MCHP Q1 2026: Inventory Days Cut to 214, Bookings at 3-Year High
- Effective Inventory Management: Management highlighted a $124M reduction in inventory and a drop in inventory days from 266 to 214 days, with forecasts to fall further. This dynamic inventory correction is expected to drive margin improvement over time.
- Robust Demand & Booking Strength: The Q&A noted that backlog for September surpassed previous levels and that July bookings were the highest in any month over the last three years, signaling strong underlying demand recovery.
- Competitive Product Innovation: The team emphasized upgrades in its microcontroller portfolio—such as introducing new low-end 32-bit products that work on industry-standard tools and deploying an AI coding assistant that improves productivity by 40%—which should help regain market share and bolster competitiveness.
- Inventory normalization remains uncertain: The persistent gap between sell-in and sell-through, along with ongoing inventory write-offs and underutilization charges, suggests the company may face challenges in fully normalizing its inventory levels over the coming quarters [Speaker 1, Speaker 2][index: 1,9].
- Supply chain constraints and extended lead times: The transcript highlights that certain products are experiencing lead times lengthening from the typical 4–8 weeks to as much as 8–12 weeks due to shortages in substrates, lead frames, and subcontracting capacity. This may stress the supply chain and limit the company’s ability to quickly respond to demand improvements [Speaker 1, Speaker 8][index: 8,11].
- Weak end-market performance in automotive: There are indications that the automotive segment is lagging behind other end markets, which could drag overall revenue growth and margin expansion if this weakness persists, especially as demand recovery appears uneven across segments [Speaker 3][index: 10].
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Net Sales | Q2 2026 | no prior guidance | $1,130,000,000 ± $20,000,000 | no prior guidance |
Non-GAAP Gross Margin | Q2 2026 | no prior guidance | between 55% and 57% of sales | no prior guidance |
Non-GAAP Operating Expenses | Q2 2026 | no prior guidance | between 32.4% and 32.8% of sales | no prior guidance |
Non-GAAP Operating Profit | Q2 2026 | no prior guidance | between 22.2% and 24.6% of sales | no prior guidance |
Non-GAAP Diluted Earnings Per Share | Q2 2026 | no prior guidance | between $0.30 and $0.36 per share | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Inventory Management and Correction | Emphasized across Q2 (e.g., inventory days at 247 with rising concerns ), Q3 (highlighting high inventory levels and write-down risks ) and Q4 (noting reductions from 266 to 251 days with a $350M reduction target, but still facing normalization challenges ). | Q1 2026 showed continued progress with inventory days down to 214 and a $124.4M reduction, while substantial write-offs and normalization uncertainties persist. | Continued focus with incremental bull progress yet lingering bearish concerns on normalization |
Demand Recovery and Bookings Visibility | Mixed signals in Q2 with low backlog visibility and reliance on expedites , weak bookings in Q3 despite some pull-ins , and in Q4 significant improvement with strong backlog rebuilding and improved book-to-bill ratios. | Q1 2026 reported structural demand recovery with the strongest monthly bookings in three years and higher September backlog, although automotive remains weak. | Overall improvement in demand signals and backlog visibility despite persistent segment variability |
Product Innovation and Market Expansion | Consistent focus through Q2 with new microcontroller introductions, digital signal controllers, and AI/ML product initiatives ; Q3 highlighted 64-bit RISC-V processors with advanced AI and strong design win momentum ; and Q4 detailed competitive microcontroller upgrades and AI coding assistants, plus design wins in data center/AI areas. | Q1 2026 reaffirmed innovation with new low-end 32-bit microcontroller upgrades, the debut of an AI coding assistant promising 40% productivity gains, and strategic design wins in data center/AI markets. | A robust, ongoing emphasis on innovation and market expansion, reinforcing momentum in AI and microcontrollers |
Pricing Pressure and Margin Erosion | Q2 acknowledged pricing pressure on new designs, though managed through cost reductions ; Q3 noted short-term mid-single-digit price reductions while aiming to maintain margins ; and Q4 explicitly referenced an expected mid-single-digit decline and margin compression from underutilization and high reserve charges. | Q1 2026 did not explicitly mention pricing pressure; instead, it focused on strong incremental non‐GAAP margins and progress in gross margin recovery. | Reduced focus on pricing pressure in Q1 2026, suggesting margin improvements driven by operational gains |
Operational Efficiency and Cost Optimization | Regularly emphasized in Q2 with capacity realignment, paused capacity expansion, and salary cuts for cost control ; Q3 discussed fab closures, rotating schedules, and managing underutilization ; Q4 highlighted capacity realignment via fab closures and global layoffs to improve cost structure. | Q1 2026 continued the focus with the closure of Tempe Fab 2, deliberate ramp-down of production, effective inventory reduction, and ongoing cost-cutting measures. | Ongoing commitment to optimizing capacity and cost structure, with continued production adjustments |
Supply Chain Constraints and Extended Lead Times | In Q2 lead times had contracted to about 8 weeks or less with high-turns, and Q3 noted short lead times with expedites and pull-ins ; Q4 did not mention supply chain issues [N/A]. | Q1 2026 reports emerging lead time pressures with extensions up to 6–12 weeks, prompting customers to maintain longer scheduled backlogs. | A shift from a comfortable short lead time environment to emerging constraints, suggesting potential impacts on responsiveness |
End-Market Performance Variability | Q2 detailed significant weakness in industrial and automotive (e.g., Europe’s 20% sequential decline) ; Q3 reiterated broad weakness across end markets, especially automotive and industrial ; and Q4 highlighted a recovery in aerospace/defense with persistent softness in automotive/industrial. | Q1 2026 indicated that while data center and some industrial segments are recovering, the automotive market continues to lag behind all other markets. | Persistent variability remains with enduring automotive weakness, even as some markets (data center) show strength |
Emerging Total System Solutions (TSS) Strategy | Q2 emphasized TSS as a driver for increasing dollar content per customer with integrated solutions and reference designs ; Q4 provided details on tools like AI coding assistants to support TSS and ease customer integration ; Q3 mentioned an upcoming update on TSS. | Q1 2026 did not mention the TSS strategy at all [N/A]. | The TSS strategy, which had been a focal point in previous periods, is no longer mentioned in Q1 2026, suggesting a possible deprioritization [N/A] |
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Seasonal Recovery
Q: Is September’s 5% growth above seasonal?
A: Management noted that a 5% sequential increase in September is well above the usual 3% seasonal uptick, signaling a strong recovery trend expected to continue into December and March. -
Inventory Gap
Q: Is sell-through exceeding sell-in?
A: They explained that distributors’ sell-through outpaced sell-in by $49.3M, indicating progress in reducing inventory imbalances, though complete alignment may take additional quarters. -
Lead Time Trends
Q: Are lead times extending further?
A: Management stated that while most products ship in 4–8 weeks, some are now reaching 8–12 weeks due to supply constraints on materials like lead frames and substrates. -
Debt & Capital
Q: What’s the target for debt reduction?
A: They indicated excess cash flow will be used to lower debt by about $350M over forthcoming quarters, aiming ultimately to bring leverage down toward approximately 1.5×. -
Competitive Positioning
Q: How is microcontroller market share trending?
A: Management emphasized that despite prior challenges, sequential microcontroller growth in the double digits—outpacing an industry increase of around 6–6.5%—reflects a recovery in market share, with new low-end 32-bit products forthcoming. -
Demand Shipping
Q: Are you under shipping end demand?
A: They acknowledged that direct customer inventories remain high compared to distributors, meaning shipments currently lag behind demand, though overall trends are moving toward normalization. -
Market Segments
Q: How do auto and industrial compare?
A: While recovery is broad, management noted that the automotive segment is lagging behind industrial and AI-driven sectors, highlighting a more uneven demand recovery. -
Tariff Exemption
Q: Do US investments secure tariff exemptions?
A: They believe that significant US-based manufacturing qualifies them for tariff exemptions, though they stressed that the specifics remain somewhat fluid. -
Inventory Write-offs
Q: When will inventory write-offs decline?
A: Management reported that write-offs have already decreased from $90.6M to $77.1M and are expected to continue falling gradually as inventory depletes and production ramps up. -
Underutilization Charges
Q: When will underutilization charges drop?
A: The charges are projected to decrease modestly this quarter and then see a more substantial decline starting in December as factory utilization improves. -
Bookings Outlook
Q: Will December be strong?
A: With record July bookings and a healthier backlog compared to earlier quarters, management is cautiously optimistic that December will also perform above seasonal norms. -
Utilization Targets
Q: When will fab utilization rise?
A: They plan to increase production well before die inventories become critically low, with significant utilization improvements anticipated beginning in December. -
Gross Margin Guidance
Q: Why is current margin above target?
A: Product gross margins are presently at 66.3%, slightly exceeding the long-term target of 65%, with mix adjustments expected to modestly lower margins over time. -
Incremental Margin
Q: Will incremental margins improve further?
A: Management expects that incremental non‐GAAP gross margins of around 76% will remain in a similar ballpark even as factory utilization gradually increases. -
Manufacturing Constraints
Q: Are delays due to backend issues?
A: Yes; most lead time extensions are linked to constraints in substrates and packaging rather than in the wafer fabrication process itself. -
Write-down Timeline
Q: Will inventory write-downs finish by September?
A: They cautioned that while the downward trend will continue, full normalization of write-downs will occur gradually over several quarters rather than by September alone. -
AI Impact
Q: How is the AI tool performing?
A: Management highlighted that their AI coding assistant is delivering about a 40% productivity improvement, although detailed revenue contributions from this tool haven’t yet been quantified. -
Seasonal Performance
Q: What are December/March seasonal norms?
A: Traditionally, December shows a slight dip (down a few percentage points) while March typically enjoys an increase of 2–3%; management expects both quarters to outperform these historical seasonal levels. -
Currency Impact
Q: How does the USD decline affect you?
A: With over 99% of revenue in US dollars and assets largely US-based, the impact of a declining dollar is minimal compared to less US-centric peers. -
Chinese Business
Q: What is the trend in China?
A: Business in China rebounded strongly—up about 14% sequentially—even as tariff concerns persist, underscoring robust performance in that market.
Research analysts covering MICROCHIP TECHNOLOGY.