MICROCHIP TECHNOLOGY INC Q4 FY2025 earnings call

• Resized manufacturing footprint: Tempe Fab 2 closed, actions in other fabs and back end Philippines facilities complete, reducing capacity but enabling rapid ramp when needed.
• Reduced inventory: Inventory at March 31, 2025 was 251 days, target 130-150 days, aiming to reduce by over $350 million in FY 2026.
• Reviewed megatrends: Replaced 5G with artificial intelligence and ADAS with Network and Connectivity.
• Business unit deep dive and channel strategy review: Completed, no negative impact on distribution.
• Strengthened customer relationships: Restored 78% of 12% of deteriorated customer relationships, 2.6% still stressed.
• Achieved operating expense model: Global layoff of ~10% of employees.
• CHIPS Act activity: Reinitiated discussions with the CHIPS Office.

In the March quarter, net sales were $970.5 million, down 5.4% sequentially. For fiscal year 2025, net sales were $4.402 billion, down 42.3% from fiscal year 2024. Product segments: Microcontroller and analog business units were down sequentially, FPGA was flat, and other businesses were up sequentially mainly due to technology licensing. Specific revenue contribution percentages weren't explicitly stated in absolute terms for each segment.

• June quarter net sales expected $1.045 billion ± $25 million.
• Non-GAAP gross margin projected 52.2%-54.2%, operating expenses 33.4%-34.8%, operating profit 17.4%-20.8%, EPS $0.18-$0.26.
• Leverage in business model: ~85% of incremental June quarter sales to bottom line as operating profit.
• Revenue accelerators: Distributor inventory correction, sell-in catch-up with sell-through, direct customer inventory correction.
• Capital return program: Returning 100% of adjusted free cash flow as dividends, expecting adjusted free cash flow to exceed dividend as inventory liberates cash.

• Tariff impact: Uncertainty exists, but direct impact on Microchip is negligible due to production setup.
• Inventory write-offs: Still a factor, but expected to decrease as inventory drains.
• China strategy changes: Uncertainty in competitive positioning and rules affecting the China for China strategy.

Q: Poll for questions A: [Operator starts polling] Q: Harsh Kumar on demand signals and tariffs A: Steve Sanghi states no tariff-related activity seen, with signals from bookings and inventory correction Q: Chris Caso on margin leverage A: Eric Bjornholt discusses underutilization charges and inventory reserves Q: Timothy Arcuri on margins and recovery A: Eric Bjornholt talks about cost structure and leverage Q: Blayne Curtis on MCU share and China strategy A: Steve Sanghi on redoing China strategy and product movement Q: Vivek Arya on gross margins and pricing A: Steve Sanghi on mid-single digit pricing decrease, Eric Bjornholt on factors affecting gross margin Q: Joshua Buchalter on visibility and production cadence A: Steve Sanghi on bookings, crawl chart, and production ramping Q: William Stein on China competitive positioning A: Steve Sanghi on redoing China strategy and total solution selling Q: Vijay Rakesh on Section 232 and utilization visibility A: Steve Sanghi on strategy evolution and production ramp planning Q: Quinn Bolton on margin leverage and inventory A: Steve Sanghi on moving parts and incremental margin Q: Christopher Danely on dividend and product positioning A: Steve Sanghi on dividend commitment, Richard Simoncic on development tool changes Q: Joe Moore on dividend scenario A: Steve Sanghi on no dividend reduction consideration Q: Janet Ramkissoon on aerospace and defense opportunity A: Steve Sanghi and Richard Simoncic on defense growth and product conversion Q: Christopher Rolland on MCU share and AI impact A: Steve Sanghi on share increase, Eric Bjornholt on AI revenue percentage Q: Craig Ellis on product development changes A: Richard Simoncic on productivity tools and AI product recommenders