Microchip Technology Reveals Data Center Sales Will Hit $1 Billion in 2026, Nearly Doubling as Supply Constraints Spread Broadly Across Product Lines
Q1 fiscal 2027 earnings call, August 6, 2026
Microchip Technology used its fiscal first-quarter 2027 earnings call to deliver the most granular breakdown of its data center exposure the company has ever provided, revealing that total data center-related sales are on pace to reach approximately $1 billion in calendar 2026, up 69% from $591 million in calendar 2025. The disclosure, layered on top of a quarter that beat guidance across every major metric, reframes Microchip less as a legacy industrial and automotive analog player and more as a diversified beneficiary of AI infrastructure buildout, even as CEO Steve Sanghi cautioned that supply constraints are now spreading well beyond the handful of pinch points the company flagged a few months ago.
Data Center Exposure Is Broader Than Investors Realized
Sanghi disclosed that Microchip's data center revenue is not confined to its dedicated Data Center Solutions business unit, which sells PCIe Gen6 switches, retimers and storage controllers directly to hyperscalers. On top of the $302.7 million that unit generated in calendar 2025, Microchip identified another $288 million in data center-linked sales embedded across its catalog businesses, power management, mixed-signal, microcontrollers, security, FPGAs, timing and memory products, sold not to hyperscalers directly but to power supply makers, module manufacturers and card stuffers such as LITEON and Delta. Combined, that puts total 2025 data center exposure at $591 million, or 14% of net sales. For 2026, Sanghi said the Data Center Solutions unit is expected to reach $500 million while the catalog business grows to a matching $500 million, pushing the total to roughly $1 billion. "Our data center exposure is probably the broadest of any other company," Sanghi said, adding that the breadth makes it "difficult to assess what is the total TAM in each of those markets" and to definitively claim share gains, though he said "I would like to think we are gaining share." Year-over-year, data center sales grew 77.2% in the March quarter and 97.8% in the June quarter. Design wins in the core switch and retimer business jumped from six last quarter to 14 today, 12 on the Gen6 switch and two on the Gen6 retimer, spanning both hyperscale and enterprise customers.
Supply Constraints Are Spreading, Not Isolated
Perhaps the most consequential operational disclosure was Sanghi's description of how capacity tightness has evolved. "These challenges previously were isolated to specific areas but have now spread broadly to many of our products that come from foundry," he said, citing substrate shortages, subcontracting capacity and foundry constraints across multiple nodes. Lead times, which had held at four to eight weeks for standard products, are now stretching as finished goods and die inventory have been drawn down. Customers are increasingly requesting expedited shipments inside the standard lead time, and Sanghi said many of those requests are "going unsupported in the quarter." Importantly, he pushed back on the idea that this caps growth: Microchip is not capacity-constrained in its own fabs, where utilization remains below 100% and $450 million of already-purchased equipment sits uninstalled. The bottleneck sits at outsourced assembly and test, particularly advanced packaging, where "AI is crowding out" available capacity at subcontractors. "You should not, by any reason, interpret a word constraint to be that the revenue is capped here, not at all," Sanghi said, noting that allocation from foundry and OSAT partners is increasing quarter over quarter even as it lags what Microchip could theoretically absorb.
Gross Margin Guidance Jumps Above Long-Term Model, But Company Warns Against Extrapolating
Microchip guided September quarter non-GAAP gross margin to 66% to 67%, above its own long-term target of 65%, a beat that triggered repeated analyst questioning about sustainability, including from UBS's Timothy Arcuri and Bank of America's Vivek Arya. CFO Eric Bjornholt and Sanghi were explicit that a meaningful portion of the beat is non-repeating: an unusually rich, 100%-margin licensing quarter and a one-time favorable swing in distribution inventory pricing reserves tied to the recent price increase. "Those two will be negative for the following quarter," Sanghi said, though he added that a full quarter of the newly implemented price increases, effective mid-August to early September, should roughly offset the drag. Management was direct that investors should not model further upside. "You should not expect non-GAAP gross margin percentage to continue to rise above this level," Sanghi said, while Bjornholt described 66.5% as "a very healthy margin" that the company expects to sustain for at least the next few quarters, aided by declining underutilization charges as factories ramp, but with the caveat that rising input costs from foundries and OSATs remain a partial offset. Sanghi characterized the price increase as a one-time reset tied to costs already absorbed over the prior six months rather than the start of a routine cadence, saying a further increase would require "another event, a major price increase by the foundries and OSATs on us."
Aerospace and Defense Ramp Is Still in Early Innings
Aerospace and defense sales grew 45.6% year-over-year and 20% sequentially in the June quarter, and Sanghi indicated the bulk of the anticipated buildout has not yet reached the order book. He said Department of War officials and prime contractors are discussing production increases of "4x to even 4x to 8x" on munitions and related systems, but that primes themselves are still sizing their own supply chain needs before placing orders. "They're trying to figure out their own needs regarding what all the things are needed... then give the orders and we start building," Sanghi said. "So our orders are strong, but it's only a fraction of really what is needed out there." He cautioned analysts against extrapolating the current growth rate, noting the comparison base is unusually depressed following the 2025 downturn, when total company revenue bottomed at $970 million versus the current quarter's $1.603 billion guidance midpoint.
Capital Allocation Stays Conservative Despite Improving Balance Sheet
Net debt fell to $5.2 billion at quarter-end, with net leverage improving to 2.85 times EBITDA from higher levels previously, and Bjornholt said he expects that ratio to drop below 2.5 times in the September quarter. Despite the progress, Sanghi ruled out both buybacks and dividend increases for the foreseeable future. "We believe the debt level is still too high, and we will continue to use the entire cash that's available beyond the current dividend and use it to pay down the debt," he said, declining to specify what leverage threshold would change that stance. On M&A, Sanghi reiterated the company is not pursuing large acquisitions, though it recently agreed to acquire Israel-based Hailo, a distressed edge-AI chip developer, in a deal expected to close in September. He described the strategic value as outsized relative to the purchase price, saying the technology "advances our roadmaps by about five years" in edge AI and would have taken Microchip four to five years to develop internally.
Distribution Channel Has Bottomed, But Restocking Has Not Started
Distributor inventory fell to 25 days, described as the low end of the historical range, while sell-through grew 17% sequentially. Sanghi said he met personally with major distributors in the past three weeks and found them reluctant to place replenishment orders because their own end customers are not yet committing to longer-term backlog despite widely reported lead-time extensions. "Customers don't move until they get in trouble," he said. "They have to go some lines down and then they panic." That dynamic suggests channel restocking, and the associated revenue tailwind, has yet to meaningfully begin, positioning it as a potential forward catalyst rather than a factor already embedded in current results.