W.035Microchip’s sales rose 42% in a year. Its chief executive says data centers, a sixth of them, are in a bubble

A recovery, then a flat quarter

Sales have risen for six quarters. Microchip, which makes microcontrollers, analog and connectivity chips, reported net sales of $1,621.5M for its fiscal second quarter, to September 30, up 9.2% from June and 42.2% from a year earlier. The low was $970.5M in the quarter to March 2025. Non-GAAP earnings per share were $0.97, against $0.35 a year earlier, and free cash flow was $396.1M. The company said bookings were robust and book-to-bill was well above one, without giving the ratio.

The December quarter is guided flat to slightly down. Microchip forecast net sales of $1,573M to $1,638M, a change of −3% to +1% from September; the midpoint, $1,605.5M, would be 35% above the December quarter a year earlier. The release says September included about $53M of infrequent revenue that will not recur; on the call, chief financial officer Eric Bjornholt split it into about $21M from a change in distributor pricing, $22M of licensing above the usual run-rate and $10M from one customer contract, all at 100% gross margin. Analysts had expected December sales of about $1.63B and adjusted earnings of $0.95 a share, according to StockStory, against guidance midpoints of $1.606B and $0.91.

Margin guided lower

The guidance puts gross margin back at the company’s long-term model. Non-GAAP gross margin was 66.5% in September, at the midpoint of the 66–67% Microchip had guided in August; it guided 64–65% for December. Taking the $53M of one-time revenue out at 100% margin, September’s margin would have been about 65.4% by our arithmetic, so more than half of the step down is those items. Sanghi gave the rest as lower sales, lower factory utilization, high-margin backlog that suppliers cannot fill, and another supplier price increase from January, and said 65% is the long-term model. Underutilization charges were $26.6M in the quarter, and Bjornholt said he expected no material change in December.

“In the bubble”

Data center was the fastest-growing end market. Microchip does not report data center sales in its release. On the call, Sanghi said the data center business sold over $250M in the September quarter, 16.7% of sales excluding licensing and 55.7% more than a year earlier, and was on its way to $1B in calendar 2026. A year earlier that implies at least about $161M by our arithmetic. He named digital power controllers for AI server power supplies and battery backup units, and PCIe Gen6 switches and retimers, where design wins reached 24 by early November, from 19 at the end of September and 12 at the end of June. He also said he has been saying that data center “is in the bubble”, though he argued it was not a broad problem for Microchip, at about a sixth of sales; in another answer he said its growth rate has to come down substantially.

He described the AI build-out as taking capacity from Microchip’s own products. Sanghi said demand for AI data centers is crowding capacity at trailing-edge wafer nodes and outside assembly-and-test suppliers, leaving high-margin orders unfilled, and that Microchip is qualifying a different assembly-and-test supplier in another country. Lead times are 6 to 32 weeks, he said, against a historical 4 to 8. Inventory was $1,117.3M at September 30, or 184 days by the company’s count, up from 175 in June. Long-term debt was $5,517.2M against $457.0M of cash and short-term investments.

The shares fell as the sector rose. Microchip fell 8.05% to $59.63 on Friday, November 6, according to JKN, or 10.02% to $58.35 according to other market reports, after falling as much as 10.3% in the morning; the VanEck Semiconductor ETF rose 3.62% the same day. The stock had dropped 13.9% on Thursday, before the results, in the chip selloff covered in W.026. At least nine brokers cut their price targets on Friday.