Q2 2025 Microchip Technology Inc Earnings Call
i
Greetings and welcome to Microchips Q2, fiscal year 2025, and as you result, conference call.
At this time, all participants are an Alyssa Nony mode, a question and answer session will follow the formal presentation.
If anyone should acquire operator assistance, please press star zero and your telephone keypad.
As a reminder, this conference is being recorded.
Speaker Change: I'd like to turn a conference over to our host Mr. Erb Bjornholt, the Fowl. Thank you. You may begin.
Speaker Change: 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, which the caution you that that statements are predictions and that actual events are results made different materialially.
We refer you to our press releases up today as well as our recent findings with the FDC that identify important risk factors that may impact microchips business and results of operations.
In attendance with me today, Arganess Moorthy, Micrchips, Presidents and CEO, with Simon Seck, Micrchips, COO, and Saajidali, Micrchips Head of Investor Relations.
I will comment on our second quarter fiscal year 2025 financial performance. Writts will then review some product line updates and Ganesh will then provide commentary on our results and cash return strategy as well as an overview of our current business environment.
We will then be available to respond to specific investor and analyst questions.
We are including information in our press release and this conference call on various gas and non-gat measures.
We have posted a full Gap to non-Gap reconciliation on the investor relations page of our website at www.microchip.com and include a reconciliation information in our earnings press release which we believe you will find useful when comparing our Gap and non-Gap 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 that sales, I will be referring to these results on a non-gap basis, which is based on expenses, priorities, effects of our acquisition activities, share base compensation, and certain other adjustments that describe in our earnings press release and in the reconciliation on our website.
Next, say over the September quarter or 1.164 billion, which was down 6.2% sequentially.
We recently settled in ongoing legal matter with one of our licensees. The impact of this settlement was a very lease of a $13.3 million accrual, which increased revenue and grows profit by $13.3 million in the September 2024 quarter.
We have posted a summary of our net sales by product line in Geography on our website for your reference.
On an on-gap basis, Gross margins were just above the midpoint of our guidance at 59 and a half percent, including capacity under utilization charges of 25.9 million. As we continue to manage production activities to adjust the challenging business conditions.
Without the benefit of the legal settlement mentioned earlier, the non-gaped cross margins would then 59.1%.
Operating expenses were at 30.3% of net sales and operating margin was 29.3%.
Nongat Net income was $250.2 million and Nongat earnings per diluted share was $46 which was 3 cents ahead of the midpoint of our guidance and positively impacted by 2 cents from the aforementioned legal settlement.
On a gap basis in the September quarter gross margins were 57.4%.
As you may recall on August 20th, on August 20th, we announced that a cybersecurity incident had impacted our business operations.
and on September 4th, we announced that this incident was unlikely to materially impact our financial condition or results of operations.
During the closed process for the September quarter, we evaluated the financial impact of the breach, including unscheduled factory outages, and although the incident did not materially impact our financial condition, a result of operations.
We determined that the total cost impact of the incident was approximately $21.4 million.
The majority of this cost is attributed to incremental, factory-underutilization charges, resulting from a cybersecurity incident.
A total operating expenses were 521.9 million and included acquisition and tangible amortization of 122.7 million special charges of 1.5 million share base compensation of 42 million and 3.6 million of other expenses.
Speaker Change: Gapnet income with 78.4 million resulting in 14 cents in earnings per alluded share.
Our non-gap cash tax rate was 13% in the September quarter which was in line with our guidance.
Speaker Change: are non-gap tax rate for fiscal year 2025 is expected to be about 13% which is exclusive of the transition tax and any tax audit settlements related to taxes occurred in prior fiscal years.
We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. If this were to happen, we would anticipate about a 200 basis point's favorable adjustment to microchips non-gap tax rate in future periods.
Speaker Change: Our inventory balance at September 30 of 2024 was 1.34 billion, which was up 31.6 million from the end of the June 2024 quarter. We had 247 days of inventory at the end of September quarter, which was up 10 days from the prior quarter's level.
At the midpoint of our December 2024 quarter guidance, we would expect both inventory dollars and days to increase.
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 18 days of inventory at the end of September quarter.
I'm in Tory utter distributors in the September quarter was at 40 days, which was down three days from the prior quarters level. Distribution took their inventory holdings in the September quarter down as distribution cell through was about $95 million higher than distribution cell in.
Our cash flow from operating activities was 43.6 million in the September quarter and was negatively impacted by the timing of interest in tax payments, including the Transition Tax payment that is paid annually and was part of the 2017 tax cuts in jobs act.
We have one more transmission tax payment that is due in the September quarter of 2025.
Kansar adjusted pre-cashflow was $14 million in the September quarter. As of September 30th, our consolidated cash and total investment position was $286.1 million.
are total debt increase by $256 million in September quarter and was negatively impacted by the higher tax and interest payments than the previous quarter.
Our adjusted EBDA in the September quarter was 405.7 million and 34.9% of net sales. Our trailing 12 month adjusted EBDA was 2.161 billion.
Our net debt to a Jeussity Badaw was 2.85. That's September 30, 2024. Up from 1.28 at September 30, 2023.
Speaker Change: Capital Expenditures, we're 20.8 million in the September quarter, our expectation for capital expenditures for fiscal year 2025.
is about 150 million.
and we expect this will year 2026 Capital expenditures.
Speaker Change: to be lower than that as we have a lot of capacity to grow back into as well as capital that we purchase during the up cycle that has not yet been placed in service.
The appreciation expense in the September quarter was 41.2 million.
Now, when I'll turn it over to Rich, we'll provide some commentary on our product line performance and innovations in the September quarter. Rich? Thank you, Eric. And good afternoon, everyone. We are strategically investing in and launching innovative technologies across high-growth sectors.
Speaker Change: We believe these advancements are positioning us to capture emerging opportunities and drive long-term value creation.
Speaker Change: and a microcontroller space, our new DSP 338 Digital Signal Controller Core with its third budget architecture and double precision floating point unit is driving innovation and critical sectors.
and Industrial Automation, it's enabling more precise, any G-efficient motor control for smart factories and renewable energy systems.
Powering Advanced Grided Verters and Solar Installations, as well as Power Supplies for GPU and CPU-based data centers.
We believe this position is strongly in a growing clean energy market as evidence by a recently released electric vehicle charger reference designs.
We have further expanded RMPO offerings with our Pick 64GX Multicore 64-bit micro-processors.
Targeting secure and intelligent edge systems that require multiple applications to run simultaneously on a single platform. Similarly, our new Pick 64 high-performance space computer Radiation Heart and MPU.
Speaker Change: Complete with built-in AI accelerators and advanced ethernet connectivity represents a significant step forward for the compute needs of space exploration and satellite deployment.
For a high-performance space computers, we are so sourced in aerospace and defense applications for this compute function, and working with numerous customers on early development of applications.
Speaker Change: and our data center and networking business. We are focused on evolving data center needs. Our family of PCIe switches and high performance PCIe SSD controllers are now in mass production and widely adopted by customers.
These product families are designed and optimized to meet the high speed connectivity and high performance storage needs of standard and AI accelerated servers.
Speaker Change: We also see increased end-customer qualification activity with our CXL controller solutions.
Speaker Change: which will enable larger server memory footprints and improve the efficiency of data center servers. We believe these solutions position us well to address the evolving needs of next generation data centers.
In the automotive sector, we are expanding our single-pair Ethernet portfolio with our new 1000BASE-T15s, supporting extended cable lengths.
Speaker Change: Additionally, we are excited about the launch of our VelocityDrive software platform and automotive-qualified multi-gigabit Ethernet switches, which are now available to support the next generation of software-defined vehicles and industrial applications.
These innovations underscore our commitment to providing cutting-edge solutions across renewable energy, automotive, aerospace, defense, and data center sectors.
Speaker Change: We are making it easier for our customers to develop smarter, more efficient products, laying the groundwork for future growth in these dynamic marketplaces.
Speaker Change: With that, I will pass the call to Ganesh for comments about our business and guidance going forward. Ganesh.
Ganesh: Thank you, Rich, and good afternoon, everyone.
Ganesh: As Eric described in his prepared remarks, our September quarter results benefited from the settlement of a legal matter with one of our licensees.
Including this benefit, our net sales were down 6.2% sequentially, and our non-gap gross margin, non-gap operating margin, and non-gap diluted EPS were all better than the midpoint of our guidance.
Speaker Change: Excluding the benefit of the legal settlement, our September quarter results were consistent with our guidance with net sales down 7.3% sequentially.
as we continue to navigate through an inventory correction that's occurring in the midst of significant macro weakness for many manufacturing businesses, especially those in the industrial end market.
Excluding the legal settlement benefit, non-GAAP gross margin came in just over the midpoint of our guidance at 59.1 percent, while non-GAAP operating margin came in at the midpoint of our guidance at 28.5 percent.
Speaker Change: as we continue to manage our expenses by balancing the short-term realities and the long-term growth opportunities.
Our consolidated non-gap diluted earnings per share came in a penny ahead of guidance at 44 cents per share.
Speaker Change: My thanks to our worldwide team for their support, hard work, and diligence as we continue to navigate a difficult environment and focus on controllable actions that we believe position us well to thrive in the long term.
Now for some color about the September quarter and the general business environment.
Speaker Change: All regions of the world and most of our end markets exhibited varying degrees of weakness.
Speaker Change: The exceptions were aerospace and defense, and the artificial intelligence subset of data center.
Speaker Change: Our business in Europe, which is concentrated in the industrial and automotive markets, was particularly weak, with revenue down almost 22% on a sequential basis.
Speaker Change: Our broad base of customers continue to manage their inventory tightly and adjust their purchasing plans in the face of a weak macro environment for manufacturing.
high interest rates, inventory in their channels,
Speaker Change: A very short lead time for our products and an uncertain business outlook.
Speaker Change: This combination of factors we believe is driving lower consumption and continued inventory destocking, as well as reductions in target inventory levels at multiple levels.
Speaker Change: at our direct customers, at contract manufacturers and distributors who buy from us, at our indirect customers who buy through our distributors, and in many cases, at our customers' customers.
The early signs of green shoots in our business we saw in the March and June quarters progressed at an uneven pace, with bookings staying flattish on a quarterly basis.
but continuing to age over shorter periods of time with an increasing number of requests for expedites of new orders as well as shipment date pull-ins for previously placed orders and with cancellations and push-outs declining to normal levels.
Speaker Change: We believe these factors are positive signs for the formation of a bottom in our business despite low customer confidence in the macro environment and resultant low visibility for our business.
Speaker Change: Our average lead times continue to be about eight weeks or less.
Speaker Change: While the short lead times are resulting in reduced near-time visibility, as customers delay placing orders since they have high confidence the supply is readily available,
We also believe short lead times during a period of business uncertainty are helping customers navigate the uncertain environment successfully and improve the quality of backlog placed with us.
Speaker Change: We have adjusted our operational systems to adapt to this uncertain environment and pre-positioned semi-finished and finished goods inventory as best as we can to be able to accept and ship the terms orders we need for the December quarter.
Speaker Change: Our factories around the world are continuing to run at lower utilization rates in order to help control inventory levels.
Speaker Change: Our internal capacity expansion actions remain paused.
Speaker Change: We expect our capital investments in FY25 as well as FY26 will be at or below the low end of our long-term range of 3-6% of revenue.
Speaker Change: as we plan to use the inventory we have invested in, as well as our underutilized capacity to support the initial phases of the next up cycle.
Speaker Change: We're also prepared for the long-term growth of our business, on the one hand in partnership with our foundry and outsourced assembly and test partners, and on the other hand with the optionality of deploying capital which we have purchased but not yet placed into service for our internal factories.
Speaker Change: While there remains uncertainty about the shape of the future recovery, we do expect it to arrive as it has in all prior semiconductor cycles.
Speaker Change: And we believe we are well prepared for the things we can control to exploit whatever the market recovery will look like.
Speaker Change: On the CHIPS Act front, we are making progress towards concluding a final agreement that is consistent with the goals of the CHIPS program and with our business values.
Speaker Change: and we are cautiously optimistic that this could happen no later than the end of December.
Speaker Change: Now, let's get into the guidance for the December quarter.
Speaker Change: While we believe substantial inventory destocking has occurred at our customers, channel partners, and their downstream customers,
Speaker Change: We remain in an environment of continuing macro uncertainty for our customers and result in low visibility for us.
Speaker Change: Additionally, the December quarter has historically been our seasonally weakest quarter, and it's when there are the most manufacturing holidays, especially in Europe and the Americas.
Speaker Change: And it is also the time of the year when customers tend to reduce inventory on the year-ending balance sheet.
Speaker Change: In the current economic environment, many customers have also indicated that they intend to take an extended year-end shutdown.
Speaker Change: While we need terms orders and customer-driven pull-ins within the quarter to meet our guidance, and operating in a high-terms environment has historically been normal for microchip, it is challenging to predict and plan for during abnormal times as we're in today.
Speaker Change: Taking all the factors we have discussed on the call into consideration, we expect our next sales for the December quarter to be between $1.025 billion and $1.095 billion.
Speaker Change: We expect our non-GAAP gross margin to be between 57% and 59% of sales. We expect our non-GAAP operating expenses to be between 33.2% and 34.8% of sales.
Speaker Change: We expect our non-GAAP operating profit to be between 22.2% and 25.8% of sales. And we expect our non-GAAP diluted earnings per share to be between 25 cents and 35 cents.
Speaker Change: We expect our long-term growth to be driven by a combination of our new product innovation as well as the strength of our design and activity.
Speaker Change: Rich has already provided a summary of several of the new product innovation results.
Speaker Change: On the design in front, after two-plus years of dealing with shortages and redeploying their innovation resources towards mitigating the impact of shortages, our customers for the last year-plus have returned to prioritizing their innovation projects.
Speaker Change: The result is a strong design and pipeline across all end markets, megatrends and key customers which is amplified by our total system solutions approach to take advantage of our broad portfolio of solutions.
Speaker Change: The impact of this growing design pipeline is muted in the current environment where excess inventory gets most of the attention and design inactivity takes time to gestate into production. But design momentum is what we expect will drive above-market long-term growth.
Speaker Change: We believe the fundamental characteristics of growth, profitability and cash generation of our business remain intact, but is suppressed in the current business environment.
Speaker Change: We're confident that our solutions remain the engine of innovation for the applications and end markets we serve.
Speaker Change: This down cycle we're in has been the most prolonged and challenging down cycle I can recall during my 43 years in the industry.
Speaker Change: and we believe it could set up a strong cycle reversal at some point in 2025.
Speaker Change: And we remain committed to executing our strategic imperatives, which we believe will deliver sustained results and substantial shareholder value.
Speaker Change: Let me wrap up with an update about our capital return to shareholders.
Speaker Change: In the September quarter, we returned $261 million to shareholders through a combination of $243.7 million in dividends.
Speaker Change: and $17.3 million in stock purchase in the open market.
Speaker Change: This represented 92.5% of our adjusted pre-cash flow in the June quarter.
Speaker Change: Since achieving investment-grade rating in November 2021, we have returned $4.8 billion of capital to shareholders through the September 2024 quarter, of which $2.4 billion represented shares to be purchased.
Speaker Change: which is about 5% of our shares outstanding.
Speaker Change: We are continuing towards our target of returning 100% of our adjusted free cash flow to shareholders by the March 2025 quarter.
Speaker Change: with the dividend being the fixed component and share buybacks being the variable component.
Speaker Change: We expect that due to the timing of cash payments, occasionally our adjusted pre-cash flow may dip below the fixed component represented by the dividend.
Speaker Change: In such situations, as you heard during Eric's prepared remarks about the September quarter,
Speaker Change: We expect to temporarily increase our borrowings to pay the dividend, and then repay those borrowings in subsequent quarters from the free cash flow generated that is in excess of the dividends paid.
Speaker Change: With this approach, we aim to stay consistent with our capital return strategy without causing it to increase our debt permanently. With that, Matt, would you please poll for questions?
Matt: Thank you.
Matt: Great, thank you. At this time we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your headset before pressing the start key.
Speaker Change: One moment, please, we'll report for questions.
Speaker Change: First question is from Timothy Arcuri from UBS. Please go ahead.
Timothy Arcuri: Thanks a lot. Ganesh, I kind of wanted your perspective on how long you think it could take the distribution channel to sort of get back to
Timothy Arcuri: normal. If I look at at your drawdown in
Timothy Arcuri: revenue. Basically it was all of distribution this quarter so it seems like things are actually relatively okay beyond that channel so
Timothy Arcuri: If you kind of look at inventory days, it's about 2x what it was before COVID.
Speaker Change: I mean, do you think that 20 days of inventory is still what that channel wants to hold? And sort of, given your discussions with them, how long do you think it could take to sort of clear that channel?
Speaker Change: So maybe two points of data first. 20 days was towards the low end of where we were during COVID. If you look at over time, closer to 30 plus or minus is where distribution days of inventory have been.
Speaker Change: Second, you know, those days of inventory are calculated on a backward-looking, you know, revenue basis.
Speaker Change: And when you are in a steep decline and expecting to bottom and grow again, the backward-looking days of inventory isn't always the most helpful calculation, although it is the calculation that is consistent across quarters.
Speaker Change: Now, that said, in this cycle...
Speaker Change: The distribution inventory is not just driven by what are they carrying but sometimes their customers and their customers' customers and their customers' channels also have inventory that is destocking.
Speaker Change: And so what we're seeing is, you know, depending on which customer, what region, which distributor, there's some of this where the distribution de-stocking is taking place, but what is less visible is de-stocking taking place at other places farther downstream.
Speaker Change: that had all been collecting during the strong quarters as we were in 2023 and 2022 as well. So it's a bit more difficult to see. We know that distribution is destocking at the rate quite significantly over the last three quarters.
Speaker Change: But they have to get enough of a signal from their customers on that coming back. We do see some early signs of that, their request for expedites, their request for pull-ins and all of that. But it's hard to read beyond that given how little visibility there is in the market.
Timothy Arcuri: Thanks a lot. And then Eric, just a question on underutilization and how it could affect the shape of the gross margin recovery. The last quarter where you didn't take charges I think was the end of 23 when revenue was like 1.8 a quarter. And so if your capacity hasn't really changed since then, does revenue have to get all the way back to 1.8 before you're no longer burdened by underutilization? Can you kind of talk through all that? Thanks.
Speaker Change: But, you know, we're significantly underutilized today.
Speaker Change: That's going to continue, obviously, in the current quarter, and then we'll just gauge it as we go, but underutilization charges are having a pretty significant impact.
Timothy Arcuri: on the
Speaker Change: our gross margin and our operating results and on top of that then we're building inventory and because we don't have great historical
Speaker Change: Sales at this point in time, looking backward a quarter, and then, you know, as we look forward, don't have a lot of backlogs, our inventory reserve charges have been quite high also. And, you know, that at some point in time is going to provide a tailwind to gross margin as the environment improves.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Vivek Arya from Bank of America Securities. Please go ahead.
Vivek Arya: Thanks for taking my question. Ganesh, when we look across the space, there seems to be kind of a wide range of corrections that we have seen across the diversified range, right? Seems like microcontrollers have been more impacted than analog, industrial more exposed than autos, but this combination of microcontrollers and industrial has corrected the most.
Vivek Arya: hopefully draw a correction. And then, you know, what is giving you the confidence that this is, you know, an industry and a cycle issue and maybe, you know, is there something company specific?
Vivek Arya: in terms of share shifts or China in sourcing, but just give us kind of the perspective of how is microchip stacking up versus the industry that you're in.
Speaker Change: You know I think you're right that this is a asynchronous up cycle and down cycle and so depending on exposure to end markets and exposure to certain regions of the world, results are going to be different.
Speaker Change: I think as I mentioned a quarter ago at our conference call, there was also different ways in which people tried to deal with the upcycle and how to tackle the demand ferocity that was taking place at the time.
Speaker Change: And so there is an overhang, obviously, that Microchip has, and I think many others have had, but to different degrees, that is based on what people were buying in excess of what they needed.
Speaker Change: And so all of that, you know, has to correct and come through. Now, what gives us confidence in our business is...
Speaker Change: The connection to the customers that we have on...
Speaker Change: programs on plans that they have. And really as they give us more visibility into what is happening with their customers and their channels.
Speaker Change: You know, the change in revenue.
Speaker Change: isn't because, you know, revenue is moving from one supplier to a different supplier. It's really customers who got very, very optimistic, built ahead of demand, thinking that their historical, you know, in 21, 22 timeframe was going to be persistent demand.
Speaker Change: And then they ran into a macro issue where not only do they have, you know, high growth plans, higher inventory, but a much slowing demand. So those are all what it's correcting through. The customers we have remain the customers that are working with us. We are working with them on next generation programs.
Speaker Change: that they will launch as they get to the point where the current inventory is burned off and the new product can be launched.
Speaker Change: But our confidence comes from, you know, this is a market that has long cycles, long design-in, long production cycles.
Speaker Change: and we just need to get through. We're not in the early innings of a correction, we're in the later innings of a correction.
Speaker Change: And that's why our confidence is that this thing will turn around, it has turned around, and just as when we were on the upside.
Speaker Change: It looked like it was impossible to know how could we ever satisfy the demand. On the down cycle, you know, you get the sense that how can we ever turn this thing around? But it does happen. It is a cyclical industry, and it will happen.
Speaker Change: business that you are assuming for December versus normal. And then, you know, I know March is still a little bit further away, but if I go back in history pre-COVID, usually your March sales tended to be, you know, flat to up, you know, one to percent. So, any conceptual way you would help us kind of think through what March might look like? Thank you.
Speaker Change: Let me take the second one and then I'll let Eric speak to the first one.
Speaker Change: You know, I think it's with as little visibility as we have, you know, we have a hard enough time trying to call the December quarter, let alone the March quarter. But you know, the puts and takes of March typically are, you know, we'll see the Chinese New Year, and usually there's about a 10 days or 14 day impact that comes.
Speaker Change: So that's the headwind. The tailwind is we have fewer production holidays in the western countries, in Europe and the Americas, and so you get more production days that happen, and typically those have strength.
Speaker Change: And, you know, and then you have to, you know, put into place whatever else takes place in terms of inventory that has, you know...
Speaker Change: been destocked and needs to be, you know, started building closer to consumption. So, a lot of puts and takes that go with it, but, you know, we're far away from trying to have visibility into the March quarter as we struggle through getting enough visibility into the December quarter.
Speaker Change: I'll let Eric answer the first question relative to...
Speaker Change: We don't break out terms specifically. You know, Ganesh gave commentary that bookings continued the week in the September quarter. They were pretty much in line with where bookings were in the June quarter, and our book-to-bill was below parity. So our visibility...
Speaker Change: continues to be not great out in time, but we've got short lead times and inventory available and can respond quite quickly.
Speaker Change: and the orders that we are receiving from customers now are more in line with where our lead times are and we're well positioned for that. So, the level of terms that we need is not outside of what we've seen historically, microchip to be able to execute on and is obviously contemplated in the range of guidance that we gave today.
Speaker Change: Thank you.
Speaker Change: [inaudible]
Speaker Change: Our next question is from Toshia Hari from Goldman Sachs. Please go ahead.
Toshia Hari: Hi, good afternoon. Thank you so much for taking the question. I had 2 questions as well. My first one, I'm just curious how you are thinking about the gap today that exists between what you are selling in versus what is being sold through it. I know you don't have –
Speaker Change: Perfect Visibility. But your December quarter revenue outlook, I think at the midpoint is 20 or 25 percent below.
Speaker Change: where you were pre-pandemic. And if I recall correctly, late 2019, back then, you were going through a cyclical correction. So you must be shipping well, well below what's being consumed. I'm curious if you have, you know, an estimation of how big that gap could be today.
Speaker Change: So we don't have a we absolutely agree with you. We are shipping considerably under where consumption is taking place as I speak to our customers
Speaker Change: to find how are they...
Speaker Change: seeing the business. Right, it is nowhere close to the magnitude of what our business is going through. And I think that is the bullwhip effect we're seeing on the reverse side, where, you know, they're trying to manage through their inventory, their channels, and then where they're at, plus some macros, that they good macro thing they're going through.
Speaker Change: But, our customer business is down substantially less than what our business is down. And that is what gives us the comfort that as they correct the inventory, they have to go back to a consumption level that is a lot higher than where we're at today.
Speaker Change: Got it. And then as my follow-up, I'm curious how you're thinking about
Speaker Change: blended pricing into calendar 25, and I know, Ganesh, historically you've said that you operate a strategic business and it's less transactional than it used to be back in the day, but you've had a couple of peers point to low single-digit declines next year, mid-single-digit declines next year. I'm curious how, at Microchip, you're thinking about pricing as of today.
Speaker Change: Thank you.
Speaker Change: You know, I think in general our direction hasn't changed. Our pricing is pretty consistent year over year. The environment for new designs is, of course, a lot more competitive.
Speaker Change: There are players who are...
Speaker Change: You know, in some cases, you know, being more aggressive than they were historically at, and we will match them to make sure that in the business that is important to us. But we also have a substantial discipline in our process.
Speaker Change: and how we go around it. And remember, it isn't just pricing, but we also have cost reductions that we're bringing on, which is what are we doing from in terms of design shrinks and other things we can do to be able to drive the margin side of the equation as well.
Speaker Change: So, you know, will there be pricing pressure as we go throughout 2025? Yes, but a lot of it is going to be on new designs as they start to go into production and a substantial amount of existing designs that will continue to stay with where pricing and terms are today.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Chris Casso from Wolf Research. Please go ahead.
Chris Casso: Yes, thank you. I guess the first question is on what you've been seeing by geography, and it looks like there's some sharp differences there with particularly what you're seeing in Europe.
Chris Casso: Is that just simply end market dependent, I guess saying, with the exposure to industrial and auto there? In addition, we've seen some others in the space talk about some strength in China. Can you speak to that and if that's been a partial offset for you?
Chris Casso: Thank you.
Speaker Change: So, Europe has a couple of factors in it. Historically, I don't know for whatever reason, Europe seems to enter cycles.
Speaker Change: you know, one to two quarters behind.
Speaker Change: when we see it in the Americas. So, you know, on a down cycle, they start a little bit slower than that. But...
Speaker Change: A big part of what we're seeing in Europe and the large sequential decline that we have seen and year-over-year declines we've seen
Speaker Change: have been.
Speaker Change: the high percentage of industrial and automotive end market customers that we have there.
Speaker Change: Yes, and I think you've seen that in the commentary for many others, and I see that in the commentary for many other industries with high exposure to Europe as well, as that's where the biggest challenges are for anyone with a large industrial and automotive side of the business.
Speaker Change: With respect to the other geographies, your question was about China.
Speaker Change: I would say that, and we don't quite break out China, but when you look at greater China for us, which is, you know, Taiwan, China, Hong Kong, all combined on it, off the four regions, or the three regions, you know, the subset of Asia that represents greater China would be the one where at least there is not weakness.
Speaker Change: There's not great strength, but it doesn't have the same weakness as we see in Europe and the Americas.
Speaker Change: Got it. As a follow-up, you mentioned in the prepared remarks about some borrowing that you were contemplating around the dividend. I wonder if you could give some some of the details around that, you know, some of the background of
Speaker Change: Why you're choosing to do that and maybe more broadly, you know, given the downturn that's lasting longer than most of us have thought, you know, what's kind of your general view towards the borrowing levels right now?
Speaker Change: Sure, so maybe I miscommunicated in my prepared remarks, so let me go through them again.
Speaker Change: In any given quarter, the adjusted free cash flow we generate will vary depending on various actions, particularly when we have concentrations of tax payments or interest payments, which happen a little bit more lumpy.
Speaker Change: In that quarter, we may generate less adjusted free cash flow than the dividend that we pay.
Speaker Change: And all that I was trying to say is that in subsequent quarters, what we would do is take some of the adjusted free cash flow that was in excess of the dividend and compensate for that so that we didn't have a net borrowing.
Speaker Change: between quarters where the adjusted free cash flow was less than the dividend payments. So it's really borrowing from within microchip, not so much borrowing from the bank. We did in the last quarter, as Eric said in his prepared remarks,
Speaker Change: have to increase the debt.
Speaker Change: in order to pay the dividend because our adjusted free cash flow was lower than what the dividend payment was.
Speaker Change: And there will be subsequent quarters as we go back into a recovery where we will generate more and what we will do is just bring the debt level down so that the 100% capital return can still happen without raising the aggregate debt.
Speaker Change: and then we fast forward to the June quarter of next year and hypothetically...
Speaker Change: The adjusted pre-cash flow is $200 million higher.
Speaker Change: than what the dividend would be. Before we would start buying back stock, we would back out that $100 million that in Ganesh's kind of terminology, we borrowed in the current quarter to pay the dividend. So over the course of time, it's 100% pre-cash flow return.
Speaker Change: without structure.
Speaker Change: without a structural increase in debt levels.
Speaker Change: That's exactly what we're targeting. And a commitment to our shareholders that the dividend is strong and continue to be there and that our cash generations continue to be strong over the long term.
Speaker Change: Okay, got it. That's clear. Thank you.
Speaker Change: Our next question is from Blaine Curtis from Jeffries. Please go ahead.
Blaine Curtis: I'm just kind of curious on the message on the guidance. So it sounded like last quarter you were hopeful of some green shoots. You said they were uneven. So I'm just kind of curious, are you seeing any areas?
Blaine Curtis: either product-wise or geography that you're feeling better about. And then I guess for the guidance, it sounds like you're just assuming less turns. Is that anything you're seeing or it's just, you know, as you explained, seasonal and you're just being conservative on that?
Speaker Change: So as I mentioned, the two places where we continue to see strength is in aerospace and defense as well as the AI subset of data centers.
Blaine Curtis: So that has been, you know, continuing now for multiple quarters.
Blaine Curtis: I think in this quarter, you know, beyond the normal macroeconomic forces and all that stuff also is, we know that the quarter ends in December when there are more holidays.
Blaine Curtis: And so less production days, and people will take the opportunity to...
Blaine Curtis: tamp down any production plans.
Blaine Curtis: as well as to cut back on inventory because many of them have year-end
Blaine Curtis: for their balance sheet.
Blaine Curtis: And they want to have a balance sheet without excess inventory sitting on it. And we've already heard from some customers who have production shutdowns that are in the latter part of the quarter. So I think all of that plays into us trying to get a sense of kind of where is this quarter going to go.
Speaker Change: And, you know, at this point in time, I think the guidance tries to reflect that combination of what are we able to do, what are we expecting will come, and where are the places where there's going to be some challenges to work through. All right. And just to clarify, you know, we didn't break out a terms percentage.
Speaker Change: You know, we aren't necessarily expecting less turns, but our backlog has continued to fall as our book-to-bill has been less than one.
Speaker Change: Got you. And then maybe just on OPEX, over the next couple quarters here, you know, I had thought that you had some pay cuts that would kind of come back in. I'm assuming with the lower forecast though, maybe the variable comp is down, you know, from, I think you're guiding it up 12 million bucks sequentially for December, but how do you think about the next few quarters beyond that?
Speaker Change: Yeah, so on a non-GAAP basis, it's a little bit more, at the midpoint of guidance, a little bit more than $8 million up quarter-on-quarter, December to September.
Speaker Change: taking
Speaker Change: This quarter and that is factored into that eight million dollar increase And so, you know, I would expect that opex because we'll have a full quarter of that effect in the March quarter We'll go up again in dollars And you know We'll see where the revenue comes in terms of percentage of sales and all that but those are things that we feel that we need to do
Speaker Change: Our employees will have been on a pay cut for nine months, and we want to make sure that we've got an engaged group that is being compensated for the work that they're performing.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Chris Rowland from Susquehanna International Group. Please go ahead.
Chris Rowland: Hi guys, thanks for the question. You had some comments about some data center products which was nice to see.
Chris Rowland: PCI switching, you know, some SSD, SXL, some other stuff as well.
Speaker Change: I guess a couple of questions here, like, is there a home run product amongst this group? Is this, you know, outgrowing, I would assume, the rest of your other end markets?
Speaker Change: The last update that you guys had I think data center was 18% of revenue
Chris Rowland: But it hasn't necessarily grown over time. Would you expect, given this product lineup, for a data center to expand as a percentage of your total over time? Thanks.
Speaker Change: So, in the long run, we are very confident about data center as an end market, as a megatrend, and our participation in the opportunities within that, and it's pretty broad in terms of what all we bring in there.
Speaker Change: In the short run, the data center subset, which is driven by accelerated computing or the AI portion of the subset, and we had estimated that to be about 30-ish percent of the overall data center revenue we have, that is, in fact, continuing to be strong and growing.
Speaker Change: But as you know, overall data center budgets are being squeezed on the non-AI portion of what they are spending. And eventually it will come back because they do need to go back and put some of that infrastructure in place.
Speaker Change: But today the data center overall growth is constrained because the non-AI portion
Speaker Change: does not have the same capital expenses.
Speaker Change: that end customers are putting in place.
Speaker Change: while they build out some of the AI infrastructure.
Speaker Change: at the pace that it's going on. But long run, AI, the data center...
Speaker Change: is a huge opportunity for us with multiple growth areas inside of it.
Speaker Change: You mentioned also an update on the Chits Act. Remind us what you're playing for there and the timing of payments.
Speaker Change: Thank you for watching.
Speaker Change: Okay, well I'll answer the CapEx question. So, our CapEx for the current fiscal year, which will end in March, is expected to be about $150 million. It was pretty front-end loaded where we had about $70 million in the June quarter, and then it's going to be at this lower rate through the end of the fiscal year.
Speaker Change: We do expect Fiscal 26 CapEx to be even lower than Fiscal 25.
Speaker Change: And that's because we've made a lot of investments in capacity that we need to grow back into. During the up cycle, we were planning for growth and brought in a bunch of equipment that's been received now that is sitting in an undepreciated state that we can deploy.
Speaker Change: So, you know, we've got maintenance, CapEx, obviously we'll be investing in growth areas of the business, but CapEx I expect to be quite low again in fiscal 26 for CHIPS Act. I'll turn it back to Ganesh.
Speaker Change: So, you know, we don't yet have an agreement on the CHIPS Act. We're working through it. We're optimistic about it. You know, I think the CHIPS Act has a piece of it, which is the investment tax credit has been taking place over some time.
Speaker Change: But you know we would need to be deploying capital to be able to take advantage of that and that will happen in time But it's not something near-term. We need to go off and do
Speaker Change: And then there are grants, and those grants are the ones we're still negotiating. And those would be determined based on when would we bring on capabilities or capacity consistent with what those grants were delivered for.
Speaker Change: So, I'm not looking for any short-term, you know, benefit that comes out of the CHIPS Act in the next one, two quarters or so, but over a three, four, five-year period of time.
Speaker Change: As demand returns, as we continue to expand and deploy the capital we have, and live up to the commitments that we're making into the CHIPS Act, they will all be beneficial to us.
Speaker Change: Excellent. Thanks, Ganesh. Thanks, Eric. Thank you.
Speaker Change: Our next question is from Harlan Sir from J.P. Morgan. Please go ahead.
Harlan Sir: Yeah, good afternoon. Thanks for taking my question. Lots of questions on the near-term cyclical dynamics. Maybe just one from me on your products and technology. So, you guys mentioned your customers are back to focusing on innovation, your TSS strategy continues to play out. The team has a very comprehensive system in place, right, to track the opportunity pipeline, also content growth for opportunity.
Harlan Sir: I don't know, can you guys quantify how successful TSS has been, how has the microchip dollar content per customer opportunity increased over the past several years? Any way to convey your success with TSS?
Speaker Change: You know it's more we have because we have a hundred and twenty thousand customers
Speaker Change: a substantial number of them through the distribution channel. It's hard to...
Harlan Sir: picked that data off on a very consistent basis. But we do have, you know, subsets of what we look at, subsets of some of the large customers, subsets of specific megatrends, subsets of things. And so internally we track, as we look at these subsets, how is it performing?
Harlan Sir: and really the same processes we know are creating that multiplier effect in other places as well.
Harlan Sir: So I think that's the best way. We don't break it down by each initiative or each megatrend in terms of what we're doing. But we do know and we do see that the TSS reflected by the total content.
Harlan Sir: in these applications is growing in the areas that we're focused on.
Harlan Sir: And we'll think about, is there a way to provide some of that insight? And over the years, we have shown...
Speaker Change: Some of the customer designs, without putting any names on them, showing all the different content. It doesn't go to your question of dollars, but it does go to your question of content, and maybe we'll bring some of that back into the investor circuit.
Speaker Change: Did you have any other? Yeah, you know what, maybe a good way for you to look at that too is on our website. We now have a very extensive reference design section that we're adding reference designs to every quarter. You can probably see...
Speaker Change: from that, what markets and about how many devices are in each of those reference designs for those target applications.
Speaker Change: And that gives you a good idea of where we're targeting.
Speaker Change: Thanks for watching. Bye.
Speaker Change: Okay, no, thank you. That's helpful. Thank you.
Speaker Change: Thanks Harlan.
Speaker Change: Our next question is from Tori Svendberg from Spiefel. Please go ahead.
Tori Svendberg: Yes, thank you. Ganesh, I had a question on your terms business.
Tori Svendberg: I mean, I assume the percentage each quarter now is very, very high. You obviously have short lead times, you have inventory, but so do your peers. So I'm just...
Speaker Change: I'm just curious, what's your view on, you know, how long we're going to be in this period? And I'm not suggesting maybe revenue is going down every quarter, but, you know, could we be in a very high-terms environment for a while, you know, just given all the inventory that, you know, all the broad-based things the companies have at this point?
Speaker Change: Yeah, it's hard to tell, right, so I mean, let me reverse the thing, go back to, you know, the middle of 2023, you know, we had 52-week lead times and it looked like lead times would never come down.
Speaker Change: And, you know, pretty soon, it rapidly unwinds. And I think the reverse could happen here as well. What will determine this is, you know, when do customers either feel the need to place backlog because they feel there is risk if they don't place it,
Speaker Change: or have confidence in their business and say, hey, I want to get going with it. Right now, our customers in the markets that we've described are uncertain about their business.
Speaker Change: are uncertain what is the rate at which their inventory will drain, their new orders will come in at.
Speaker Change: And as long as they're uncertain, and there are short lead times available, there's no need to place backlogs.
Speaker Change: And if they don't place backlog, that means we have higher turns that go with it. It will turn around. And it will turn around when they get to the point where they either get concerned, they may not get product.
Speaker Change: Because they need to place a backlog or they get confidence in their own business. They're having turned around
Speaker Change: And, you know, some of the things, the external conditions have started to, you know, with interest rates starting to come down, that is a good, you know, stimulus in the right direction is happening here.
Speaker Change: It's happening in Europe.
Speaker Change: I think we've got to get some of the uncertainty with the, you know, elections and some of that stuff out of the way.
Speaker Change: But as all that works out, and every quarter, inventory is draining, right, which means that their margin of error, if they don't place orders, is increasing. And I think all that will come back, but how it comes back and how fast it comes back is not very predictable.
Speaker Change: But we have seen it, and we have seen it come back pretty quickly when we thought it's going to be here taking a long, long time before it recovers.
Speaker Change: Well, that's great, Calder. As my follow-up for Eric, Eric's on CAPEX.
Speaker Change: Obviously, it's going to be lower in the next fiscal year. But from a capacity perspective that Microchip has, and I do recognize that you're obviously outsourced too, right? But I mean, is it fair to say that the company can double its quarterly revenue with basically just maintenance, hot capex, at this point?
Speaker Change: Yeah, I mean...
Speaker Change: In theory, if the mix stayed what it was today, we could do that. You know, what the mix is going to be at when we get there, it's hard to tell, right? And we'll have new products that...
Speaker Change: accelerate their pace in the marketplace and we'll need to make investments to support that. So it's not a completely straightforward answer. It'll be somewhat mixed dependent, but we've got a lot of capacity to grow back into.
Speaker Change: Very good. Thank you.
Speaker Change: Our next question is from William Stein from Truist Securities. Please go ahead.
William Stein: Great. Thank you for taking my question. I'd like to ask about the green shoots, as you characterize them.
Speaker Change: and the uneven way that they're playing out.
William Stein: sounds to me as an outsider looking into the company that this is essentially just expedites which are, you know, easy to
Speaker Change: sort of confuse as as like upsides or urgent demands when in reality the customers are just depending on you to have ever shorter lead times.
Speaker Change: How do you distinguish between those two sort of demand triggers and and where do you think the mix like are there are there a lot of customers that are
Speaker Change: viewing demand in the way that, oh, they really need upside, or they need it faster than before, it's real pull-ins, or or should I think of this mostly as just responding to your very short lead times?
Speaker Change: You know I'm sure customers are taking advantage of the fact that there are short lead times but we also know that you know we have customers who didn't have to place and didn't place orders for two or three quarters.
Speaker Change: and they've started to place orders.
Speaker Change: And in some cases, they had previously placed orders for farther out in time but now recognize that they have used up what they had placed and need to pull in. So those are the effects that we see. And the fact that we have short lead times is just our ability to then respond to what they are seeing as the demand signal.
Speaker Change: They don't have very much visibility in their demand signals.
Speaker Change: But as they sell through, you know, they recognize they need to build more and as they need to build more they're starting to place orders on us or place orders on us at short lead times or pulling in orders previously placed on it.
Speaker Change: Those are the green shoots that we think reflect consumption and, you know, the need to place orders on it that are starting to get closer to where their consumption is at.
Speaker Change: One follow-up if I can. I appreciate that answer, Ganesh.
Speaker Change: I think at the last Analyst Day, the company highlighted a 6-8%
Speaker Change: I think there's a more basic question investors have which is what's sort of the What's the actual rate of end demand even if it weren't really growing much?
Speaker Change: So we're under shipping today, clearly you are over shipping at the peak.
Speaker Change: Do you have any...
Speaker Change: even if it's a qualitative way to get at what you think sort of normal normalized demand is on a let's call it sort of a sellout basis or an end demand basis.
Speaker Change: You know, the noise on that signal is so high, it's hard to give you a useful number at this point in time. You know, we were for two years in a row growing at 25% annually.
Speaker Change: And we didn't take our growth rates up as that happened because we knew that these things run in cycles.
Speaker Change: Today we're in a deep down cycle, and we're not trying to you know reflect that this is how it's going to be so I don't have a good answer. I think we've gone through the most unusual Cycles here in the last three plus years. We're all trying to get our bearings on okay. What part of that cycle was You know
Speaker Change: a secular growth, versus what were things that were maybe pull-aheads because of COVID or because of other issues, etc. I don't think anybody knows precisely where that is.
Speaker Change: So, I don't want to give you an answer today reflecting where today's end of the cycle is, just so that I didn't want to give an answer that was optimistic when the upper end of the cycle was there.
Speaker Change: Yeah, and we really feel that our focus on these areas that we call the megatrends, where our products play, that we think are the faster area, growing areas of the market that we can participate in, as well as TSS, is going to allow us to consistently gain market share over time.
Speaker Change: Well, I think, you know, the way, if I step back and look at it, you know, I look and say, okay, you know, there's a lot of noise in the short term, et cetera, but how is innovation
Speaker Change: in what you and I and others and everybody else counts on and uses in what we do and how we run things, etc., being delivered. And that innovation has a substantial semiconductor content on which it's being delivered.
Speaker Change: And if you believe that that semiconductor content is essential for how growth and innovation is being delivered by the customer base for all of us as consumers to be able to take advantage, right, there's a lot of optimism on where this thing goes in the long term.
Speaker Change: But the noise in the short term is just too high to be able to discern where that is in the long term.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Chris Bainly from Citi. Please go ahead.
Chris Bainly: Hey, thanks guys. So clearly this town turn's gone on longer and deeper and farther than any of us expected. If we're still in this, you know, muck...
Speaker Change: Let's call it, you know, another couple of quarters or whatever. Is there any risk of an inventory write-down or restructuring or would you guys have to cut the dividend?
Speaker Change: I think that the answer to that on, you know, a cut in the dividend or a significant inventory write-down, those aren't things that we lose sleep over, you know, our products have really long lives, you know, we know this is going to come back, you know, timing of that.
Speaker Change: and the size of the bounce back is hard to predict, but that's not anything that we're worried about. The cash generation from this business is there.
Speaker Change: and the dividend is there to stay. I don't know if I've addressed all pieces of your question. Was there anything else?
Speaker Change: That's fine. And then the last one is a little provocative. So, you know, some of your, or most of your peers have already reported, and I'm sure you see that your sales are down substantially more than any of the competitors. You know,
Speaker Change: Why is there not anything sort of wrong with microchip, or what do you attribute your, you know, deeper sales decline versus all the competitors to?
Speaker Change: So, you know, I talked about it a quarter ago. I think if you aggregate over time, you know, we had a steeper increase too.
Speaker Change: If you go back and look at 22 and 23...
Speaker Change: And so, you know, did some of our shipments take place ahead of what others were at? You know, we all have had different ways in which we have navigated through the cycle. Clearly, for many of our customers in the industrial marketplace and some in the automotive marketplace, they also had policies about carrying far more inventory. They were building quite valuable end products.
Speaker Change: And so, you know, some of those customers have had a higher inventory that they're starting from which they're burning down.
Speaker Change: But when I look at the aggregate of how much revenue on an index basis has everybody been able to generate going back to the December quarter before COVID, so December 2019, I think you'll find that the total area under the curve is very similar.
Speaker Change: That said, you know, we're down significantly and therefore we expect that the opportunity to grow significantly is also an important part of what is ahead of us in microchip.
Speaker Change: Yeah, and I think with that growth should come a Nice acceleration return to a more normalized level in our operating profit, which is obviously down significantly at this point in time So I think that that's that's an opportunity
Speaker Change: That's fair. Thanks, guys.
Speaker Change: Thanks, Chris.
Speaker Change: Our next question is from Joshua Buckwalter from TD Cowan. Please go ahead
Joshua Buckwalter: Hey guys, thanks for taking my question
Joshua Buckwalter: As we bridge to the December quarter gross margin, any help you can give us on expectations for directionally? I know you usually don't comment on utilization rates, but directionally how you would expect underutilization charges to trend in the quarter and maybe similar question regarding expectations for potential inventory write-downs. I know that's been moving a little bit the last few quarters. Thank you.
Speaker Change: Yeah, you know, I think it's going to be, you know, more of the same of what we've seen in the last couple of quarters, that we're going to continue to run the factories at much less than optimal utilization. So those underutilization charts are going to...
Speaker Change: are going to be with us.
Speaker Change: So, we'll have the manufacturing teams executing on that.
Speaker Change: Inventory reserves are going to be a result of where inventory ends up and you know where our sales for the quarter and over the last couple of periods are going to be so inventory reserves are going to be high again and
Speaker Change: The good thing is we don't believe we're building inventory that isn't going to sell. Long life products are really going to help us in the future and even though we'll have a write down currently, the chances of that inventory selling through at some point in the future are quite high.
Speaker Change: Okay, thank you. And then maybe a bigger picture question. I mean, the DISC-E is obviously an issue right now and where you still have work to do on the inventory side. And I mean, through this cycle, a lot of your peers have sort of de-emphasized the channel and distribution partners.
Speaker Change: I'm just wondering, I guess, coming out of this cycle,
Speaker Change: the channel and how you expected to treat it, I guess, long-term strategically as you prioritize your inventory. I'd be curious your thoughts coming out of the cycle. Thank you.
Speaker Change: You know, we have, I think, somewhere on the order of about 100 channel partners across the world.
Speaker Change: they're an important part of our sales process.
Speaker Change: They've reached a large number of customers that we would not be individually able to go. We have different models by which we work with them based on the work that they're able to do and the results that they're able to provide.
Speaker Change: hanging right about at the 50% plus or minus, you know, 5-10% for a long time to come. But we do evolve. How do we work with them and how do we work to incentivize and also compensate for performance with them?
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question is from Harsh Kumar from Piper Sandler. Please go ahead.
Harsh Kumar: Hey guys, thanks for squeezing me in. Ganesh, I had a question on pricing in this cycle. This is a period of kind of high capacity, low product uptake.
Harsh Kumar: I was curious, as you are negotiating prices with your customers for your next contract, for the next 12 months, are you starting to see any pressure at this point in time or is pricing still pretty firm?
Speaker Change: Oh, there's always pressure, right? Any purchasing...
Speaker Change: be pushing for that. The question is, you know, what is a reasonable deal that allows, you know, a win-win outcome that comes from it and what is the true risk of losing something on price?
Speaker Change: And, you know, the vast majority of our products are designed in...
Speaker Change: I have long designing cycles, long production cycles that go with them.
Speaker Change: You know, we're business people and we work to make sure that, you know, we can make the pie bigger.
Speaker Change: And generate a significant amount of overall business that for both of the customer and for us is a good win-win relationship, we'll go with it. But I would say in the aggregate, that isn't what is moving gross margins for us. It's really at this point in time, some of the underutilization and other issues that are there. Pricing on a long-term basis is a lot more stable, a lot more disciplined.
Speaker Change: And for my last question, Ganesh,
Speaker Change: You talked about green shoots. This is the second quarter, I think, you're seeing those signs of cancellation, and this is...
Speaker Change: Probably very typical of being at the bottom, but I was curious if you could give us some color on these green shoots. Are these green shoots getting stronger for you? Are they just about the same? I mean, I'm kind of nitpicking here, but I want to see if there's something to be taken away from the demand signals that you are seeing at the bottom.
Speaker Change: You know, it's hard to tell. I would say the green shoots were a lot greener two quarters ago and, you know, at this point in time they're still green but maybe not quite as green. I think, you know, there's a malaise in terms of where the market is at.
Speaker Change: We're seeing the expedites, the pull-ins, continuing to rise, so that's goodness.
Speaker Change: We are seeing, you know, the cancellations and all of that, you know, has bottomed out. That's good news. What we haven't seen quite yet is sufficient confidence in customers to give us more bookings and backlog because they don't have quite that same confidence. So I think that's the missing piece that we want to see come through.
Speaker Change: Thanks Ganesh. Thanks Arshad.
Speaker Change: The next question here is from Janet Ramkisson from Florida Capital. Please go ahead.
Janet Ramkisson: Oh yes, just a follow-up on the CHIPS Act question that was asked before.
Janet Ramkisson: I just want to make sure that I understand this right. You were awarded, what place?
Speaker Change: talk of an award in brackets for $162 million and $90 million was for the expansion of the Colorado Springs facility and $72 million was for a fab expansion in Oregon.
Speaker Change: You know
Speaker Change: from January to today.
Speaker Change: The Commerce Department just made these awards.
Speaker Change: And it's a situation where it's very difficult for you to meet.
Speaker Change: requirements to actually get these grants, or you know, is there any color that you could provide that could help us understand why this was awarded and nothing has happened?
Speaker Change: So let me kick it off and then I'll hand it to Rich. So you know what you're referring to in January was a what's called a preliminary memorandum of terms so it's really a an LOI so to speak.
Speaker Change: It needed work to be done, they needed to do diligence, and then there was an agreement and good work.
Speaker Change: We have worked through a fair amount, and you know, the Commerce Department, this is new for the CHIPS office in terms of what needed to happen, so there was a lot of learning.
Speaker Change: for us and for them in terms of where it's at.
Speaker Change: We've run into, you know, things that were not necessarily the right answer for microchip that we have to educate them on.
Speaker Change: But, you know, we have worked through a lot of that at this point in time and maybe I'll let Rich speak to it because he's been spearheading that for Microchip in terms of where we are and kind of why we feel at this point that there is a reasonable chance that we might get the final agreement done this year.
Rich: You know what, this is probably the first true public-private partnership with government in terms of investment in the U.S., and as Ganesh said, there was quite a bit of learning on both sides.
Speaker Change: in terms of what it took to invest and grow this industry. The semiconductor device is probably the most complex industrial product that we make, with some of the longest cycle times.
Speaker Change: and the most capital-intensive industry that there is out there today.
Speaker Change: And so there was a great deal of education back and forth.
Speaker Change: making a semiconductor chip.
Speaker Change: and not familiar with, just...
Speaker Change: contained in one geography or one area. You know, to make a chip or install equipment in a factory, we need support from all over the world to make that happen.
Speaker Change: educate each other on what was needed.
Speaker Change: There was quite a bit of constituents within Washington that weighed in on the CHIPS Act and we had to go through and work with those various constituents to make sure that we met their needs as well as the business needs.
Speaker Change: as well as the structural needs of the CHIPS Act in terms of what it was intended for.
Speaker Change: So did you, you do have some equipment that you haven't deployed yet. At any time did you feel that you were just trying to get one step ahead in terms of buying equipment?
Speaker Change: to meet the obligations that you would have if you got that $162 million with the breakdown for Colorado Springs and Oregon. It does require a little bit of lead time.
Speaker Change: to be able to deliver on whatever you were promising, or whatever the Commerce Department thinks that they're getting. So do you feel like you tried to order equipment a little earlier?
Speaker Change: because you think you felt like you were going to get this money.
Speaker Change: Now, so, you know, we ran the business.
Speaker Change: The way we needed to run the business, we weren't running the business to be able to time it with something that the chip stack would end up having to go do. It was all running in parallel, obviously, you know, the markets have changed and things have changed. But, you know, all of what we did largely is driven by what do we need to do to run the business.
Speaker Change: Okay. That's fair. Thanks very much for the call. I appreciate it. All right. Thanks, Janet.
Speaker Change: This concludes the question and answer session. I'd like to turn the floor back to Mr. Moorthy for any closing comments.
Mr. Moorthy: Well, thank you everyone for your patience in sitting through the meeting and we appreciate the questions and we look forward to meeting many of you on the road in the coming weeks. Thank you.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.
Emily Beynon: © transcript Emily Beynon
Speaker Change: Music Music Music Music Music Music Music Music Music Music
Speaker Change: Thank you for watching.
Speaker Change: We thank you for your support!!
Speaker Change: Thank you for watching.
Emily Beynon: JOSEPH MORAL FOUNDATION
Speaker Change: Have you notice the teeth gap in each corner? Speaking of the teeth gap gathering If you want to learn more about genital bladdering Visit our website at www.ottobock.com
Speaker Change: Greetings and welcome to Microchip's Q2 Fiscal Year 2025 Financial Results Conference Call.
Speaker Change: At this time, all participants are in a listen-only mode. A question and answer session will follow formal presentation.
Speaker Change: If anyone should require operator assistance, please press star zero on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded.
Speaker Change: I'd like to turn the conference over to our host, Mr. Eric Bjornholt, CFO. Thank you.
Eric Bjornholt: 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.
Speaker Change: We refer you to our press releases 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.
Speaker Change: In attendance with me today are Ganesh Moorthy, Microchip's President and CEO, Rick Simonsek, Microchip's COO, and Saja Dowdy, Microchip's Head of Investor Relations.
Speaker Change: I will comment on our second quarter fiscal year 2025 financial performance. Rich will then review some product line updates, and Ganesh will then provide commentary on our results and cash return strategy, as well as an overview of our current business environment.
Speaker Change: We will then be available to respond to specific investor and analyst questions.
Speaker Change: We are including information in our press release and this conference call on various GAAP and non-GAAP measures.
Speaker Change: We have posted a full gap to non-gap 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 gap and non-gap results
Speaker Change: We have also posted a summary of our outstanding debt and our leverage metrics on our website.
Speaker Change: I will now go through some of the operating results, including net sales, gross margin, and operating expenses.
Speaker Change: 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.
Speaker Change: Net sales in the September quarter were $1.164 billion, which was down 6.2% sequentially.
Speaker Change: We recently settled an ongoing legal matter with one of our licensees. The impact of this settlement was the release of a $13.3 million accrual, which increased revenue and gross profit by $13.3 million in the September 2024 quarter.
Speaker Change: We have posted a summary of our net sales by product line and geography on our website for your reference.
Speaker Change: On an on-gap basis, gross margins were just above the midpoint of our guidance at 59.5%, including capacity underutilization charges of $25.9 million as we continued to manage production activities to adjust to challenging business conditions.
Speaker Change: Without the benefit of the legal settlement mentioned earlier, the non-GAAP gross margins would have been 59.1%.
Speaker Change: Operating expenses were at 30.3% of net sales and operating margin was 29.3%.
Speaker Change: Non-GAAP net income was $250.2 million, and non-GAAP earnings per diluted share was $0.46, which was $0.03 ahead of the midpoint of our guidance and positively impacted by $0.02 from the aforementioned legal settlement.
Speaker Change: On a gap basis in the September quarter, gross margins were 57.4%.
Speaker Change: As you may recall, on August 20th, we announced that a cybersecurity incident had impacted our business operations, and on September 4th, we announced that this incident was unlikely to materially impact our financial condition or results of operations.
Speaker Change: During the closed process for the September quarter, we evaluated the financial impact of the breach, including unscheduled factory outages and, although the incident did not materially impact our financial condition or results of operations, we determined that the total cost impact of the incident was approximately $21.4 million.
Speaker Change: The majority of this cost is attributed to incremental factory underutilization charges resulting from a cybersecurity incident.
Speaker Change: Total operating expenses were $521.9 million and included acquisition and tangible amortization of $122.7 million, special charges of $1.5 million, share-based compensation of $42 million and $3.6 million of other expenses.