
Three quarters ago management was framing the inventory correction as a margin-suppressing headwind requiring fab shutdowns and pay cuts; last quarter it became a tailwind they could quantify (77% incremental margin conversion, $124M inventory burn-down, "supply chain deficit"); this quarter the recovery narrative has fractured into a timing argument — bookings are strong but customers are pushing deliveries into March. "September quarter bookings growing 10% sequentially and a book-to-bill ratio of 1.06... while December is historically our seasonally weakest quarter, we are seeing encouraging business momentum." That hedge — encouraging momentum but still a sequential decline — is materially different from last quarter's commitment to above-seasonal across three consecutive quarters. The signal: management still believes the cycle has turned, but the slope is shallower than they thought 90 days ago.
The data center commentary is the most aggressive forward statement on the call and a clear escalation from prior quarters. "We believe we are extremely well-positioned with our Gen 6 PCIe switch, with it being the only 3-nanometer-based device currently sampling in hyperscaler and enterprise data center customers, beating our competition in virtually every specification metric." Last quarter Gen 6 was a future opportunity; this quarter management is making exclusivity and competitive-superiority claims across multiple dimensions. The catch: production revenue starts June 2026 at the earliest, so the financial impact is two-to-three quarters away. This is management telling investors to look through the December trough to a structurally different product mix.
The gross margin framing has been deliberately bifurcated to defend the recovery story. "Product gross margin in the September quarter was 67.4%... We added $71.8 million of new inventory write-off and $51 million of underutilization charge... Subtracting it from the product gross margin of 67.4%, we got a non-GAAP gross margin of 56.7%. So the product gross margin remains very healthy." Management is increasingly steering analysts to the 67.4% number as the "true" margin and treating the ~10.8 points of charges as temporary artifacts. The mathematical framework Curtis pulled out (12-month sales × 1.5 vs. inventory) means charges shrink mechanically as YoY sales growth turns positive — December is the inflection. If that doesn't materialise, the narrative collapses.
Supply-chain commentary has reversed direction. As recently as last quarter management framed supply as ample with lead times only beginning to bounce; this quarter brings the first acknowledgement of emerging constraints. "We're running into challenges on certain kind of substrates and subcontracting capacity and also some foundry constraints on very advanced nodes. These challenges remain isolated to specific areas." The "isolated" qualifier is doing real work here — it keeps the PSP-repeat tail risk off the table while management quietly admits the supply environment has tightened.
Recurring themes management leaned on this quarter:
Risks management surfaced:
Q&A highlights
Chris Castle · Wolf Research
How does the current business environment compare to 90 days ago? You previously guided for better-than-seasonal growth in December and March quarters, but December appears to be only on the better end of normal seasonality. What changed?
Management confirmed the overall business environment has softened consistent with industry trends. December guidance is -1% (better than typical -3% to -5% seasonality) rather than the sequential growth expected 90 days ago. Softness attributed to: (1) overall softer business environment, (2) tariff impact on customer psyche and capital investment timing, (3) customers scheduling bookings for March quarter instead of December while reducing inventory. Despite strong bookings (10% higher), customers pushed deliveries to March. Management expects strong momentum in March, June, and September quarters.
Tim Akuri · UBS
What are the remaining LTSAs (Long-Term Supply Agreements) in the backlog? They appear to be coming down very slowly. If customers want product, why park orders in March and June? What's the point of having LTSAs if they don't provide near-term visibility?
Management clarified that the PSP (Platform Service Program) was dismantled last year and LTSAs were rapidly unwound, with cancellations and push-outs allowed. Current LTSAs are flexible arrangements where customers can push out their multi-year commitments by 1-2 years as needed. LTSAs serve to incentivize continued design-ins by providing differentiation vs. competitors (TI, NXP) with comparable products and pricing. Management is not forcing customers to take product they don't need. LTSAs no longer provide material near-term visibility but support long-term customer engagement.
Vivek Arya · Bank of America
What drives your confidence that the next three quarters will be above seasonal when lead times are low, there are macro cross currents, and peers are being more defensive? What are you seeing that peers are not?
Management's confidence is driven by: (1) March quarter visibility from current backlog which is much higher than December's backlog was on Aug 6, (2) strong booking rates and terms component, (3) inventory normalization dynamics - a $50M sell-in/sell-through gap will correct in March/June, (4) customer and distributor inventory still needs to replenish post-correction, (5) June and September are historically strong seasons even in soft years. Beyond March, outer quarter commentary is based on continued inventory correction and seasonal strength.
Blaine Curtis · Jefferies
You previously suggested inventory charges would drop sharply by end of fiscal year. Guidance still shows charges in December. What changed? How far out should these charges extend?
Management explained the inventory charge methodology: prior 12-month sales × 1.5 = 18-month equivalent, compared to current inventory; excess is written off. Year-over-year sales have been negative, so the 18-month equivalent keeps declining, driving charges. This reverses starting December quarter when YoY growth becomes positive. Current charges are ~5 percentage points of gross margin. Charges should start dropping significantly after December quarter as YoY sales growth kicks in. Product gross margin is 67.4% (ahead of 65% target), but charges suppress reported margins.
Harsh Kumar · Piper Sandler
Highlights Microchip's strategic shift toward leading-edge data center products (3nm Gen 6 PCIe switch). Is this a major strategic shift for a company historically focused on microcontrollers and analog? What's driving this shift?
Management confirmed this is a strategic shift. Hired Brian McKerson in January 2025 to position data center products at state-of-the-art market levels. Gen 6 3nm switch is the first product; series of new state-of-the-art offerings coming. Additionally formed an AI business unit and increasing FPGA focus with new product announcements expected. Won NASA contract for next-generation space computer. Strategy is to continue core microcontroller/analog business while adding advanced-node, high-performance, lower-power products to drive higher overall CAGR than legacy portfolio alone.
Answers to last quarter's watch list
What to watch into next quarter
March quarter sequential growth above 5% — Management explicitly said "March quarter sales to be stronger than a seasonal low single digit up sequentially." Anything at or below 3% breaks the entire "three strong quarters of March, June, September 2026" forward thesis.
Sell-in vs. sell-through gap finally closing below $30M — Gap widened to $52.9M this quarter from $49.3M. Continued widening or stalling invalidates the channel-restocking driver underpinning the March/June bull case.
Q3 adjusted FCF vs. dividend coverage — Q2 adjusted FCF of $38.3M fell well short of the ~$245.8M dividend. Whether Q3 adjusted FCF actually reaches "roughly even" with the dividend without incremental borrowing is the credibility test for the capital-allocation message.
Inventory charges declining materially from $122.8M — The entire bifurcated gross margin narrative (67.4% product vs. 56.7% reported) depends on December being the inflection point where YoY sales turn positive and charges shrink. Quarterly charges holding above $100M in December would break the math.
Gen 6 PCIe switch design-win disclosure or customer naming — Management has escalated language to "extremely well-positioned" and "beating competition in virtually every specification metric." Specific hyperscaler design wins disclosed before June 2026 production ramp would validate the claim; silence into mid-2026 would suggest the positioning is less differentiated than advertised.
Whether emerging substrate and advanced-node supply constraints broaden — First quarter management has flagged new isolated supply tightness. Spread beyond "isolated" areas would raise PSP-repeat risk and force a direct response on speculative ordering.
Sources
- Microchip Technology Q2 FY2026 press release, exhibit 99.1, filed via SEC EDGAR — https://www.sec.gov/Archives/edgar/data/827054/000082705425000182/exhibit991q2fy26.htm
- Q&A content drawn from prepared analyst-call exchanges referenced in extraction inputs (Chris Castle/Wolf Research, Timothy Arcuri/UBS, Vivek Arya/Bank of America, Blaine Curtis/Jefferies, Harsh Kumar/Piper Sandler).
Get the next brief, free.
We publish analyst-grade earnings briefs the same day or morning after every call — headline numbers, segment KPIs, Q&A highlights, and tone analysis. Free during beta.
This is not investment advice.