Chris Casso

Chris Casso asked about the gross margin fall-through model, specifically if a mid-seventies incremental revenue fall-through is still appropriate now that inventory reserves are normalizing, and what the fall-through level would be. He also inquired about the use of cash, asking if Microchip will pause buybacks and prioritize debt reduction, and what specific debt level or leverage target they are aiming for.

Answer

Eric Bjornholt (CFO) acknowledged that a fall-through model is easy but cautioned that gross margin improvement will be lumpier. Steve Sanghi (Executive Chair) added that stronger growth from higher-margin external foundry products will contribute to gross margin accretion. On cash use, Steve Sanghi (Executive Chair) stated that Microchip was 'spooked' by the last cycle's high debt levels and will prioritize bringing down debt for 'quite some time,' keeping dividends flat and pausing buybacks until debt and leverage are significantly reduced. Eric Bjornholt (CFO) referenced a past 1.5x net leverage target but noted current leverage is 4.18.

Chris Casso asked about the relative growth of memory versus Foundry Logic for 2026, considering clean room space constraints, and how it shapes up, particularly in the second half. He also inquired about the impact of rising utilization rates and tight market conditions on KLA's service growth for 2026 and into 2027, given the normalized 12%-14% target.

Answer

CFO Bren Higgins expects DRAM to grow faster than Foundry Logic in 2026, driven by HBM and conventional memory demands. He forecasts Foundry Logic WFE up 10-15% and DRAM WFE up 15-20%, with Flash being slower. He confirmed that higher utilizations, a growing and longer-living install base, opportunities in memory and packaging, and acquired businesses are all driving service growth. He expressed confidence in operating at the higher end of the 12%-14% target range over time.