MICROCHIP TECHNOLOGY INC Q3 FY2025 earnings call

• Resizing manufacturing footprint: Closing Tempe fab two, managing other fabs with rotating schedules, adjusting back-end facilities and smaller plants.
• Reducing inventory: Targeting 130-150 days inventory, aiming to reduce by $250 million by March 31, 2026.
• Review of megatrends and TSS, business unit deep dive, channel strategy changes (adjusting demand creation flag and fulfillment margins), strengthening customer relationships with top 1000 customers.
• Chipset activity paused pending new administration.
• Product line updates: New 64-bit RISC-V processors, expanded Wi-Fi portfolio, Smart Touch controller, automotive networking tech, FPGA certifications and sensor connectivity.

In the December quarter, net sales were $1.026 billion. Non-GAAP gross margins were 55.4% including capacity underutilization charges of $42.7 million. Inventory balance at December 31, 2024 was $1.356 billion with 266 days of inventory, up from 247 days in the prior quarter. Distribution inventory days were 37, down 3 days from the prior quarter. Cash flow from operating activities was $271.5 million, adjusted free cash flow was $244.6 million. Net sales from product segments like microcontroller, analog, FPGA, etc., were all down sequentially across major geographies.

For the March quarter, net sales are expected to be between $920 million and $1 billion. Non-GAAP gross margin is expected to be between 54% and 55% of sales. Non-GAAP operating expenses are between 37.7% and 40.5% of sales. Non-GAAP operating profit is between 11.5% and 16.3% of sales. Non-GAAP diluted earnings per share is between $0.05 and $0.15. Expect above-market growth once inventory correction is complete.

Inventory obsolescence risk due to low visibility, high inventory, and falling revenue. Refinancing risk related to debt maturities, though recent bond issuances help mitigate some of the risk for the 2025 bond.

Q: Vivek Arya asked about inventory hotspots by end market or product and if it's specific to Microchip.

A: Steve Sanghi said inventory is high across the board, distribution inventory is getting closer to historical levels while direct inventory of customers is still high, and it's not specific to Microchip alone as competitors also have excess inventory issues.

Q: Blayne Curtis asked about gross margin.

A: Steve Sanghi said the midpoint gross margin for the current quarter is 53%, and historical gross margins can be regained once inventory is corrected.

Q: Harsh Kumar asked about gauging channel inventory or direct inventory.

A: Steve Sanghi explained that historically distributor inventory is about 2.5 to 3 times what they ship out in a quarter, and there's no reason to think distributor inventory would go below 3 times.

Q: Toshiya Hari asked about customer feedback.

A: Richard J. Simoncic said customers are dealing with inventory, and they're working on relationships with customers, especially the top 1000 customers, to improve them.

Q: Vijay Rakesh asked about inventory obsolescence risk.

A: Steve Sanghi said inventory reserves are reflected in the gross margin, and there's a plan to reduce inventory to address the risk.

Q: Chris Danely asked about competitive positioning.

A: Richard J. Simoncic said Microchip is predominantly holding its own in competitive positioning with strong customer relationships.

Q: Joe Moore asked about inventory breakdown by internal fabs.

A: Eric Bjornholt said internal fabs have higher inventory than the foundry and system side of the business.

Q: Jeremy asked about turns and new products.

A: Eric Bjornholt and Richard J. Simoncic discussed that turns are within normal range in a short lead time environment and there's high activity with the new RISC-V processors but no announced revenue yet.

Q: Craig Ellis asked about manufacturing capacity details.

A: Steve Sanghi said details on manufacturing capacity realignment will be disclosed on March 3.

Q: Chris Caso asked about dividend commitment and manufacturing capacity.

A: Steve Sanghi said the dividend is committed to and will likely remain flat, and details on manufacturing capacity strategy will be shared on March 3.