Microchip Technology Incorporated Depositary Shares Each Representing a 1/20th Interest in a Share of 7.50% Series A Mandatory Convertible Preferred Stock 2027 Q1 Earnings Call

Please go ahead. Thank you, operator, 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 release 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 Eric Bjornholt, Microchip's CFO, and Sajid Daudi, Microchip's Head of Investor Relations. I will provide a new breakout of our net sales by end market, including further information on our total data center exposure. Eric will then go over our financial performance.

I will then provide an overview of the current business environment and our guidance for second quarter of fiscal year 2027. We will then be available to respond to specific investor and analyst questions. Let us begin with providing you with a further update on our exposure to the data center market. On June 1, 2026, we provided you a breakdown of our net sales from our Data Center Solutions business unit for calendar year 2025, which we said was $302.7 million. We also said that in addition to these net sales from the Data Center Solutions business unit, we have many catalog products from various business units that also have exposure to data centers. In the last couple of months, we have worked to pull together an estimate for this additional exposure to the data center market from these catalog products from various business units.

These additional products include our power management analog products, mixed signal products, microcontrollers, digital signal controllers, security products, FPGAs, timing products, and Serial Quad I/O memory products. The additional net sales from data centers for these various business units for calendar year 2025 was approximately $288 million. This makes the total net sales from data centers for calendar year 2025 for all Microchip products to be approximately $591 million. That was the $303 million approximately from Data Center Solutions business unit and $288 million from all other catalog products for a total of $591 million. This was approximately 14% of our net sales for calendar year 2025. We have also estimated the data centers sales growth expected in calendar year 2026. We earlier told you that our net sales from Data Center Solutions business unit is expected to be about $500 million for calendar year 2026.

Our net sales from the products from all other business units, which also go into the data centers, is expected to grow from $288 million in calendar year 2025 to about $500 million in calendar year 2026. This makes the total net sales expected in calendar year 2026 from all of Microchip products, Data Center Solutions business unit, as well as all the other catalog products going into data centers as about $1 billion. This is expected to be up approximately 69% from $591 million net sales from data centers in calendar year 2025. A growth of about 69% from $591 million net sales in calendar year 2025 to about $1 billion in calendar year 2026. A little bit about calendar Q1 and Q2.

In calendar Q1 2026, which was the March quarter, our net sales from data centers was up 77.2% from calendar Q1 2025. In calendar Q2 2026, the June quarter just ended. Our net sales from data centers was up 97.8% from calendar Q2 2025. As our numerous new designs wins on our PCIe Gen 6 switch, PCIe Gen 6 retimer, storage controller, NVM controllers, power management products, mixed signal products, security products, timing products, and memory products proceed to production in calendar year 2027, we expect significant growth from data centers in 2027 and thereafter. Here is our end market net sales breakdown for the June quarter. We remind you that these percentages are our best estimates of the end market splits.

There is probably a couple of percent error band due to the fact that about 50% of our business and the long tail of customers are serviced through distribution, which makes it difficult to track the end market. Our June quarter end market breakdown was as follows. Industrial was 32.2%, data centers, 17.1%, Aerospace and Defense, 16.7%, automotive, 15%, communication, 8.2%, consumer appliances, 7.4%, and compute, 3.4%. You can see that we are now breaking out end markets of data center and compute separately. We are now breaking out our sales into seven end markets. From June quarter 2025 to June quarter 2026, year-over-year growth, our industrial net sales grew 24.3%. Data center sales grew 97.8%. Aerospace and Defense grew 45.6%. Automotive grew 29.3%. Communication grew 53.3%. Consumer appliances grew 19.1%, and compute grew 9.6%.

This is the most comprehensive breakout you have heard from us, enough to unpack for you. With that, I will pass it on to Eric.

All right. Thanks, Steve. Good afternoon, everyone. We are including information in our press release 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'll find useful when comparing GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and leverage metrics on our website. I will now go over 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 as described in our earnings press release and the reconciliations on our website.

Our non-GAAP financial results were all above our guidance provided on May 7th, 2026. Net sales in the June quarter were $1.485 billion, which was up 13.2% sequentially and up 38% from the June 2025 quarter. 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 63.8%, including capacity underutilization charges of $38.5 million. Operating expenses were at 28.7% of sales, and operating income was 35.1% of sales. Non-GAAP net income was $438.6 million, and non-GAAP earnings per diluted share were $0.76, which was $0.07 above the midpoint of our guidance. On a GAAP basis in the June quarter, gross margins were 63.2%.

Total operating expenses were $602.1 million and included acquisition and tangible amortization of $90 million, special charges of $18.9 million, which were primarily driven by two longstanding legal matters, which were settled during the quarter, as well as our activities associated with the closure of Fab 2. Share-based compensation of $66.3 million and $0.4 million of other expenses. The GAAP net income attributable to common shareholders was $202 million or $0.37 per share. Our non-GAAP cash tax rate was 7.5% in the June quarter, and we expect to have a tax rate of about 7.5% for all of fiscal year 2027. Our tax rate is down from the prior year for a variety of reasons, including the amortization of domestic research and development experimentation expenditures capitalized in previous years, and the impacts of a reduction in inventory reserves. Our inventory balance at June 30th, 2026 was $1.047 billion.

We had 175 days of inventory at the end of the June quarter, which was down 10 days from the end of the March quarter. Included in our June ending inventory was 14 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 quarter was at 25 days, which was down one day from the March quarter, and at the lower end of what we have experienced historically. Our cash flow from operating activities was $511.5 million in the June quarter. Our adjusted free cash flow was $478.6 million in the June quarter. As of June 30th, our consolidated cash and total investment position was $272.3 million. Our total debt decreased by $138 million in the June quarter, and our net debt decreased by $170 million.

Our adjusted EBITDA in the June quarter was $587.8 million and 39.6% of net sales. Our trailing 12-month adjusted EBITDA was $1.798 billion. Our net debt to adjusted EBITDA was 2.85 at June 30th, 2026. We expect our net debt to adjusted EBITDA to reduce significantly as we progress through fiscal year 2027. Capital expenditures were $13.9 million in the June quarter, and we expect capital expenditures for fiscal year 2027 to be about $100 million. Depreciation expense in the June quarter was $37.8 million. I will now turn it back to Steve, who will provide some additional commentary on our June quarter results and our guidance for the September quarter.