EPS of $0.14 decreased by 87.8% from previous year
Gross margin of 57.4%
Net income of 78.40M
""Excluding the benefit of the legal settlement, our September quarter results were consistent with our guidance with net sales down 7.3% sequentially as we navigate through an inventory correction and macro weakness in manufacturing."" - Ganesh Moorthy
Microchip Technology Incorporated (MCHP) QQ2 2025 Results: Navigating Inventory Destocking Amid AI/Data Center Growth and CHIPS Act Ambitions
Executive Summary
Microchip Technology reported a QQ2 2025 quarter characterized by a continued inventory correction and macro weakness across much of the industrial end market, with notable resilience in AI/data center and aerospace/defense segments. On a reported basis, net sales were $1.164 billion, down 6.2% sequentially, while GAAP gross margins were 57.4% and non-GAAP gross margins were just above 59% (midpoint guidance). The company highlighted a $21.4 million total cost impact from a cybersecurity incident and a $25.9 million capacity underutilization charge, illustrating the near-term profitability drag from underutilized capacity in a weak demand environment. Excluding the legal settlement benefit, September quarter results were essentially in line with guidance, with non-GAAP net income of $250.2 million and non-GAAP diluted EPS of $0.46, modestly above the midpoint of guidance due to the settlement tailwind (+$0.02). Management signaled an improving design-in pipeline and highlighted AI/data center, aerospace/defense, and automotive/industrial opportunities as longer‑term growth engines, while cautioning that December is historically the weakest quarter and that macro uncertainty remains a headwind. In the near term, the company is guiding for December net sales of $1.025–$1.095 billion, with non-GAAP gross margin of 57–59% and non-GAAP operating margin of 22.2–25.8%; non-GAAP EPS guidance of $0.25–$0.35. The results underscore a cyclical recovery path rather than a structural expansion, with meaningful leverage to an upcycle should demand re-accelerate and channel destocking unwind. The capital-return program remains robust, with the company returning $261 million to shareholders in Q2 and targeting 100% of adjusted free cash flow to be returned going forward, albeit with occasional balance-sheet levers to manage the dividend in tight quarters.
Key Performance Indicators
Revenue
1.16B
QoQ: -6.24% | YoY:-48.37%
Gross Profit
668.50M
57.44% margin
QoQ: -9.28% | YoY:-56.23%
Operating Income
146.60M
QoQ: -33.09% | YoY:-83.44%
Net Income
78.40M
QoQ: -39.37% | YoY:-88.24%
EPS
0.15
QoQ: -37.50% | YoY:-87.80%
Revenue Trend
Margin Analysis
Key Insights
QQ2 2025 net sales: $1.164 billion; QoQ change: -6.2% (sequential). YoY comparison not explicitly stated in the call but 4-quarter revenue shows pronounced declines in the recent period.
GAAP gross margin: 57.4%; Non-GAAP gross margin: just above midpoint guidance at 59.5% (including $25.9 million capacity underutilization charges). Excluding the license settlement, non-GAAP gross margin would be 59.1%.
Net income: GAAP net income $78.4 million; Non-GAAP net income $250.2 million; Non-GAAP EPS $0.46 (beat by $0.03 at the guidance midpoint).
EBITDA: GAAP EBITDA $338.2 million; Adjusted EBITDA $405.7 million (34.9% of net sales).
Financial Highlights
Revenue and profitability
- QQ2 2025 net sales: $1.164 billion; QoQ change: -6.2% (sequential). YoY comparison not explicitly stated in the call but 4-quarter revenue shows pronounced declines in the recent period.
- GAAP gross margin: 57.4%; Non-GAAP gross margin: just above midpoint guidance at 59.5% (including $25.9 million capacity underutilization charges). Excluding the license settlement, non-GAAP gross margin would be 59.1%.
- Operating margin: GAAP operating margin 12.6%; Non-GAAP operating margin 28.5% (midpoint of guidance, excluding settlement).
- Net income: GAAP net income $78.4 million; Non-GAAP net income $250.2 million; Non-GAAP EPS $0.46 (beat by $0.03 at the guidance midpoint).
- EBITDA: GAAP EBITDA $338.2 million; Adjusted EBITDA $405.7 million (34.9% of net sales).
- EPS/diluted: GAAP EPS $0.14; Non-GAAP diluted EPS $0.46; Weighted average diluted shares around 542 million.
Liquidity, cash flow and leverage
- Free cash flow (reported): $22.8 million in the September quarter; Adjusted free cash flow: $14 million (as disclosed in the call).
- Operating cash flow: $43.6 million; Net cash provided by operating activities modestly positive amid working-capital timing.
- Cash position: cash and short-term investments totaling $286.1 million at quarter end.
- Debt: Total debt $6.4576 billion; Net debt around $6.1715 billion; Net debt to adjusted EBITDA 2.85x as of September 30, 2024, up from 1.28x year-ago.
- Capex: $20.8 million in the quarter; FY2025 capex guidance about $150 million; 2026 capex expected to be lower as capacity is pre-positioned for the upcycle.
- Inventory and working capital: Inventory $1.34 billion; 247 days of inventory; 40 days of distributor inventory; backlog and lead times remain short (~8 weeks).
Balance sheet quality and capital returns
- Balance sheet remains solid with a substantial net debt load but ample liquidity. The company has reiterated a target of returning 100% of adjusted free cash flow to shareholders over the cycle, with a balance between dividends and share repurchases, and uses borrowings when necessary to pay the dividend in lean quarters.
- Dividend policy remains a focal point of capital allocation, with management outlining a plan to borrow temporarily if needed but to reduce debt when cash flow strength returns.
Market dynamics and management tone
- Management highlighted strength in AI/data center, aerospace/defense, and automotive segments, with weakness in Europe’s industrial end markets. Europe revenue declined about 22% sequentially; Greater China activity was not weak, albeit not a driver of growth either.
- The long-cycle design-in processes, channel dynamics, and a broad product portfolio (MCUs, MPU/space compute, PCIe switches, CXL, etc.) position Microchip to participate in the next upcycle as inventories normalize.
- Near-term guidance emphasizes continued macro uncertainty, seasonality in December, and the potential for green shoots to develop as supply/demand balance improves.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
1.16B
-48.37%
-6.24%
Gross Profit
668.50M
-56.23%
-9.28%
Operating Income
146.60M
-83.44%
-33.09%
Net Income
78.40M
-88.24%
-39.37%
EPS
0.15
-87.80%
-37.50%
Key Financial Ratios
currentRatio
0.88
grossProfitMargin
57.4%
operatingProfitMargin
12.6%
netProfitMargin
6.74%
returnOnAssets
0.5%
returnOnEquity
1.25%
debtEquityRatio
1.03
operatingCashFlowPerShare
$0.08
freeCashFlowPerShare
$0.04
dividendPayoutRatio
311%
priceToBookRatio
6.87
priceEarningsRatio
137.41
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key takeaways from management commentary and Q&A:
- Strategy and growth themes: Rich Simoncic highlighted ongoing investments in high-growth sectors, including dsPIC33A, PIC64GX, PIC64 space computer, PCIe switches, PCIe SSD controllers, CXL controllers, and automotive Ethernet (VelocityDRIVE and 1000BASE-T1 PHYs). He framed these as positions to capture next-gen data centers, automotive, aerospace, and defense opportunities, with AI acceleration as a core driver. (Quote context: product line updates and strategic positioning.)
- Margin and profitability dynamics: Eric Bjornholt emphasized that underutilization charges are a meaningful drag on near-term gross margins and that the company will continue to manage capacity in a weak demand environment; he also noted that the cybersecurity incident added approximately $21.4 million of costs, largely due to underutilization.
- Macro view and guidance discipline: Ganesh Moorthy acknowledged secular trends in AI/data center growth and emphasized a long-cycle view with a potential cycle reversal in 2025. He also highlighted Europe’s weakness in industrial and automotive sectors and the importance of design-in momentum for long-term growth. He cautioned that December is typically the weakest quarter due to seasonality and year-end inventory management. He reiterated the company’s commitment to returning 100% of adjusted FCF to shareholders and explained the use of debt temporarily to fund dividends when needed.
"Excluding the benefit of the legal settlement, our September quarter results were consistent with our guidance with net sales down 7.3% sequentially as we navigate through an inventory correction and macro weakness in manufacturing."
— Ganesh Moorthy
"Underutilization charges are having a pretty significant impact on our gross margin and our operating results, and we are continuing to manage production and inventory levels accordingly."
— Eric Bjornholt
Forward Guidance
Near-term outlook and risk factors:
- December quarter guidance: Net sales expected between $1.025 billion and $1.095 billion; non-GAAP gross margin guidance of 57–59%; non-GAAP operating margin guidance of 22.2–25.8%; non-GAAP EPS guidance of $0.25–$0.35. The company notes December is historically seasonally weak, with significant year-end inventory adjustments and potential extended shutdowns by customers.
- Longer-term trajectory: Management contends that growth will be driven by new product innovations and a robust design-in pipeline across megatrends (data center, automotive, aerospace/defense, renewable energy). They expect design-win momentum to translate into above-market growth over time, even as near-term demand remains volatile.
- Confidence signals: AI/datas center growth, aerospace/defense strength, and a broadening product portfolio (e.g., PCIe/SAS interfaces, CXL, space-grade microprocessors) support a favorable medium-term trajectory. CHIPS Act-related grants and incentives could bolster US-based capacity expansion if final terms are agreed by year-end; such incentives would be additive to the company’s long-term capital plan.
- Key risks to monitor: Ongoing macro underpinnings (high rates, inventory destocking, and soft demand in industrial/end-market segments), potential further supply chain disruption, and potential pricing pressure as competition intensifies. Monitoring the pace of the channel destocking unwind, backlog replenishment, and the effectiveness of the TSS (Total System Solutions) approach will be important to gauge the speed of any upturn.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
MCHP Focus
57.44%
12.60%
1.25%
137.41%
TXN
57.80%
32.70%
6.55%
39.37%
ON
44.50%
26.60%
4.06%
21.74%
ADI
45.90%
18.10%
0.86%
81.92%
QRVO
42.60%
0.93%
-0.51%
-140.96%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Microchip trades at a high multiple given its leadership position in embedded control and a multi-year design-in-led growth thesis. QQ2 2025 demonstrates the classic cyclicality of semiconductors: revenue declined and margins compressed in the near term due to inventory corrections, while management maintains a constructive long-run view anchored by design-in momentum and a diversified megatrend exposure (AI/data center, aerospace/defense, automotive). Near-term catalysts include a potential unwind of channel destocking, improved backlog conversion as lead times normalize, and potential CHIPS Act funding acceleration. The company’s ability to sustain 100% FCF return to shareholders, even with temporary leverage during weaker quarters, is a meaningful structural support for the stock. Key investment considerations include the pace of the December quarter recovery, the durability of AI-related demand, CHIPS Act progress, and how quickly inventory normalization translates into higher utilization and margin expansion. Relative to peers, Microchip’s growth profile is heavily design-in driven; the company should outperform in a stabilizing macro if its AI/data center and aerospace/defense opportunities translate into meaningful backlog and production ramps, though near-term metrics may lag peers with less cyclicality or stronger end-market diversification. Given the current data, a cautious stance with a watchful eye on channel destocking, backlog replenishment, and CHIPS Act implementation is prudent; a favorable re-rating would rely on tangible evidence of demand recovery and improved utilization across its global manufacturing footprint.
Key Investment Factors
Growth Potential
Long-term growth drivers include a broad embedded system solutions portfolio, growing design-in momentum, and a strategic emphasis on megatrends (AI/data center acceleration, automotive Ethernet, space-grade compute, renewable energy, and aerospace/defense). The company’s TSS framework and extensive reference designs support higher content per customer and broader cross-sell opportunities via 120k+ customers and a distribution network.
Profitability Risk
Near-term cyclicality and macro weakness in industrial and automotive markets; inventory destocking and short lead times that limit backlog; potential pricing pressure as competitors compete for share; higher leverage and ongoing integration costs from legacy and acquisition-related amortization; CHIPS Act funding timing risk; reliance on customer design cycles and end-market recovery timing.
Financial Position
Solid liquidity position with $286.1M cash; total debt of $6.46B and net debt of ~$6.17B; net debt to adjusted EBITDA at 2.85x; trailing 12-month adjusted EBITDA of $2.161B; free cash flow generation modest in the quarter (FCF $22.8M) but with a long-run capacity to convert cash into dividends and buybacks given the redesigned capital-return framework.
SWOT Analysis
Strengths
Broad, diversified product portfolio across microcontrollers, MPs, analog interfaces, memory, and system solutions
Strong design-in culture and TSS framework driving higher content per customer
Resilient end-markets in aerospace/defense and data center AI initiatives
Healthy gross margins (GAAP 57.4%, non-GAAP ~59%) and strong cash generation potential over the cycle
Robust capital return philosophy (100% of adjusted FCF to shareholders; sizable dividend and buybacks)
Weaknesses
Cyclicality and sensitivity to industrial/auto macro and inventory normalization