Microchip Technology Q4 2025 Earnings Report

Microchip Technology EPS Results

• Actual EPS: $0.11
• Consensus EPS: $0.10
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.57

Microchip Technology Revenue Results

• Actual Revenue: $970.50 million
• Expected Revenue: $962.86 million
• Beat/Miss: Beat by +$7.64 million
• YoY Revenue Growth: -26.80%

Microchip Technology Announcement Details

• Quarter: Q4 2025
• Date: 5/8/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 8, 2025
• Conference Call Time: 5:00PM ET

Microchip Technology (NASDAQ:MCHP) engages in the development, manufacture, and sale of smart, connected, and secure embedded control solutions in the Americas, Europe, and Asia. The company offers general purpose 8-bit, 16-bit, and 32-bit mixed-signal microcontrollers; 32-bit embedded mixed-signal microprocessors; and specialized microcontrollers for automotive, industrial, computing, communications, lighting, power supplies, motor control, human machine interface, security, wired connectivity, and wireless connectivity applications. It also provides analog, interface, mixed signal, and timing products comprising power management, linear, mixed-signal, high-voltage, thermal management, discrete diodes, and metal oxide semiconductor field effect transistors (MOSFETS), radio frequency (RF), drivers, safety, security, timing, USB, Ethernet, wireless, and other interface products; field-programmable gate array (FPGA) products; and application development tools that enable system designers to program microcontroller, FPGA, and microprocessor products for specific applications. In addition, the company offers serial electrically erasable programmable read-only memory, serial flash memories, parallel flash memories, serial static random access memories, and serial electrically erasable random access memories for the production of very small footprint devices; and licenses its SuperFlash embedded flash and non-volatile memory technologies to foundries, integrated device manufacturers, and design partners for use in the manufacture of microcontroller products, gate array, RF, analog, and neuromorphic compute products that require embedded non-volatile memory, as well as provides engineering services. Further, it offers wafer foundry and assembly, and test subcontracting manufacturing services; and timing systems products, application specific integrated circuits, and aerospace products. The company was incorporated in 1989 and is headquartered in Chandler, Arizona.

Microchip Technology Q4 2025 Earnings Call Transcript

Presentation

[Operator]

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

[Operator]

Steve Sankey, the Executive Chair, CEO and President. Thank you and you may proceed sir.

[Steve Sanghi, CEO, President & Executive Chairman 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 releases of today as well as our recent filing 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 Simonsak, Microchip's COO Eric Dionholt, Microchip's CFO and Sajid Daudi, Microchip's Head of Investor Relations.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

I will provide an update on our restructuring. Eric will go over fourth 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 and our first quarter fiscal year twenty twenty six 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, CEO, President & Executive Chairman at Microchip]

On 03/03/2025, I provided an update on our nine point recovery plan to set the company on a course to achieve its previous premium status of performance. Today, I will give you a brief update on our progress on that nine point plan. The first action was to resize our manufacturing footprint. Tempe Fab two is now closed. The actions in our other two fabs namely Fab four in Oregon and Fab five in Colorado Springs are complete.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The actions in our back end Philippines facilities are also complete. These actions reduce capacity, but leaves the fabs in a position to ramp capacity rapidly when needed on short notice. The second action was to reduce our inventory. Our inventory at the December 2024 was two sixty six days. Our target inventory is one hundred and thirty to one hundred and fifty days.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Our inventory at 03/31/2025 was two fifty one days, making it the first meaningful reduction in days of inventory in three years. In the March, we had reduced production for only part of the quarter. We will have reduced production for all of the June. Thus, we expect to reduce inventory more substantially in this June. The inventory at the June is expected to be between two fifteen two twenty five days.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

During the fiscal year twenty twenty six ending 03/31/2026, our goal is to reduce inventory by over $350,000,000 which will liberate cash. The third action was a review of our megatrends and total system solution. We made two changes to our megatrends. First, we replaced five gs with artificial intelligence and second, we replaced ADAS with network and connectivity. ADAS is now part of network and connectivity, which is essentially the movement of data outside of the data center such as Industry four point zero and automotive networking.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The fourth action was to conduct a business unit by business unit deep dive. This was completed and resulting organization changes were made. The fifth action was a review of Microchip's channel strategy. This action was also completed and resulting changes have been made in our channel strategy. We have not seen any negative impact from these changes in our distribution channel.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The sixth point of evaluation was to strengthen our customer relationships. We met with over 700 customers in the past one hundred and thirty plus days giving customers a chance to communicate with us candidly. The results are in based on customer feedback. Recall that we had said that at twelve percent of the customers our relationship had deteriorated through the COVID cycle. Within this twelve percent, we have already been able to restore seventy eight percent of these customers to either approved or preferred status, leaving only 2.6 of the customers where our relationship remains stressed and in need of more restoration effort.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

At this point, we will continue to work our customer relationships as a normal course of business and believe that this concern is closed and behind us. Point seven was the long term business model, which we unveiled on March 3. Point eight was achieving our operating expense model. We completed a global layoff of approximately 10% of our employees to bring our expenses down. We plan to continue to improve our operating expense percentage through revenue growth, attrition and controlling other operating expenses.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The ninth and final area was the Chips Act activity. We reinitiated our discussions with the Chips office. The Chips office is still reorganizing under the new administration. With that, I will pass the call over to Eric Bianbourg.

[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 on 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 Web site 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 have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go over some of the operating results, including net sales, gross margin and operating expenses.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

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 reconciliation on our website. Net sales in the March were $970,500,000 which was down 5.4% sequentially and $10,500,000 above the midpoint of our guidance provided on 02/06/2025. 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 52%, including capacity underutilization charges of 54,200,000.0 Operating expenses were at 38% of sales and operating income was 14% of sales. Non GAAP net income was $61,400,000 and non GAAP earnings per diluted share was $0.11 which was $01 above the midpoint of our guidance.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

On a GAAP basis in the March, gross margins were 51.6. Total operating expenses were $601,400,000 and included acquisition and tangible amortization of $122,600,000 special charges of $71,600,000 which was primarily driven by foundry contract exit costs and employee separation costs. Share based compensation was $37,200,000 and $1,400,000 of other expenses. The GAAP net loss attributable to common shareholders was $156,800,000 or $0.29 per share. For fiscal year twenty twenty five, net sales were $4,402,000,000 and were down 42.3% from net sales in fiscal year twenty twenty four.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

On a non GAAP

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

basis, gross margins were 57%, operating expenses were 32.5% of sales and operating income was 24.5% of sales. Non GAAP net income was $708,800,000 and EPS was $1.31 per diluted share. On a GAAP basis, gross margins were 56.1%, operating expenses were 49.3% of sales and operating income was 6.7% of sales. The GAAP net loss attributable to common shareholders was $2,700,000 Our non GAAP cash tax rate was 13.6% in the March and 14.2 for fiscal year twenty twenty five. Our non GAAP tax rate for fiscal year twenty twenty six is expected to be about 12%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Our inventory balance at 03/31/2025 was $1293000000.00062800000.0 dollars from the balance at 12/31/2024. We had two fifty one days of inventory at the end of the March, which was down fifteen days from the prior quarter's level, driven by our inventory reduction actions. Included in our March ending inventory was eighteen days of a long life cycle, high margin products whose manufacturing capacity has been end of life by our supply chain partners. Inventory at distributors in the March was at 33, which was down four days from the prior quarter's level. Distribution took down their inventory in the March as distribution sell through was about $103,000,000 higher than distribution sell in.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Our cash flow from operating activities was $205,900,000 in the March. Our adjusted free cash flow was $182,600,000 in the March. As of March 31, our consolidated cash and total investment position was $771,700,000 In the March, we completed a $1,485,000,000 mandatory convertible preferred stock offering with a three year term and purchased a cap call that is generally expected to reduce or offset potential dilution to the common stock upon conversion of the preferred stock with such reduction subject to an initial cap price of $71.4 per share. The mandatory preferred convertible transaction was done to reduce our debt and preserve our investment grade rating. Our total debt decreased by $1,125,000,000 in the March and our net debt decreased by $1,310,000,000 Our adjusted EBITDA in the March was $200,400,000 and 20.6% of net sales.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Our trailing twelve month adjusted EBITDA was $1,337,000,000 and our net debt to adjusted EBITDA was 3.66 at 03/31/2025. Capital expenditures were $14,200,000 in the March and $126,000,000 for fiscal year twenty twenty five. Our expectation for capital expenditures for fiscal year twenty twenty six is to be at or below $100,000,000 Depreciation expense in the March was $41,200,000 I will now turn it over to Rich, who will provide some commentary on our product line innovations in the March. Rich?

[Richard Simoncic, Chief Operating Officer at Microchip]

Thank you, Eric, and good afternoon, everyone.

[Richard Simoncic, Chief Operating Officer at Microchip]

During this quarter, we have continued to execute our strategic initiatives that deliver value across multiple markets. Our investments in next generation technologies like the Switch Tech PCIe switches enable us to adapt and deploy technologies initially developed for high speed data centers into automotive and embedded computing applications. These advancements create new capabilities in applications where accelerated communication performance is critical, such as software defined vehicles and robotics. We are strengthening our core portfolio through advancements in our ARM based microprocessors for human machine interface applications and our 32 bit microcontrollers integrated with high performance analog peripherals that serve industrial, consumer, medical and AIML markets. These high speed peripherals and other analog related functionality reduce the need for external analog components, decrease system complexity and cost and deliver high performance solutions.

[Richard Simoncic, Chief Operating Officer at Microchip]

Our innovative MPLAB AI coding assistant is helping customers accelerate their design cycles, reducing their embedded software development time and increasing productivity by as much as 40%. We continue to enhance this tool with additional features and functionality. Additionally, our new PIK64 product line continues to gain momentum and new design opportunities for the space, industrial automation, automotive and edge compute. Our recently launched 10 based T1S solutions continue to see market adoption with a growing design funnel. These innovations coupled with our operational efficiency efforts demonstrate our commitment to driving top line growth and improve profitability as we continue to bring in differentiated solutions to our target markets.

[Richard Simoncic, Chief Operating Officer at Microchip]

With that, I will pass the call to Steve for comments about our business and guidance going forward. Steve?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Thank you, Rich.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

As Eric described in his prepared remarks, our March net sales were $970,500,000 down 5.4% sequentially and down 26.8 from the year ago quarter as we navigated through a very large inventory correction following a post COVID super cycle. Our revenue from our microcontroller and analog business units was down sequentially, FPGA was about flat and other businesses were up sequentially, mainly driven by technology licensing. Geographically, our business was seasonally down sequentially in Americas and Asia and was seasonally up in Europe. Now let's get into our guidance for the June. We believe substantial inventory destocking has occurred at our customers, channel partners and their downstream customers.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

While we believe the inventory at our customers, channel partners and downstream customers will continue to correct, the customers and distributors are starting to increase their purchases. As a result, I'm finally calling the last quarter as a revenue bottom for us. Our bookings were up significantly in the March. After nearly three years of book to bill ratio well below one point zero, our book to bill ratio in the March was a very healthy 1.07. Our backlog for the June started out higher than the starting backlog for the March.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The bookings in the month of April were higher than any month in the March. Taking all of these factors into account, we expect our net sales for the June to be $1,045,000,000 plus or minus $25,000,000 We expect our non GAAP gross margin to be between 52.254.2% of sales. We expect our non GAAP operating expenses to be between 33.434.8% of sales. We expect our non GAAP operating profit to be between 17.420.8% of sales. We expect our non GAAP diluted earnings per share to be between $0.18 and $0.26 There are a couple of things I want to highlight in our guidance.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The first is the leverage in our business model. With a $74,500,000 increase in net sales at the midpoint of the guidance for the June, we are taking approximately 85% of it to the bottom line as non GAAP operating profit. As the inventory drains further and inventory write offs decrease, our gross margin recovery will accelerate and with the incremental profits going to the bottom line, we will have tremendous leverage. The second point I wanted to make is on the revenue growth. There are three revenue accelerators kicking in just from the inventory drain.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The first is that our distributors' inventory and our distributor customers' inventory is getting corrected. We're expecting the first increase in distributors' sell through after many quarters. Therefore, our distributors are starting to buy more product to replenish their inventory and feed their customers' growth. Second, the distributors' sell in has to rise to meet the sales out. Last quarter, sell in revenue was $103,000,000 lower than sell through.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

If sell in revenue were to catch up with sell through, the sell in revenue will rise approximately $103,000,000 higher and will further feed sales growth. And third, our direct customers' inventory is getting corrected and we are starting to see the direct customers' shipments increase. We believe that this trifecta effect is a compelling setup for sales growth going into this fiscal year. With sales growth, gross margin increasing and inventory declining, we expect to deliver significantly improved financial performance in this fiscal year. Now let me provide an update on our capital return program for shareholders.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

We are essentially returning 100% of our adjusted free cash flow to investors in the form of dividends right now. Due to depressed net sales, our adjusted free cash flow is currently less than our dividend. In certain quarters, we have had to make higher bond interest payments and tax payments and bond interest payments are generally 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 inventory coupled with very low capital expenditures, we expect to bring the adjusted free cash flow above the dividend.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

In future quarters, we intend to use this 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. We're not considering any cut to the dividend. Our financial activity last quarter in which we raised $1,400,000,000 in a mandatory convertible preferred transaction improved our balance sheet and reaffirmed our investment grade debt rating. With that operator, will you please poll for questions?

[Operator]

Thank you very much. We will now be conducting a question and answer session. You. First question comes from Harsh Kumar from Piper Sandler. Please proceed with your questions.

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

Yes. Hey, Steve. First of all, let me add my congratulations to the recovery. I know it's been a long time coming, but we've seen you call bottoms in the past and I'm excited that you see the bottom. But the question we get Steve though from a lot of our clients or investors is that maybe talk about the demand signals that you're seeing, which you kind of did, but there is also another aspect of maybe potential pull ins from tariffs.

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

If you could just help us understand why this may not be a head fake from that? And then also if you could just I'll ask my second question here. If you could just talk about the recovery that you're seeing relative to your key end markets, if there's one that's acting better than the other or they're both acting the same?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Thank you, Harsh. The demand signals we are seeing really began in starting early January. Our January, February, March, each of those three months bookings were significantly higher than December bookings. And we have shown them on a slide in on the March 3 conference call that we had. And that was really before any of the tariffs talk appeared.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So we're really not seeing any tariff related activity or pull in. If you look at downstream customers' information, many of the direct customers that were not buying the product are starting to buy it because their inventory is getting depleted. Same way at the distributors, they are starting to buy additional amount of product because on many of the SKUs their inventory has gone back to very much normal. And our distributors' customers also downstream customers their inventory is getting corrected. So all of the signals we have really are related to that and number of large number of designs that we were designed in last year many of them are turning to production.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So there is also growth coming from new products and new design win activity. We haven't seen any impact of tariffs. The tariffs are largely exempted on all the semiconductors that we make today, whether shipping into China or shipping into U. S.

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

The second one was related to the key end markets.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So if we look at the last year's data, fiscal year twenty twenty five ending March 31, the notable thing that stands out is aerospace and defense. The aerospace and defense used to be 11% of our business in the prior year. In fiscal twenty twenty five that is now 17%, eighteen %, eighteen %. And it's almost the second largest market now after industrial. And the underlying reasons are that business has stayed strong.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Defense budgets have been high. NATO has been increasing their defense spending. And with two wars going on while the automotive, industrial, communication, consumer, other businesses were weak. So there is a notable shift in our end markets. And if you look at the year that just started on April 1, I think we're headed for a first ever over $1,000,000,000,000 budget for U.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

S. Defense. And I recently met a customer from Europe and the talk of the talk was around they were talking about their business growing two to 3x over the next three years because U. S. Was pushing NATO to dramatically increase their defense spending and they're a major contractor to NATO and European defense.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So I think the opportunities in that segment are very good even this year and we think that will be a very good segment. Now all the others industrial automotive consumers and others we are seeing a broad based recovery in all of those segments embedded in our bookings fair amount driven by inventory depletion and also driven by new designs and new products.

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

Thank you, Steve.

[Operator]

Thank you. The next question comes from Chris Caso from Wolfe Research. Please proceed with your questions, Chris.

[Chris Caso, Managing Director at Wolfe Research LLC]

Yes. Thank you. Good evening. I guess the first question and we've been discussing this quite a bit with others during this earnings season is what sort of macro impact that the tariff environment such will have as we go into the rest of the year. And Steve, I'm judging by your comments about improving bookings in that, that you're not seeing that.

[Chris Caso, Managing Director at Wolfe Research LLC]

But I guess the question is what are your customers telling you right now? And from an investor standpoint, there's been concern about pull ins of demand from second half to now to get ahead of tariffs. What's your view on that?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So I think there are two things. There is a direct impact of tariffs like the tariffs on our products as they ship anywhere into China or U. S. And then there is the indirect effect which is the effect on global economy and global GDP. The second one impact on global GDP is below my is above my pay grade.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The customers that I have met in the last couple of weeks personally when I ask them how you're thinking about tariffs they turn around and asking me how do I think about tariffs and nobody knows because as we speak today there's really no tariffs on the semiconductors. So leaving that impact on the global GDP aside and I'll comment a little more on that afterwards. If you look at the direct impact on us, it's basically nothing. In the Donald Trump's first term, he implemented 25% tariffs on semiconductors made in China coming into U. S.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

At that time about 10% or 11% of our parts were made in China. And we moved aggressively to move that production assembly essentially from China to Philippines, Thailand, Vietnam, Indonesia, others. And today less than 4% of our parts are made in China. And those don't come to U. S.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

They go to Europe. They go to Japan. They go to Southeast Asia. A handful of orders that made in China that might come to U. S.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Which may become subject to tariff basically we pass that tariff to the customers, but it was negligible because that was really very small. Now the other thing is if there is a tariff for U. S.-made product going to China and we're looking at it all parsing it together very carefully Many of our technologies run-in U. S. And they also run-in Taiwan.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And we'll try to portion our production so that the parts that are going into China are made in Taiwan or Europe or elsewhere and are not made in U. S. And I'm sure we'll find that it's not 100%. It's a very small amount. So I'm really not that concerned about the direct tariffs because of that setup.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Now when it comes to indirect tariffs, really nobody knows what the overall impact on the economy would be. So what we did for a modeling purpose inside is we took a hypothetical haircut on our revenue and we wanted to make sure that if that kind of impact were to happen, what would happen to the inventory? What would happen to our manufacturing? Would we have to take additional actions? And the result of that very stress case analysis is that we have already cut back our manufacturing so much that with this haircut our inventory is still declining slower than in the normal plan, but inventory is declining because the production rate today would still be lower than the worst case scenario that we have modeled.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Therefore, there will be no other actions required. We simply would ramp our factories later because the inventory is dropping slower. That's the answer to your question.

[Chris Caso, Managing Director at Wolfe Research LLC]

That's a very helpful color. Thank you. As my follow-up question, I wanted to dig in a little bit to the margin leverage that you referred to in your prepared remarks as well. And maybe two parts to that question. One is if you could discuss some of the charges that are acting as headwinds to gross margin now, some of the underutilization charges and the reserve charges.

[Chris Caso, Managing Director at Wolfe Research LLC]

And with the assumption that revenue starts to come back now, how does that play out over the next few quarters? And how is that leverage realized as the revenue comes back?

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Right. Hey, Chris, this is Eric. So the two main headwinds that we have right now are the underutilization charges, which were a little over $54,000,000 last quarter. We don't expect that to really change significantly in the current quarter. We're still going to be running the factories at a low rate as we're focused on bringing inventory down.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

And then the inventory reserve charges, which we provided a little bit more color on March 3 and then when we went through the nine point plan. Those are still big numbers and we expect that inventory reserve number to still be large again in the current quarter. But they are going to start dropping pretty dramatically as revenue increases assuming that's what happens as we go through the fiscal year because inventory is dropping at a rapid pace. Steve mentioned that we're targeting reducing inventory by about $350,000,000 plus in the fiscal year. So the products that are really subject to review for reserve charge is coming down dramatically.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

So that should start changing pretty soon outside of this quarter. And the leverage in gross margin is going to be really high. So we aren't putting numbers around it for investors today, but it's significant.

[Chris Caso, Managing Director at Wolfe Research LLC]

Got it. Thank you.

[Operator]

Thank you. The next question comes from Timothy Arcuri from UBS. Please proceed with your questions, Timothy.

[Timothy Arcuri, Managing Director at UBS Group]

Thank you. Eric, just on that point, so given all the actions you've taken, if we sort of get back to a point where, I mean, pick your revenue number maybe like mid-1s back to 1.5 or something like that. With all the actions you've taken and you assume that the reserves come down and the underutil comes down too. Should we expect margins to be higher this time around than they were at the same revenue level last time? I mean, you've closed three fabs.

[Timothy Arcuri, Managing Director at UBS Group]

So I would think that ultimately margins will be higher at equivalent revenue than they were last cycle. Is that fair?

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

So it depends on the slope of the recovery. And I think you said we closed two fabs, we did not. We've only closed one fab, Fab two in Tempe. But it depends on the slope of recovery and then where we're at in terms of needing to ramp our factories. We have higher cost inventory per unit sitting in inventory today and that will come out on a FIFO basis.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

But the cost structure is in really good shape. Obviously, we gave a new long term model of 65% non GAAP gross margins, which we're very confident in. And I know all of you will be looking on how to model this going forward. But the leverage is significant, but I don't want to commit at this point in time in terms of a margin level at a comparable revenue level in the past. It will depend on the slope of how revenue returns there.

[Timothy Arcuri, Managing Director at UBS Group]

Okay. And then Steve, do you have a way to determine what consumption is in June relative to your guidance? I know, Disney sell through is finally growing in June. I would think that Disney sell in is still going to be below sell through in June. There's still some

[Timothy Arcuri, Managing Director at UBS Group]

sort

[Timothy Arcuri, Managing Director at UBS Group]

of slower moving MCU parts that seem to be moving a little slower. So where do you think consumption is for June relative to what you're guiding revenue?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So our internal modeling shows that the Disti sell through will be higher than the guidance we have given you, which is GAAP guidance based on sell in. Last quarter that difference was $103,000,000 We expect the difference would be lower than that. How much lower we can't quantify, but will be below 100,000,000 certainly maybe well below 100 And that the gap will continue to close in the coming quarters and which will result into one of the things that are trifecta I talked about where the sell in will close to equal to sell through. It's not the sell through coming down, it's the sell in going up. And the second part of the consumption is on the factory side, what are we producing and what are we consuming?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And we have looked at it in our model based on our June guidance. We are consuming a lot of inventory and producing significantly less than what we are consuming from the inventory. So therefore, the inventory will continue to come down at an accelerated pace, which will eventually lower the write offs and it will eventually improve the factory utilization. And all of those will move in the right direction as the inventory continues to come down.

[Timothy Arcuri, Managing Director at UBS Group]

Okay. Thanks, Steve.

[Operator]

Thank you. The next question comes from Blayne Curtis from Jefferies. Please proceed with your questions, Blayne.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Yes. Good afternoon. I had two questions. I wanted to ask about kind of big picture. Your cadence has been different than other companies.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

If you kind of look at MCU share, maybe you guys gained a little bit too much share during the pandemic and now your share looks quite low as you're correcting while others aren't correcting as much. I'm just kind of curious as you kind of look through here and there's been a lot of talk about share gainers in MCUs. Kind of just curious when things normalize do you expect to get back to where you were pre pandemic?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Well, we certainly expect to gain share. And it's quarter at a time, but we certainly plan to gain share on the way up here as we recover. I think competitors are more closer to a full recovery than we are. I mean, we just began this is the first quarter. So therefore, we should be gaining share.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Thanks. And I want to ask you, there's a lot of kind of debate about China strategy and I guess who knows how all this trade war works out. And I'm not sure they're tariffing semis in China, but I think there are a handful of companies looking to do a China for China strategy. I'm just kind of curious your perspective, do you think that's the right move or the wrong move? I think you're starting to hear that ASPs are lower because the costs are lower.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

So I mean, might be a headwind for the overall market if that's what everybody does. Just curious your perspective.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Well, if you go back to the March 3 report we gave to The Street, we talked about our China for China strategy in that report. And that was built around we have a Chinese partner with a Chinese name and Chinese logo, a Chinese website, a Chinese data sheet. And we were going to sell our die to their Chinese partner. And then they were going to locally assemble and test it and put a locally made logo and then sell it to Chinese customers as a local part. But the die inside was microchip.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Now there was a time when the rules were made in China, I mean assembled in China. And since then the rules are sort of being changed where made in China or made in U. S. Is where it is diffused, which means where it is fab not where it's assembled. So with that rule change, our made in China strategy, which was parts made in our fabs here assembled in China and shipping in China as a local product that really doesn't work.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So we are redoing our China strategy. We could still do that based on parts made in Taiwan and we can transfer some of the other products from U. S. To Taiwan. So we'll be redoing the strategy and talk to you at a later point.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

A point I'd like to make on record, which we are communicating to the Trump administration to Secretary of Commerce and all that is that the current rules are actually incentivizing moving product out of U. S, which is opposite of what they intended. They were trying to get more people to make parts in U. S. And we are moving mask sets as we speak from U.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

S. To Taiwan, wherever we have dual source, so that we don't have to pay tariffs going into China. So we'll come back to you on a China for China strategy.

[Blayne Curtis, Managing Director at Jefferies Financial Group]

Thank you.

[Operator]

Thank you. The next question comes from Vivek Arya from Bank of America Securities. Please proceed with your questions, Vivek.

[Vivek Arya, Managing Director at Bank of America]

Thank you for taking my questions. On the first one related to gross margins and then pricing. So March gross margins were I think kind of at the lower end of your outlook even though sales were slightly above. So just anything to call there? And then in general Steve what are you assuming for the pricing environment this year versus say three months ago?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

The pricing environment we have assumed is basically mid single digit type of a decrease.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Yeah. And I think on your question on gross margin, why it came in on the lower end versus when sales were above the midpoint, it's a number of factors, but the bottom line is we continue to aggressively try to reduce inventory. So our utilization was low and our inventory reserve charges were still high. So it's really a combination of those factors.

[Vivek Arya, Managing Director at Bank of America]

All right. And for my follow-up, Steve, you're calling June an inflection quarter. How should this inform us about your visibility for one quarter out in September? Like if we had to think about September, should we be thinking given that June is an infection that September should be seasonal, above seasonal? Should it kind of be in the same range as June?

[Vivek Arya, Managing Director at Bank of America]

Because modeling your business when it is going through these periods of infection gets really tough. So I would appreciate any help that you could provide in how we should be thinking about order plus one for your business?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So if we look at September backlog today and compare it to the June backlog at the same point in time, which means June '8 just go back a quarter and what June would be at the same point in time a quarter ago, the September backlog is higher than where June was at the same point in time. And the slope of the fill on the crawl chart looks quite good. So if I were to say today, I'm quite optimistic about the September.

[Vivek Arya, Managing Director at Bank of America]

Thank you.

[Operator]

Thank you. The next question comes from Tore Svanberg from Stifel. Please proceed with your questions, Tore.

[Tore Svanberg, Managing Director at Stifel Financial]

Yes, thank you. So Steve, one of the organization changes was to combine the eight and thirty two bit microencoder development tools under one group. I was just wondering if you could clarify, talk a little bit more about what was behind that particular change and how that might impact your share in the overall microcontroller market?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So the change was not combining the eight bit and 32 bit development tools. The change was combining eight bit and 32 bit business units, the product groups. The development tool was only was always one common group, but they reported in a way that they were not totally aligned with eight and thirty two bit. The reason for the change that came out during my deep dive was eight bit was pursuing eight bit opportunities and thirty two bit was pursuing 32 bit opportunities. And nobody was mining the store as some of the eight bit customers wanting to convert to 32 bit.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So the thirty two bit group was doing a lot of middle end and high end products and leaving the low end of 32 bit vulnerable. So when an eight bit customer wanted to move to a low end 32 bit, we didn't have the appropriate product. So eight bit will keep fighting with eight bit trying to compete with eight bit, but customer was trying to go to 32 bit. Remember this eight bit to 32 bit conversion now has been talked about for about thirty five years. People were talking to me about that conversion back in 1994 and it didn't happen forever, but it did happen during COVID.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

It accelerated. Parts were hard to find so people found whatever they did and whatever parts they could find anywhere. And so a lot more designs were able to fulfill their needs with 32 bit and they stayed with 32 bit. And going forward they have adopted 32 bit. So since combination of those business units, we have changed the developmental priorities to fill that hole.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And the first of those products will be introduced to the market in early January. And we're already working with the customers to design it in because customers can design in using our one of the other products because the architectures are very compatible and they would be ready to go in production with our product when it is released. So that was the change we made.

[Tore Svanberg, Managing Director at Stifel Financial]

That's great color. As my follow-up for Eric. Eric, the 90,000,000 to $100,000,000 in operating expenses that you're saving from the recent restructuring, could you just talk a little bit about the linearity of that? I mean, obviously, of it has already played out and we can see that in the numbers. But any more color you could offer us for those savings for as we move into fiscal twenty twenty six?

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Yes. I would say most of it is already played in, right? If you look at where our OpEx came in for the March compared to forecast, think it was 7,000,000 or $8,000,000 below what our guidance to the Street was because we implemented the RIF beginning in early March. And so most of those actions were fully reflected in the guidance that we gave today for the June. There still might be little small pieces to go, but most of those actions are completed at this point in time.

[Tore Svanberg, Managing Director at Stifel Financial]

Great. Thank you very much.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Welcome.

[Operator]

Thank you. The next question comes from Harlan Sur from JPMorgan. Please proceed with questions, Harlan.

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

Good afternoon. Thanks for taking my question. Steve, you already got the question on tariff related balloons and you mentioned indirect impact is above your pay grade. But to be fair to the team, if you look back in the twenty eighteen, twenty nineteen U. S.-China tariff and trade conflict, The Microchip team was actually the first to call out seeing order patterns dropping within your China industrial and manufacturing customers due to the demand uncertainty caused by tariff impact at that time.

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

You've got the team has somewhat of a unique profile of having very large exposure to like small and medium sized manufacturers and they tend to modulate their activity fairly quickly and in real time. So given the current trade and tariff dynamics, like are you starting to see any signs of a pullback or perturbations in order activity from your small, medium sized China manufacturing and industrial base?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So Harlan, I don't recall like between then and now I retired for about a few years. So I don't recall what happened. But I think the tariffs were very pointed at that time only for China. This time tariffs are a lot broader in the whole world. And people are still going to be buying cars and washers and dryers and equipment and appliances.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And what we do see is people from China, our customers in China rapidly moving production from China to outside of China. For example, a lot of our development tools were made in China and our supplier who builds the development tool, our contract manufacturer has moved their facility to Vietnam. So a lot of those changes are happening and they're accelerating now, but they've been happening for five years because this thing Trump has been saying that for two years now during all his campaign. So this is not new. So therefore, just think that people are going to continue to build these products, but there'll be a lot of movements out of China.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So China may have a problem, but the world may not have as big a problem.

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

I appreciate that. And then on the fixed megatrend focus from fiscal 'twenty one to fiscal 'twenty four, megatrend revenues grew at a twenty percent twenty six percent CAGR, right? That's about 2x the growth of the overall Microchip business, represented about 47% of your revenues. Can you guys just drill us up? So what was the performance of the megatrend revenues versus your total sales in fiscal twenty twenty five?

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

And what was the percentage mix of the megatrend revenues in fiscal twenty twenty five?

[Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co]

Rich?

[Richard Simoncic, Chief Operating Officer at Microchip]

Sorry, megatrend mix is pretty much held the same in terms of overall revenue growth. With in terms of overall percentage growth, that trend has diminished or slowed down. Megatrends are still growing above the microchip rate in terms of CAGR. But with all of the inventory correction, megatrends were just as susceptible to inventory correction as our standard markets.

[Operator]

Thank you. The next question comes from Joshua Buchalta from TD Cowen. Please proceed with your questions, Joshua.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Hi, guys. Thank you for taking my question. You guys have been pretty transparent about your limited visibility as we kind of went through the pick of the inventory digestion in the last few quarters. Clearly, there's been a lot of digestion. And I realize we touched on

[Joshua Buchalter, Director - Equity Research at TD Cowen]

it a bit, but I

[Joshua Buchalter, Director - Equity Research at TD Cowen]

was wondering if you could maybe comment on what's improved from a visibility standpoint that's allowing you to conclusively say we've hit the bottom here. Mean, it simply that the bookings have gotten high enough where you're able to get a better pulse on true end demand and consumption versus inventory situation? Thank you.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Well, I think there are many pieces of it. So one of them is the distribution sales out is increasing after many, many quarters. So distribution is selling more to their end customers, which means in some cases the end customers' inventory is getting corrected so distribution is shipping more. So that's one. Number two, the bookings in March quarter were up significantly from any prior quarter and bookings in April were higher than any other month January, February or March.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

That's number two. And number three, when you look at the crawl chart, so a crawl chart essentially on a daily basis looks at what we have built for the quarter and what we have bookings aged in the quarter. So if no more bookings come in, in the quarter that's the number we're going to be for the quarter. And you can compare those crawl charts one quarter versus the other at the same point in time. So the June starting backlog was higher than March on the first day of the quarter.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And if I look at it now on May 8 and compare it to February 8, the backlog for June on May 8 is substantially higher than at the same point in time on February 8. And then when you look at the backlog for the September compared to March or compared to June, it's higher than both of them. And slope at which it's increasing is also higher, which means customers are increasingly thinking of buying more because either the inventory is correcting or they have a new product that's going into production. So it's multifaceted.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Thank you for all the color there. And then I think you mentioned more sustained shutdowns in the June. Can you elaborate on how you're thinking about the cadence of this? I think in the past you've done some two week ones. And clearly you're getting more aggressive now.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Should we think about sort of the sustained lower production levels until you hit the I think it's 130 to 150 on books inventory targets and similar where you feel comfortable in the channel? Thank you.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So there are two factories where we are still working a little bit of rotating time off. One is the Oregon facility where we could have brought it down further, but we didn't bring it up as low because it will get below a critical mass. We brought it to a point lower and then we're running a two weeks rotating time off out of 13. And the reason for that is that is the factory where all our advanced products are. And by having a two weeks rotating time off, we can ramp it very rapidly by just removing the rotating time off.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

We're not doing the same thing in Colorado. We're not doing the same thing in Philippines. But that facility was unique in the products it builds why we decided to do it that way. Now our plan is to run the production at these levels, which is well below really what we are shipping today so that the inventory could come down. But your last part of your question is would we continue to run this way till our inventory comes down to one hundred and thirty to one hundred and fifty days?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And the answer to that is not. And the reason for that is if you wait till the inventory comes down to one hundred and thirty to one hundred and fifty days then for the following quarter your inventory can't decline anymore because you really cannot size. You may have to grow your capacity 40%, fifty % in a single quarter because we're running so much below consumption plus revenue is growing. So therefore you have to model it where you have to start growing capacity or start growing production few quarters ahead of time, so you don't have a hill to climb that you can climb in rehiring and retraining people.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

We don't believe that inflection point is in this quarter or next quarter. But as we progress through the fiscal year, we could get there where we need to start and start ramping the factories.

[Joshua Buchalter, Director - Equity Research at TD Cowen]

Got it. Thank you.

[Operator]

Thank you. The next question comes from William Stein from Securities. Please proceed with your questions William.

[William Stein, Managing Director/Senior Research Analyst - Technology at Truist Securities]

Great. Thank you. Steve, I appreciate all the clarifications you've provided. I wanted to dig into the question earlier question about China for China. And as I recall the business update from March timeframe, I thought that you talked about your some of the products in your portfolio no longer being meaningfully competitive in China, especially I think what you characterize as standard products.

[William Stein, Managing Director/Senior Research Analyst - Technology at Truist Securities]

And I thought that was the reason for this partnership. Now it sounds like that strategy has changed. So can you talk about your competitive positioning in China going forward? And how if some of your products are less competitive, how that influences the total, I think it's called total solution selling strategy that you have? Thank you.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

I think don't know if you misunderstood, but I don't think we set our products that are as competitive. There is a push from the Chinese government to the local industry to design in the local products. And so a lot of the customers want to use a local product to check that box. Now when we talk to the customers, they like the Western product better than the local product, but they're under pressure from Chinese government. So if you can provide them the product with Western quality, Western design, Western spec, but under a local brand then you get the best of both worlds.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So that's what we were trying to do to provide our Western made product under a Chinese logo from a local company. And many of the customers were telling, yes, that's exactly what I want. Now what happened then is that they changed the definition of where it is made of. It used to be assemblies where the product is formed changes shape significantly and they redefine that to where it is diffused, which means where it is fabbed. So therefore, all of The U.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

S.-made product won't fit into the China for China strategy. All of our parts made in Taiwan and Germany and Japan and everywhere else will fit. But that's not a complete portfolio. So we are redoing that strategy and may land up building relationships with some of our U. S.-made products are also made in Taiwan or elsewhere, but I don't want to rush to it.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

We are already transferring some of our mask sets where the process already runs in Taiwan at one of the foundries, but we're not forming new relationships to transfer our U. S. Product. Instead we're giving feedback to the government that the strategy is having an opposite effect where there's an incentive to move U. S.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Production out. But if there is no change in the strategy and the current rules continue in another few weeks then we will probably start to move some U. S. Production elsewhere.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Well, I think maybe where some of the confusion came is we talked about how where we have seen some and may see more competition over time from China based companies in semiconductors is in the kind of the lower end of the standard microcontroller and analog products. But we won't see it in kind of our higher end more complex products, at least not in the near term.

[William Stein, Managing Director/Senior Research Analyst - Technology at Truist Securities]

Okay. Thank you.

[Operator]

Thank you. The next question comes from Vijay Rakesh from Mizuho. Please proceed with your questions Vijay.

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Yeah. Hi, Steve and Eric.

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Just a quick question. On the Section two thirty two, talking about bringing product back to The U. S, what are you contemplating? How are you looking at that? What's the time frame for that?

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Thanks. And a follow-up.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Time frame for

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

what?

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Just wondering if you're expecting any Section two thirty two rulings coming down in terms of trying to bring product back to The U. S?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Well, I just finished explaining that we're taking product from U. S. To elsewhere. The current rules are such that produce the product anywhere, but don't produce them in China and don't produce them in U. S.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

You're in best shape if you stay away from U. S. And you stay away from China. Because China hits U. And U.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

S. Hits China. So if you produce elsewhere, you're loved by everybody else. So I think that's the those are the rules the way I understand it today. But we are the rules are changing every day and we will do whatever the appropriate thing to do is.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

We have fair amount of overlap in our products where we produce them in U. S. And produce them in Taiwan on many of our products. And some other products we produce them in Germany and we produce them in Japan. But as the rules continue to change, we will evolve that strategy to ensure that we're best positioned with whatever the final rules are.

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Got it. And then talking about visibility, just wondering how you are looking at utilization, I guess, across the fabs as you go through the back half, if you have some visibility there in terms of demand or how we should see that going? Thanks.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

we guided that the June inventory is somewhere between two fifteen and two twenty five days. If I just kind of project ahead in September, I think it drops below 200. I don't know what the exact number would be. And our goal is one hundred and thirty to one hundred and fifty days longer term. So somewhere between that one hundred and fifty and two hundred, there is a number at which we need to start rehiring people and start growing production.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Because if we wait till the inventory gets into that band, then we'll have to create the full output of the quarter fresh without being able to take it from the inventory. It could be growth unachievable because that's a hill to climb. So we understand that how much we can grow per quarter. And based on that model, we think we will start growing the production well before it hits one hundred and fifty days.

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Got it.

[Vijay Rakesh, Managing Director at Mizuho Financial Group]

Thank you.

[Operator]

Thank you. The next question comes from Quinn Bolton from Needham and Co. Please proceed with your questions Quinn.

[Quinn Bolton, Senior Analyst at Needham & Company]

Hi guys. Thanks for taking my questions. Steve, for me just a quick follow-up on that last question. As you guys start to you get below the two hundred days somewhere between two hundred to 150, you start increasing production. Is that where you could see the incremental margin that you talked about being 85% in the June?

[Quinn Bolton, Senior Analyst at Needham & Company]

Is that where it could start to tick even higher? Or is there a scenario where you could see better than 85% incremental margins before that point maybe just because of the reduction in inventory reserves? Thank

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

There are a lot of moving parts. There are lot of moving parts. There is as the inventory comes down your write offs go away because even the slow moving parts are no longer higher than eighteen months of inventory. Your utilization starts to improve when you ramp the fab. So there are lot of moving parts.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

But I think we can roughly keep that sort of incremental margin falling to the bottom for a few quarters. That's sort of the best I can describe.

[Quinn Bolton, Senior Analyst at Needham & Company]

Okay. Thank you.

[Operator]

Thank you. The next question comes from Chris Stanley from Citibank. Please proceed with your questions, Chris.

[Chris Stanley, Manager at Citi]

Hey, thanks guys. Steve or Eric, just a question on the inventory write downs, write offs, etcetera, etcetera. How much of that has been written off, written down? And then when will you start to sell that? What's the impact going to be on the P and L for planning purposes?

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Well, it's a bit unpredictable on when we will see it, right? If we had an order on the backlog today, we wouldn't have written it off this last quarter. So it's just based on the pattern of orders that come in. We know that we are building very long life products that are going to sell over time. It's just predicting that is difficult.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

But every quarter, we have some sell through of previously written off inventory. And because we've written off so much over the last five or six quarters, that tailwind to gross margin is going to come. We don't necessarily think that's happening this quarter. But I think as we progress through fiscal twenty twenty six, we're going to start to see benefits of that.

[Chris Stanley, Manager at Citi]

Okay. Thanks, Eric. And then as a follow-up, so either Steve or Rich, Steve, now that you've been there for several months, how would you I guess, what would be your take on just microchips product positioning in the microcontroller market? Maybe, you know, how it's gone over the last year or Do you think that anything needs to change? Do you guys think you need to add on anything to the product lines or do anything differently?

[Chris Stanley, Manager at Citi]

Or is it sort of autopilot right now? I just appreciate your thoughts on the market share and the product positioning.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Well, I mean, there's certainly nothing autopilot. There is an extreme sense of urgency Rich and I have brought back to the group we've made a number of organization changes eight bit combining with 32 bit is the most visible to you, but we made other changes across the company. And there is a new sense of vigor and a new sense of urgency. And you're starting to see essentially when I look across the company every indicator is starting to move in the right direction. Revenue growth, gross margin growth, operating margin growth, EPS growth, inventory reduction, product schedules, pricing everything else is really just lining up and

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Customer counts. Counts.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Customer counts. So all those things

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

are happening. So it's nothing business as usual. But I think when it gets to specific products, you can't have a CEO admit on a conference call to all the competitors that his products are XYZ. No, our products are great. But where we missed the boat was in some of the eight bit to 32 bit transition at the low end.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And I did admit that, I highlighted that and we're correcting it. But no, beyond that I think products are good.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

It's more of this conversion too. Even in development tools, we're going to make it much easier for customers to move between our product lines. A great deal of automation is being given to our customers to help them design in our products. So we are moving very aggressively on a number of fronts here, very aggressively.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So one other thing I would highlight is really kind of on the development tools. So the past strategy was that Microchip has its own unique development platform on 32 bit microcontroller that was Harmony and customers had to adopt that development platform to design with our products. Now that was required when our products were with either the proprietary architecture, which the third parties didn't support or when very originally we were trying to do MIPS based products, which were not supported by the third party ecosystem. Since we now are doing most of our 32 bit products ARM based architecture. Most large customers are using either KAIL or or many a number of these development platforms, which are pretty standard.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So Microchip was pushing its own platform to the people who already had a platform, just providing a sort of resistance path for adapting our products. So I think what we have done very recently is change that strategy. And now we are up and running to all of these third party platforms. So therefore, when we go into a large customer, we just have to position our products and not ask them to change the development platform. And that has really dropped one barrier and we're succeeding getting new designs.

[Chris Stanley, Manager at Citi]

All right. Thanks a lot guys. That's great.

[Operator]

Thank you. The next question comes from Joe Moore from Morgan Stanley. Please proceed with your questions, Joe.

[Joseph Moore, Managing Director at Morgan Stanley]

Great. Thank you. I know the dividend has always been a big priority. Is there any scenario where you could see that coming down in different economic circumstance? I'm just asking I get the question a lot.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So there is an absolute commitment that dividend reduction has not been a consideration. When we were threatened that our debt rating could be downgraded, we took strong action last quarter by raising this $1,450,000,000 mandatory convert and brought our debt level down by about $1,100,000,000 With that, we reaffirmed our investment grade rating by both rating agencies and kept the dividend intact. Now as we look at it going forward with our revenue increasing, cash getting liberated from inventory, gross margins rising, we're talking about 85% of the incremental revenue fall through. I don't really think we're in a situation where there is risk. So I think we have put that behind us.

[Joseph Moore, Managing Director at Morgan Stanley]

Okay. I appreciate that. Thank you. And then I've also gotten questions on the non GAAP adjustments, the preferred dividend coming out of the non GAAP numbers. Can you just describe the rationale for that?

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

Well, it's a dividend, right? So for GAAP accounting purposes, the preferred dividend is shown on the income statement. But there are many companies that have these mandatory preferreds in place and exclude them from the non GAAP results because it's really an equity instrument. It's not a debt instrument.

[Joseph Moore, Managing Director at Morgan Stanley]

Got it. Makes sense. All right. Thank you.

[Operator]

Thank you. The next question comes from Janet Ramkisson from Quadra Capital. Please proceed with your questions, Janet.

[Janet Ramkissoon, Owner at Quadra Capital]

Hello, Hi, Steve. Thanks. Great job and what you've been able to accomplish in such a short period of time. I wanted to drill down a little bit on the aerospace and defense. I was a little bit surprised that it's up to 18%.

[Janet Ramkissoon, Owner at Quadra Capital]

And there are a lot of changes in the defense area where we're seeing a lot of the traditional defense companies working more with some of the newer players in the market, SpaceX and the world industries and guys who are making drones and robots. Can you give me a sense of what your exposure is to some of these newer markets? And I noticed you did say that one of the focus was to switch from five gs to AI. How does that tie into this defense business and addressing some of the newer opportunities with some of these more innovative players in the space?

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

So, good question on that. So when it comes to new space, we've been working with those customers for quite some time. And now there's this new generation of new defense customers coming up. And what we've been doing is taking some of our products instead of rad hard, you become rad tolerant. We've been now introducing more plastics into our aerospace and defense product line and then working with our different product BUs to convert more products to that rad tolerant or plastic product line that is more focused towards these new defense or new space customers.

[Janet Ramkissoon, Owner at Quadra Capital]

Could you give me a sense of what how you characterize the opportunity for you? How large is it? Is this just a small thing? Or is it could this be aversion to a good growth area for you?

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

So I think Janet all these new things is an opportunity and we're engaged with everyone. But I think where the real growth is going to come from is two factors. Number one, U. S. Defense is talking about rebuilding its arsenal.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

They are depleted on missiles and bullets and rifles and tanks and planes and everything is aging fleet is old. So there's going to be a substantial rebuilding of our defense arsenal and we are in everything. There's nothing in our U. S. Defense no battle tank, no plane, no missile, no nothing that microchip is not in it.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

We are in everything. So I think that's where the growth comes in U. S. Now you can add to that drones and SpaceX and all that. But those are not multibillion dollar opportunities.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

And the second piece on the growth is really what's happening in NATO. NATO is going to double and triple its budget over the next two years, three years and because they're being pushed to really invest for their defense. So they are rebuilding their arsenal, rebuilding missiles and tanks and rifles and drones and radars and all that. And we are in all that stuff. So we are already hearing from defense customers in Europe about a significant opportunity.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Just about four weeks ago one of the major customer from France heard about that we were closing Fab two Tempe Fab and he flew down to Chandler to come see me confronting me on he's planning to double his business why am I closing Fabs. Then I explained him that his fabs products were not made in fab two. His products are RedHard or whatever they're made in other fabs. And one or two items that may be in fab two we have inventory and we're transitioning them to other fabs. So you could kind of see that customers are looking for significant growth and they want to ensure that Microchip is in a position to meet their needs.

[Janet Ramkissoon, Owner at Quadra Capital]

Thanks. That's very helpful.

[Operator]

you. The next question comes from Christopher Rolland from Susquehanna International. Please proceed with your questions, Christopher.

[Christopher Rolland, Senior Equity Analyst at SIG Group]

Thanks for the question. I'll try to be brief. Steve, how do you see market share dynamics in microchip, the actual MCU market playing out? Do you see China taking share? Are there any more formidable competitors?

[Christopher Rolland, Senior Equity Analyst at SIG Group]

And do you expect your share to increase? Thanks.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

I absolutely expect our share to increase in MCU in the coming couple of years. And some of it has to be some of it is driven by many of our microcontroller customers that have been sitting on a significant inventory haven't been buying the full boat of products. And just starting this quarter, we're starting to see increased bookings from them, increased purchasing from them. Our guidance for the June is on the upper end of the industry. And I think market share gains are reflected in them.

[Christopher Rolland, Senior Equity Analyst at SIG Group]

Thank you, Steve. One other and I apologize if this was asked, but AI as a percentage of revenue and you had a bunch of new looks like AI product announcements, optical, power, PCIe. Are you expecting any of these to be really needle moving and or of particular emphasis for you guys moving forward? Thanks.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

So we continue to see as a percentage of sales that increasing. I think we had given a number last year that was about 4% of sales. As of the latest measurement, it's just over 6% of sales. So we continue to see strength in that particular marketplace for us. And we continue to introduce new product lines within that area.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

In fact, one of the reorganizations that we did was we created an AIML product group to help. We've got almost eight different BUs within the company that need either models or model zoos or accelerators on their products. And that group is helping coordinate that activity within the organization.

[Christopher Rolland, Senior Equity Analyst at SIG Group]

Great. Thank you.

[Operator]

Thank you. The next question comes from Craig Ellis from B. Riley Securities. Please proceed with your question, Craig.

[Craig Ellis, Director of Research at B Riley Financial]

Yeah. Thank you for taking the question. I wanted to go back to the point that Rich made earlier about the significant changes that Microchip had made to improve our product development and product development efficiency for customers. What I was hoping you could do is just share an example or two of what those changes are. And more importantly, help

[Craig Ellis, Director of Research at B Riley Financial]

us

[Craig Ellis, Director of Research at B Riley Financial]

understand when would investors see the benefit of the changes that you've made? And how material could they be in say 2026 and years beyond? Thank you.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

That's what we've helped customers do is essentially speed up their development time. And so it becomes a productivity tool in terms of time to market. So we've been training an internal model for almost two years in terms of writing code for our products. We've decided to provide that tool that we've been using internally with over 1,000 engineers for their own productivity free of charge. And so we've essentially handed our customers an internally trained tool that we found is 40% plus productivity improvements to help their own embedded control designers.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

And we continue to any enhancement that we make internally for our internal designers, we are now passing that on to our customers as well. And so we've gotten great feedback from customers that have started using it in terms of productivity improvements. In terms of relating that to revenue, that is difficult to say at this point. Our goal is to make our customers' life easier and to make the transition to Microchip development environment or using Microchip as a whole easier, right? And also making customers tend to choose Microchip over someone else because of the ease of designing in a Microchip product.

[Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip]

That's the goal.

[Craig Ellis, Director of Research at B Riley Financial]

And is there anything about those tools, Rich, that would help them if they're going to use Microchip in one product on a system board more easily designing Microchip products for other parts of that system board so that the total system solution ambition that Microchip has had is something that's facilitated with the capability you've developed?

[Richard Simoncic, Chief Operating Officer at Microchip]

Yes. So there we have work going on. So we actually have AI product recommenders that actually do that now for customers. We've started unleashing that to them. But later in the year, we will actually be offering board related support for TSS type solutions.

[Richard Simoncic, Chief Operating Officer at Microchip]

And so you can see where we're going. So now you've got product recommenders. Now you've got software development tools, now you can start to combine product recommender with software development tools and you can start recommending block diagrams and putting that all together.

[Craig Ellis, Director of Research at B Riley Financial]

Thank you, Rich.

[Operator]

Thank you. There are no further questions at this time. And now I'd like to hand over to Mr. Sanghi for closing remarks. Thank you, sir.

[Steve Sanghi, CEO, President & Executive Chairman at Microchip]

Thanks everyone for joining us. As you can see from our report that we've turned the corner and we're looking for significant improvement in our financial performance in this fiscal year. And we'll see many of you on the road as we go to the conferences this quarter. Thank you.

[Operator]

Thank you very much. Ladies and gentlemen, that does conclude today's teleconference. Thank you very much for joining us. You may now disconnect your lines.

Participants

Executives

• Steve Sanghi, CEO, President & Executive Chairman
• Richard Simoncic, Chief Operating Officer

Analysts

• Eric Bjornholt, Senior Vice President and Chief Financial Officer at Microchip
• Harsh Kumar, Managing Director & Senior Research Analyst at Piper Sandler Companies
• Chris Caso, Managing Director at Wolfe Research LLC
• Timothy Arcuri, Managing Director at UBS Group
• Blayne Curtis, Managing Director at Jefferies Financial Group
• Vivek Arya, Managing Director at Bank of America
• Tore Svanberg, Managing Director at Stifel Financial
• Harlan Sur, Executive Director - Equity Research at JP Morgan Chase & Co
• Joshua Buchalter, Director - Equity Research at TD Cowen
• William Stein, Managing Director/Senior Research Analyst - Technology at Truist Securities
• Vijay Rakesh, Managing Director at Mizuho Financial Group
• Quinn Bolton, Senior Analyst at Needham & Company
• Chris Stanley, Manager at Citi
• Joseph Moore, Managing Director at Morgan Stanley
• Janet Ramkissoon, Owner at Quadra Capital
• Christopher Rolland, Senior Equity Analyst at SIG Group
• Craig Ellis, Director of Research at B Riley Financial