Microchip's Data Center Pivot: A New Growth Engine
With a fresh end-market breakdown, Microchip reveals a multi-hundred-million-dollar data center franchise and guides gross margins above its long-term model—signals a broad, above-seasonal upturn.
MCHP · Earnings Call · 2026-08-06
Data Center: The New Growth Engine
Microchip has long been viewed as a microcontroller and analog company, but this quarter the company pulled back the curtain on a far more diverse revenue base. For the first time, management provided a detailed breakdown of net sales by end market, including a separate Data Center Solutions business unit and the catalog products that also feed into data centers. Total data center net sales in calendar 2025 were $591 million, or about 14% of revenue, and management expects that to grow roughly 69% to about $1 billion in calendar 2026. The June quarter already showed the acceleration, with data center revenue up 97.8% year-over-year.
The additional net sales from data centers for 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.
The company outlined a broad product set—power management, memory, security products, microcontrollers, and Gen6 switch and retimer designs—and said it has won 14 Gen6 designs to date.
Gross Margin: Above Model, But One-Time Benefits
The September guidance for non-GAAP gross margin of 66% to 67% sits above the company's 65% long-term target. Management attributed the step-up to a rich product mix, a large licensing quarter (which carries 100% gross margin), and the full-quarter impact of a recent price increase. “There are a lot of items that we have been improving to get to our financial model.” — Steve Sanghi, President and Chief Executive Officer · 2026-08-06 But they cautioned that some of the benefits are one-time in nature. Lower underutilization charges and inventory write-offs also contributed, though Eric noted the licensing and distribution-inventory effects will not repeat at the same level.
Gross margin has rebounded from 52% in the March 2025 quarter to 61% in the June quarter, and the company is guiding to 66-67% for September.
The Upturn Sustainability and Supply Constraints
When asked how long the recovery can last, Steve Sanghi cited four factors: data center growth, aerospace and defense rebuild, and the later-stage recoveries in industrial and automotive. “So there are at least three or four factors going on that may make this last a bit longer than usual.” — Steve Sanghi, President and Chief Executive Officer · 2026-08-06 He also highlighted tightening supply across substrates, foundries, and OSATs, with lead times stretching and expedite requests rising. This echoes the messaging from prior quarters, where management consistently called for above-seasonal growth—“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.” — Stephen Sanghi, Executive Chair (and likely acting CEO for the call) · 2025-08-07 The inventory correction dynamics have now shifted from destocking to restocking, as Eric noted a year ago: “We feel that as we move through the current quarter, the inventory reserves are pretty much going to be normalized at this point in time.” — Eric Bjornholt, CFO · 2026-02-05
Debt Reduction and Capital Allocation
Management remains focused on deleveraging, with net debt at $5.2 billion and net debt-to-EBITDA of 2.85, expected to fall below 2.5 this quarter. “There is just no other plan--no plan to buy back stock and no plan to increase the dividend for foreseeable future.” — Steve Sanghi, President and Chief Executive Officer · 2026-08-06 The company is using free cash flow to pay down debt, and the recovery is already translating into strong cash generation.
The combination of a new visible data center growth engine, gross margins above the long-term model, and a disciplined balance sheet suggests Microchip is entering a phase where the market may need to re-rate the earnings power of a company that was recently trading at a deep discount.