Q3 2025 Microchip Technology Inc Earnings Call

Greetings and welcome to the Microchips Q3 fiscal 'twenty five financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you require operator assistance during the conference. Please press star zero on your tongue.

Phone keypad as a reminder, this conference is being recorded.

Sandeep: It's now my pleasure to introduce you to your host <unk> Sandeep.

Steve: Thank you Steve you may begin.

Speaker Change: Thank you operator.

Steve: And good afternoon, everyone.

Steve: During the course of this conference call.

Steve: We will be making projections and other forward looking statements.

Steve: Regarding future events or the future financial performance of the comfortable.

Steve: We wish to caution you that such statements are predictions and that actual events or results.

Steve: May differ materially.

Steve: We therefore, you to our press release of today.

Steve: As well as our recent filings with the FCC.

Steve: Identify important risk factors that may impact the microchips business.

Steve: And as those two populations.

Rick Simons: In attendance with me today are Rick Simons sick.

Speaker Change: Mike what you feel that it could be onboard CFO.

Speaker Change: Jim Doherty head of Investor Relations.

Speaker Change: Comment on the restructuring.

Speaker Change: And my observations since returning to microchip as CEO.

Speaker Change: It will go over our third quarter of fiscal year 2025 financial performance.

Speaker Change: Rich will then review some product line updates.

Speaker Change: I will then provide an overview of the current business environment.

Speaker Change: Our fourth quarter fiscal year 2025 guidance.

Speaker Change: We will then be available to respond to specific investor and analyst questions.

Speaker Change: Since I returned as Microchip CEO on November 18, 2024.

Speaker Change: I have spent a significant amount of time evaluating key aspects of microchips business.

Speaker Change: At the UBS conference on December 3rd.

He described in nine point plan to evaluate microchip and make changes where needed to set the company on a course to achieve its previous premium status of performance.

Speaker Change: We're setting up an investor and analyst call on the morning of March 3rd to provide you with a comprehensive update on that nine point plan today.

Speaker Change: Today I'll give you an interim report on several aspects of that plan.

Speaker Change: The first action was to resize other manufacturing footprint.

Speaker Change: After analysis, we have decided to close our Tempe fab known S fab two.

Speaker Change: Currently we are in the process of building the material to provide the buffer required before we transfer the processes and products.

Speaker Change: Our other two fabs, 70% of this product is already qualified at these other fabs.

Speaker Change: Our other two fabs, namely fab four in Gresham, Oregon.

Speaker Change: And for Fab five in Colorado Springs.

Speaker Change: Our working on rotating time off schedule.

Speaker Change: This reduces our capacity, but leaves the fabs in a position to ramp capacity when needed when it really short notice.

Speaker Change: He never backend facilities in Thailand, and Philippines, we're managing capacity by taking shutdown days.

Speaker Change: Reducing the number of employee hours.

Speaker Change: And days of work.

Speaker Change: In the rest of our smaller plants worldwide. There is a plan for each plant based.

Speaker Change: Based on the specific demand in each plant some of them are running at capacity, while others are working short term two weeks.

Speaker Change: The second action was to reduce our inventory.

Speaker Change: Inventory at the end of December 2024 was 266 days.

Speaker Change: Up from 247 days at the end of September 2024 hour target inventory is 130 to 150 days.

On March 3rd.

Speaker Change: I will project out for you the inventory reduction plan.

Speaker Change: An example from December 2024 to the end of fiscal year 'twenty six.

Speaker Change: Which is March 31 2026.

Speaker Change: We are currently expected to be able to reduce our inventory balance by.

Speaker Change: Approximately $250 million.

Speaker Change: Which we liberate cash from this inventory reduction.

Speaker Change: The production was at a view of our Mega trends.

Speaker Change: In TSS.

Speaker Change: And recommend any changes.

Speaker Change: I will provide an update on this topic on March 3rd.

Speaker Change: The fourth action was business unit by business unit deep dive.

Speaker Change: This is still underway, but I already know that we will reorganize some of her business units for greater efficiency and synergy.

Speaker Change: In the process, we will combine a few groups together.

The first action was of the view of Microchips channel strategy.

Speaker Change: I have reviewed our channel strategy and we have made two changes.

Speaker Change: First when.

Speaker Change: When we give a demand creation registration to a distributor when a design socket.

Speaker Change: We historically have kept the demand creation flag forever.

Speaker Change: Going forward, we will change that flag.

Speaker Change: The demand fulfillment after the given number of years.

Speaker Change: This will incentivize the distributors.

Speaker Change: Present, other new products to customers.

Speaker Change: Sort of sitting on a higher margin and exposing the socket to competitors.

Speaker Change: The second changes.

Speaker Change: We had been providing industry high fulfillment margins for distributors.

Speaker Change: We have lowered the fulfillment margins, which will bring it to a level that is still on the higher end of what our competitors provide.

Speaker Change: The six point of evaluation was to strengthen our customer relationships.

Speaker Change: We have targeted the top 1000 customers within other than focus on the 256 customers.

Speaker Change: Many of them have already been approached NV.

Speaker Change: And visited all the customers visited us.

Speaker Change: We're giving customers the chance to communicate candidly with us showing empathy and care.

Speaker Change: And then engaging with them to support them on their new designs.

Speaker Change: One is to put our customers first.

Speaker Change: And when did hartstein design opportunities with our products technology support and care.

Speaker Change: Between seven and eight with our long term business model and operating expenses I will provide an update on these topics on March 3rd.

Speaker Change: The ninth and final area, whereas the chip sector activity.

Speaker Change: We are currently paused waiting for the New administration to re staff. The chips office. We will then reengage when the time is right.

Patrick: That I will pass it to be on for Patrick.

Speaker Change: Thanks, Steve and good afternoon, everyone.

Speaker Change: We are including information in our press release and in this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip Dot com.

Speaker Change: And include a reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non-GAAP results.

We've also posted a summary of our outstanding debt in 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 that 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.

Speaker Change: Share based compensation and certain other adjustments as described in our earnings press release and in the reconciliations on our website.

Speaker Change: Net sales in the December quarter were 1.0, $2 6 billion, which was down 11, 8% sequentially.

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 a non-GAAP basis gross margins were 55, 4%, including capacity Underutilization charges of $42 7 million as we are aggressively managing production activities to adjust to challenging business conditions.

Speaker Change: Operating expenses were at 34, 9% of net sales and operating margin was 25% non.

Speaker Change: non-GAAP net income was 107.3.

Speaker Change: <unk> 3 million and non-GAAP earnings per diluted share was 20 cents.

Speaker Change: Please note that our operating expenses increased in the December quarter.

Speaker Change: We will further increase in the March quarter due to a predominant portion of our employees coming off the pickup that we had been on for about nine months.

Speaker Change: In the late November early December 'twenty, 'twenty four time frame.

Speaker Change: The full quarterly impact of this is reflected in our operating expense guidance for the March quarter.

Speaker Change: On a GAAP basis in the December quarter gross margins were 54, 7%.

Speaker Change: Total operating expenses were $530 5 million and included acquisition intangible amortization of $122 6 million special charges of $3 5 million in share based compensation of $42 million and $4 3 million of other expenses the.

Speaker Change: The GAAP net loss was $53 6 million, resulting in a loss per share of <unk> 10 cents.

Speaker Change: Our non-GAAP cash tax rate was 19, 9% in the December quarter. We currently expect our non-GAAP cash tax rate to be approximately 14, 5% for the fourth quarter of fiscal year, 2025, which is modestly higher than our previously forecasted 13% tax rate.

Speaker Change: This is a result of expected overpayments in two of our larger tax jurisdictions, which will have the impact of reducing our fiscal year 2026 tax rate as we are calculating that's on a cash basis.

Speaker Change: Our non-GAAP cash tax rate is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Speaker Change: Our inventory balance at December 31, 2024 was 1.356 billion, which was up $16 $7 million from the end of the September 2024 corner.

Speaker Change: We had 266 days of inventory at the end of the December quarter, which was up 19 days from the prior quarter's level.

Speaker Change: At the midpoint of our March 2025 quarterly guidance, we would expect both inventory dollars and inventory days to decrease from the December 31 2024 levels.

Speaker Change: 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 December.

Speaker Change: Inventory at our distributors in the December quarter was at 37 days and was down three days from the prior quarter's level distribution took down their inventory holdings in the December quarter as distribution sell through was $118 million higher than distribution sell in.

Our cash flow from operating activities was $271 5 million in the December quarter, our adjusted free cash flow was $244 6 million in the December quarter.

Speaker Change: As of December 31, our consolidated cash and total investment position was $586 million, which is higher than normal due to the timing of the maturity dates of some of our commercial paper that did not occur until early January which was used to pay down debt. After the end of the December quarter.

Speaker Change: We retired $665 5 million in convertible bonds that matured in November 2024.

Speaker Change: In the December quarter, We also issued 1 billion in investment grade bonds with a four 9% coupon maturing in March of 2028.

Speaker Change: And $1 billion in investment grade bonds with a five 5% coupon maturing in February 2030.

Speaker Change: We used the proceeds of these bond offerings to retire our $750 million term loan and pay down a portion of our commercial paper balance.

Speaker Change: Our next debt maturity is a $1 $2 billion bond maturing maturing in September 2025.

Speaker Change: The debt issuance this past quarter and will give us ample room to retire our September 2025 bonds with our line of credit or commercial paper programs.

Speaker Change: As a result, we have taken the refinancing risk off the table for the $1 2 billion dollar maturity.

Speaker Change: Our net debt increased by $33 6 million in the December quarter.

Speaker Change: Our adjusted EBITDA in the December quarter was $274 9 million and 26, 8% of net sales our trailing 12 month adjusted EBITDA was $1 64 billion.

Speaker Change: Our net debt to adjusted EBITDA was $3 seven eight at December 31, 2024 up from one point to seven at December 31 2023.

Speaker Change: Capital expenditures were $18 1 million in the December quarter, our expectation for capital expenditures for fiscal year 'twenty five is about $135 million and we expect fiscal year 2026 capital expenditures to be lower than that as we have a lot of capacity to grow back into as well as capital that we purchased <unk>.

Speaker Change: The up cycle that has not been placed in service yet.

Speaker Change: Depreciation expense in the December quarter was $40 4 million.

Speaker Change: I'll now turn it over to rich who will provide some commentary on our product line innovations in the December quarter rich.

Rich: Thank you Eric and good afternoon, everyone.

Rich: Our strategic investments continue to strengthen our position across key growth markets.

And our core microcontroller business.

Rich: Reduced a new generation of 64 bit risk five processors, featuring advanced AI capabilities integrated time sensitive networking and next generation security. These processors deliver exceptional reliability for factory automation and secure data processing applications.

Rich: Particularly where real time communication is critical in nature.

Rich: Customer response has been strong with promising design win momentum across industrial and aerospace and defense sectors.

Rich: We expanded our Wi Fi portfolio with 20, new products spanning microcontrollers and plug and play modules, helping customers simplify robust secure wireless connectivity and accelerate time to market. We also introduced a new smart touch controller with an industry stand.

Rich: Interface, making it simpler for manufacturers to implement water tolerant touch solutions and their products.

For our high speed Wired connectivity, we continued strengthening our automotive networking portfolio with ASI motion linked technology, enabling next generation software defined vehicles with high speed data exchange between systems are innovative technology is currently being evaluated.

Rich: By several leading global automotive manufacturers.

Rich: Our FPGA portfolio achieved two notable milestones.

Rich: We earned the highest level of space certification for our radiation hardened chips.

Rich: Maintaining our position in critical space missions.

Rich: And released a new sensor connectivity solution for a nobody is whole a scan platform, enabling AI applications in medical imaging and industrial automation.

Rich: These developments reinforce our commitment to providing comprehensive solutions across our target markets, while we're making it easier for customers to implement advanced capabilities in next generation products Demi.

Rich: Demonstrating our ability to simplify advanced technological implementation for our customers.

Steve: That I will pass the call to Steve for comments about our business and guidance going forward Steve.

Steve: Thank you rich.

Eric: As Eric described in his prepared remarks.

Eric: Our December quarter net sales were one point or two 6 billion.

Eric: 11, 8% sequentially.

Eric: <unk> 41, 9% from a year ago quarter.

Eric: We continue to navigate through a very large inventory correction following a post COVID-19 super cycle.

Eric: We saw continued broad based weakness in the December quarter.

Eric: Revenue from our microcontroller.

Eric: <unk> S.

Eric: SPG and other businesses were all down sequentially.

Eric: Geographically our business was down sequentially in all major geographies.

Eric: Because Europe and Asia.

Eric: Now, let's get into our guidance for the March quarter.

We believe substantial inventory Destocking has occurred at our customers channel partners and their downstream customers.

Eric: Everyone would like me to call it the last quarter as the bottom.

Eric: However.

Our view the inventory at our customers channel partners.

Eric: And their downstream customers has not fully corrected yet.

Eric: Our bookings remain low although the current quarter bookings are running at a higher rate than in the December quarter.

Eric: Our backlog started out lower for the March quarter than it was at the start of the December quarter. So we have a lot of turns to take.

Eric: For the March quarter, and the visibility remains low.

Eric: Taking all these factors into account.

Eric: We expect net sales for the March quarter.

Eric: To be between $920 million and $1 billion.

Eric: We expect non-GAAP gross margin to be between 52%.

Eric: And 54% of sales, we expect non-GAAP operating expenses.

Eric: Between 37, 7% and 45% of sales.

Eric: We expect non-GAAP operating profit to be between 11, 5% and 16, 3% up soon.

Eric: We expect non-GAAP diluted earnings per share.

Eric: To be between five and 15.

Eric: We are laser focused on our nine point plan.

Eric: The mega trends in customer a portion of that loan.

Eric: And to aggressively winning designs.

Eric: At the customers and then putting them through the funnel.

Eric: To generate growth.

Eric: We believe.

Eric: But as the remaining excess inventory is consumed at our customers and distributors.

Eric: We are well positioned to provide above market growth.

Eric: <unk>.

Eric: Now, let me provide update on our capital return program for our shareholders.

Eric: We are essentially returning 100% of our adjusted free cash flow to investors in the form of dividends right now.

Eric: Due to depressed net sales.

Eric: However, just to the free cash flow is currently less than.

Eric: And then our dividend and then certain quarters, we have had two big hired a bond interest payment.

Eric: And tax payments.

Eric: Bond interest payments are made every six months.

Eric: So every other quarter this impacts out there to just your free cash flow.

Eric: And there's also no dividend exceeding our adjusted free cash flow.

Eric: As we begin to liberate cash from our inventory coupled with very low capital expenditures, we expect to bring the free cash flow above the dividend.

Eric: In future quarters, we intend to use the excess cash to bring our borrowings back down to at least the levels they were at.

That before at our dividend exceeded our adjusted free cash flow.

Eric: With that operator will you please poll for questions.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants.

Speaker Change: Speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: One moment, please while we poll for questions.

Thank you.

Speaker Change: Our first question comes from the line of Diavik ARIA with Banc of America Securities. Please proceed.

Diavik ARIA: Thanks for taking my question, Steve I appreciate your comments and I realize visibility is limited, but you mentioned inventory remains elevated at customers and channel partners could you share with us where the hotspots are by end market or by the kind of product is the worst at industrial our microcontrollers.

Diavik ARIA: And do you think that this is the inventory issue specific to microchip or do you think those customers and channel partners.

Speaker Change: Excess inventory from your competitors also because many of them seem to be indicating a lower level of concern.

Diavik ARIA: We're indicating.

Diavik ARIA: So I.

Diavik ARIA: I think the.

Diavik ARIA: The answer to your first part of your question, which is you know by end markets.

Diavik ARIA: You know or by product line.

Diavik ARIA: The inventories, how you're pretty much across the board and it's not different by end markets.

Diavik ARIA: What is different is slightly by direct our distribution.

Diavik ARIA: Our distribution customers.

Diavik ARIA: Inventory is getting a lot closer to where they historically would be.

Diavik ARIA: Then.

Diavik ARIA: If you know just in the quarter past.

Diavik ARIA: Our sell in revenue.

Diavik ARIA: It was $118 million lower.

Diavik ARIA: Then our sell through revenue.

One gap, we report on sell in but distributions sold out $118 million more than they've been doing this kind of number for the last few quarters. So the distribution inventory is getting a lot closer to getting corrected but the direct inventory at customers is still high.

Diavik ARIA: And part of that reason is.

Diavik ARIA: You know when a when the supply was really tight.

Diavik ARIA: We were serving our largest direct customers, sometimes tough financially over the broad based distribution customers.

Diavik ARIA: So.

Diavik ARIA: And the number two reason for art.

Diavik ARIA: Our customers, having higher inventory is.

Diavik ARIA: We dismantled.

Diavik ARIA: Noncancelable program called the PSP.

Diavik ARIA: Two quarters or so later than our competitors did.

Diavik ARIA: Therefore, we continue to ship for two more quarters.

Diavik ARIA: And when the business had eventually sell custom.

Diavik ARIA: Customers.

Diavik ARIA: It had a higher inventory of our products then.

Diavik ARIA: Essentially our competitors.

Diavik ARIA: Hopefully that answers your question.

Speaker Change: Stephen just as a follow up what would you say the earnings power for Microchip over the next year.

Speaker Change: And this last fiscal year, and we know what the March guidance, it's about the dollar.

Speaker Change: 30 ish or so so even if we start assuming some level of seasonal rebound or you know at some point over the next several.

Speaker Change: Quarters.

Speaker Change: Should we be thinking $2 $2, what is the kind of earnings power right in the medium term for the company because I imagine you are suggesting.

Speaker Change: Justifiably prioritizing cash flow and you would probably keep fab utilization level and then the need to get opex back to a reasonable level, but also influencing how.

Speaker Change: Do you think about earnings power for the company over the next year two years or so thank you Harlan.

Speaker Change: I don't know that but putting numbers around it I don't really have it we don't guide that far out well pass it onto Erik and see if he has something to add.

Speaker Change: Well, Steve Steve's right, we guided a quarter at a time, we are working through Steve nine point plan and you know obviously he's talked a lot about what we're doing in manufacturing.

Speaker Change: Opex in the long term business model that is still to be set and we've got some more work to do on that and we'll share more details with the analysts and investor community on March or so.

Speaker Change: It's hard to answer that question I think as you as you knew when you when you asked it and we think we are positioned to Steve's prepared remarks said for above market growth, but.

Speaker Change: We need to get through this inventory correction to start seeing the benefits of that and we've got a lot of confidence in our long term business and what it can drive from an operating margin perspective, and cash flow perspective, but we're.

Speaker Change: We're not we're not quite out of this yet.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from the line of Blayne Curtis.

Blayne Curtis: With Jefferies. Please proceed hey, good afternoon.

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

Blayne Curtis: So I think.

Blayne Curtis: You know in March 3rd we will give you.

Blayne Curtis: Some data on inventory depletion and right sizing, our factories and all that well with which you may be able to model.

Speaker Change: The question you asked in the question Vivek asked.

Speaker Change: You really have it today, but what I would like to highlight is.

Speaker Change: So even for the current quarter, we're guiding a gross margin of mid point of 53%.

Speaker Change: So many of our competitors don't do that in good times.

Speaker Change: So that's extremely good gross margin no operating expense.

Speaker Change: At about 39, 1%.

Speaker Change: The midpoint of what we guided today.

Speaker Change: It was quite high compared to our historical and that's driven by really adding a lot of people at the top of the cycle when assumption what is the business just keeps growing so we have a correction there to do and it will be able to talk to you more about it again on March <unk>.

Speaker Change: And the gross margin of 53% is where the very very low factory utilization.

Speaker Change: Oh that we're running today.

Speaker Change: And you know where the gross margins historically have been there's absolutely no reason why gross margins do not return.

Speaker Change: Our historical numbers not the historical high which was really at the peak of the cycle and you know how to expedite charges and price increases in all that in but.

Speaker Change: But leaving that timeframe out we should be able to get to our historical gross margins.

Speaker Change: Correcting the operating expenses, you should have really a beautiful P&L, which I'll give it to you as a long term target on March two.

Speaker Change: Thanks, and then I wanted to ask you on the growth side, that's always been a debate for the company I just kind of curious your renewed perspective here coming back you mentioned some moves with the distribution channel to kind of incentivize demand creation do you think when you said the company can outgrow the market is that going.

Speaker Change: To be a work in progress or do you think that's what it is today and these moves would kind of add to that.

Speaker Change: I don't know if I can separate those two I concur.

I think mega trends design.

Speaker Change: Design wins.

Speaker Change: You know higher than a non megatrend design win I think we have shared some data in the past with you.

Speaker Change: We did about two extra normal. So we also went through an environment.

Speaker Change: During a super cycle of Covid.

Speaker Change: All customers engineers, we're doing is trying to find alternate parts are.

Speaker Change: It really fit whatever product, we had available for them into their design and the qualifying them.

So kind of not much new designs happen for a couple of years, our customers are engaged doing new designs, there and you know.

Speaker Change: Various parts of the funnel and when they go to production.

No that really a model will ensure that our business grows.

Speaker Change: Debt.

Speaker Change: And then the other thing is the.

Speaker Change: Inventory depletion, both at the customers and channels.

Speaker Change: And when that inventory depletes, a then customers start buying their full consumption rate and then that will increase revenue and combine those two together, we don't really have any concerns about the long term future.

We got to get through this I told we're getting close.

Speaker Change: But industry has been sold and getting close for about a year.

Speaker Change: So I don't want to really spell out any quarter to be the bottom, but we ought to be getting quite close.

Speaker Change: Got you. Thank you.

Speaker Change: Thank you. Our next question comes from the line of harsh Kumar.

Speaker Change: Please proceed.

Harsh Kumar: Yeah, Hey, Steve good to see you back.

Speaker Change: Had a quick question on Opex it sounds like from the answer you just gave to Blaine I think.

Speaker Change: You said that Opex will come down from the current level in absolute dollars is that a fair assumption. That's my clarification question and then.

Speaker Change: On the nine point program that you have are you assuming that things that the environment will stay the same or are you.

Speaker Change: In some level of recovery at some point in time this year or next year, it's kind of it's kind of come back at some point in time, but I'm curious if you're baking that in your assumption or just keeping the environment at the same.

Speaker Change: We are baking it in our assumption.

Speaker Change: The growth will be result of.

Speaker Change: Some are turned off business when the inventory is depleted.

Speaker Change: Our efforts into winning new designs with all the new products. We've introduced in the last three or four years.

Speaker Change: Many of them many customers are sitting on significant designs, but they didnt complete them are launched M&A.

Speaker Change: In an environment when they had a lot of inventory.

Speaker Change: Understood.

Speaker Change: I had another question, maybe not so easy but could you take me through the process of how.

Speaker Change: Your organization would even trying to gauge the correct level of channel inventory direct inventory in this kind of an environment, where things are dynamic moving around must be going down, but still moving around a lot.

Speaker Change: Curious about the process to understand how you would try to get to the right answer here.

Speaker Change: So I think historically over.

Speaker Change: 2025 years.

Speaker Change: China on the evident worldwide.

Speaker Change: We'll have an inventory which is about.

Speaker Change: Two and a half to two seven X.

Speaker Change: You know what the ship out to their customers in a given quarter.

Speaker Change: And it really stayed in that window of two and a half to three.

Speaker Change: <unk> bin.

Speaker Change: Very few occasions, when the inventory was much higher than that one happen soon after the microsemi acquisition when we consolidate the numbers Microsemi inventory was closer to forward in us was lower than.

Speaker Change: That we aggressively brought it down.

Speaker Change: So it can change but in general it is in that and we see no reason why distributor inventory.

Speaker Change: We'll come back down to below three.

Speaker Change: Understood. Thank you and I think when you are saying that Steve. Your you mentioned two five times, what they ship in a quarter its really two and a half to three months of inventory based on what they're shipping out.

Speaker Change: After three months.

Speaker Change: No that's all right understood. Thank you.

Speaker Change: Teamwork.

[laughter].

Speaker Change: Thank you.

Speaker Change: As a reminder, please press star one to ask a question at this time.

Speaker Change: Our next question comes from the line of <unk> Hari with Goldman Sachs.

Speaker Change: Proceed.

Speaker Change: Hi, Thank you so much for taking the question.

Speaker Change: Steve It sounds like you've been spending quite a bit of time with customers over the past two months since your return I'm curious what the feedback has been to you and the company any common threads and.

Speaker Change: How do you plan on responding to some of the customer asks going forward.

Speaker Change: You need to do to regain any lost trust if you will.

Rick Simons: So I'm going to hand that question to Rick Simons SEC.

Speaker Change: He has talked to more customers than I have.

Speaker Change: I've been spending a lot of time on the business units and the factories and customers. Also then they come to us, but I may add something but let him give the basic answer go ahead.

Speaker Change: So we've been spending a lot of time in front of customers and.

Speaker Change: Mainly what customers are dealing with today.

Speaker Change: Is trying to digest the inventory that they have.

Speaker Change: And dealing with the weaker markets.

Speaker Change: So we've been spending time with our distributors our catalog houses.

Speaker Change: And our customer relationships are are in pretty good shape.

Speaker Change: We're we're losing.

Speaker Change: Or that losing by where we have some tough customer relationships are where they are sitting on quite a bit of inventory now from a PSP program.

Speaker Change: <unk> are upset about some of the price increases that took place during the.

Speaker Change: The Covid period, right now I think a lot of customers suffered from not from other semiconductor suppliers. So we're trying to do is work with them you know understand where.

Speaker Change: They're upset on some of those customers.

Speaker Change: And then and see what we can do going forward.

Speaker Change: I don't think there's anything magic here.

Speaker Change: And other than us working together to find.

Speaker Change: Good win wins going forward.

Speaker Change: I think as we went through the customer relationships we found.

Speaker Change: Twice as many that we're happier with us.

Speaker Change: We are relationship improved and then we have some that.

Speaker Change: Our relationship are integrated.

Speaker Change: And when where we have those have degraded and and are our worst accounts, where they are integrated with those 256 that Steve highlighted then.

Speaker Change: Out of the abundance of customers we have we're.

Speaker Change: We're going to work on those.

Speaker Change: 256, where we integrated our relationship.

Luke: Thank you Luke.

Speaker Change: No customer is telling us Oh go ahead every horrible anything like that I think our products are good our tools are good our service and support has been world class over the years and many of these customers we have a multi decade relationship.

Luke: So it's kind of just.

Speaker Change: Yeah.

Speaker Change: There's a lot there.

Speaker Change: Got hurt some of them got hurt during the Super cycle, one way or the other either with pricing or not getting enough tzaddik or getting too much product and have inventory in just to hurt feelings has to be sued in time. He's in discussion and talk to you then.

Speaker Change: Largely getting those customers back design with us.

Speaker Change: Great. Thank you and then as a quick follow up maybe on pricing.

Speaker Change: Calendar 'twenty, four where did blended asps for you all land roughly in how should we think about 25 in sort of the forward path I think many of your peers have said something along the lines of.

Speaker Change: They expect pricing to to revert to pre pandemic patterns, which is down low single digits.

Speaker Change: Are you thinking about pricing the same way or could it be a.

Speaker Change: A little bit different for you guys. Thank you.

Speaker Change: So.

Speaker Change: You know my sense is that short term yes.

Speaker Change: But the competitors are doing is correct.

Speaker Change: I'm not sure that returns to a twice.

Speaker Change: Price drop every year, because sleeping damning Michael.

Speaker Change: Microchip wasn't giving a year over year price decrease.

Speaker Change: Gordon don't go down year over year.

Speaker Change: You know many of the costs go up into as you know.

Speaker Change: Through efficiency gains and yield improvements and others you got to get back to your margin. So you know the price drops.

Speaker Change: For the year was really a thing of the past, but short term I think you know we increased prices quite a bit over the past three or four years and some price reduction.

Speaker Change: Low to mid single digits are near term.

Speaker Change: Appropriate.

Speaker Change: Thank you.

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

Vijay Rakesh: Alright, Thanks, Steve.

Speaker Change: Do you in.

Speaker Change: Christian.

Speaker Change: Yes.

Speaker Change: Argos industrial consumer.

Speaker Change: Two.

Speaker Change: And how they are down year on year.

Yeah.

Speaker Change: So we are we breakout our end markets once a year P. J, we do that at the end of the fiscal year, which will end in March and so we will provide more color.

Speaker Change: On that.

<unk>.

Speaker Change: Probably in that kind of early may timeframe, when we release our year end earnings so don't have to share today.

Really all end markets have been weak we've highlighted a few things that have been stronger over this period of time and not a whole lot of change there right.

Speaker Change: Overall.

Speaker Change: Industrial automotive and weak that's consistent with what youre hearing from everybody else.

Speaker Change: Got it and then on the inventory side is that any of this inventory obsolescence write down.

Speaker Change: Given that you are seeing some.

Speaker Change: Disintermediation with.

Speaker Change: Okay.

Speaker Change: So we have been we've been taking pretty significant inventory reserve charges and so those have been reflected in the gross margin on our expectation for gross margin this quarter.

Speaker Change: We've got a lot of inventory sitting on the balance sheet and revenue has been falling in backlogs when falling so visit with low visibility.

Speaker Change: And in lower revenue and at a high level of inventory. That's just the place we're in right now, but Steve has talked about the actions that we're taking to.

Speaker Change: Reduced inventory in dollars and days and I think we've got a good plan in place to do that and so as we move forward not saying necessarily this quarter is there our gross margin guidance is down but as we move forward on those charges should reduce as the inventory balance comes down and hopefully we see a better revenue environment.

Speaker Change: Got it thank you.

Speaker Change: Welcome.

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

Speaker Change: Hey, Thanks, guys.

Speaker Change: I guess question for Steve Slash rich.

Speaker Change: Steve as you've been there for three months now is there anything you see.

Speaker Change: That's gone wrong that is not fixable.

Speaker Change: And then if you slash rich could you just spend some time on your assessment of micro chips competitive positioning and how you feel that that is let's say versus a couple years ago. Thanks.

Speaker Change: So.

Speaker Change: I haven't found anything that is not fixable.

Speaker Change: I think.

Speaker Change: You know of right sizing the factories is fixable and we're in the process of doing so.

Speaker Change: The high inventories fixable and we are in the process of doing so.

Speaker Change: We're doing these various business unit by business unit reviews.

Speaker Change: Some business units have Florida as to some of the others have atrophied.

Speaker Change: We need to move some things around to put our resources.

Speaker Change: Away from lower performing business units and put them in a high performing business units. So some optimization needs to be done so that is fixable.

Speaker Change: No there are.

Speaker Change: We compete in a lot of concern businesses Microcontrollers analog data center, automotive aerospace and defense and all that and in any business or any end market. You are saying you know God. We should have this product for this feature we don't have a kid somebody else has it.

Speaker Change: An internal discussion would be how we can plug that gap, but at the same time, we have products with some differentiating features that our competitors don't.

Speaker Change: But no I haven't found anything that is not fixable, but anytime you find a product hole it.

Speaker Change: It does take you know two years of development to plug that hole.

Speaker Change: Great.

Speaker Change: In general I haven't really found anywhere.

Speaker Change: No any major problem that is not fixable, but.

Speaker Change: But it takes time to fix some of these things.

Speaker Change: Okay, and the competitive positioning question and then I'll go away.

Rich: Rich you want to answer that.

Speaker Change: Yes.

Speaker Change: I think in our analysis of that in our surveys of that in our discussions with our distributors.

Speaker Change: Now the feedback we're getting we're predominantly holding our own in that competitive positioning.

Speaker Change: It's still we're still working through it.

Which confusing right now because of inventory.

Speaker Change: Ah you lose visibility in terms of where some of those customers are when you have.

Speaker Change: A large swath of customers Microchip has about 120000 customers. So obviously, we can't touch 120000.

Speaker Change: But where we're touching all of the.

Speaker Change: Focus wines and dedicated one is that we have and the relationships are still strong.

Speaker Change: And we have customers that are still coming through in and working with us. So.

Speaker Change: I don't see anything majorly broken on on that customer front.

Speaker Change: We.

Speaker Change: Bring relationships, but there is nothing fundamentally broken.

Speaker Change: Like I said earlier I think most customers were just unhappy about how the whole COVID-19 period went in and how they had built up inventory.

Speaker Change: We did find which was quite fascinating.

Speaker Change: Our smaller customers medium and smaller customers when material was finally available to them.

Speaker Change: Instead of buying one year at 12 months. They may have bought 24 months.

Speaker Change: But a little bit extra on the smaller and medium customers and surely it did.

Speaker Change: Really varies depending on the market and our customer base.

Speaker Change: Got it.

Speaker Change: Thank you.

Speaker Change: Next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.

Speaker Change: Great. Thank you.

Speaker Change: 266 days of inventory.

Speaker Change: Can you talk about how much of that is from the internal Fabs I think you had given a number that it's over 300 in the past and then I had a follow up on that.

Speaker Change: So I think.

Speaker Change: Internal fabs were 288 or something.

Speaker Change: Got it.

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

Speaker Change: Okay, and then you talked about taking an inventory kind of reserve around the lower utilization like already that 53% does that fully reflect the lower utilization or is there kind of a lingering cost of inventory that is higher because of that lower utilization going forward.

Speaker Change: Well there you know when you're running the factories less efficiently you you are capitalizing costs and inventory yet at higher levels, even though you're taking these underutilization charges. So you know it.

Speaker Change: It takes some time to build to work through that higher cost inventory, but I would expect to see gross margin improvement before that because these inventory reserve charges will go down right. We've taken a lot of reserve charges at some point, we will get sell through benefit from that also so it's hard to predict exactly how that will weigh.

Speaker Change: And we will probably just give quarterly guidance and we'll give a long term target, but we are reflecting in the gross margin you see today, you know the underutilization charges and you know as the factories build that up back up those charges will go down and you know obviously, we were taking out our third largest factory in <unk>.

Speaker Change: <unk> two that's going to help us get inventory corrected faster than if we had not taken that step.

Speaker Change: Great. Thank you so much.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Torrey staffing is tore Svanberg with Stifel. Please proceed.

Jeremy: Yes. Good afternoon. This is Jeremy.

Speaker Change: <unk>.

Speaker Change: Just maybe going back to that.

Speaker Change: Sure.

Speaker Change: Can you just help us quantify or.

Speaker Change: It's a little bit the terms that you might need to take the midpoint and how that compares versus <unk>.

Speaker Change: Historical cycles.

Speaker Change: Historically, thank you.

Speaker Change: So it doesn't get there was another noise did you get that no I think.

Speaker Change: I I've got it. So the question is I'll repeat it real quickly is you know what what and when we're looking at the current quarter to get them. The midpoint, how do returns look compared to what we've seen historically and so I'll give an answer to that and rich and Steve can add to it if they want to so.

Speaker Change: When lead times are very short, which they are today.

Speaker Change: Our business has historically been able to respond to a high level of turns and it just it's just a matter is the customer demand there to fill that in we've given guidance based on what we think is reasonable for the quarter and obviously given our range of guidance and the turns required to meet that are not outside of.

Speaker Change: What would be normal and a short lead time environment.

Speaker Change: It's very helpful.

Mike: And maybe Mike.

Speaker Change: Maybe Amy can add one more piece of it because it turns and then that is.

Speaker Change: Expedites and pull ins.

Speaker Change: And we're continuing to see expedite can pull ins come in as well right and what what our Poland is would be as we already have backlog in place that sits outside of the quarter and then the customer comes to us and say hey, instead of needing that product in April now I needed in March can you support that and that that's that's what rich means by a poll.

Speaker Change: Lynn.

Speaker Change: That's very helpful and maybe a quick question on the new product side.

Speaker Change: Can you give us.

Speaker Change: On the risk five processing can you help us maybe size the opportunity here both in the near term and the long term.

Speaker Change: In the near term when we can see initial revenue contribution and in the longer term, how you know what.

Speaker Change: But how big could this potentially that as you look out three to five years. Thank you.

Speaker Change: Yes, so what we haven't forecasted the overall revenue impact to microchip, but we are seeing is.

Speaker Change: A great many customers.

Speaker Change: Building development environment, and asking for our help with software and understanding of that product portfolio.

Speaker Change: And so we've seen customers now start to build out development groups and design groups.

Speaker Change: Around this platform of products.

Speaker Change: And starting to design them in.

Speaker Change: Different applications and so we haven't announced any of those design wins yet but.

Speaker Change: The level of activity is quite high.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Craig Ellis with B Riley Securities. Please proceed.

Speaker Change: Yes, thanks for taking the question and Tim Thanks for all the color so far Steve I wanted to go back to.

Speaker Change: The planned first point on production and ask a more qualitative question can you help us understand where the team is.

Speaker Change: Assessing the right level of front end and back end capacity and where you are in terms of identifying the specific steps that are needed to realign that capacity and the things that that allow you to be operating at the new correct capacity that you determined.

Speaker Change: The team is very far along.

Speaker Change: Identifying what steps need to be taken.

Speaker Change: So to right size the other factories.

Speaker Change: On closing down fab two.

Speaker Change: And we'll.

Speaker Change: We'll be disclosing that to you on March 3rd.

Speaker Change: Got it and then Eric I'll just follow up the point you made on the <unk>.

Speaker Change: At maturity in September it sounds like you're well positioned to deal with that is it correct that the next maturity beyond that would be in March of 2028, and if not can you help me understand when that might be.

Speaker Change: Yeah.

Speaker Change:

Speaker Change: Good thing to look at his computer.

Speaker Change: Yeah, I'm, just calling it out to make sure I don't Miss speak to it so we do have.

Speaker Change: Another tranche of $1 billion due in March of 2028.

Speaker Change: On the $1 $2 billion, we talked about.

Speaker Change: We'll have to redo our line of credit at some point in time, that's a pretty standard progress process that we go through but.

Speaker Change: Talbot tranches are laying out right now the $1 $2 billion in September of 'twenty. Five is the next one and then after that it's not until 2008.

Speaker Change: Got it thanks guys.

Speaker Change: Thank you.

Speaker Change: Question comes from the line of Chris Caso with Wolfe Research. Please proceed.

Chris Caso: Yes. Thank you I guess, the first question with regard to the dividend and.

Speaker Change: I know at this point youre, not fully generating free cash flow to support the dividend.

Speaker Change: You talk about your level of commitment to that dividend and as we're going through.

Speaker Change: Sort of a recovery plan in.

Speaker Change: And such that.

Speaker Change: We're still committed to this dividend.

Speaker Change: For the foreseeable future as free cash flow starts to get better.

Speaker Change: Yes, so as you can.

Speaker Change: You may have noticed.

Speaker Change: We did not increase the dividend a smidgen that we've been doing it for years and years.

Speaker Change: So there's no reason to add to it.

Speaker Change: And we will keep this dividend flat, but there is no reason to take it down.

Speaker Change: Not generating enough cash flow is a very short term problem.

Speaker Change: And it kind of.

Speaker Change: It's ugly head every six months because every six months bond payments are due.

Speaker Change: And in one quarter.

Speaker Change: They're not there in the other quarter the dividend payment I'm, sorry, the bond payment Pops up so every other quarter, we have to borrow some money to pay the dividend.

Speaker Change: This problem should really go away in the coming quarters pretty rapidly so because it's a short term issue.

Speaker Change: There's no reason to do a long term damage by cutting the dividend.

Speaker Change: Yeah, and maybe just as an example, as an example, you know our adjusted free cash flow in the December quarter is essentially equal to what our dividend payment is in March but our adjusted free cash flow will be lower in the March quarter, and then won't cover what we could pay in the June quarter, and we always have based our capital return program based on.

Speaker Change: The prior quarter's free cash flow so anyway right right now it's it's.

Speaker Change: It's.

Speaker Change: Obviously, not as high as we would like it to be but the confidence in the business getting back to higher levels and profitability returning as well as the working capital management, we're doing with the inventory reduction is going to help us with that.

Speaker Change: Yeah.

Speaker Change: Understood.

Speaker Change: For a second question.

Speaker Change: It is about kind of manufacturing capacity and I know you.

Speaker Change: To provide some more details in March.

Speaker Change: But.

Speaker Change: I guess two parts to that one would be internally you don't have access to 300 millimeter manufacturing.

Speaker Change: And it doesn't sound like that's something that you're going to pursue.

Speaker Change: Do you feel that the internal fab network is still competitive with the rest of the market as you see some others.

To expand on 300 millimeter, how does microchip respond to that and then secondly.

Speaker Change: You've seen some other competitors moved to a China for China manufacturing strategy because of some of the geopolitical tensions that feeling that Chinese customers want manufacturing footprint inside of China, how is microchip responding to that.

Speaker Change: So let me take those the first one on 300 millimeter.

Speaker Change: We use a substantial 300 millimeter capacity.

Speaker Change: Our foundry saw a fair amount of our business today in various business units is on 300 is just not internet it is external.

Speaker Change: And I will tell you that.

Speaker Change: Many of our competitors will make 300 millimeter with all of the under utilization and all the cost to ramp it.

Speaker Change: You know the time it takes to develop the technology. When you look at the total cost of ownership.

Speaker Change: I think their experience and total cost of ownership is really no better than.

Speaker Change: US buying very well known learning technology with a high use at.

At the professional foundries, so I think we're pretty happy with that.

Speaker Change: There was a point.

Speaker Change: Three years ago, when foundries were telling us they wouldn't be adding more trailing edge capacity.

Speaker Change: And all the investments we're going to go into the advanced technology.

Speaker Change: So at that point, we were concerned about whether there'll be enough capacity for 300 millimeter for 90 nanometer 65 nanometer and 40, specifically those three technologies and at that time. We'll then we were pursuing building a fab in U S and <unk>.

Speaker Change: Getting some money from chipset to do so.

Speaker Change: And as we were engaging with government in order to do that.

Speaker Change: Business is slow and our foundries businesses. So no today, you can buy as much 40 nanometer 65 nanometer and 90.

Speaker Change: As you want and then the factory has told us.

Speaker Change: This would be no longer a problem in fact.

Speaker Change: Some of them are investing an additional 40 to $65 90 for the future. So therefore.

Speaker Change: For Us just Ben.

Speaker Change: Multibillion dollar suddenly at $5 billion to $6 billion investment.

Speaker Change: Well the 300 millimeter factory.

Speaker Change: Which will take a decade plus to fill it and you'll have low utilization in the beginning I think that cost of ownership equation just does not work.

Speaker Change: And the second part of your question was on China for China strategy.

Speaker Change: We have a China for China strategy also.

Speaker Change:

Speaker Change: And I'll talk about that also in March 3rd.

Speaker Change: Thanks.

Speaker Change: Thank you.

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

Speaker Change: I want to thank all the investors and analysts who attended the call and thanks for your support over many many years when I was a CEO and I have just got them back in.

Speaker Change: And you know things are going to improve rapidly. So please be patient and I. Thank you for your support.

Speaker Change: Right.

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

Speaker Change: Okay.

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Speaker Change: Greetings and welcome to the micro chips Q3 fiscal 'twenty financial results Conference call.

Speaker Change: At this time all participants are in a listen only mode.

Speaker Change: Question and answer session will follow the formal presentation. If you require operator assistance during the conference. Please press star zero on your telephone keypad.

Speaker Change: A reminder, this conference is being recorded.

Speaker Change: Now my pleasure to introduce you to your host Sandy.

Sandy: Thank you Steve you may begin.

Speaker Change: Thank you operator.

Sandy: And good afternoon, everyone.

Sandy: During the course of this conference call, we will be making projections and other forward looking statements.

Sandy: Regarding future events or the future financial performance of the comfortable.

Sandy: We wish to caution you that such statements are predictions and that actual events or results may differ materially.

Sandy: Therefore, you to our press release of today.

Sandy: As well as our recent filings with the SEC.

Sandy: Identify important risk factors that may impact the microchips business.

Sandy: And results of operations.

Rick Simons: In attendance with me today are Rick Simons sick.

Sandy: Microchip seal.

Speaker Change: Eric <unk> CFO and <unk>.

Speaker Change: Jody head of Investor Relations.

Speaker Change: Comment on the restructuring.

Speaker Change: And my observations since returning to microchip as CEO.

Speaker Change: It will go over our third quarter of fiscal year 2025 financial performance.

Rich: Rich will then review some product line updates.

Speaker Change: I will then provide an overview of the current business environment.

Speaker Change: Our fourth quarter fiscal year 2025 guidance.

Speaker Change: We will then be available to respond to specific investor and analyst questions.

Since I returned as Microchip CEO on November 18, 2024.

Speaker Change: I have spent a significant amount of time evaluating key aspects of microchips business.

Speaker Change: At the UBS conference on December 3rd.

Speaker Change: You described a nine point plan to evaluate microchip and make changes where needed to set the company on a course to achieve its previous premium status of performance.

Speaker Change: We're setting up an investor and analyst call on the morning of March 3rd.

Speaker Change: To provide you with a comprehensive update on that nine point plan.

Speaker Change: Today I'll give you an interim report on several aspects of that plan.

Speaker Change: The first action was to resize, our manufacturing footprint.

Speaker Change: After analysis, we have decided to close our Tempe fab Nunez fab two.

Speaker Change: Currently we are in the process of building the material to provide the buffer required.

Speaker Change: Before we transfer the processes and products to our other two fabs.

Speaker Change: 70% of this product is already qualified at these other fats.

Speaker Change: Our other two fabs, namely fab four in Gresham, Oregon Fab.

Speaker Change: <unk> five in Colorado Springs.

Speaker Change: We're working on rotating time off schedules.

Speaker Change: This reduces the capacity.

Speaker Change: That leaves the fabs in a position to ramp capacity when needed on a very short notice.

Speaker Change: In other backend facilities in Thailand, and Philippines, we're managing capacity by taking shutdown days.

Speaker Change: Reducing the number of employees.

Speaker Change: And days of work.

Speaker Change: In the rest of our smaller plants worldwide. There is a plan for each plant.

Speaker Change: Based on the specific demand in each plant.

Some of them are running at capacity, while others are working shortened in two weeks.

Speaker Change: The second action was to reduce our inventory.

Speaker Change: Inventory at the end of December 2024 was 266 days.

Speaker Change: Up from 247 days at the end of September 2024 hour target inventory is 130 to 150 days.

Speaker Change: On March 3rd.

Speaker Change: I will project out for you the inventory reduction plan.

Speaker Change: An example from December 2024 to the end of fiscal year 2006.

Speaker Change: Which is March 31 2026.

Speaker Change: We are currently expected to be able to reduce our inventory balance by.

Speaker Change: Approximately $250 million.

Speaker Change: Which will liberate cash from this inventory reduction.

Speaker Change: The third action was it a view of our Mega trends.

Speaker Change: In TSS.

And recommend any changes.

Speaker Change: I will provide an update on this topic on March 3rd.

Speaker Change: The protection one business unit by business unit deep dive.

Speaker Change: This is still underway, but I already know that we will reorganize some of our business units for greater efficiency and synergy.

Speaker Change: In the process, we will combine a few groups together.

Speaker Change: The first action was a review of Microchips channel strategy.

Speaker Change: I have reviewed our channel strategy and we have made two changes.

Speaker Change: First when.

Speaker Change: When we give a demand creation registration to a distributor on a design socket.

We historically have kept the demand creation flag forever.

Speaker Change: Going forward, we will change that flag.

Speaker Change: The demand fulfillment after the given number of years.

Speaker Change: This will incentivize the distributors.

Speaker Change: Present, our new products to customers in <unk>.

Speaker Change: Sort of sitting on a higher margin and exposing the socket to competitors.

Speaker Change: The second changes.

Speaker Change: We had been providing industry high fulfillment margins for distributors.

Speaker Change: We have lowered the fulfillment margins, which will bring it to a level that is still on the higher end of what our competitors provide.

Speaker Change: The six point of evaluation.

Speaker Change: To strengthen our customer relationships.

Speaker Change: We have targeted the top 1000 customers with an origin focus on the 256 customers.

Speaker Change: Many of them have already been approached and.

Speaker Change: And visited all the customers visited us.

Speaker Change: We are giving customers the chance to communicate candidly with us.

Empty and care.

Speaker Change: And then engaging with them to support them on their new designs.

Speaker Change: Our goal is to put our customers first.

Speaker Change: And win their hearts and design opportunities with our products technologies support and care.

Speaker Change: Seven and eight with our long term business model and operating expenses I will provide an update on these topics on March 3rd.

Speaker Change: The ninth and final area was the chip sector activity.

Speaker Change: We are currently paused waiting for the New administration to re staff. The chips office. We will then reengage when the time is right.

Patrick: That I will pass it to Patrick.

Speaker Change: Thanks, Steve and good afternoon, everyone.

Speaker Change: We are including information in our press release and in this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip Dot com.

Speaker Change: And included reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non-GAAP results.

Speaker Change: We have also posted a summary of our outstanding debt in 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 that sales I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our earnings press release and in the reconciliations on our website.

Speaker Change: Net sales in the December quarter were 1.0, $2 6 billion, which was down 11, 8% sequentially.

Speaker Change: We have posted a summary of our net sales by product line and geography on our website for your reference.

On a non-GAAP basis gross margins were 55, 4%, including capacity Underutilization charges of $42 7 million as we are aggressively managing production activities to adjust to challenging business conditions.

Speaker Change: Operating expenses were at 34, 9% of net sales and operating margin was 25% non.

Speaker Change: non-GAAP net income was $107.

Speaker Change: $3 million and non-GAAP earnings per diluted share was <unk> 20.

Speaker Change: Please note that our operating expenses increased in the December quarter.

Speaker Change: We will further increase in the March quarter due to a predominant portion of our employees coming off the pay cut so we had been on for about nine months.

Speaker Change: In the late November early December 2024 timeframe.

Speaker Change: The full quarterly impact of this is reflected in our operating expense guidance for the March quarter.

Speaker Change: On a GAAP basis in the December quarter gross margins were 54, 7%.

Speaker Change: Total operating expenses were $530 5 million and included acquisition intangible amortization of $122 6 million special charges of $3 $5 million and share based compensation of $42 million and $4 3 million of other expenses the.

Speaker Change: The GAAP net loss was $53 6 million, resulting in a loss per share of <unk> 10.

Speaker Change: Our non-GAAP cash tax rate was 19, 9% in the December quarter. We currently expect our non-GAAP cash tax rate to be approximately 14, 5% for the fourth quarter of fiscal year, 2025, which is modestly higher than our previously forecasted 13% tax rate.

Speaker Change: This is a result of expected overpayments in two of our larger tax jurisdictions, which will have the impact of reducing our fiscal year 2026 tax rate as we are calculating that's on a cash basis.

Speaker Change: Our non-GAAP cash tax rate is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Speaker Change: Our inventory balance at December 31, 2024 was $1 $35 6 billion, which was up $16 $7 million from the end of the September 2024 quarter.

Speaker Change: We had 266 days of inventory at the end of the December quarter, which was up 19 days from the prior quarter's level.

Speaker Change: At the midpoint of our March 2025 quarterly guidance, we would expect both inventory dollars and inventory days to decrease from the December 31 2024 levels.

Speaker Change: 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 December.

Speaker Change: Inventory at our distributors in the December quarter was at 37 days and was down three days from the prior quarter's level distribution took down their inventory holdings in the December quarter as distribution sell through was $118 million higher than distribution sell in.

Speaker Change: Our cash flow from operating activities was 271 5 million in the December quarter, our adjusted free cash flow was $244 6 million in the December quarter.

Speaker Change: As of December 31, our consolidated cash and total investment position was $586 million, which is higher than normal due to the timing of the maturity dates of some of our commercial papers that did not occur until early January which was used to pay down debt. After the end of the December quarter.

Speaker Change: We retired $665 5 million in convertible bonds that matured in November 2024.

Speaker Change: In the December quarter, We also issued 1 billion in investment grade bonds with a four 9% coupon maturing in March of 2028.

Speaker Change: And $1 billion in investment grade bonds with a five 5% coupon maturing in February 2030.

Speaker Change: We used the proceeds of these bond offerings to retire our $750 million term loan and pay down a portion of our commercial paper balance.

Our next debt maturity is a $1 $2 billion bond maturing maturing in September of 2025.

Speaker Change: The debt issuance this past quarter will give us ample room to retire our September 2025 bond with our line of credit or commercial paper programs.

Speaker Change: As a result, we have taken the refinancing risk off the table for the $1 $2 billion maturity.

Speaker Change: Our net debt increased by $33 6 million in the December quarter.

Speaker Change: Our adjusted EBITDA in the December quarter was $274 9 million and 26, 8% of net sales our trailing 12 month adjusted EBITDA was 164 billion.

Speaker Change: Our net debt to adjusted EBITDA was $3 seven eight at December 31, 2024 up from one point to seven at December 31 2023.

Speaker Change: Capital expenditures were $18 1 million in the December quarter, our expectation for capital expenditures for fiscal year 'twenty five is about $135 million and we expect fiscal year 2026 capital expenditures to be lower than that as we have a lot of capacity to grow back into as well as capital that we purchased <unk>.

Speaker Change: The up cycle that has not been placed in service yet.

Speaker Change: Depreciation expense in the December quarter was $40 4 million.

Speaker Change: I'll now turn it over to rich who will provide some commentary on our product line innovations in the December quarter rich.

Rich: Thank you Eric and good afternoon, everyone.

Rich: Our strategic investments continue to strengthen our position across key growth markets.

Rich: In our core microcontroller business and we introduced a new generation of 64 bit risk five processors, featuring advanced AI capabilities.

Rich: The greatest time sensitive networking and next generation security. These processors deliver exceptional reliability for factory automation and secure data processing applications, particularly where real time communication is critical initial customer response has been strong with promising.

Rich: Design win momentum across industrial and aerospace and defense sectors.

Rich: We expanded our Wi Fi portfolio with 20 new products.

Rich: Spanning microcontrollers and plug and play modules, helping customers simplify robust secure wireless connectivity and accelerate time to market. We also introduced a new smart touch controller with an industry standard interface, making it simpler for manufacturers to implement water.

Rich: Tolerant touch solutions and their products for.

Rich: For our high speed wire connectivity, and we continued strengthening our automotive networking portfolio with ASI motion linked technology, enabling next generation software defined vehicles with high speed data exchange between systems are innovative technology is currently being evaluated.

Rich: By several leading global automotive manufacturers.

Rich: Our FPGA portfolio achieved two notable milestones.

Rich: We earned the highest level of space certification for our radiation hardened chips.

Rich: Maintaining our position in critical space missions.

Rich: And released a new sensor connectivity solution for our <unk> platform, enabling AI applications in medical imaging and industrial automation.

Rich: These developments reinforce our commitment to providing comprehensive solutions across our target markets, while we're making it easier for customers to implement advanced capabilities in next generation products Demi.

Rich: Demonstrating our ability to simplify advanced technological implementation for our customers with that I will pass the call to Steve for comments about our business and guidance going forward Steve.

Steve: Thank you rich.

Eric: As Eric described in his prepared remarks.

Eric: Our December quarter net sales were one point or two 6 billion.

Eric: 11, 8% sequentially.

Eric: Down 41, 9% from a year ago quarter.

Eric: As we continue to navigate through a very large inventory correction following it post COVID-19 Super cycle.

Eric: We saw continued broad based weakness in the December quarter.

Eric: Revenue from our microcontroller.

Eric: FPGA and other businesses were all down sequentially.

Eric: Geographically our business was down sequentially in all major geographies.

Eric: Americas, Europe and Asia.

Eric: Now, let's get into our guidance for the March quarter.

Eric: We believe substantial inventory Destocking has occurred at our customers channel partners and their downstream customers.

Eric: Everyone would like me to call it the last quarter as the bottom.

However, in our view the inventory at our customers channel partners and their downstream customers has not fully corrected yet.

Eric: Our bookings remain low although the current quarter bookings are running at a higher rate than in the December quarter.

Eric: Our backlog started out lower for the March quarter than it was at the start of the December quarter.

Eric: We have a lot of turns to take for the March quarter, and the visibility remains low.

Eric: Taking all these factors into account.

Eric: We expect <unk> net sales for the March quarter.

Eric: To be between $920 million and $1 billion.

Eric: We expect <unk> non-GAAP gross margin to be between 52% and.

Eric: 54% of sales, we expect non-GAAP operating expenses.

Eric: To be between 37, 7% and 45% of sales.

Eric: We expect non-GAAP operating profit to be between 11, 5% and 16, 3% up soon.

Eric: We expect non-GAAP diluted earnings per share.

Eric: Between five and 15.

Eric: We are laser focused on our nine point plan.

Eric: The mega trends in customer portion of that plan.

Eric: Intel is aggressively winning designs.

Eric: The customers and then putting them through the funnel to.

To generate growth.

Eric: We believe.

Eric: That as the remaining excess inventory is consumed at our customers and distributors.

We are well positioned to provide above market growth.

Eric: Yes.

Eric: Now, let me provide update on our capital return program for our shareholders.

Eric: We are essentially returning 100% of our adjusted free cash flow to investors in the form of dividends right now.

Eric: Due to depressed net sales.

Eric: However, adjusted free cash flow is currently less.

Eric: Then our dividend and then certain quarters, we have had two big Hyatt bond interest payments and tax payments.

Eric: Bond interest payments are made every six months.

Eric: So every other quarter this impacts out there to just strict free cash flow.

Eric: And results in a dividend exceeding our adjusted free cash flow.

Eric: As we begin to liberate cash from our inventory.

Eric: With very low capital expenditures, we expect to bring the free cash flow above the dividend.

Eric: In future quarters, we intend to use the excess cash to bring our borrowings back down to at least the levels they were at.

Eric: Before our dividend exceeded our adjusted free cash flow.

Eric: With that operator will you please poll for questions.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants.

Speaker Change: Speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: One moment, please while we poll for questions.

Speaker Change: Thank you.

Speaker Change: Our first question comes from the line of Diavik ARIA with Banc of America Securities. Please proceed.

Speaker Change: Thanks for taking my question, Steve I appreciate your comments and I realize visibility is limited, but you mentioned inventory remains elevated at customers and channel partners could you share with us where the hotspots are by end market or by the kind of product like Washington, Industrial our microcontrollers.

Speaker Change: At that time and do you think that this is the inventory issues specific to microchip or do you think those customers and channel partners have kind of.

Speaker Change: Excess inventory from your competitors also because many of them seem to be indicating a lower level of concern then you were indicating.

Speaker Change: So.

I think.

Speaker Change: The answer to your first part of your question, which is you know by end markets.

Speaker Change: Our by product line.

Speaker Change: The inventories higher pretty much across the board and it's not different by end markets.

Speaker Change: What is different is slightly by direct our distribution.

Speaker Change: Our distribution customers.

Speaker Change: Inventory is getting a lot closer to where they historically would be.

Speaker Change: <unk>.

Speaker Change: Just in the quarter past.

Speaker Change: Our sell in revenue.

Speaker Change: It was $118 million lower.

Speaker Change: And then our sell through revenue.

Speaker Change: One gap, we report on sell in but distributions sold out $118 million more than they have been doing this kind of number for the last few quarters. So the distribution inventory is getting a lot closer to getting corrected but the direct inventory at customers is still high.

Speaker Change: And part of that reason is.

Speaker Change: When when the supply was really tight.

Speaker Change: We were serving our largest direct customers, sometimes preferentially over the broad based distribution customers.

So and.

Speaker Change: And the number two reason for.

Speaker Change: Our customers having higher inventory.

Speaker Change: Doug.

Speaker Change: We dismantled.

Speaker Change: Noncancelable program called the PSP.

Speaker Change: Two quarters or so later than <unk>.

Speaker Change: <unk> did so therefore, we continue to ship for two more quarters.

Speaker Change: And when the business had eventually so that our customers they had higher inventory of our products then potentially our competitors.

Speaker Change: Hopefully that answers your question.

Speaker Change: Stephen just as a follow up what would you say the earnings power for Microchip over the next year.

Speaker Change: And this last fiscal year, we know what the March guidance, it's about $1.

Speaker Change: 30 ish or so.

Speaker Change: So even if we start assuming some level of seasonal rebound at some point over the next several.

Speaker Change: Quarters.

Speaker Change: Should we be thinking $2 $2, what is the kind of earnings power right in the medium term for the company because I imagine you are adjusted.

Speaker Change: Justifiably prioritizing cash flow and you will probably keep fab utilization level and then the need to get opex back to a reasonable level, but also influencing how do you think about earnings power for the company over the next two years or so thank you Harlan you're right on all of that but putting numbers around it I don't.

Speaker Change: Really have it we don't guide that far out well pass it onto Erik and see if he has something to add.

Speaker Change: Well, Steve Steve's right, we guided a quarter at a time, we are working through Steve nine point plan and you know obviously he's talked a lot about what we're doing in manufacturing.

Speaker Change: Opex in the long term business model that is still to be set and we've got some more work to do on that and we'll share more details with the analysts and investor community on March or so.

Speaker Change: It's hard to answer that question I think as you as you knew when you when you asked it and we think we are positioned to Steve's prepared remarks said for above market growth, but.

Speaker Change: We need to get through this inventory correction to start seeing the benefits of that and we've got a lot of confidence in our long term business and what it can drive from an operating margin perspective, and cash flow perspective, but.

Speaker Change: We're not we're not quite out of this yet.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from the line of Blayne Curtis.

Speaker Change: With Jefferies. Please proceed hey, good afternoon.

Speaker Change: Two questions I just wanted to ask I know you don't want to forecast the revenue slope back, but maybe can you walk us through the gross margin a bit because I think step.

Speaker Change: Step down more obviously, you said days and dollars would come down in inventory, but is there some level that you want to get to to give us some reference as to how long. This may be depressed before it comes back with revenue.

Speaker Change: So I think.

Speaker Change: You know in March 3rd we will give you.

Speaker Change: Some data on inventory depletion and right sizing their factories and all that.

Speaker Change: With which you may be able to model.

Vivek: The question you asked in the question Vivek asked.

Vivek: Don't really have it today, but what I would like to highlight is.

Vivek: So even for the current quarter, we're guiding a gross margin of mid point of 53%.

Vivek: So many of our competitors don't do that in good times.

Vivek: So that's extremely good gross margin.

Vivek: Operating expense.

Vivek: At about 39, 1%.

Vivek: The midpoint of what we guided today.

Vivek: Quite high compared to our historical and that's driven by really adding a lot of people at the top of the cycle. When assumption was the business keeps growing so we have a correction there to do and it will be able to talk to you more about it again on March <unk>.

Vivek: And the gross margin of 53% is where the very very low factory utilization.

Vivek: Oh that we're running today.

Vivek: And.

Vivek: Gross margins historically have been there's absolutely no reason why gross margins do not return.

Vivek: The historical numbers not the historical high which was really at the peak of the cycle.

Vivek: You know how to expedite charges and price increases in all that in.

Vivek: Leaving that timeframe out we should be able to get to our historical gross margins.

Vivek: And we're collecting the operating expenses you should have really a beautiful P&L, which I'll give it to you as a long term target on March two.

And then I wanted to ask you on the growth side Thats always been a debate for the company I just kind of curious your renewed perspective here coming back you mentioned some moves with the distribution channel to kind of incentivize demand creation do you think when you said the company can outgrow the market is that going to be a work.

Vivek: And progress or do you think that's what it is today and these moves would kind of add to that.

I don't know if I can separate those two I think.

Vivek: I think.

Vivek: Mega trends.

Vivek: Design wins.

Vivek: You know higher than a non megatrend design.

Shared some data in the past with you.

Vivek: <unk> did about two extra normal.

Vivek: So we also went through an environment.

Vivek: During a super cycle of Covid.

Vivek: All customers engineers, we're doing is trying to find alternate parts are.

Vivek: Really fit whatever product, we had available for them into their design and the qualifying them.

Vivek: So kind of not much new designs happen for a couple of years, our customers have engaged doing new designs didn't.

Vivek: Various parts of the funnel and when they go to production.

Vivek: That really a model will ensure that our business grows.

Vivek: From that.

Vivek: And then the other thing is the inventory.

Vivek: Inventory depletion, both at the customers and channels and when that inventory depletes, then customers start buying their full consumption rate and then that will increase revenue combined those two together, we don't really have any concerns about the long term future.

Vivek: We got to get through this I told we're getting close.

Vivek: But industry has been slow in getting close for about a year.

Vivek: So I don't want to really spell out any quarter to be the bottom, but we ought to be getting quite close.

Speaker Change: Got you. Thank you.

Speaker Change: Thank you. Our next question comes from the line of harsh Kumar.

Speaker Change: Please proceed.

Harsh Kumar: Yeah, Hey, Steve good to see you back.

Speaker Change: I had a quick question on Opex it sounds like from the answer you just gave to Blaine I think.

Speaker Change: You said that Opex will come down from the current level in absolute dollars is that a fair assumption. That's my clarification question and then.

Speaker Change: On the nine point program that you have are you assuming that things that the environment will stay the same or are you <unk>.

Speaker Change: And some level of recovery at some point in time this year or next year. It's got it has kind of come back at some point in time, but I am curious you are baking that in your assumption or just keeping the environment the same.

Speaker Change: And we're taking it in our assumption.

Speaker Change: The growth will be result of.

Speaker Change: Some return of business when the inventory is depleted.

Speaker Change: Efforts into winning new designs with all the new products, we've introduced in the last three or four years.

Speaker Change: So many of the many customers are sitting on significant designs, but they didnt complete them are launched stamina.

Speaker Change: In an environment when they had a lot of inventory.

Understood.

Speaker Change: I had another question, maybe not so easy but could you take me through the process of how.

Speaker Change: Your organization would even try to gauge the correct level of channel inventory direct inventory in this kind of an environment, but things are dynamic moving around must be going down, but still moving around a lot.

Speaker Change: Curious about the process to understand how you would try to get to the right answer here.

So I think historically over.

Speaker Change: 2025 years.

Speaker Change: You know our channels on the average worldwide.

Speaker Change: We'll have an inventory which is about.

Speaker Change: Two and a half to two seven X.

Speaker Change: You know what the ship out to their customers in a given quarter.

Speaker Change: And it really stayed in that window of two five to three.

Speaker Change: <unk> bin.

Speaker Change: Very few occasions, when the inventory was much higher than that one happen soon after the microsemi acquisition when we consolidate the numbers Microsemi inventory was closer to four than US was lower and then.

Speaker Change: So that we aggressively brought it down.

Speaker Change: So it can change but in general it is in that.

Speaker Change: And we see no reason why distributor inventory.

Speaker Change: It will come back down to below three.

Speaker Change: Understood. Thank you.

Speaker Change: When youre, saying that Steve Your you mentioned two five times, what they ship in a quarter its really two and a half to three months of inventory based on what they're shipping out pretty hefty.

Speaker Change: Three months.

Speaker Change: Alright understood.

Speaker Change: Thank you.

Speaker Change: Teamwork.

Speaker Change: Yeah.

Speaker Change: Thank you.

Speaker Change: As a reminder, please press star one to ask a question at this time.

Speaker Change: Our next question comes from the line of <unk> Hari.

Speaker Change: With Goldman Sachs. Please proceed.

Speaker Change: Alright. Thank you so much for taking the question.

Speaker Change: Steve It sounds like you've been spending quite a bit of time with customers over the past two months since your return I'm curious what the feedback has been to you and the company any common threads and.

Speaker Change: How do you plan on responding to some of the customer asks going forward what.

Speaker Change: What do you need to do to regain any Penny lost trust if you will.

Speaker Change: So I'm going to hand that question to Rick Simons SEC he.

Speaker Change: He has talked to more customers than I have.

Speaker Change: Spending a lot of time under business units in the factories and customers. Also then they come to us, but I may add something but let him give the base again, sorry go ahead.

Speaker Change: So we've been spending a lot of time in front of customers and.

Speaker Change: Mainly what customers are dealing with today.

Speaker Change: <unk> is trying to digest the inventory that they have high end and dealing with the weaker markets.

Speaker Change: So we've been spending time with our distributors our catalog houses.

Speaker Change: Hi.

Speaker Change: Our customer relationships are are in pretty good shape.

Speaker Change: We're we're losing.

Speaker Change: Or that losing but where we have some tough customer relationships are where they are sitting on quite a bit of inventory now from a PSP program.

<unk> are upset about some of the price increases that took place during the.

Speaker Change: The Covid period, right now I think a lot of customers suffered from not from other semiconductor suppliers. So we're trying to do is work with them.

Speaker Change: I understand where.

Speaker Change: Theyre upset on some of those customers.

Speaker Change: And then see what we can do going forward.

Speaker Change: I don't think there's anything magic here.

Speaker Change: And other than us working together to find.

Speaker Change: Good win wins going forward.

Speaker Change: I think as we went through the customer relationships we found.

Speaker Change: Twice as many that we're happier with us.

Speaker Change: We are relationship improved and then we have some that are.

Speaker Change: Our relationship are integrated.

Speaker Change: Alright, and win where we have those integrated and are our worst accounts, where they are integrated with those 256 that Steve highlighted then.

Speaker Change: Out of the abundance of customers we have.

We're going to work on those.

Speaker Change: 256, where we integrated our relationship.

Speaker Change: Thank you Lucas.

Speaker Change: No customer is telling us Oh go ahead every horrible anything like that I think our products are good our tools are good our service and support has been world class over the years and many of these customers we have a multi decade relationship. So it's kind of just.

Speaker Change: You know theres a lot there.

Speaker Change: Got hurt some of them got hurt during the Super cycle.

Either with pricing or not getting enough product or getting too much product and have inventory and just hurt feelings has to be sued in time. He was in discussion and talk to you then.

Speaker Change: Largely getting those customers back design with us.

Speaker Change: Great. Thank you and then as a quick follow up maybe on pricing.

Speaker Change: Calendar 'twenty, four where did blended asps for you all land roughly in how should we think about 25 in sort of the forward path I think many of your peers have said something along the lines of.

Speaker Change: They expect pricing to revert to pre pandemic patterns, which is down low single digits.

Speaker Change #100: Are you thinking about pricing the same way or could it be a.

Speaker Change #100: A little bit different for you guys. Thank you.

Speaker Change #100: So you know.

Speaker Change #100: No.

Speaker Change #102: My sense is that short term guess, what the competitors are doing is correct.

Speaker Change #100: I'm not sure it returns to <unk>.

Speaker Change #103: Price drop every year, because pre pandemic Michael.

Speaker Change #103: Microchip wasn't giving a year over year price decrease.

Speaker Change #104: Gordon don't go down year over year.

Speaker Change #103: Many of the costs go up into <unk>.

Speaker Change #103: Through efficiency gains and yield improvements and others you got to get back to your margin. So you know the price drops.

Speaker Change #103: For the year was really a thing of the past, but short term I think you know we increased prices quite a bit over the past three or four years.

Speaker Change #103: Some price reduction.

Speaker Change #103: Low to mid single digits are near term.

Speaker Change #103: Appropriate.

Speaker Change #103: Thank you.

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

Speaker Change #103: These proceeds.

Speaker Change #105: Alright. Thanks.

Speaker Change #103: Are you in.

Speaker Change #103: A quick question.

Speaker Change #103: Argos.

Speaker Change #103: Still consumer.

Speaker Change #103: To.

Speaker Change #103: Let's walk and how theyre down year on year.

Speaker Change #103: Okay.

Speaker Change #106: So we we breakout our end markets once a year P. J, we do that at the end of the fiscal year, which will end in March and so we will provide more color.

Speaker Change #103: On that.

Speaker Change #103: <unk>.

Speaker Change #103: Probably in the kind of early May timeframe, when we release our year end earnings so don't have to share today.

Speaker Change #103: Really all end markets have been weak we've highlighted a few things that have been stronger over this period of time and not a whole lot of change there right.

Speaker Change #103: Overall <unk>.

Speaker Change #103: Industrial automotive and weak that's consistent with what youre hearing from everybody else.

Speaker Change #107: Got it and then on the inventory side is there any risk.

Speaker Change #103: Solid.

Speaker Change #103: Right.

Speaker Change #103: Given that you are seeing some.

Speaker Change #103: Disintermediation with.

Speaker Change #103: Thanks.

Speaker Change #103: So we have been we've been taking pretty significant inventory reserve charges and so those have been reflected in the gross margin on our expectation for gross margin this quarter.

Speaker Change #103: We've got a lot of inventory sitting on the balance sheet and revenue has been falling in backlogs when falling so visit with low visibility.

Speaker Change #103: And lower revenue.

Speaker Change #108: At a high level of inventory that's the place we're in right now, but Steve talked about the actions that we're taking to.

Speaker Change #108: Reduced inventory in dollars and days and I think we've got a good plan in place to do that and so as we move forward not saying necessarily this quarter is there our gross margin guidance is down but as we move forward those charges should reduce as the inventory balance comes down and hopefully we see a better revenue environment.

Speaker Change #108: Got it thank you.

Speaker Change #108: Okay.

Speaker Change #109: Thank you. Our next question comes from the line of Chris Danley with Citi. Please proceed.

Chris Danley: Hey, Thanks, guys.

Speaker Change #110: I guess question for Steve Slash rich.

Speaker Change #111: Steve as you've been there for three months now is there anything you see.

Speaker Change #110: That's gone wrong that is not fixable.

Speaker Change #112: And then if you slash rich could you just spend some time on your assessment of micro chips competitive positioning and how you feel that that is let's say versus a couple years ago. Thanks.

Speaker Change #110: So.

Speaker Change #110: I haven't found anything that is not fixable.

Speaker Change #110: I think.

Speaker Change #110: You know right sizing the factories is fixable and we're in the process of doing so.

Speaker Change #110: The high inventories fixable and we are in the process of doing so.

Speaker Change #110: We are doing these various business unit by business unit reviews.

Speaker Change #110: Some business units have Florida as to some of the others have atrophied.

Speaker Change #110: We need to move some things around to put our resources.

Away from lower performing business units and put them in a high performing business unit. So some optimization needs to be done so that is fixable.

Speaker Change #110: Hum.

Speaker Change #110: We compete in a lot of different businesses Microcontrollers analog data center, automotive aerospace and defense and all that and in any business or any end market. You are saying you know what God. We should have this product or this feature we don't have a kid somebody else has it.

Speaker Change #110: An internal discussion would be how we can plug that gap.

Speaker Change #110: Same time, we have.

Speaker Change #110: Products with some differentiating features that our competitors don't.

Speaker Change #110: But no I haven't found anything that is not fixable, but anytime you find a product hole.

Speaker Change #110: Does take two years of development to plug that hole.

Speaker Change #110: So I think putting.

But in general I haven't really found anywhere.

Speaker Change #110: Any major problem that is not fixable, but.

Speaker Change #110: But it takes time to fix some of these things.

Speaker Change #110: Okay, and the competitive positioning question and then I'll go away.

Rich: Rich you want to answer that.

Speaker Change #110: Yes.

Speaker Change #113: In our analysis of that in our surveys of that in our discussions with our distributors.

Speaker Change #110: The feedback we're getting we're predominantly holding our own in that.

Speaker Change #113: Our competitive positioning.

Speaker Change #113: It's still we're still working through it.

Speaker Change #113: <unk>.

Speaker Change #113: Which confusing right now because of inventory.

Speaker Change #113: Hi, you lose visibility in terms of where some of those customers are when you have.

Speaker Change #113: A large swath of customers Microchip has about 120000 customers. So obviously, we can't touch 120000.

Speaker Change #113: But where we're touching all of the focus wines and dedicated one is that we have and the relationships are still strong.

Speaker Change #113: And we have customers that are still coming through in working with us. So.

Speaker Change #113: I don't see anything majorly broken on on that customer front.

Speaker Change #113: We.

Speaker Change #113: Bring relationships, but there is nothing fundamentally broken.

Speaker Change #113: Like I said earlier I think most customers were just unhappy about how the whole COVID-19 period went in and how they had built up inventory.

Speaker Change #114: We did find which was quite fascinating.

Speaker Change #114: Our smaller customers medium and smaller customers when material was finally available to them.

Speaker Change #114: Instead of buying one year of 12 months. They may have bought 24 months.

Speaker Change #114: But a little bit extra on the smaller and medium customers and surely it did.

Speaker Change #114: Really varies depending on the market and the customer base.

Speaker Change #114: Got it.

Thank you.

Speaker Change #115: Next question comes from the line of Joe Moore with Morgan Stanley. Please proceed.

Speaker Change #115: Great. Thank you.

Speaker Change #116: 266 days of inventory.

Speaker Change #116: Can you talk about how much of that is from the internal Fabs I think you had given a number that it's over 300 in the past and then I had a follow up on that.

Speaker Change #116: So I think.

Speaker Change #116: Internal fabs were 288 or something.

Speaker Change #116: Got it.

Speaker Change #116: Yes.

Speaker Change #116: It's in that range that I'd have to pull up a spreadsheet to look at it but it's in that range. The internal fabs are higher than what it is on the foundry and systems side of the business.

Speaker Change #118: Okay, and then you talked about taking an inventory kind of reserve around the lower utilization like already that 53% does that fully reflect the lower utilization or is there kind of a lingering cost of inventory that is higher because of that lower utilization going forward.

Speaker Change #118: Well when you're running the factories less efficiently you you are capitalizing costs and inventory at higher levels, even though you're taking these underutilization charges. So it.

Speaker Change #118: It takes some time to build to work through that higher cost inventory, but I would expect to see gross margin improvement before that because these inventory reserve charges will go down right and we've taken a lot of reserve charges at some point, we will get sell through benefit from that also so it's hard to predict exactly how that will weigh.

And we'll probably just give quarterly guidance and we'll give a long term target, but we are reflecting in the gross margin you see today, the underutilization charges and you know as the factories build that back up those charges will go down and you know obviously, we were taking out our third largest factory in <unk>.

Speaker Change #118: <unk> two that's going to help us get inventory corrected faster than if we had not taken that step.

Great. Thank you so much.

Speaker Change #118: Thank you.

Speaker Change #119: Our next question comes from the line of Torrey Staffan towards Shannon Burke with Stifel. Please proceed.

Jeremy: Yes. Good afternoon. This is Jeremy.

Speaker Change #120: Thank you Troy.

Jeremy: Just maybe going back to that.

Jeremy: Sure.

Jeremy: Can you just help us quantify or.

Jeremy: A little bit the terms that you might need to take the mid point and how that compares versus <unk>.

Jeremy: Historical cycles.

Jeremy: Different points in the cycle historically, thank you.

Jeremy: So it doesn't get there was another noise did you get that no I think.

Speaker Change #121: Got it. So the question is I'll repeat it real quickly as you know what and when we're looking at the current quarter to get them. The midpoint, how do the turns look compared to what we've seen historically and so I'll give an answer to that and rich and Steve can add to it if they want to so.

Jeremy: When lead times are very short, which they are today.

Jeremy: Our business has historically been able to respond to a high level of turns and it just it's just a matter is the customer demand there to fill that in we've given guidance based on what we think is reasonable for the quarter and obviously given our range of guidance and the turns required to meet that are not outside of.

Jeremy: What would be normal and a short lead time environment.

It's very helpful.

Jeremy: And maybe Mike.

I mean, maybe that is to add one more piece of it because it turns and then that is.

Jeremy: Expedites and pull ins.

Rick Simons: And we're continuing to see expedite can pull ins come in as well right in what I'm, calling us would be as we already have backlog in place that sits outside of the quarter and then the customer comes to us and say hey, instead of needing that product in April now I needed in March can you support that and that that's what rich means by a poll.

Jeremy: Lynn.

Speaker Change #122: That's very helpful. Thank you and maybe a quick question on the new product side.

Speaker Change #122: Can you give us.

Speaker Change #122: On the risk five processor can you help us maybe size the opportunity here both in the near term and the long term.

Speaker Change #122: In the near term when we can see initial revenue contribution and in the longer term.

Speaker Change #122: But how big could this potentially that as you look out three to five years. Thank you.

Speaker Change #122: Yes, so what we haven't forecasted the overall revenue impact to microchip, but we are seeing is.

Speaker Change #122: A great many customers.

Speaker Change #122: Building development environment, and asking for our help with software and understanding of that product portfolio.

Speaker Change #122: And so we've seen customers now start to build out development groups and design groups.

Speaker Change #122: Around this platform of products.

Speaker Change #122: And starting to design them in different applications.

Speaker Change #122: So we havent announced any of those design wins, yet, but the level of activity is quite high.

Speaker Change #122: Thank you.

Speaker Change #124: Our next question comes from the line of Craig Ellis with B Riley Securities. Please proceed.

Craig Ellis: Yes, thanks for taking the question and Tim Thanks for all the color so far Steve I wanted to go back to the.

Craig Ellis: The planned first point on production and ask a more qualitative question can you help us understand where the team is.

Craig Ellis: Assessing the right level of front end and back end capacity and where you are in terms of identifying the specific steps that are needed to realign that capacity and the things that that allow you to be operating at the new correct capacity that you determined.

The team is very far along.

Craig Ellis: Identifying what steps need to be taken.

So to rightsize the other factories.

Craig Ellis: In closing down fab two.

Craig Ellis: And we'll be there.

Craig Ellis: Disclosing that to you on March 3rd.

Speaker Change #126: Got it and then Eric I'll just follow up the point you made on the debt maturity in September it sounds like you're well positioned to deal with that is it correct that the next maturity beyond that would be in March of 2028, and if not can you help me understand when that day.

Craig Ellis: Yeah.

Craig Ellis:

Craig Ellis: Good thing to look at his computer.

Craig Ellis: Yeah, I'm, just calling it out to make sure I don't Miss speak to it so we do have.

Craig Ellis: Another tranche of $1 billion due in March of 2028.

Craig Ellis: The $1 $2 billion, we talked about.

Craig Ellis: I'll have to redo our line of credit at some point in time, that's a pretty standard progress process that we go through but.

Craig Ellis: Talbot tranches are laying out right now the $1 $2 billion in September of 'twenty. Five is the next one and then after that it's not until 2008.

Craig Ellis: Got it thanks guys.

Craig Ellis: Thank you.

Craig Ellis: Question comes from the line of Chris Caso with Wolfe Research. Please proceed.

Chris Caso: Yes. Thank you I guess, the first question with regard to the dividend.

Chris Caso: I know at this point youre, not fully generating free cash flow to support the dividend.

Chris Caso: You talk about your level of commitment to that dividend and as we're going through.

Chris Caso: Sort of a recovery plan in.

Chris Caso: And such that.

Chris Caso: We're still committed to this dividend.

For the foreseeable future as free cash flow starts to get better.

Chris Caso: Yes, so as you may have noticed.

Chris Caso: We did not increase the dividend a smidgen that we've been doing it probably for years and years.

Chris Caso: So there is no reason to add to it.

Chris Caso: And we will keep this dividend flat, but there is no reason to take it down.

Chris Caso: Generating enough cash flow is a very short term problem.

Chris Caso: And it kind of.

Chris Caso: This ugly head every six months because every six months bond payments are due.

Chris Caso: And in one quarter.

Chris Caso: They're not there in the other quarter the dividend payment I'm.

Chris Caso: I'm sorry, the bond payment Pops up so every other quarter, we have to borrow some money to pay the dividend.

Chris Caso: But I think at this problem should really go away in the coming quarters pretty rapidly so because it's a short term issue.

Chris Caso: There is no reason to do a long term damage by cutting the dividend.

Chris Caso: Yeah, and maybe just as an example, as an example, you know our adjusted free cash flow in the December quarter is essentially equal to what our dividend payment is in March but our adjusted free cash flow will be lower in the March quarter, and then won't cover what we could pay in the June quarter, and we always have based our capital return program based on the <unk>.

Chris Caso: Higher quarters free cash flow so anyway.

Chris Caso: Right now it's.

Chris Caso: It's.

Chris Caso: Obviously, not as high as we would like it to be but the confidence in the business getting back to higher levels and profitability returning as well as the working capital management, we're doing with the inventory reduction is going to help us with that.

Chris Caso: Yeah.

Chris Caso: Understood.

Chris Caso: For a second question, it's about kind of manufacturing capacity and I know.

Chris Caso: You're going to provide some more details in March.

Chris Caso: But.

Chris Caso: I guess two parts to that one would be internally you don't have access to 300 millimeter manufacturing.

Chris Caso: And it doesn't sound like that's something that you're going to pursue.

Speaker Change #127: Do you feel that the internal fab network is still competitive with the rest of the market as you see some others start to expand on 300 millimeter, how does microchip respond to that and then secondly.

Speaker Change #127: <unk> seen some other competitors moved to a China for China manufacturing strategy because of some of the geopolitical tensions that feeling that Chinese customers want manufacturing footprint inside of China, how is microchip responding to that.

Speaker Change #127: So let me take those the first one on 300 millimeter.

Speaker Change #127: We use a substantial 300 millimeter capacity.

Speaker Change #127: Our foundries.

Speaker Change #127: Our business today in various business units is on 300 is just not internet it is external.

Speaker Change #127: And I will tell you that.

Speaker Change #127: Many of our competitors will make 300 millimeter with all of the under utilization and all the cost to ramp it.

Speaker Change #127: You know the time it takes to develop the technology. When you look at the total cost of ownership.

Speaker Change #127: I think their experience and total cost of ownership is really no better than.

Speaker Change #127: US buying very well known learning technology with a high use at.

Speaker Change #127: At the professional foundries, so I think we're pretty happy with that.

Speaker Change #127: There was a point.

Speaker Change #127: Two three years ago, when foundries were telling us they wouldn't be adding more trailing edge capacity.

Speaker Change #127: And all of the investments we're going to go into the advanced technology.

Speaker Change #127: So at that point, we were concerned about whether there'll be enough capacity for 300 millimeter for 90 nanometer 65 nanometer and 40, specifically those three technologies and at that time. We'll then we were pursuing building a fab in U S.

Getting some money from chipset to do so.

Speaker Change #127: And as we were engaging with government in order to do that.

Speaker Change #127: Business is slow and our foundries businesses. So no today, you can buy as much 40 nanometer 65 nanometer and 90.

Speaker Change #127: As you want and then the factory has told us.

Speaker Change #127: This will be no longer a problem in fact.

Some of them are investing an additional 40 to $65 90 for the future. So therefore.

Speaker Change #127: For Us just Ben.

Speaker Change #127: Multibillion suddenly at $5 billion to $6 billion investment.

Speaker Change #127: <unk> 300 millimeter factory, which will take a decade plus to fill it.

Speaker Change #127: Low utilization in the beginning.

Speaker Change #127: I think that can cost of ownership equation, just does not work.

Speaker Change #127: And the second part of your question was on China for China strategy.

We have a China for China strategy also.

Speaker Change #127:

Speaker Change #127: I'll talk about that also in March 3rd.

Speaker Change #127: Thanks.

Speaker Change #127: Thank you.

Speaker Change #127: There are no further questions at this time I would like to pass the call back over to Steve for any closing remarks.

Speaker Change #128: We want to thank all the investors and analysts who attended the call and thanks for your support over many many years when I was a CEO and I have just got them back in.

Speaker Change #128: And you know things are going to improve rapidly. So please be patient and I. Thank you for your support.

Speaker Change #128: Right.

Speaker Change #128: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.