Microchip Technology Q3 2025 Earnings Call Transcript

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February 6, 2025
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Operator

Greetings, and welcome to the Microchip's Q3 Fiscal twenty twenty five Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Steve Sanghi, CEO. Thank you, Steve. You may begin.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Thank you, operator, and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press release of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Rich Simonsac, Microchip's COO Eric Bjornholt, CFO and Sajid Doudi, Head of Investor Relations.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

I will comment on our restructuring and my observations since returning to Microchip as CEO. Eric will go over our third quarter fiscal year twenty twenty five financial performance and Rich will then review some product line updates. I will then provide an overview of the current business environment in our fourth quarter fiscal year twenty twenty five guidance. We will then be available to respond to specific investor and analyst questions. Since I returned as Microchip's CEO on 11/18/2024, I have spent a significant amount of time evaluating key aspects of Microchip's business.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

At the UBS conference on December 3, I described a nine points plan to evaluate Microchip and make changes where needed to set the company on a course to achieve its previous premium status of performance. We're setting up an investor and analyst call on the morning of March 3 to provide you with a comprehensive update on that nine point plan. Today, I'll give you an interim report on several aspects of that plan. The first action was to resize our manufacturing footprint. After analysis, we have decided to close our 10P fab known as Fab two.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Currently, we are in the process of building the material to provide the buffer required before we transfer the processes and products to our other two fabs. 70% of this product is already qualified at these other fabs. Our other two fabs, namely Fab four in Gresham, Oregon and Fab five in Colorado Springs are working on rotating time off schedules. This reduces the capacity, but leaves the fabs in a position to ramp capacity when needed on a very short notice. In our backend facilities in Thailand and Philippines, we're managing capacity by taking shutdown days and reducing the number of employee hours and days of work.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

In the rest of our smaller plants worldwide, there is a plan for each plant based on the specific demand in each plant. Some of them are running at capacity, while others are working short end weeks. The second action was to reduce our inventory. Our inventory at the December 2024 was two sixty six days, up from two forty seven days at the September 2024. Our target inventory is 130 to 150.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

On March 3, I will project out for you the inventory reduction plan as an example from December 2024 to the end of fiscal year twenty twenty six, which is 03/31/2026. We are currently expected to be able to reduce our inventory balance by approximately $250,000,000 which will liberate cash from this inventory reduction. The third action was a review of our mega trends and TSS and recommend any changes. I will provide an update on this topic on March 3. The fourth action was business unit by business unit deep dive.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

This is still underway, but I already know that we will reorganize some of our business units for greater efficiency and synergy. In the process, we will combine a few groups together. The fifth action was a review of Microchip's channel strategy. I have reviewed our channel strategy and we have made two changes. First, when we give a demand creation registration to a distributor on a design socket, we historically have kept that demand creation flag forever.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Going forward, we will change that flag to demand fulfillment after a given number of years. This will incentivize the distributor to present our new products to customers instead of sitting on a higher margin and exposing the socket to competitors. The second change is we had been providing industry high fulfillment margins for distributors. We have lowered the fulfillment margins which will bring it to a level that is still on the higher end of what our competitors provide. The sixth point of evaluation was to strengthen our customer relationships.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

We have targeted the top 1,000 customers with an urgent focus on the two fifty six customers. Many of them have already been approached and visited or the customers visited us. We are giving customers a chance to communicate candidly with us showing empathy and care and then engaging with them to support them on their new designs. Our goal is to put our customers first and win their hearts and design opportunities with our products, technologies, support and care. Points seven and eight were our long term business model and operating expenses.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

I will provide an update on these topics on March 3. The ninth and final area was the Chips Act activity. We are currently paused waiting for the new administration to restaff the Chips office. We will then reengage when the time is right. With that, I will pass it to Erik Bjornhoert. Erik?

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Thanks, Steve, and good afternoon, everyone. We are including information in our press release and in this conference call on various GAAP and non GAAP measures, we have posted a full GAAP to non GAAP reconciliation on the Investor Relations page of our website at www.microchip.com and included reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non GAAP results. We've also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin and operating expenses. Other than net sales, I will be referring to these results on a non GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share based compensation and certain other adjustments as described in our earnings press release and in the reconciliations on our website.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Net sales in the December were $1,026,000,000 which was down 11.8 sequentially. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non GAAP basis, gross margins were 55.4% including capacity underutilization charges of $42,700,000 as we are aggressively managing production activities to adjust to challenging business conditions. Operating expenses were at 34.9% of net sales and operating margin was 20.5%. Non GAAP net income was $107,300,000 and non GAAP earnings per diluted share was $0.2 Please note that our operating expenses increased in the December and will further increase in the March due to a predominant portion of our employees coming off the pay cut that we had been on for about nine months in the late November, early December '20 '20 '4 timeframe.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

The full quarterly impact of this is reflected in our operating expense guidance for the March. On a GAAP basis in the December, gross margins were 54.7%. Total operating expenses were $530,500,000 and included acquisition and tangible amortization of $122,600,000 special charges of $3,500,000 and share based compensation of $42,000,000 and $4,300,000 of other expenses. The GAAP net loss was $53,600,000 resulting in a loss per share of $0.1 Our non GAAP cash tax rate was 19.9% in the December. We currently expect our non GAAP cash tax rate to be approximately 14.5% for the fourth quarter of fiscal year twenty twenty five, which is modestly higher than our previously forecasted 13% tax rate.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

This is a result of expected overpayments in two of our larger tax jurisdictions, which will have the impact of reducing our fiscal year twenty twenty six tax rate as we are calculating this on a cash basis. Our non GAAP cash tax rate is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years. Our inventory balance at 12/31/2024 was $1,356,000,000 which was up $16,700,000 from the end of the September 2024 quarter. We had two sixty six days of inventory at the end of the December which was up nineteen days from the prior quarter's level. At the midpoint of our March 2025 quarterly guidance, we would expect both inventory dollars and inventory days to decrease from the 12/31/2024 levels.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

We also continue to invest in building inventory for long lived high margin products, whose manufacturing capacity is being end of life by our supply chain partners and these last time buys represented eighteen days of inventory at the December. Inventory at our distributors in the December was at thirty seven days and was down three days from the prior quarter's level. Distribution took down their inventory holdings in the December as distribution sell through was $118,000,000 higher than distribution sell in. Our cash flow from operating activities was $271,500,000 in the December. Our adjusted free cash flow was $244,600,000 in the December.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

As of December 31, our consolidated cash and total investment position was $586,000,000 which is higher than normal due to the timing of the maturity dates of some of our commercial paper that did not occur until early January, which was used to pay down debt after the end of the December. We retired $665,500,000 in convertible bonds that matured in November 2024. In the December, we also issued $1,000,000,000 in investment grade bonds with a 4.9% coupon maturing in March of twenty twenty eight and $1,000,000,000 in investment grade bonds with a 5.05% coupon maturing in February 2030. We use the proceeds of these bond offerings to retire our $750,000,000 term loan and pay down a portion of our commercial paper balance. Our next debt maturity is a $1,200,000,000 bond maturing in September 2025.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

The debt issuance this past quarter will give us ample room to retire our September 2025 bond with our line of credit or commercial programs. As a result, we have taken the refinancing risks off the table for the $1,200,000,000 maturity. Our net debt increased by $33,600,000 in the December. Our adjusted EBITDA in the December was $274,900,000 and 26.8% of net sales. Our trailing twelve month adjusted EBITDA was $1,640,000,000 Our net debt to adjusted EBITDA was $3.78 at 12/31/2024, up from $1.27 at 12/31/2023.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Capital expenditures were $18,100,000 in the December. Our expectation for capital expenditures for fiscal year twenty twenty five is about $135,000,000 and we expect fiscal year twenty twenty six capital expenditures to be lower than that as we have a lot of capacity to grow back into as well as capital that we purchased during the up cycle that has not been placed in service yet. Depreciation expense in the December was $40,400,000 I will now turn it over to Rich, who will provide some commentary on our product line innovations in the December. Rich?

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

Thank you, Eric, and good afternoon, everyone.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

Our strategic investments continue to strengthen our position across key growth markets. In our core microcontroller business, we introduced a new generation of 64 bit RISC V processors featuring advanced AI capabilities, integrated time sensitive networking and next generation security. These processors deliver exceptional reliability for factory automation and secure data processing applications, particularly where real time communication is critical. Initial customer response has been strong with promising design win momentum across industrial and aerospace and defense sectors. We expanded our Wi Fi portfolio with 20 new products, expanding microcontrollers and plug and play modules, helping customers simplify robust, secure wireless connectivity and accelerate time to market.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

We also introduced a new Smart Touch controller with an industry standard interface, making it simpler for manufacturers to implement water tolerant touch solutions in their products. For high speed wired connectivity, we continue strengthening our automotive networking portfolio with ASA Motion Link technology, enabling next generation software defined vehicles with high speed data exchange between systems. Our innovative technology is currently being evaluated by several leading global automotive manufacturers. Our FPGA portfolio achieved two notable milestones. We earned the highest level of space certification for our radiation hardened chips, strengthening our position in critical space missions and released a new sensor connectivity solution for NVIDIA's Holoscan platform, enabling AI applications in medical imaging and industrial automation.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

These developments reinforce our commitment to providing comprehensive solutions across our target markets, while making it easier for customers to implement advanced capabilities in their next generation products, demonstrating our ability to simplify advanced technological implementation for our customers. With that, I will pass the call to Steve for comments about our business and guidance going forward. Steve?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Thank you, Rich. As Eric described in his prepared remarks, our December net sales were $1,026,000,000 down 11.8% sequentially and down 41.9 from a year ago quarter. As we continue to navigate through a very large inventory correction following a post COVID super cycle. We saw continued broad based weakness in the December, our revenue from our microcontroller, analog, SPGA and other businesses were all down sequentially. Geographically, our business was down sequentially in all major geographies of Americas, Europe and Asia.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Now let's get into our guidance for the March. We believe substantial inventory destocking has occurred at our customers, channel partners and their downstream customers. Everyone would like me to call the last quarter as a bottom. However, in our view, the inventory at our customers, channel partners and their downstream customers has not fully corrected yet. Our bookings remain low, although the current quarter bookings are running at a higher rate than in the December.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Our backlog started out lower for the March than it was at the start of the December. So we have a lot of turns to take for the March and the visibility remains low. Taking all these factors into account, we expect our net sales for the March to be between $920,000,000 and $1,000,000,000 We expect our non GAAP gross margin to be between 5254% of sales. We expect non GAAP operating expenses to be between 37.740.5% of sales. We expect non GAAP operating profit to be between 11.516.3% of sales.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

We expect our non GAAP diluted earnings per share to be between $0.05 and $0.15 We are laser focused on our nine point plan. The megatrends and customer portion of that plan entails aggressively winning designs at the customers and then pulling them through the funnel to generate growth. We believe that as the remaining excess inventory is consumed at our customers and distributors, we are well positioned to provide above market growth in our net sales. Now let me provide update on our capital return program for shareholders. We are essentially returning 100% of our adjusted free cash flow to investors in the form of dividends right now.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Due to depressed net sales, our adjusted free cash flow is currently less than our dividend and in certain quarters we have had to make higher bond interest payments and tax payments. Bond interest payments are made every six months. So every other quarter this impacts our adjusted free cash flow and results in our dividend exceeding our adjusted free cash flow. As we begin to liberate cash from our inventory coupled with very low capital expenditures, we expect to bring the free cash flow above the dividend. In future quarters, we intend to use the excess cash to bring our borrowings back down to at least the levels they were at before our dividend exceeded our adjusted free cash flow. With that, operator, will you please poll for questions?

Operator

Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Vivek Arya with Bank of America Securities. Please proceed.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Thanks for taking my question. Steve, I appreciate your comments and I realize visibility is limited. But you mentioned inventory remains elevated at customers and channel partners. Could you share with us where the hotspots are by end market or by the kind of product? Is it like worse than industrial or microcontrollers, etcetera?

Vivek Arya
Vivek Arya
Managing Director at Bank of America

And do you think that this is the inventory issue specific to microchip? Or do you think those customers and channel partners have kind of excess inventory from your competitors also because many of them seem to be indicating a lower level of concern than you are indicating?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So, I think the answer to your first part of your question, which is by end markets or by product line, the inventory is high pretty much across the board and it's not different by end markets. What it is different is slightly by direct or distribution. Our distribution customers inventory is getting lot closer to where they historically would be. And if just in the quarter past, our sell in revenue was $118,000,000 lower than our sell through revenue. On GAAP, we report on sell in, but distribution sold out $118,000,000 more.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

And they've been doing this kind of number for the last few quarters. So the distribution inventory is getting a lot closer to getting corrected. But the direct inventory as customers is still high and part of that reason is when the supply was really tight, we were serving our large direct customers sometime preferentially over the broad based distribution customers. So, and the number two reason for our customers having higher inventory is that we dismantled our non cancellable program called PSP two quarters or so later than our competitors did. So therefore, we continue to ship for two more quarters and when the business had eventually fell at our customers, they had higher inventory of our products than potentially our competitors. Hopefully that answers your question.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Stephen, just as a follow-up, what would you say is the earnings power for Microchip over the next year? In fiscal in this last fiscal year, with the March guidance, it's about $1.3 ish or so. So even if we start assuming some level of seasonal rebound over at some point over the next several quarters, should we be thinking $2.03 dollars What is the kind of earnings power right in the medium term for the company? Because I imagine you are justifiably prioritizing cash flow and you will probably keep fab utilization low and then the need to get OpEx back to a reasonable level, right, would also influence. So just how do you think about earnings power for the company over the next year to two years or so? Thank you.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Well, you're right on all that, but putting numbers around it, I don't really have it. We don't guide that far out. Well, I'll pass it on to Eric and see if he has something to add.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Well, Steve is right. We guide a quarter at a time. We are working through Steve's nine point plan and obviously he's talked a lot about what we're doing in manufacturing. OpEx in the long term business model that is still to be set and we've got some more work to do on that and we'll share more details with the analyst and investor community on March 3. So it's hard to answer that question, I think as you knew when you asked it.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

And we think we are positioned as Steve's prepared remarks said for above market growth, but we need to get through this inventory correction to start seeing the benefits of that. And we've got a lot of confidence in our long term business and what it can drive from an operating margin perspective and cash flow perspective, but we're not quite out of this yet.

Vivek Arya
Vivek Arya
Managing Director at Bank of America

Thank you.

Operator

Thank you. Our next question comes from the line of Blayne Curtis with Jefferies. Please proceed.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Hey, good afternoon. Two questions. I just want to ask, I know you don't want to forecast the revenue slow back, but maybe can you walk us through the gross margin a bit? Because I think it stepped down more obviously, you said days and dollars would come down in inventory, but is there some level that you want to get to give us some reference as to how long this may be depressed before it comes back with revenue?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So I think on March 3, we'll give you some data on inventory depletion and rightsizing our factories and all that with which you may be able to model the question you asked and the question Vivek asked. We don't really have it today. But what I would like to highlight is, even for the current quarter, we're guiding a gross margin of midpoint of 53%. Many of our competitors don't do that in good times. So that's extremely good gross margin.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Now operating expense at about 39.1%, it was the midpoint of what we guided today. So it's quite high compared to our historical and that's driven by really adding a lot of people at the top of the cycle when assumption was the business just keeps going. So we have a correction there to do and I'll be able to talk to you more about it again on March 3. And the gross margin of 53% is with very, very low factory utilization that we're running today. And you know where the gross margins historically have been.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

There's absolutely no reason why gross margins do not return to a historical number, not the historical high, which was really at the peak of the cycle and had expedite charges and price increases and all that in, but leaving that timeframe out, we should be able to get to our historical gross margins. And with correcting the operating expenses, you should have really a beautiful P and L, which I'll give it to you as a long term target on March 3.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Thanks. And then I wanted to ask you on the growth side. That's always been a debate for the company. I'm just kind of curious your renewed perspective here coming back. You mentioned some moves with the distribution channel to kind of incentivize demand creation.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Do you think when you said the company can outgrow the market, is that going to be a work in progress or you think that's what it is today and these moves would kind of add to that?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

I don't know if I can separate those two. I think our megatrends design wins are higher than a non megatrend design win. I think we have shared some data in the past with you. There are about 2x the normal. So we also went through an environment during super cycle of COVID where all customers, engineers were doing is trying to find alternate parts or really fit whatever product we had available for them into their design and re qualifying them.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So kind of not much new designs happened for a couple of years. Our customers are reengaged doing new designs. They are in various parts of the funnel and when they go to production, that really a model will show that our business grows from that. And then the other thing is the inventory depletion both at the customers and channels. And when that inventory depletes, then customers start buying their full consumption rate, then that will increase revenue.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Combine those two together, we don't really have any concerns about the long term future. It's just we got to get through this. I think we're getting close, but industry has been saying getting close for about a year. So I don't want to really spell out any quarter to be the bottom, but we ought to be getting quite close.

Blayne Curtis
Blayne Curtis
Managing Director at Jefferies Financial Group

Got you. Thank you.

Operator

Thank you. Our next question comes from the line of Harsh Kumar with Piper Sandler. Please proceed.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Yes. Hey, Steve, good to see you back. I had a quick question on OpEx. Sounds like from the answer you just gave to Blaine, I think you said that OpEx will come down from the current level in absolute dollars. Is that a fair assumption?

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

That's my clarification question. And then on the nine point program that you have, are you assuming that things or the environment will stay the same or are you baking in some level of recovery at some point in time this year or next year? It's got to come back at some point in time, but I'm curious if you're baking that in your assumption or just keeping the environment the same?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

We are baking it in our assumption. The growth will be result of some return of business and the inventory is depleted plus our efforts into winning new designs with all the new products we have introduced in the last three, four years, many customers are sitting on significant designs, but they didn't complete them or launch them in an environment when they had a lot of inventory.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Understood. I had another question, maybe not so easy, but could you take me through the process of how your organization would even try to gauge the correct level of channel inventory or direct inventory in this kind of an environment where things are dynamic, they're moving around, mostly going down, but still moving around a lot. I'm more curious about the process to understand how you would try to get to the right answer here.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So, I think historically over twenty, twenty five years, our channels on the average worldwide would have an inventory which is about 2.5 to 2.7 x what they ship out to their customers in a given quarter. And it kind of really stayed in that window 2.5 to three. There have been very few occasions when the inventory was much higher than that. One happened soon after the Microsemi acquisition, when we consolidated the numbers, Microsemi inventory was closer to four and ours was lower. And then that we aggressively brought it down.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So it can change, but in general it is in that. And we see no reason why distributor inventory would come back down to below three.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Understood. Thank you.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

And I think when you're saying that Steve, you mentioned 2.5 times what they ship in a quarter, it's really two point five to three months of inventory based on what they're shipping out.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Two point five to three months, sorry.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

That's right.

Harsh Kumar
Harsh Kumar
Managing Director & Senior Research Analyst at Piper Sandler Companies

Understood. Thank you.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Teamwork.

Operator

Thank you. Our next question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Hi. Thank you so much for taking the question. Steve, it sounds like you've been spending quite a bit of time with customers over the past two months since your return. I'm curious what the feedback has been to you and the company, any common threads and how do you plan on responding to some of the customer asks going forward? What do you need to do to regain any lost trust, if you will?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So, I'm going to hand that question to Rich Simonsac. He has talked to more customers than I have. I've been spending a lot of time on the business units and the factories and customers also when they come to us, but I may add something, but let him give the basic answer. Go ahead, Rich.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

So we've been spending a lot of time in front of customers and mainly what customers are dealing with today is trying to digest the inventory that they have and dealing with the weaker markets. So we've been spending time with our distributors, our catalog houses, and our customer relationships are in pretty good shape. Where we're losing or not losing, but where we have some tough customer relationships, so where they're sitting on quite a bit of inventory from PSP program or upset about some of the price increases that took place during the COVID period. But I think a lot of customers suffered from that from other semiconductor suppliers. So we're trying to do is work with them, understand where they're upset on some of those customers, and then and see what we can do going forward.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

I don't think there's anything magic here other than us working together to find good win wins going forward. I think as we went through the customer relationships, we degraded. And where we have those that degraded and our worst accounts where they had degraded was those two fifty six that Steve highlighted. And out of the abundance of customers we have, we're going to work on those two fifty six where we've degraded that relationship.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Thank you.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

No customer is telling us, go away, you're having horrible anything like that. I think our products are good, our tools are good, our service and support has been world class over the years and many of these customers, we have a multi decade relationship. So it's kind of just there's a lot they got hurt, some of them got hurt during the super cycle one way or the other either with pricing or not getting enough product or getting too much product and have inventory And just hurt feelings have to be soothed and time heals and discussion and talk heals and we're largely getting those customers back designing with us.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Great. Thank you. And then as a quick follow-up, maybe on pricing, calendar 2024, where did blended ASPs for you all land roughly? And how should we think about 2025 and sort of the forward path? I think many of your peers have said something along the lines of they expect pricing to revert to pre pandemic patterns, which is down low single digits.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Are you thinking about pricing the same way or could it be a little bit different for you guys? Thank you.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So, my sense is that short term, yes, what the competitors are doing is correct. But I'm not sure it returns to a price drop every year because pre pandemic microchip wasn't giving a year over year price decrease. Our costs don't go down year over year. Many of the costs go up and through efficiency gains and yield improvements and others, you got to get back to your margin. So, the price drops every year was really think of the past.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

But short term, I think, we increased prices quite a bit over the past three, four years and some price reduction in the low to mid single digits near term is appropriate.

Toshiya Hari
Toshiya Hari
Managing Director at Goldman Sachs

Thank you.

Operator

Thank you. Our next question comes from the line of Vijay Rakesh with Mizuho Securities. Please proceed.

Vijay Rakesh
Vijay Rakesh
Managing Director at Mizuho Financial Group

Hi, thanks, Steve. And just a quick question. As you look at your different segments, autos, industrial, consumer, etcetera, is there a way to tell us what the split is and how they're done year on year?

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

So we break out our end markets once a year, DJ. We do that at the end of the fiscal year, which will end in March. So we'll provide more color on that probably in the kind of early May timeframe when we release our year end earnings. So don't have it to share today. Really all end markets have been weak.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

We've highlighted a few things that have been stronger over this period of time and not a whole lot of change there, right? But overall, industrial automotive has been weak. That's consistent with what you're hearing from everybody else.

Vijay Rakesh
Vijay Rakesh
Managing Director at Mizuho Financial Group

Got it. And then on the inventory side, is there any risk of inventory of Solasence or write down given you are seeing some disintermediation with other solutions, I guess? Thanks.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

So we've been taking pretty significant inventory reserve charges and so those have been reflected in the gross margin and our expectation for gross margin this quarter. We've got a lot of inventory sitting on the balance sheet and revenue has been falling and backlog has been falling. So with low visibility and lower revenue and a high level of inventory, that's just the place we're in right now. But Steve's talked about the actions that we're taking to reduce inventory in dollars and days. And I think we've got a good plan in place to do that.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

And so as we move forward, not saying necessarily this quarter as there are gross margin guidance is down, but as we move forward, those charges should reduce as the inventory balance comes down and hopefully we see a better revenue environment.

Vijay Rakesh
Vijay Rakesh
Managing Director at Mizuho Financial Group

Got it. Thank you.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Welcome.

Operator

Thank you. Our next question comes from the line of Chris Danley with Citi. Please proceed.

Christopher Danely
Christopher Danely
Analyst at Citigroup

Hey, thanks guys. I guess question for SteveRich. Steve, as you've been there for three months now, is there anything you see that's gone wrong that is not fixable? And then if youRich could just spend some time on your assessment of Microchip's competitive positioning and how you feel that that is, let's say versus couple of years ago? Thanks.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So, I haven't found anything that is not fixable. I think rice pricing the factories is fixable and we're in the process of doing so. The high inventory is fixable and we're in the process of doing so. As we're doing these various business unit by business unit reviews, some business units have flourished, some of the others have atrophied and we need to move some things around to put our resources, take them away from lower performing business units and put them in the high performing business units. So some optimization needs to be done.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So that is fixable. There are we we compete in lot of different businesses, microcontrollers, analog, data center, automotive, aerospace and defense and all that. And in any business in it or any end market, you will find that we should have this product or this feature, we don't have it yet, somebody else has it. And internal discussion would be how we can plug that gap. But at the same time, we have products with some differentiating features that our competitors don't.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

But no, I haven't found anything that is not fixable. But anytime you find a product hole, it does take two years of development to plug that hole. So I think, but in general, I haven't really found anywhere, any major problem that is not fixable, but it takes time to fix some of these things.

Christopher Danely
Christopher Danely
Analyst at Citigroup

Okay. And the competitive positioning question? Then I'll go away.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Rich, you want to answer that?

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

Yes. I think in our analysis of that, in our surveys of that, in our discussions with our distributors, the feedback we're getting, we're predominantly holding our own in that competitive positioning. It's still we're still working through it. I think what's confusing right now because of inventory, you lose visibility in terms of where some of those customers are when you have a large swath of customers. Microchip has about 120,000 customers.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

So obviously, we can't touch 120,000, but we're touching all of the focus ones and dedicated ones that we have. And the relationships are still strong. And we have customers that are still coming through and working with us. So I don't see anything majorly broken on that customer front. We don't work on relationships, but there's nothing fundamentally broken. Like I said earlier, I think most customers were just unhappy about how the whole COVID period went and how they built up inventory. We did find, which was quite fascinating, our smaller customers, medium and smaller customers, when material was finally available to them, instead of buying one year or twelve months, they may have bought twenty four months. So they bought a little bit extra on the smaller and medium customers. And so it really varies.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

And so it really varies depending on the market and the customer base.

Christopher Danely
Christopher Danely
Analyst at Citigroup

Got it.

Operator

Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.

Joseph Moore
Joseph Moore
Managing Director at Morgan Stanley

Great. Thank you. Of the two sixty six days of inventory, can you talk about how much of that is from the internal fabs? I think you had given a number that it's over 300 in the past and then I had a follow-up on that.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So I think internal fabs were $2.88 or something. Eric, you have the breakdown?

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

It's in that range. I'd have to pull up a spreadsheet to look at it, but it's in that range. The internal fabs are higher than what it is on the foundry and systems side of the business.

Joseph Moore
Joseph Moore
Managing Director at Morgan Stanley

Okay. And then you talked about taking an inventory kind of reserve around the lower utilization. Like are we that 53, does that fully reflect the lower utilization or is there kind of a lingering cost of inventory that's higher because of that lower utilization going forward?

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Well, when you're running the factories less efficiently, you are capitalizing costs and inventory at higher levels even though you're taking these underutilization charges. So it takes some time to build to work through that higher cost inventory. But I would expect to see gross margin improvement before that because these inventory reserve charges will go down, right? We've taken a lot of reserve charges at some point. We will get sell through benefit from that also.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

So it's hard to predict exactly how that will weigh and we'll probably just give quarterly guidance and we'll give a long term target. But we are reflecting in the gross margin you see today the underutilization charges and as the factories build back up those charges will go down and obviously we're taking out our third largest factory in Fab 2 that's going to help us get inventory corrected faster than if we had not taken that step.

Joseph Moore
Joseph Moore
Managing Director at Morgan Stanley

Great. Thank you so much.

Operator

Thank you. Our next question comes from the line of Tore Stavenberg with Stifel. Please proceed.

Analyst

Yes. Good afternoon. This is Jeremy calling for Tore. I guess just maybe going back to the terms and question, can you just help us quantify or size a little bit the terms that you might need to get the midpoint and how that compares versus historical cycles and at different points in the cycle historically? Thank you.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

I didn't get that. It was a lot of noise. Did you get that?

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

No, I think I've got it. So the question is I'll repeat it real quickly is, what we're looking at the current quarter to get to the midpoint, how do the turns look compared to what we've seen historically? And so I'll give an answer to that and Rich and Steve can add to it if they want to. So when lead times are very short, which they are today, our business has historically been able to respond to a high level of turns. And it's just a matter is the customer demand there to fill that in.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

We've given guidance based on what we think is reasonable for the quarter and obviously given a range of guidance and the turns required to meet that are not outside of what would be normal in a short lead time environment.

Analyst

Very helpful.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Maybe just to add one more piece to it, because there's turns and then as expedites and pull ins and we're continuing to see expedites and pull ins come in as well. Right. And what a pull in is would be as we already have backlog in place that sits outside of the quarter and then the customer comes to us and say, hey, instead of needing that product in April, now I need it in March, can you support that? And that's what Rich means by a Poland.

Analyst

That's very helpful. Thank you. And maybe a quick question on the new product side. Can you give us on the RISC V processor, can you help us maybe size the opportunity here both in the near term and the long term? Maybe in the near term, when we can see initial revenue contribution?

Analyst

And in the longer term, how big could this potentially get as you look out three to five years? Thank you.

Richard Simoncic
Richard Simoncic
Chief Operating Officer at Microchip

Yes. So what we haven't forecasted overall revenue impact to microchip, but we're seeing is a great many customers building development environments and asking for help with software and understanding of that product portfolio. And so we've seen customers now start to build out development groups and design groups around this platform of products and starting to design them in to different applications. And so we haven't announced any of those design wins yet, but the level of activity is quite high.

Operator

Thank you. Our next question comes from the line of Craig Ellis with B. Riley Securities. Please proceed.

Craig Ellis
Director of Research at B Riley Financial

Yes. Thanks for taking the question. And Tim, thanks for all the color so far. Steve, I wanted to go back to the plan's first point on production and ask a more qualitative question. Can you help us understand where the team is in assessing the right level of front end and back end capacity and where you are in terms of identifying the specific steps that are needed to realign that capacity and the things that allow you to be operating at the new correct capacity that you determine?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

The team is very far along identifying what steps need to be taken to right size the other factories beyond closing down Fab two and we'll be disclosing that to you on March 3.

Craig Ellis
Director of Research at B Riley Financial

Got it. And then Eric, I'll just follow-up the point you made on the debt maturity in September. It sounds like you're well positioned to deal with that. Is it correct that the next maturity beyond that would be in March of twenty twenty eight? And if not, can you help me understand when that would be?

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Yes.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Eric is trying to look at his computer.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Yes, I'm just pulling it up to make sure I don't misspeak to it. So we do have another tranche of $1,000,000,000 due in March of twenty twenty eight. The $1,200,000,000 we talked about, we'll have to redo our line of credit at some point in time. That's a pretty standard process that we go through. But that's how the tranches are laying out right now.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

The $1,200,000,000 in September of twenty twenty five is the next one. And then after that, it's not till 2028.

Craig Ellis
Director of Research at B Riley Financial

Got it. Thanks guys.

Operator

Thank you. Our next question comes from the line of Chris Caso with Wolfe Research. Please proceed.

Chris Caso
Managing Director at Wolfe Research LLC

Yes. Thank you. I guess the first question with regard to the dividend and I know at this point you're not fully generating free cash flow to support the dividend. Could you talk about your level of commitment to that dividend and as we're going through sort of the recovery plan and such that we're still committed to this dividend in the foreseeable future as free cash flow starts to get better?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

Yes. So as you may have noticed, we did not increase the dividend by a smidgen that we have been doing it probably for years and years. So there's no reason to add to it and we'll keep this dividend flat, but there is no reason to take it down. Not generating enough cash flow is a very short term problem and it kind of raises its ugly head every six months, because every six months bond payments are due and in one quarter, they're not there and the other quarter, the dividend payment I'm sorry, the bond payment pops up. So every other quarter we have to borrow some money to pay the dividend, but I think this problem should really go away in the coming quarters pretty rapidly.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So because it's a short term issue, there's no reason to do a long term damage by cutting the dividend.

Eric Bjornholt
Eric Bjornholt
Senior Vice President and Chief Financial Officer at Microchip

Yes. And maybe just as an example, our adjusted free cash flow in the December is essentially equal to what our dividend payment is in March. But our adjusted free cash flow will be lower in the March and then won't cover what we would pay in the June. And we always have based our capital return program based on the prior quarter's free cash flow. So anyway, right now it's obviously not as high as we would like it to be, but confidence in the business getting back to the higher levels and profitability returning as well as the working capital management we're doing with the inventory reduction is going to help us with that.

Chris Caso
Managing Director at Wolfe Research LLC

Understood. For a second question, it's about kind of manufacturing capacity and I know you're going to provide some more details in March. But I guess two parts to that. One would be internally, you don't have access to 300 millimeter manufacturing and it doesn't sound like that's something that you're going to pursue. Do you feel that the internal fab network is still competitive with the rest of the market as you see some others start to expand on 300 millimeter?

Chris Caso
Managing Director at Wolfe Research LLC

How does Microchip respond to that? And then secondly, you've seen some other competitors move to a China for China manufacturing strategy because of some of the geopolitical tensions, the feeling that Chinese customers want manufacturing footprint inside of China. How is Microchip responding to that?

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

So let me take those. The first one on 300 millimeter, we use substantial 300 millimeter capacity at our foundry. So a fair amount of our business today in various business units is on 300. It's just not internal, it is external. And I will tell you that many of our competitors will make 300 millimeter with all the under utilization, all that cost to ramp it and the time it takes to develop the technology.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

When you look at the total cost of ownership, I think their experience in total cost of ownership is really no better us buying a very well known running technology with high yields at the professional foundry. So, I think we're pretty happy with that. There was a point two, three years ago when foundries were telling us they wouldn't be adding more trailing edge capacity, all the investments were going to go into the advanced technology. So at that point, we were concerned about whether there'll be enough capacity for 300 millimeter for 90 nanometer, 65 nanometer and 40, specifically those three technologies. And at that time, we were pursuing building a fab in U.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

S. And getting some money from ChipSack to do so. And as we were engaging with government and all that to do that, the business is fell and our foundry's business is fell. Now today, you can buy as much 40 nanometer, 65 nanometer and 90 as you want. And then the factories told us that this will be no longer a problem.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

And in fact, some of them are investing in additional $40.65 and 90 for the future. So, therefore, for us to spend multi billion dollars probably a $5,000,000,000 to $6,000,000,000 investment to build a 300 millimeter factory, which will take a decade plus to fill it and you'll have low utilization in the beginning. I think that cost of ownership equation just does not work. And the second part of your question was on China for China strategy. We have a China for China strategy also and I'll talk about that also on March 3.

Chris Caso
Managing Director at Wolfe Research LLC

Thanks.

Operator

Thank you. There are no further questions at this time. I would like to pass the call back over to Steve for any closing remarks.

Steve Sanghi
Steve Sanghi
Interim CEO, President & Executive Chair at Microchip

I want to thank all the investors and analysts who attended the call and thanks for your support over many, many years when I was the CEO. I have just gotten back and things are going to improve rapidly. So please be patient and I thank you for your support. Bye.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • CEO Steve Sanghi outlined a nine-point plan focused on resizing the manufacturing footprint—closing Fab 2 and rotating schedules at other fabs—and cutting inventory to a 130–150 day target to free ~$250 million in cash by FY ’26.
  • Q3 net sales were $1.026 billion, down 11.8% sequentially and 41.9% year-over-year; non-GAAP gross margin was 55.4% (including $42.7 million in underutilization charges) and non-GAAP EPS was $0.20 versus a GAAP loss of $0.10.
  • Inventory rose to 266 days (up 19 days), with distributor inventory at 37 days, and management expects both inventory dollars and days to decline in Q4.
  • Q4 guidance calls for net sales of $920–1,000 million, non-GAAP gross margin of 52–54%, operating expenses at 37.7–40.5% of sales, and non-GAAP EPS of $0.05–0.15.
  • New product launches include 64-bit RISC-V processors with AI/TSN/security, 20 new Wi-Fi modules, ASA Motion Link for automotive, space-certified FPGAs and Nvidia Holoscan sensor solutions, all showing strong early design-win momentum.
AI Generated. May Contain Errors.
Earnings Conference Call
Microchip Technology Q3 2025
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