Microchip Q2 Earnings Beat Estimates, Sales Down Y/Y, Shares Drop

Core Insights - Microchip Technology (MCHP) reported non-GAAP earnings of 35 cents per share for Q2 fiscal 2026, exceeding the Zacks Consensus Estimate by 6.06% but down 24% year over year [1] - Net sales reached $1.14 billion, a 2% decrease year over year, but slightly above the Zacks Consensus Estimate by 0.75%, with a sequential increase of 6% [1][9] - Following the earnings report, Microchip shares fell over 9%, although they have increased 3.5% year to date, outperforming the broader Zacks Computer and Technology sector's 27.1% appreciation [2] Segment Performance - Sales from Mixed-signal Microcontroller, Analog, and Other segments contributed 51.3%, 28.2%, and 20.6% to net sales, respectively [3] - The Microcontroller segment saw a sequential growth of 9.7%, driven by strong demand for 32-bit MCUs, while the Analog segment grew by 1.7% sequentially [3] - Direct sales accounted for 55% of total sales, with the remaining 45% coming from distribution channels [3] Geographic Revenue Breakdown - Revenue contributions by region were 29.7% from the Americas, 19.7% from Europe, and 50.6% from Asia [4] - Sales increased in the Americas and Asia, while revenue remained flat in Europe [4] Operating Results - Non-GAAP gross margin decreased by 290 basis points year over year to 56.7%, but improved by 236 basis points sequentially [5] - Product gross margin was reported at 67.4%, supported by a favorable product mix [5] - Non-GAAP operating margin declined to 24.3% compared to 29.3% in the previous year, although it expanded sequentially by 364 basis points [7] Financial Position - As of September 30, 2025, cash and short-term investments totaled $236.8 million, down from $566.5 million as of June 30 [8] - Total debt was reported at $5.38 billion, a slight decrease from $5.46 billion in June [8] - Inventory days decreased to 199 days from 214 days at the end of June 2025 [8] Cash Flow and Shareholder Returns - Cash flow from operating activities was $88.1 million, down from $275.6 million in the previous quarter [9] - Free cash flow also decreased to $38.3 million from $257.7 million in the prior quarter [10] - The company returned approximately $245.8 million to shareholders through dividends, announcing a quarterly dividend of 45.5 cents per share [10] Future Guidance - For Q3 fiscal 2026, Microchip projects net sales of approximately $1.13 billion, reflecting a 1% sequential decline, with anticipated non-GAAP earnings between 34 and 40 cents per share [11] - Non-GAAP gross margin is expected to range between 57.2% and 59.2%, with operating margin projected between 24.5% and 26.9% [12]