# How Microchip makes money

CXProWealth Business Lens · Microchip (MCHP) · Q1 FY2027

Read from the 10-Q for the period 2026-04-01 to 2026-06-30, filed 2026-08-06 with the SEC (accession 0000827054-26-000038): https://www.sec.gov/Archives/edgar/data/827054/000082705426000038/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $1.5B (+38.0% on the year)
- Operating income: $336.8M (operating margin 22.7%)
- Net income: $229.8M (net margin 15.5%)
- Gross margin: 63.2%
- Free cash flow: $497.6M (33.5% of revenue)
- Cash conversion (operating cash flow / net income): 2.23x
- Capital expenditure: 0.9% of revenue

## Where the money goes (Q1 FY2027)

- Mixed-signal Microcontrollers → Net sales: $739.1M
- Analog → Net sales: $410.9M
- Other → Net sales: $334.7M
- Net sales → Cost of sales: $545.8M
- Net sales → Gross profit: $938.9M
- Gross profit → Operating expenses: $602.1M
- Operating expenses → Research and development: $308.9M
- Operating expenses → Selling, general and administrative: $184.3M
- Operating expenses → Amortization of acquired intangible assets: $90.0M
- Operating expenses → Special charges and other, net: $18.9M
- Gross profit → Operating income: $336.8M
- Operating income → Interest expense: $48.8M
- Operating income → Income before income taxes: $288.0M
- Interest income → Income before income taxes: $1.4M
- Other income, net → Income before income taxes: $500.0K
- Income before income taxes → Income tax provision: $60.1M
- Income before income taxes → Net income (loss): $229.8M

## Where the revenue comes from

### Products and services (Net Sales (Details))

| Member | Value | Share |
|---|---:|---:|
| Mixed-signal Microcontrollers | $739.1M | 49.8% |
| Analog | $410.9M | 27.7% |
| Other | $334.7M | 22.5% |

The members sum to total revenue.

### Segments (Segment Information - Net Sales and Gross Profit (Details))

| Member | Value | Share |
|---|---:|---:|
| Semiconductor products | $1.4B | 97.1% |
| Technology licensing | $42.6M | 2.9% |

The members sum to total revenue.

### ContractWithCustomerSalesChannel (Net Sales (Details))

| Member | Value | Share |
|---|---:|---:|
| Distributors | $772.8M | 52.1% |
| Direct customers | $669.3M | 45.1% |
| Licensees | $42.6M | 2.9% |

The members sum to total revenue.

## Income statement, as filed

| Line | Q1 FY2027 | Of revenue |
|---|---:|---:|
| Net sales | $1.5B | 100% |
| Cost of sales | $545.8M | 36.8% |
| **Gross profit** | $938.9M | 63.2% |
| Research and development | $308.9M | 20.8% |
| Selling, general and administrative | $184.3M | 12.4% |
| Amortization of acquired intangible assets | $90.0M | 6.1% |
| Special charges and other, net | $18.9M | 1.3% |
| **Operating expenses** | $602.1M | 40.6% |
| **Operating income** | $336.8M | 22.7% |
| Interest income | $1.4M | 0.1% |
| Interest expense | ($48.8M) | 3.3% |
| Other income, net | $500.0K | 0.0% |
| **Income before income taxes** | $289.9M | 19.5% |
| Income tax provision | $60.1M | 4.0% |
| **Net income (loss)** | $229.8M | 15.5% |
| Dividends on Series A Preferred Stock | ($27.8M) | 1.9% |
| **Net income (loss) attributable to common stockholders** | $202.0M | 13.6% |
| Basic net income (loss) per common share (in dollars per share) | $0 | 0.0% |
| Diluted net income (loss) per common share (in dollars per share) | $0 | 0.0% |
| Dividends declared per common share (in dollars per share) | $0 | 0.0% |
| Basic common shares outstanding (in shares) | 542,500,000 |  |
| Diluted common shares outstanding (in shares) | 550,500,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2008 | $1.0B | $301.7M | $296.8M | $447.3M | $5.0M | $442.3M |
| FY2009 | $903.3M | $233.3M | $245.6M | $308.7M | $21.6M | $287.1M |
| FY2010 | $947.7M | $245.0M | $217.0M | $452.0M | $15.4M | $436.6M |
| FY2011 | $1.5B | $474.2M | $419.0M | $582.7M | $16.6M | $566.1M |
| FY2012 | $1.4B | $396.5M | $336.7M | $412.0M | $5.8M | $406.2M |
| FY2013 | $1.6B | $178.6M | $127.4M | $459.4M | $4.7M | $454.6M |
| FY2014 | $1.9B | $458.9M | $395.3M | $676.6M | $9.1M | $667.5M |
| FY2015 | $2.1B | $425.6M | $369.0M | $721.2M | $6.7M | $714.5M |
| FY2016 | $2.2B | $352.3M | $324.1M | $744.4M | $7.1M | $737.3M |
| FY2017 | $3.4B | $275.8M | $164.6M | $1.1B | $10.2M | $1.0B |
| FY2018 | $4.0B | $936.3M | $255.4M | $1.4B | $206.8M | $1.2B |
| FY2019 | $5.3B | $714.3M | $355.9M | $1.7B | $228.9M | $1.4B |
| FY2020 | $5.3B | $647.1M | $570.6M | $1.5B | $67.6M | $1.5B |
| FY2021 | $5.4B | $998.1M | $349.4M | $1.9B | $92.6M | $1.8B |
| FY2022 | $6.8B | $1.8B | $1.3B | $2.8B | $370.1M | $2.5B |
| FY2023 | $8.4B | $3.1B | $2.2B | $3.6B | $486.2M | $3.1B |
| FY2024 | $7.6B | $2.6B | $1.9B | $2.9B | $285.1M | $2.6B |
| FY2025 | $4.4B | $296.3M | -$500.0K | $898.1M | $126.0M | $772.1M |
| FY2026 | $4.7B | $490.1M | $230.0M | $962.1M | $91.1M | $871.0M |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +7.1% (year before -42.3%): accelerating
- Operating income: +65.4% (year before -88.5%): accelerating
- Net income: -45,900.0% (year before -100.0%): slowing
- Free cash flow: +12.8% (year before -70.4%): accelerating

## Operating figures stated in the filing

- Days of inventory held by distributors: 25 days (as of 2026-06-30). "At June 30, 2026, our distributors maintained 25 days of inventory of our products compared to 26 days at March 31, 2026." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Days of inventory held by distributors: 26 days (as of 2026-03-31). "At June 30, 2026, our distributors maintained 25 days of inventory of our products compared to 26 days at March 31, 2026." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Days of inventory on the balance sheet: 175 days (as of 2026-06-30). "We maintained 175 days of inventory on our balance sheet at June 30, 2026 compared to 185 days of inventory at March 31, 2026." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Days of inventory on the balance sheet: 185 days (as of 2026-03-31). "We maintained 175 days of inventory on our balance sheet at June 30, 2026 compared to 185 days of inventory at March 31, 2026." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Assembly performed in internal facilities: 68.0% (as of 2026-06-30). "Approximately 68% of our assembly requirements were performed in our internal assembly facilities during the three months ended June 30, 2026, compared to 69% during the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Assembly performed in internal facilities: 69.0% (as of 2025-06-30). "Approximately 68% of our assembly requirements were performed in our internal assembly facilities during the three months ended June 30, 2026, compared to 69% during the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Test performed in internal facilities: 71.0% (as of 2026-06-30). "During the three months ended June 30, 2026, approximately 71% of our test requirements were performed in our internal facilities compared to 68% during the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Test performed in internal facilities: 68.0% (as of 2025-06-30). "During the three months ended June 30, 2026, approximately 71% of our test requirements were performed in our internal facilities compared to 68% during the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Net sales from products made at outside wafer foundries: 67.0% (as of 2026-06-30). "Approximately 67% of our net sales came from products that were produced at outside wafer foundries during the three months ended June 30, 2026, compared to 64% during the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Net sales from products made at outside wafer foundries: 64.0% (as of 2025-06-30). "Approximately 67% of our net sales came from products that were produced at outside wafer foundries during the three months ended June 30, 2026, compared to 64% during the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Share of net sales through distributors: 52.0% (as of 2026-06-30). "Distributors accounted for approximately 52% of our net sales in the three months ended June 30, 2026 and approximately 47% of our net sales in the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Share of net sales through distributors: 47.0% (as of 2025-06-30). "Distributors accounted for approximately 52% of our net sales in the three months ended June 30, 2026 and approximately 47% of our net sales in the three months ended June 30, 2025." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Share of net sales from the largest distributor (Arrow Electronics): 12.0% (as of 2026-06-30). "With the exception of Arrow Electronics, our largest distributor, which accounted for 12% and 11% of our net sales in the three months ended June 30, 2026 and in the three months ended June 30, 2025, no other distributor or direct customer accounted for more than 10% of our net sales during these periods." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Share of net sales from the largest distributor (Arrow Electronics): 11.0% (as of 2025-06-30). "With the exception of Arrow Electronics, our largest distributor, which accounted for 12% and 11% of our net sales in the three months ended June 30, 2026 and in the three months ended June 30, 2025, no other distributor or direct customer accounted for more than 10% of our net sales during these periods." (Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations)

## Key insights

### A 38.0% sales rise lifted operating income 949%

Cost of sales rose 9.4% and operating expenses 10.6%, so most added revenue reached operating income: a 22.7% margin against 3.0%.

Net sales rose 38.0% to $1,484.7 million from $1,075.5 million a year earlier. Cost of sales rose 9.4%, to $545.8 million, and operating expenses 10.6%, to $602.1 million. Operating expenses fell to 40.6% of net sales from 50.6%. Operating income went to $336.8 million from $32.1 million, a margin of 22.7% against 3.0%. _(from the filing)_
The filing attributes the gross profit rise to product mix, lower unabsorbed capacity charges, lower inventory reserves and higher licensing revenue, and says it cannot quantify each one separately. Gross margin reached 63.2% against 53.6%. The filing also says the plants still ran below normal capacity this quarter, so part of the fixed factory cost was still expensed as incurred. _(from the filing)_
Set against the whole of FY2026, the quarter stands out. Its operating income of $336.8 million equals 68.7% of FY2026's $490.1 million, and its net income of $229.8 million equals 99.9% of FY2026's $230.0 million. _(from the filing)_
Analysis: the lever works both ways. Between FY2023 and FY2025, annual sales fell to 52.2% of their peak while operating income fell to 9.5% of its peak. A cost base that barely moves with volume turned this quarter's sales rise into a far larger profit rise, and it is the same cost base that made the downturn so steep. _(analysis)_

### Operating cash flow was more than double net income

Operating cash flow of $511.5 million was more than double net income of $229.8 million, and capital spending of $13.9 million left free cash flow of $497.6 million.

Operating cash flow was $511.5 million against net income of $229.8 million. A year earlier it was $275.6 million while the company reported a net loss of $18.6 million. The filing attributes the gap to non-cash and non-operating charges added back to net income, plus net inflows from changes in operating assets and liabilities. _(from the filing)_
Amortization of acquired intangible assets, a non-cash charge left by past acquisitions, was $90.0 million: equal to 26.7% of operating income and 39.2% of net income. It fell 16.4% from $107.6 million a year earlier. _(from the filing)_
Capital spending was $13.9 million, 0.9% of net sales and 2.7% of operating cash flow, against $17.9 million a year earlier. Free cash flow was $497.6 million, 33.5% of net sales and more than double net income. Inventory fell to 175 days on the balance sheet from 185 a quarter earlier, and the filing says the dollar level stayed roughly flat. _(from the filing)_
Analysis: two supports of this cash are tied to the moment. Capital spending this low draws on capacity built before the downturn, and falling inventory days at a flat dollar level mean stock already on hand is serving higher sales. If growth continues, both could start to absorb more cash than they do now. _(analysis)_

### Interest fell from 178.8% of operating income to 14.5%

A year ago interest of $57.4 million exceeded operating income; now $48.8 million equals 14.5% of it, and net income reached $229.8 million.

A year earlier interest expense of $57.4 million was 178.8% of operating income of $32.1 million, and income before taxes was a loss of $15.8 million. This quarter interest expense fell 15.0% to $48.8 million, which the filing puts down to lower debt and rates, and equals 14.5% of operating income. Income before income taxes was $289.9 million. _(from the filing)_
The income tax provision was $60.1 million, 20.7% of income before taxes, against $2.8 million a year earlier on a pretax loss. Net income was $229.8 million, 15.5% of net sales, against a loss of $18.6 million. _(from the filing)_
Series A preferred dividends of $27.8 million, unchanged from a year earlier, rank ahead of common holders and took 12.1% of net income. Common holders earned $202.0 million, $0.37 per diluted share, while the company declared $0.455 per common share, 123% of diluted earnings per share. _(from the filing)_
The filing says each preferred share converts automatically into common stock on a set date unless converted earlier, and that capped call options are expected to reduce the dilution. _(from the filing)_
Analysis: conversion would end the preferred dividend but spread earnings over more common shares. Whether the common dividend comes to sit below earnings per share depends on how far earnings grow, and debt falls, before then. This quarter cash flow, helped by low capital spending, covers both. _(analysis)_

### Competitive edge

- **Owned plants make Microchip a low-cost producer** Its own facilities handled 68% of assembly and 71% of test, which the filing credits with significant savings over outside contractors.
- **Proprietary microcontrollers hold their selling prices** Microcontrollers, 49.8% of net sales, grew 38.8%, and the filing says their prices stayed relatively stable because the parts are proprietary.
- **Licensing adds revenue with no cost of sales** Technology licensing brought in $42.6 million, 2.9% of net sales, equal to 4.5% of gross profit and 12.6% of operating income.

### What to watch

- **Restocking drove the rise, and the cycle can turn** The filing ties the 38.0% rise to customers restocking, after FY2025 sales fell to 52.2% of FY2023 and operating income to 9.5%.
- **67% of sales rely on outside wafer foundries** Products made at outside wafer foundries were 67% of net sales, up from 64%, and those partners may stop supporting older processes.
- **China, trade controls and a Malaysian tax claim** Most net sales go to foreign customers, and the filing names Chinese competition, trade measures and a disputed Malaysian tax assessment as pressures.

## Investor view

**Sales rose 38.0% and cost of sales far less, so Microchip's owned factories turned the restock into margin**

### How it makes money

Microchip designs, makes and sells embedded control chips: microcontrollers, analog parts, FPGAs, memory and timing products, packaged with software and tools into what it calls a Total System Solution. This quarter mixed-signal microcontrollers brought in $739.1 million, 49.8% of $1,484.7 million in net sales. Analog added $410.9 million, 27.7%, and the other line, which holds FPGAs, memory, licensing and manufacturing services, $334.7 million, 22.5%. _(from the filing)_
It owns much of its manufacturing. The filing calls that ownership "an important component of our business strategy" and says it makes Microchip "one of the lowest cost producers in the embedded control industry". It still leans on outside foundries: 67% of net sales came from products made at outside wafer foundries, against 64% a year earlier, while its own plants handled 68% of assembly and 71% of test. _(from the filing)_
Distributors carried $772.8 million of sales, 52% of the total against 47% a year earlier. Direct customers, mostly equipment makers and contract manufacturers, bought $669.3 million. Arrow Electronics alone accounted for 12% of net sales, against 11%. Distributors can end the relationship with little notice, and the filing says their inventory holding patterns "may have a material impact on our net sales". _(from the filing)_
A small technology licensing segment licenses its SuperFlash embedded flash and other intellectual property to foundries and chip makers. It brought in $42.6 million, 2.9% of net sales. The filing notes that licensing revenue "has no associated cost of sales", so all of it lands in gross profit: 4.5% of the quarter's $938.9 million. _(from the filing)_

### What shifted

Net sales rose 38.0% to $1,484.7 million from $1,075.5 million a year earlier. The filing attributes the rise to "increased demand after customers reduced excess inventory levels" and to new design wins entering production. Every product line grew: microcontrollers 38.8%, analog 29.9% and the other line 47.6%. The fastest grower gained share, to 22.5% of net sales, while analog, the slowest, slipped to 27.7%. _(from the filing)_
Cost of sales rose only 9.4%, to $545.8 million from $498.8 million. Gross profit rose 62.8% to $938.9 million, and gross margin reached 63.2% against 53.6% a year earlier. The filing names four causes: product mix, lower unabsorbed capacity charges, lower inventory reserves and higher licensing revenue. _(from the filing)_
Operating expenses rose 10.6% to $602.1 million, far slower than sales. R&D rose 20.9% to $308.9 million and SG&A 15.7% to $184.3 million, both mainly on higher pay including share-based compensation. Amortization of acquired intangibles fell to $90.0 million from $107.6 million. Operating income went to $336.8 million from $32.1 million, a 22.7% margin against 3.0%. _(from the filing)_
Interest expense fell to $48.8 million from $57.4 million on lower debt and rates; a year earlier it exceeded operating income. Net income was $229.8 million against a loss of $18.6 million. After $27.8 million of preferred dividends, common holders earned $0.37 per diluted share, against $0.455 declared in dividends. Operating cash flow was $511.5 million against that $229.8 million of net income, and capital spending was $13.9 million, 0.9% of sales. _(from the filing)_
Inventory kept coming down in days. Microchip held 175 days on its balance sheet at the quarter end against 185 a quarter earlier, and distributors held 25 days against 26. The filing says the dollar level stayed roughly flat while days fell, from "efforts to balance manufacturing production, customer demand and inventory levels". _(from the filing)_

### Risks in the filing

Visibility is short. Much of each quarter's sales come from turns orders, booked and shipped in the same quarter, which the company says are hard to predict when customers change order levels mid-quarter. Its long-term supply agreements, together with orders outside them, left customers holding excess inventory, and the cancelled and deferred orders that followed led to inventory write-downs that hurt gross margins. _(from the filing)_
Running below normal capacity is expensive: unabsorbed capacity charges are expensed as incurred, and the company says results "will suffer" if yields slip. It depends on outside foundries and contractors that may stop investing in the trailing-edge processes many of its products use, and a U.S. defense law provision will bar government agencies from buying chips made at SMIC, where some of its products are made. _(from the filing)_
Trade and geography. Most sales go to foreign customers. China is named as a key market with intense, state-supported competition; an analog antidumping probe China suspended could resume, and a new Chinese rule could expose the company to liability for complying with foreign trade controls. Tariffs, rare earth export limits, and Middle East disruption to helium, bromine and fuel are also named. _(from the filing)_
Channel and tax. Distributors, 52% of net sales, have no long-term agreements, and subsidiaries of Arrow Electronics, the largest at 12%, were briefly placed on a U.S. export list that stopped shipments to them. Separately, a Malaysian tax assessment that the company calls without merit could, if upheld, have a material adverse impact on its financial position. _(from the filing)_
Of these, the numbers already show the inventory cycle. Annual sales roughly halved between the peak year and the trough, operating income fell much further, and this quarter's growth is the same mechanism running in reverse as customers restock. The filing's own caution that period-to-period comparisons are not necessarily meaningful applies with particular force here. _(analysis)_

## Founder view: mechanisms

### Owned factories turn volume into margin

Microchip owns wafer fabs and most of its assembly and test. That makes a large part of its cost fixed: depreciation, staff and clean rooms cost about the same whether the lines run full or half empty. When volume returns, revenue rises much faster than cost of sales and the difference falls to gross profit. When volume falls, the same fixed cost is expensed as unabsorbed capacity and margin drops hard. _(analysis)_

### Proprietary parts that keep their price

Most chips lose price over their life. Microchip's microcontrollers largely do not, because each is proprietary: once a customer's engineers write firmware for its architecture and tools and qualify the part in a car or factory controller, switching means redesign and requalification. The company also offsets aging prices by launching parts with more features at higher prices. The design win, not the unit sale, is the asset. _(analysis)_

### The channel amplifies the cycle

Microchip sells more than half its volume through distributors and ships much of each quarter on short lead times. When customers over-order, as they did under long-term supply agreements during the shortage, the excess sits in their stockrooms and in the channel. Orders then fall far more than end demand, and recover faster than end demand once the stock is used. Reported sales are end demand plus the change in everyone's inventory. _(analysis)_

### Licensing know-how with no cost of sales

Microchip licenses its SuperFlash embedded flash technology to foundries and chip makers and earns royalties on what they produce. The licensing segment carries no cost of sales: the know-how was paid for once through R&D, and each new licensee adds revenue without adding factories. _(analysis)_

## Member research

Signed-in members read, on the page: what Microchip's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Microchip 10-Q for the period to 2026-06-30: https://www.sec.gov/Archives/edgar/data/827054/000082705426000038/ (2026-08-06)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02