Microchip Technology Says Inventory Slump Is Nearing End as Data Center Wins Build

Key Points

• Microchip Technology says its prolonged inventory correction is nearing an end, with shipments and distributor sales now much closer to normal and customer counts rising. Management expects the cycle to normalize in about another quarter.
• The company said inventory days have fallen sharply from a peak of 266 to 185, and it is targeting 130 to 150 days as revenue recovers. Microchip also said it is avoiding opportunistic price hikes, preferring to pass along only genuine cost increases.
• Data center is a major growth focus, especially in PCIe switching, storage controllers and memory controllers, with several design wins already in hand. Microchip also sees strong demand opportunities in aerospace and defense, while automotive growth is tied to design wins and future software-defined vehicle programs.

Microchip Technology NASDAQ: MCHP executives said the company is nearing the end of a prolonged inventory correction while positioning for growth tied to data centers, aerospace and defense, automotive systems and industrial markets.

Speaking at TD Cowen’s 54th annual TMT conference, President and CEO Steve Sanghi described the post-COVID semiconductor cycle as “extremely unique,” saying artificial demand created a large gap between customer orders and actual consumption. He said Microchip was particularly affected because of an inflexible customer order program that limited cancellations and pushouts, prolonging the downturn for the company.

Sanghi said that over the past two years, Microchip’s shipments to customers were below customer usage, and shipments to distributors were below distributor sales. That gap has narrowed substantially, he said, with distributor shipments and sales out “fairly close” in the latest quarter. He added that Microchip’s customer count is rising by thousands, suggesting more end customers are returning to normal purchasing patterns.

“I think in another quarter or so, that part of the cycle normalizes,” Sanghi said. “Customers and distributors are buying what they’re using, and that part of the business is normal.”

Inventory and pricing strategy

In response to a question directed to Eric Bjornholt, the company said inventory days peaked at 266 days a year ago in March and declined to 185 days as of the end of the most recent March quarter. That figure includes about 15 days of last-time-buy inventory tied to foundry products being discontinued. Excluding that inventory, days stood at about 170. The company reiterated its target range of 130 to 150 days and said inventory days are falling rapidly as revenue grows.

Sanghi also addressed industry pricing, drawing a distinction between opportunistic price increases during tight supply and increases driven by higher input costs. He said Microchip is less interested in raising prices simply because it can, particularly for proprietary design-in products such as microcontrollers, FPGAs and processors.

“The opportunistic price increase to gouge the customer to pad your margin, I think that’s probably not a good thing for us to do,” Sanghi said. He added that Microchip would be more willing to pass along cost increases if suppliers raise wafer, assembly or test costs.

Sanghi said the company has largely completed efforts to repair customer relationships that were strained during the prior cycle, adding that avoiding unexpected price increases helps preserve that progress.

Data center products in focus

Sanghi said Microchip’s data center exposure includes products designed specifically for that market, as well as catalog products such as microcontrollers, analog components, security chips and power management devices that may also be used in other end markets.

For dedicated data center products, he said Microchip has three main categories: storage controllers, memory controllers and PCI Express products, with the business roughly split into thirds. Retimers are grouped with PCI Express from a product-line standpoint. Sanghi said all three dedicated data center areas are growing significantly from calendar 2025 to calendar 2026.

Microchip is seeking to regain momentum in PCIe switching after missing the market with its Gen 5 product, which Sanghi said arrived nearly two years late and left the company largely in second-source positions. He said the company has made a strong commitment to Gen 6 and Gen 7.

According to Sanghi, Microchip’s Gen 6 PCIe switch is built on 3-nanometer technology, compared with competitors’ 5-nanometer parts, and offers 160 lanes versus 120 lanes for competing devices, along with 30% to 40% lower power. The company has disclosed six design wins, including one expected to exceed $100 million. Sanghi said the device goes into production at the end of the current quarter, with small shipments to follow and a major ramp next year.

Microchip also recently entered the data center retimer market. Sanghi said the first product came out of the fab about six weeks ago, has been evaluated by customers and has one design win. He said the company expects to co-sell the retimer alongside its PCIe products.

Aerospace, defense and automotive outlook

In aerospace and defense, Sanghi said Microchip’s business is divided among aviation, weapons systems and space, each representing about one-third of the segment. He said aviation demand is strong as Boeing resumes aircraft production and works through a long backlog.

For defense systems, Sanghi said prime contractors are seeking to ramp production of offensive and defensive weapons. He described Microchip as broadly positioned across missiles, aircraft, radar installations, drones and interceptors, with products ranging from diodes and controllers to power management and RF devices. He said backlog is building and expects the business to perform well over multiple years.

In space, Sanghi said Microchip is the largest supplier of radiation-hardened parts, serving low orbit, medium orbit and deep space applications. He said renewed interest in lunar and Mars missions should create additional opportunities. Low-Earth-orbit constellations are also an incremental opportunity, though Sanghi said those customers often use lower-priced industrial and automotive-grade parts with redundancy rather than traditional radiation-hardened components.

In automotive, Sanghi said current growth is being driven by inventory normalization and new design wins in areas such as USB, Ethernet and MOST bus. Longer term, he highlighted Microchip’s position in 10BASE-T1S and ASA as automakers move toward software-defined vehicles. He said those technologies remain in design today, with production largely expected to begin in 2028, and some programs potentially starting in late 2027.

Margins and cash use

The company said its gross margin path is straightforward: adding back $46.6 million of underutilization charges from the last quarter would put gross margins at the long-term target. Underutilization charges are expected to decline significantly, though not disappear entirely by year-end.

On cash use, the company said deleveraging remains a priority. Net leverage is expected to fall below three times this quarter, but management said it still wants to continue reducing debt and strengthen the balance sheet for future semiconductor cycles. Cash generation is expected to support the current dividend while also paying down debt.

About Microchip Technology NASDAQ: MCHP

Microchip Technology Inc is a semiconductor company headquartered in Chandler, Arizona, that designs, develops and supplies a broad portfolio of embedded control and analog semiconductors. Its product lineup centers on microcontrollers (including the well-known PIC family), digital signal controllers and associated development tools and software, along with a range of mixed-signal and analog devices, nonvolatile memory, power management, timing, interface, wireless and security products. The company also provides integrated hardware and software solutions intended to simplify embedded design and accelerate time to market for OEMs and contract manufacturers.

Microchip's products are used across a wide range of end markets, including automotive, industrial automation, consumer electronics, communications, aerospace and defense, and Internet of Things (IoT) applications.

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