Q4 2025 Microchip Technology Inc Earnings Call
Speaker Change: Greetings and welcome to Microchip's Q4 and FY25 Financial Resolve Conference call. Welcome to Microchip's Q4 and FY25
Speaker Change: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Sanghi, the Executive Chair, CEO and President. Thank you, and you may proceed so. Thank you.
Thank you operator and good afternoon everyone [inaudible]
Speaker Change: During the course of this conference call we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company
Speaker Change: We wish to caution you that such statements of predictions and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filing with the SEC that identify important risk factors. Thank you very much.
that may impact Microchip's business and results of operations. Thank you very much.
Sajid Daudi: In attendance with me today, Ritz Simoncic, Microchip COO, Eric Dionholt, Microchip CFO , and Sajid Daudi, Microchip Head of Investor Relations
Rich Simoncic: I will provide an update on a restructuring. Eric will go over fourth quarter fiscal year 2025 financial performance
Rich Simoncic: and Rich will then review some product line updates. I will then provide an overview of the current business environment and our first quarter fiscal year 2026 guidance.
Rich Simoncic: We will then be available to respond to specific investor and analyst questions.
and Ganesh Moorthy.
Since I returned as Microchip CEO on November 18, 2024
Rich Simoncic: I have spent a significant amount of time evaluating key aspects of Microchip's business [inaudible]
Rich Simoncic: On March 3rd, 2025, I provided an update on our 9-point recovery plan to set the company on a course to achieve its previous premium status of performance. Thank you very much.
Rich Simoncic: Today I will give you a brief update on our progress on that 9 point plan.
The first action was to resize our manufacturing footprint.
Kempifab 2 is now closed. [inaudible]
Rich Simoncic: The actions in our other two fabs, namely, fab four in Oregon and fab five in Colorado Springs are complete. The actions in our back-and-filippine facilities are also complete.
Rich Simoncic: These actions reduce capacity but leaves the fabs in a position to ramp capacity rapidly when needed on short notice.
The second action was to reduce our inventory.
Rich Simoncic: Our inventory at the end of December 2024 was 266 days Our target inventory is 130 to 150 days
Our inventory at March 31, 2025.
Rich Simoncic: was 251 days making it the first meaningful reduction in days of inventory in three years.
Rich Simoncic: In the March quarter, we had reduced production for only part of the quarter.
Rich Simoncic: We will have reduced production for all of the June quarter, thus we expect to reduce inventory more substantially in this June quarter. The inventory at the end of June is expected to be between 215 and 225 days. The inventory at the end of June quarter is expected to be between 225 days. The inventory at the end of June quarter,
Rich Simoncic: During the fiscal year 2026 ending March 31, 2026, our goal is to reduce inventory by over 350 million dollars which will liberate cash.
We made two changes to our mega trends.
Rich Simoncic: First, we replaced 5G with artificial intelligence, and second, we replaced ADAS with network and connectivity.
Rich Simoncic: ADAS is now part of network and connectivity, which is essentially the movement of data outside of the data center, such as industry 4.0 and automotive networking. Thank you.
Rich Simoncic: The fourth action was to conduct a business unit, but business unit deep dive. This was completed and resulting organization changes were made.
Rich Simoncic: The fifth action was a review of Microchip's channel strategy This action was also completed and resulting changes have been made in our channel strategy We have not seen any negative impact from these changes in a distribution channel [inaudible]
Rich Simoncic: The sixth point of evaluation was to strengthen our customer relationships.
Rich Simoncic: We met with over 700 customers in the past 230 plus days. [inaudible]
Rich Simoncic: Giving customers a chance to communicate with us candidly. The results are in based on customer feedback.
Rich Simoncic: Recall that we had said that at 12% of the customers, our relationship had deteriorated through the COVID cycle.
Rich Simoncic: Within this 12% we have already been able to restore 78% of these customers to either approved or preferred status.
Rich Simoncic: leaving only 2.6% of the customers where their relationship remains stressed.
Rich Simoncic: and in need of more restoration effort. At this point, we will continue to work our customer relationships as a normal course of business and believe that this concern is closed in behind us.
Rich Simoncic: 0.7 was the long-term business model which we unveiled on March 3rd.
Rich Simoncic: 0.8 was achieving our operating expense model. We completed a global layer of approximately 10% of our employees to bring our expenses down. We plan to continue to improve our operating expense percentage.
to revenue growth, attrition, and controlling other operating expenses.
Rich Simoncic: The ninth and final area was the Chips Act activity. We re-missed our discussions with the Chips Office. The Chips Office is still reorganizing under the new administration. The Chips Office is still reorganizing under the new administration.
Speaker Change: With that, I will pass the call over to Isaac Bjornholt.
Thanks Steve and good afternoon everyone.
Speaker Change: and included reconciliation information in our earnings press release, which we believe you will find useful when comparing our gap and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. Thank you very much.
Speaker Change: I will now go over some of the operating results including net sales, gross margin, and operating expenses [inaudible]
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 that are described in our earnings press release and in the reconciliation on our website. Thank you very much.
Speaker Change: Net sales in the March quarter were 970.5 million, which was down 5.4% sequentially, and $10.5 million above the midpoint of our guidance provided on February 6, 2025.
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-gal basis, gross margins were 52%, including capacity under utilization charges of 54.2 million, operating expenses were at 38% of sales and operating income with 14% of sales.
Speaker Change: Nongat in that income was 61.4 million, and Nongat earnings per deluded share was 11 cents, which was 1 cent above the midpoint of our guidance.
Speaker Change: On a gap basis in the March quarter, gross margins were 51.6%, total operating expenses were 601.4 million and included acquisition and tangible amortization of 122.6 million.
Speaker Change: Special Charges of $71.6 million, which was primarily driven by foundry contract exit costs and employee separation costs.
Speaker Change: The GapNet loss attributable to common shareholders was 156.8 million or 29 cents per share . .
Speaker Change: For fiscal year 2025, net sales were 4.402 billion and were down 42.3% from net sales in fiscal year 2024.
Speaker Change: On an on-get basis, gross margins were 57%, operating expenses were 32.5% of sales, and operating income was 24.5% of sales.
Speaker Change: non-GAAP Net Income was $708.8 million, and EPS was $1.31 for the alluded share.
Speaker Change: On a gap basis, gross margins were 56.1%, operating expenses were 49.3% of sales and operating income was 6.7% of sales
Speaker Change: The gap net loss attributable to common shareholders was $2.7 million. $2.7 million.
Speaker Change: Our non-GAAP cash tax rate was 13.6% in the March quarter and 14.2% for fiscal year 2025
Speaker Change: Arnon Gap, Tax Rate for Fiscal Year 26 is expected to be about 12%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.
Speaker Change: Our inventory balance at March 31st, 2025 was 1.293 billion and was down 62.8 million from the balance at the summer 31st, 2024. We had 251 days of inventory at the end of the March quarter, which was down 15 days from the prior quarters level driven by our inventory reduction actions.
Speaker Change: Included in our March ending inventory was 18 days of a long life cycle, high margin products whose manufacturing capacity has been end of life by our supply chain partners
Speaker Change: The inventory at our distributors in the March quarter was at 33 days, which was down 4 days from the prayer quarters level Distribution took down their inventory in the March quarter as Distribution's cell through was about $103 million higher than Distribution's cell end The inventory was at 33 days from the prayer quarters level Distribution's cell through was about $103 million higher than Distribution's cell end
Dr. Prima, Dr. Prima, Dr. Prima, Dr. Prima,
Speaker Change: Our cash flow from operating activities was 205.9 million in the March quarter. Our adjusted free cash flow was $182.6 million in the March quarter.
Speaker Change: As of March 31st, our consolidated cash and total investment position was 771.7 million
Speaker Change: and the March quarter we completed a $1.485 billion mandatory convertible preferred stock offering with a three-year term and purchased a cap call that is generally expected to reduce or offset potential delusion to the common stock upon conversion of the preferred stock. [inaudible]
Speaker Change: with such reduction subject to an initial cap price of $71.40 per share. [inaudible]
Speaker Change: The mandatory preferred convertible transaction was done to reduce our debt and preserve our investment grade rating.
Speaker Change: Our total debt decreased by 1.125 billion in the March quarter and our net debt decreased by 1.31 billion dollars.
Speaker Change: Arjasad Ibidah in the March quarter was 200.4 million and 20.6% of net sales.
Speaker Change: Our Trailing 12-month Adjusted EBITDA was 1.337 billion and our net debt to Adjusted EBITDA was 3.66 at March 31st, 2025.
Speaker Change: Capital expenditures were 14.2 million in the March quarter and 126 million for fiscal year 2025. Our expectation for capital expenditures for fiscal year 2026 is to be at or below $100 million.
Depreciation Expense in the March Quarter was 41.2 million.
Speaker Change: I will now turn it over to Rich who will provide some commentary on our product wine innovations in the March quarter. Rich. Thank you Eric, and good afternoon everyone. During this quarter we have continued to execute our strategic initiatives that deliver value across multiple markets. Thank you very much.
Rich Simoncic: Our investments in next-generation technologies like the SwitchTech PCIe Switches enable us to adapt and deploy technologies initially developed for high-speed data centers into automotive and embedded computing applications.
Rich Simoncic: These advancements create new capabilities in applications where accelerated communication performance is critical, such as software-defined vehicles and robotics
Rich Simoncic: We are strengthening our core portfolio through advancements and our arm-based microprocessors for human-machine interface applications and our 32-bit microcontrollers integrated with high-performance analog peripherals that serve industrial consumer, medical and AIML markets.
Rich Simoncic: These high-speed peripherals and other analog-related functionality reduce the need for external analog components, decrease system complexity and cost, and deliver high performance solutions [inaudible]
Our Innovative MPLAB AI Coding Assistant
is helping customers accelerate their design cycles. [inaudible]
Rich Simoncic: Reducing their embedded software development time and increasing productivity by as much as 40%. We continue to enhance this tool with additional features and functionality.
Rich Simoncic: Additionally, our new PIC-64 product line continues to gain momentum and new design opportunities for the space, industrial automation, automotive and edge compute
Rich Simoncic: Our recently launched 10-base T1S solutions continue to see market adoption with a growing design funnel.
These innovations, coupled with our operational efficiency efforts
Rich Simoncic: Demonstrate our commitment to driving top-line growth and improve profitability as we continue to bringing differentiated solutions to our target markets. With that, I will pass the call to Steve for comments about our business and guidance going forward, Steve.
Thank you, Rich.
Rich Simoncic: As Eric described in his prepared remarks, our Mars quarter net sales were $970.5 million.
Rich Simoncic: Down 5.4% sequentially, and down 26.8% from the year ago quarter, as we navigated through a very large inventory correction following a post-COVID super cycle.
Rich Simoncic: I was revenue from our microcontroller and analog business units was down sequentially, FPGA was about flat and other businesses were up sequentially mainly driven by technology licensing. [inaudible]
Rich Simoncic: Geographically, a business was seasonally down sequentially in America and Asia and was seasonally up in Europe .
Now let's get into our guidance for the June quarter.
Rich Simoncic: We believe substantial inventory destocking has occurred at our customers, channel partners and their downstream customers.
Rich Simoncic: While we believe the inventory at our customers, channel partners and downstream customers will continue to correct the customers and distributors are starting to increase their purchases
Rich Simoncic: As a result, I am finally calling the last quarter as the revenue bottom for us!
Our bookings were up significantly in the March quarter.
Rich Simoncic: Our backlog for the June quarter started out higher than the starting backlog for the March quarter.
Rich Simoncic: The bookings in the month of April were higher than any month in the March quarter [inaudible]
Rich Simoncic: Taking all of these factors into account, we expect our net sales for the June quarter.
to be 1.045 billion plus or minus 25 million.
We expect our non-GAAP gross margin.
Rich Simoncic: To be between 52.2% and 54.2% of sales, we expect our non-GAAP operating expenses to be between 33.4% and 34.8% of sales
Rich Simoncic: We expect our non-GAAP operating profit to be between 17.4% and 20.8% of sales.
Rich Simoncic: We expect our non-GAAP diluted earnings per share to be between 18 cents and 26 cents.
Rich Simoncic: There are a couple of things I want to highlight in our guidance in our guidance.
The first is the leverage in a business model. [inaudible]
Rich Simoncic: with a $74.5 million increase in net sales at the midpoint
Rich Simoncic: of the guidance for the June quarter. We are taking approximately 85% of it to the bottom line as non-GAAP operating profit.
Rich Simoncic: and Inventory Right-Off Decrees of a Gross Margin Recovery will accelerate, and with the incremental profits going to the bottom line, we will have tremendous leverage.
The second point I wanted to...
Make it on the revenue growth.
Rich Simoncic: There are three revenue accelerators kicking in just from the inventory drain.
Rich Simoncic: The first is that our distributors inventory and our distributor customers inventory is getting corrected.
Rich Simoncic: We're expecting the first increase in distributors sell through after many quarters therefore our distributors are starting to buy more product to replenish their inventory and feed their customers growth.
Rich Simoncic: Second, the distributor's Sullen has to rise to meet the sales out. Last quarter, Sullen revenue was $103 million lower than sell through.
Rich Simoncic: If Sully and Revenue were to catch up with Sully through, the Sully and Revenue will rise approximately $103 million higher and will further feed sales growth.
Rich Simoncic: And third, our direct customer's inventory is getting corrected and we're starting to see the direct customer's shipments increase. We believe that this trifecta...
Rich Simoncic: Effect is a compelling setup for sales growth going into the fiscal year. With sales growth, gross margin increasing and inventory declining we expect to deliver significantly improved financial performance in the fiscal year.
Rich Simoncic: Now let me provide an update on our capital return program for shareholders. Thank you very much.
Rich Simoncic: We are essentially returning 100% of our adjusted free cash flow to investors in the form of dividends right now [inaudible]
Rich Simoncic: Due to the press net sales, our adjusted free cash flow is currently less than our dividend
Rich Simoncic: In certain quarters we have had to make higher bond interest payments and tax payments [inaudible]
and Bond Interest Payments.
Rich Simoncic: Generally made every six months, so every other quarter, this impacts our adjusted free cash flow.
Rich Simoncic: and results in a dividend exceeding our adjusted free cash flow.
Rich Simoncic: As we begin to liberate cash from inventory coupled with very low capital expenditures we expect to bring the adjusted free cash flow above the dividend.
In future quarters, we intend to use this excess gas
Rich Simoncic: to bring our borrowings back down to at least the levels they were at before our dividend exceeded our adjusted free cash flow.
Rich Simoncic: We're not considering any cut to the dividend, our financial activity last quarter in which we raised 1.4 billion dollars in the mandatory convertible.
With that operator will you please pull for question?
Speaker Change: Thank you very much. You will now be conducting a question and answer session. If you would like to ask a question please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. Thank you very much.
Speaker Change: If I may just ask if analysts and investors could please limit your questions to one question and a brief follow-up question. If you have any further questions, you are welcome to rejoin the question cube.
Speaker Change: For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment please while we pull for questions.
Speaker Change: The first question comes from Harsh Kumar from Piper's Handler. Please proceed with your question.
James Jenf
Harsh Kumar: Yeah, Steve, first of all, let me add my congratulations to the recovery. I know it's been a long time coming, but we've seen you call bottoms in the past, and I'm excited that you see the bottom, but...
Harsh Kumar: The question he gets to you though, from a lot of our clients on investors is that...
Speaker Change: Maybe you know talk about the demand signals that you're seeing which you kind of did but there is also another aspect of maybe potential pull-ins from tariffs [inaudible]
Speaker Change: If you could just help us understand why this may not be a head fake from that and then also if you could just I'll ask my second question here if you could just talk about the recovery that you're seeing relative to your key and markets if there's one that's acting better than the other or they're both acting the same.
[inaudible]
So, thank you, Harsh.
You know, the demand signals we are seeing...
We really begin in studying early January , our January February March.
Each of those three months bookings were...
significantly higher than December quarter bookings and...
Speaker Change: We have shown them on a slide and in on the March third conference call that we had and that was really before any of the tariffs torque appeared. Thank you very much.
If you look at...
you know, downstream customer's information.
Speaker Change: Many of the direct customers that were not buying the product are starting to buy it because the inventory is getting depleted .
Speaker Change: Same way as the distributors, they are starting to buy additional amount of product because on many of the skews
Speaker Change: Their inventory has gone back to very much normal and our distributors, customers also downstream customers their inventory is getting corrected so all of the signals we have
I really are related to that in number of...
Speaker Change: Large number of designs that we were designed in last year, many of them are turning to production, so there is also growth coming from new products and new design-man activity. We haven't seen any impact of tariffs. The tariff's are largely...
Speaker Change: Exempted on all the semiconductors that we make today were the shipping into China or shipping into US.
[inaudible]
The second one was related to the key end markets.
Speaker Change: So, if we look at the last year's data, fiscal year 25 ending March 31,
The notable thing that stands out.
Speaker Change: is Aerospace and Defense. The Aerospace and Defense used to be 11% of a business in the prior year. In fiscal 25, that is now 17%.
Speaker Change: 18%, 18% and it's almost the second largest market now after industrial and you know the underlying reasons are
Speaker Change: You know, that business has stayed strong, defense budgets have been high, NATO has been increasing their defense spending and with two wars going on, while the automotive industrial communication consumer, other businesses were weak. So there is a notable shift in our end market. Good.
Speaker Change: and if you look at the year that just started on April 1, [inaudible]
I think we headed for...
Speaker Change: If first ever, over a trillion dollar budget for U.S. defense [inaudible]
and I recently met a customer from Europe .
Um...
and the talk of the...
Speaker Change: You know, talk was around, they were talking about their business growing 2 to 3x over the next three years
Speaker Change: because US was pushing NATO to dramatically increase their defense spending and they are a major contractor.
Speaker Change: to NATO and European Defence. So I think the opportunities in that segment are very good even this year.
Speaker Change: In reaching there will be a very good segment Now all the others industrial automotive consumers and others we are seeing a broad base recovery in all of those segments [inaudible]
Speaker Change: I'm buried in our bookings, Fair amount driven by inventory depletion and also driven by new designs and new products.
Dr. Prima, Dr. Prima, Dr. Prima, Dr. Prima
Thank you, Steve
Speaker Change: Thank you. The next question comes from Chris Caso from Wolf Research. Please proceed with your questions Chris.
Chris Kayser: Thank you, good evening. I guess the first question and we've been discussing this quite a bit with others during this earnings season.
Chris Kayser: is, you know, what sort of macro impact that, you know, the tariff environment such will have, you know, as we go into the rest of the year and, you know, Stephen, I'm judging by your comments about,
Chris Kayser: Improving bookings in that that you're not seeing that. And, you know, but I guess the question is what are your customers telling you right now? And, you know, from an investor standpoint, there's been concern about pull-ins of demand from second half to now to get ahead of tariffs. What's your view on that? [inaudible]
Chris Kayser: So, I think, you know, there are two things, there is a direct impact of tariffs like the tariffs on our products as they ship anywhere into China or US and then there is the indirect effect which is the effect on global economy and global GDP.
Chris Kayser: The second one, impact on global GDP, is above my pay grade.
The customer that I have met...
Chris Kayser: In the last couple of weeks, personally, when I ask them how you're thinking about tariffs, they turn around and asking me, how do I think about tariffs? And nobody knows because, as we speak today, there's really no tariffs [inaudible]
Chris Kayser: on the semiconductors, so leaving that impact on the global GDP, you know, aside, and I'll comment a little more on that afterwards.
Chris Kayser: If you look at the direct impact on us, it's basically nothing. You know, in the Donald Trump's first term, he implemented 25% tariffs on semiconductors made in China coming into US.
Chris Kayser: At that time, about 10 or 11% of our parts were made in China, and we moved aggressively to move that production assembly essentially from China to...
Philippines, Thailand, Vietnam, Indonesia, others.
Chris Kayser: And today less than 4% of our parts are made in China.
Chris Kayser: And those don't come to US, they go to Europe , they go to Japan, they go to Southeast Asia.
Chris Kayser: A handful of orders that made in China that might come to US, which may become subject to tariffs, basically we passed that tariff to the customers, but it was negligible because there was really very small.
Chris Kayser: Now, the other thing is, if there is a terrorist for U.S. made propaganda going to China. [inaudible]
Chris Kayser: And we're looking at it all, parsing it together very carefully.
Chris Kayser: Many of our technologies run in the U.S. and they also run in Taiwan.
Chris Kayser: So, I'm really not that concerned about the direct tariffs because of that setup. [inaudible]
Chris Kayser: Now, when it comes to indirect tariffs, really nobody knows what the overall impact on the economy would be [inaudible]
Chris Kayser: So what we did for a modeling purpose inside is we took a hypothetical haircut on our revenues.
Chris Kayser: And we wanted to make sure that if that kind of impact were to happen, you know, what would happen to the inventory? What would happen to our manufacturing? Would we have to take additional actions? What would happen to the inventory? What would happen to the inventory?
Chris Kayser: that with this haircut our inventory is still declining slower than in the normal plan but inventory is declining because the production rate today
Chris Kayser: Would still be lower than the worst case scenario that we have modeled. Therefore, there will be no other action required. We simply would ramp our factories, you know, later because the inventory is dropping slower.
That's the answer to your question.
Dr. Prima, Dr. Prima, Dr. Prima, Dr. Prima
Chris Kayser: It's a very hopeful color, thank you. As my follow-up question, I wanted to dig in a little bit to the margin leverage that you're referring to and you're prepared remarks as well.
Chris Kayser: and maybe two parts of that question. One is if you could discuss some of the charges that are acting as headwinds to gross margin now, some of the
Chris Kayser: and with the assumption that the revenue starts to come back now, how does that play out over the next few quarters and how is that leverage realized as the revenue comes back?
Alright, hey, hey, Chris, this is Eric, so... [inaudible]
Chris Kayser: So, you know, the two main headwinds that we have right now are the underutilization charges which were a little over $54 million last quarter. We don't expect that to really change significantly in the current quarter. We're still going to be running the factories at a low rate as we're focused on bringing inventory down.
Chris Kayser: and then the inventory reserve charges, which we provided a little bit more color on March 3rd and we went through the 9-point plan. Those are still big numbers and we expect that inventory reserve number to still be large again in the current quarter. [inaudible]
Chris Kayser: as revenue increases. You know, assuming that's what happens as we go through the fiscal year because inventory is dropping at a rapid pace. You know, Steve mentioned that we're targeting reducing inventory by about $350 million plus.
in the fiscal year.
Chris Kayser: So the products that are really subject to review for reserve charge is coming down dramatically So that should start changing pretty soon outside of this quarter [inaudible]
Chris Kayser: and the leverage in Gross Margin is going to be really high. So we aren't putting numbers around it for investors today, but it's significant.
Thank you.
[inaudible]
from UBS, please proceed with your questions.
and Halston Howarth. Thank you all.
and Ganesh Moorthy.
Chris Kayser: Thank you. Eric, just on that point, so given all the actions you've taken, if we sort of get back to a point where I mean pick your revenue number maybe like mid ones back to one five or something like that.
Chris Kayser: with all the actions you've taken and you assume that the reserves come down and they're under, you know, you know, you go away.
Speaker Change: conversation comes down to, should we expect margins to be higher this time around than they were at the same revenue level last time? I mean, you'd close three fast. So I would think that ultimately, you know, margins would be higher at equivalent revenue than they were last cycle. That's fair. [inaudible]
Speaker Change: So it depends on the slope of the recovery, and I think you said we closed two fabs, we did not, we've only closed one fab fab two in tempi, but it depends on the slope of recovery and then where we're at in terms of needing to ramp our factories. [inaudible]
Very competent, then.
Speaker Change: And I know all of you will be looking on how to model this going forward, but you know that the leverage is significant, but I don't want to commit at this point in time in terms of a margin level at a comparable revenue level in the past. It will depend on the slope of how revenue returns there. Thank you very much.
Speaker Change: Okay, and then Steve, do you have a way to determine? [inaudible]
Speaker Change: What consumption is in June relative to your guidance? I know, you know, Disney, Salthus, Fund of Growing in June [inaudible]
Speaker Change: I would think that this is a challenge still going to be below Selfie in June .
Speaker Change: There's still some sort of slow moving MCU parts that seem to be moving a little slower. So where do you think consumption is for June relative to what you're guiding revenue?
So, you know, internal modeling shows that...
Speaker Change: Last quarter the difference was $103 million. We expect the difference would be lower than that. How much lower we can't quantify?
Speaker Change: Berg will be, you know, below 100 certainly maybe well below 100 [inaudible]
Speaker Change: and that the gap will continue to close in the coming quarters. [inaudible]
Speaker Change: and which will result into one of the things that I talked about where the cellin will close to equal to cell through. It's not the cell through coming down, it's a cellin going up.
Speaker Change: and the second part of the consumption is on the factory side, what are we producing and what are we consuming?
Speaker Change: And we have looked at it in a model based on a June quarter guidance. [inaudible]
Speaker Change: We are consuming a lot of inventory and producing significantly less than what we are consuming from the inventory.
Speaker Change: So therefore, the inventory will continue to come down at an accelerated base.
Speaker Change: which will eventually lower the write-offs and it will eventually improve the factory utilization and all of those will move in the right direction as the inventory continues to come down.
and Piper Breau.
Jyothastie. Thank you.
Thank you. The next question comes from...
and Blayne Curtis from Jeffries, please.
You can't proceed with your question.
Blayne Curtis: You guys, good afternoon. I had two questions. I wanted to ask about kind of big picture, you know, your, your cadence has been different than other companies. So if you kind of look at MCU, share.
Maybe you guys gained a little bit too much hair.
Blayne Curtis: during the pandemic and now your share looks quite low as you're correcting where others aren't correcting as much. It's kind of curious as you kind of look through here and there's been a lot of talk about share gainers and MCUs kind of just curious when things normalize do expect to get back to where you were pre-pendemic.
Blayne Curtis: Well, we certainly expect to gain share and, you know, quarterly time, but we finally plan to gain share on the way up here as we recover.
Speaker Change: I think comparators are more closer to a full recovery than we are. We just began this
So therefore we should be getting shared.
Speaker Change: Thanks, and I want to ask you, there's a lot of kind of debate about China's strategy and I guess who knows how all this trade war works out and I'm not sure they're
Speaker Change: If you think that's the right move or the wrong move, I think you're starting to hear that ASPs are lower because the cops are lower so it might be a headwind for the overall market if that's what everybody does. It's curious your perspective.
Speaker Change: Well, if you go back to, you know, the March 3rd report we gave to the street, we talked about that China for China's strategy in that report.
and that was built around... [inaudible]
Speaker Change: You know, we have a Chinese partner with a Chinese name and Chinese logo, a Chinese website, a Chinese data sheet and we were going to sell our die to that Chinese partner. Thank you very much.
Speaker Change: And then they were going to locally assemble and test it and put a locally made logo and then sell it to Chinese customers as a local part. But the dye inside was Microchip.
Speaker Change: Now there was a time when the rules were made in China, I mean in December in China.
Speaker Change: And since then the rules are sort of being changed, where made in China or made in US is where it is diffused, which means where it is fabbed, not where it is assembled. So with that rule change, our made in China strategy. Thank you.
Speaker Change: which was part made in Afab here, assembled in China and ship in China as a local product, that really doesn't work so we are redoing our China's strategy. We could still do that based on part made in Taiwan and
Speaker Change: We can transfer some of the other products from US to Taiwan, so we'll be redoing the strategy and talk to you at a later point.
Speaker Change: A point I like to make on record which we are communicating to the Trump administration, to Secretary of Commerce and all that is that the current rules are actually incentivizing moving product out of U.S.
Speaker Change: which is opposite of what they intended. They were trying to get more people to make parts in U.S. and we are moving mask sets as we speak from U.S. to Taiwan wherever we have dual source so that we don't have to pay a tariff going into China.
Speaker Change: So we'll come back to you on the China for China's strategy. Thank you
Speaker Change: Matthew, the next question comes from Vivek Arya, from Bank of America Securities. Please proceed.
with your questions, Vivek.
Vivek Arya: Thank you for taking my questions. On the first one related to gross margins and pricing, so March quarter of gross margins were I think kind of at the lower end of your outlook even those sales were slightly above, so just anything to call there and then in general see what are you assuming for the pricing environment this year versus you know say three months ago.
Vivek Arya: The pricing environment we have assumed is basically, you know, mid-single digit type of decrease.
Vivek Arya: I think on your question on Gross Margin, why it came in on the lower end versus when sales were above the midpoint. It's a number of factors, but the bottom line is we continue to aggressively try to reduce inventory, so utilization was low.
Vivek Arya: and your inventory reserve charges were still high, so that's really a combination of those factors.
[inaudible]
Speaker Change: All right, and for my follow-up, please be recalling June and inflection quarter
Speaker Change: How should this inform us about your visibility for one quarter out in September ? [inaudible] no, no, no, no, no
Speaker Change: If we had to think about September , should we be thinking...
Speaker Change: You know, given that June is an infection, that September should be seasonal, above seasonal, should it kind of be? [inaudible]
Speaker Change: You know, in the same range as June , because you know, modeling your business when it is going through these fears of infection gets ready, so I would appreciate any help that you could provide and how we should be thinking about, you know, order plus one out of your business.
Speaker Change: So, you know, if we look at September quarter backlog today,
Speaker Change: and compared it to the June quarter backlog at the same point in time.
Speaker Change: which means, you know, June 8th, just go back a quarter and what June quarter would be at the same point in time a quarter of a row. The September backlog is higher than where June quarter was at the same point in time.
Speaker Change: and the slope of the film on the crawl chart looks quite good. So, you know, if I were to say today, I'm quite optimistic about this September quarter. [inaudible]
and Ganesh Moorthy. Thank you.
Thank you
Speaker Change: Thank you. The next question comes from Torey Svanberg, from Styphal. Please proceed with your question.
Thank you for your patience, Tori.
Tori Stamberg: Yes, thank you. Steve, one of the organization changes was to combine the 1832-bit Markencorder development tools under one group. It was just worried if you could clarify a talk a bit more about what was behind that particular change and how that might impact your share in the overall Markencorder market.
Tori Stamberg: So the change was not combining the 8-bit and 32-bit development tools [inaudible]
Tori Stamberg: The change was combining 8-bit and 32-bit business units. You know, the product groups, the development tool was only, was always one common group, but they reported in a way that they were not totally aligned with, you know, 8-32-bit.
Tori Stamberg: The reason for the change that came out during my deep dives was...
Tori Stamberg: 8-bit was pursuing 8-bit opportunities and 32-bit was pursuing 32-bit opportunities and nobody was minding the store as some of the 8-bit customers wanting to convert to 32-bit.
Tori Stamberg: So the 32-bit group was doing a lot of midland and high-end products
Tori Stamberg: and leaving the low end of 32-bit vulnerabilities so when an 8-bit customer wanted to move to a low end 32-bit we didn't have the appropriate product.
Tori Stamberg: So 8-bit will keep fighting with 8-bit trying to, you know, compete with 8-bit but customer was trying to go to 32-bit Remember this 8-bit to 32-bit conversion now has been talked about for about 35 years
Tori Stamberg: People were talking to me about that conversion back in 1994 and it didn't happen for forever.
Tori Stamberg: But it did happen during COVID, accelerated parts for how to find, so people found whatever they did and you know whatever parts they could find anywhere [inaudible]
Tori Stamberg: and so lot more designs were able to fulfill their needs with 32-bit and they stayed with 32-bit and going forward they have adapted 32-bit. So since combination of those business units
We have changed the developmental priorities. [inaudible]
to fill that hole. [inaudible]
Tori Stamberg: And the first of those products will be introduced to the market in early January and we're already working with the customers.
Tori Stamberg: to design your day and because customers can design in using one of the other products because the architectures are very comparable and they would be ready to go in production with our product when it is released. So that was the change we made.
[inaudible]
Tori Stamberg: That's a great caller. As my follow-up for Eric, Eric, the $90 to $100 million in...
Speaker Change: from the recent restructuring. Could you just talk a little bit about the linearity of that? Obviously, some of it is already played out that we can see better than the numbers. But any more color you could offer us for those savings for as we move into fiscal 26. Thank you.
Speaker Change: Yeah, I would say most of it is already played in, right? If you look at where our off-ex came in for the March quarter compared to forecast, I think it was $78 million below what our guidance to the street was because we implemented the rip beginning in an early March.
Speaker Change: So most of those actions were fully reflected in the guidance that we gave today for the June quarter. There still might be little small pieces to go, but most of those actions are completed at this point in time.
Great, thank you very much.
Speaker Change: Thank you. The next question comes from Holland, Sarah from JP Morgan. Please proceed with your other question, Holland.
Good afternoon, thanks for taking my question. [inaudible]
Steve, you already got the question on tariff-related bullings? [inaudible]
Speaker Change: You mentioned indirect impact as above your pay grade, but to be fair, this is a team, but if you look back in the 2018-2019 US China
Tariffin Treypum Flick, [inaudible]
Speaker Change: The magnitude team was actually the first to call out scene order patterns dropping within your China industrial. [inaudible]
and manufacturing customers due to the...
Speaker Change: The man on certainty caused by tariff impact at that time. The team has some of the unique profile of having very large exposure to small and…
Speaker Change: Medium-sized manufacturers, and they tend to modulate their activities fairly quickly and in real time, so given the current trade and paraph dynamics, are you starting to see any signs of a pullback or perturbations? [inaudible]
Speaker Change: in order activity from a small medium-sized China manufacturing and industrial base.
Speaker Change: Harlan, I don't recall between then and now I retired for about two years, so I don't recall what happened, but I think...
Speaker Change: I think the tariffs were very pointed at that time only for China. This time, tariffs are a lot broader in the whole world and people are still going to be buying cars and washers and drives and equipment and appliances.
and what we do see is people...
Speaker Change: From China, our customers in China rapidly moving production from China to outside of China.
For example, a lot of development tools. [inaudible]
You know, we're made in China and are...
Speaker Change: Supplier who builds a development tool, our contract manufacturer has moved their facility to Vietnam
Speaker Change: So a lot of those changes are happening and they're accelerating now but they've been happening for five years because this...
Speaker Change: You know, this thing, Trump has been saying that, you know, for two years now during all his campaigns, so this is not new [inaudible]
Speaker Change: So therefore we just think that people are going to continue to build these products but there will be a lot of movements out of China so China may have a problem but the world may not have as big a problem [inaudible]
Dr. Prima, Dr. Prima, Dr. Prima, Dr. Prima
Speaker Change: I appreciate that. And then on the sixth Megatron focus from fiscal 21 to fiscal 24.
Megatron, Revenue, Bhua, 20%, 26% Carrier, that's about...
to access the growth of the overall microchip business.
Speaker Change: representing about 47% of your revenues. Can you guys just true us up? So what was the performance of the Megatrend revenues versus your total sales in fiscal 25 and what was the percentage mix of the Megatrend revenues in fiscal 25?
Speaker Change: Megatrend Mix is pretty much held the same in terms of overall revenue growth, in terms of
Overall percentage growth.
Speaker Change: That trend has diminished or slowed down. Megatrends are still growing above the microchip rate, in terms of CHER, but with all of the inventory correction, Megatrends were just as susceptible to inventory correction as our standard markets.
Thank you.
Speaker Change: Thank you. The next question comes from Joshua Buchalter from TD Cohen. Please proceed.
Timothy Questions, Joshua
Dr. Prima, Dr. Prima, Dr. Prima, Dr. Prima
Speaker Change: Thank you for taking my question. You've never been pretty transparent parent about your limited visibility as we kind of went through the thick of the inventory digestion in the last few quarters, and it's been a lot of digestion, and I realize we touched on it a bit, but I was...
Speaker Change: I'm wondering if you could maybe comment on what's improved from a visibility standpoint that's allowing you to conclusively say, you know, we've hit the bottom here. I mean, is it simply that the bookings have gotten high enough where you're able to get a better pulse on true end demand and consumption versus inventory situation? Thank you.
Speaker Change: I think there are many pieces of it, so one of them is...
The distribution sales out is increasing after many, many quarters.
Speaker Change: So distribution is selling more to their end customers which means in some cases the end customer's inventory is getting corrected so distribution is shipping more so that's one.
Speaker Change: Number two, the bookings in March quarter were up significantly from any prior quarter, and bookings in April were higher than any other month, January , February , March.
December 2,
Speaker Change: Number three, when you look at the crawl chart, so crawl chart essentially on a daily basis looks at what we have built for the corridor and what we have bookings aged in the corridor. So if no more bookings come in in the corridor, that's the number we're going to be for the corridor.
Speaker Change: And you can compare those crawl charts, you know, one quarter versus the other at the same point in time [inaudible]
Speaker Change: So the June quarter starting backlaw was higher than March quarter on the first day of the quarter and if I look at it now on May 8th and compare it to February 8th
Speaker Change: The backlog for June quarter on May 8th is substantially higher than at the same point in time on February 8th.
Speaker Change: And when you look at the backlog for this September quarter, compare it to March or compare it to June , it's higher than both of them.
Speaker Change: and Slope at which it's increasing is also higher which means customers are increasingly you know thinking of buying more because either the inventory is correcting or they have a new product just going into production so it's multifaceted.
[inaudible]
Speaker Change: Thank you for all the color there and I think you mentioned more sustained shutdowns in the June quarter. Can you elaborate on how you're thinking about the cadence of this? I think in the past you've done some two week ones, including you're getting more aggressive. Now should we think about sort of this sustained lower production level until you hit I think it's 130 to 150 day on books inventory targets and similar where you feel comfortable in the channel. Thank you. Thank you.
Thank you.
Speaker Change: So there are two factories where we are still working a little bit of rotating time off [inaudible]
One is the Oregon facility where we could have...
You know, brought it down further.
Speaker Change: But we didn't bring it up as low because we will get below a critical mass. We brought it to a point lower and then we are running a two weeks rotating time out of 13.
Speaker Change: And then reason for that is, you know, there is a factory where all our advanced products are and by having a two-weeks rotating time off
Speaker Change: We can ramp it very rapidly by just removing the rotating time off.
Speaker Change: We're not doing the same thing in Colorado. We're not doing the same thing in Philippines, but that facility was unique in the products it builds, why we decided to do it that way.
Speaker Change: Now our plan is to run the production at these levels which is well below really what we are shipping today so that the inventory could come down.
Speaker Change: But your last part of your question is, would we continue to run this way till our inventory comes down to 130 to 150 days? And the answer to that is not.
And the reason for that is, if you wait, [inaudible]
Till the inventory comes down to 130 to 150 days
Speaker Change: Then for the following quarter, your inventory can't decline anymore because you really can't size.
Speaker Change: You may have to grow your capacity 40-50% in a single quarter [inaudible]
Speaker Change: Because we are running so much below consumption, plus revenue is growing [inaudible]
Speaker Change: So, therefore you have to model it where you have to start growing capacity or start growing production a few out of the harrow time so you don't have a hill to climb that you can climb in rehiring and retraining people
Speaker Change: We don't believe that inflection point is in this quarter or next quarter, but as we progress through the fiscal year we could get there where we need to start ramping the factories.
Thank you.
Thank you. The next question comes from William Stein…
from Tourist Securities. Please proceed.
Thank you for your questions, William.
Dr. Prima, Dr. Prima, Dr. Prima, Dr. Prima,
Great, thank you [inaudible]
Speaker Change: Stephen, appreciate all the clarifications you've provided. I wanted to dig into the earlier question about China for China. And as I recalled the business update from the March time frame.
I thought that you talked about some of the product.
Some of the productions you'll portfolio.
Speaker Change: Bit of a longer being meaningfully competitive in China, especially I think what you characterize as standard products and I thought that was the reason for this.
Speaker Change: Partnership that now it sounds like that strategy has changed. So can you talk about your competitive positioning in China?
Speaker Change: Some of your products are less competitive, how that influences the total, I think it's called total solution selling strategy that you have. Thank you.
Speaker Change: I think I don't know if she misunderstood, but I don't think we set a product for less comparative.
[inaudible]
Speaker Change: There's a push from the Chinese government to the local industry to design in the local products.
Speaker Change: And so a lot of the customers want to use a local product to check that box.
Now when we talk to the customers... [inaudible]
Speaker Change: They like the Western product better than the local product but they under pressure from Chinese government so if you can provide them the you know product with Western quality, Western design, Western spec, but under a local brand then you get the best of both worlds. [inaudible]
Speaker Change: So that's what we were trying to do to provide our Western made product.
Speaker Change: Under a Chinese logo from a local company and many other customers were telling here that's exactly what I want.
Speaker Change: Now what happened then is that they changed the definition of
Speaker Change: You know, where it is made off, it used to be, you know, assemblies where the product is formed, changes shape significantly and they redefine that to where it is diffused, which means where it is fact. So, you know, the product, the product.
Speaker Change: So therefore all of the U.S. made product won't fit into their China for China's strategy, all of a part made in Taiwan and Germany and Japan and everywhere else will fit.
Speaker Change: But, you know, that's not a complete portfolio. So, we're redoing that strategy and made land up.
Speaker Change: Building relationships with some of our US-made products.
Speaker Change: I also made in Taiwan on elsewhere, but I don't want to rush to it. We are already transferring some of the math sets.
Speaker Change: You know where the process already runs in Taiwan at one of the foundries
Speaker Change: But we're not forming new relationships to transfer our US product. Instead we're giving feedback to the government. [inaudible]
Speaker Change: that the strategy is having an opposite effect where it is an incentive to move US production out. But if there is no change in the strategy and the current rules continue in other few weeks, then we will probably start to move some US production elsewhere.
Speaker Change: Have seen some and may seen more competition over time from China-based companies and semiconductors is in the kind of the lower end of the standard microcontroller and analog products, but we won't see it in kind of our higher and more complex products at least not in the near term.
Okay, thank you [inaudible]
Thank you.
Thank you. The next question comes from you.
Vijay Rakesh from Mizzo, please proceed with...
Thank you for your questions, Vijay.
Jay Rakesh: Yeah, hi Stephen, quick question. On the section 232 talking about your bringing product back to the US, what are you contemplating? How are you looking at that? What's the time frame for that?
And I follow. Thank you for what? Thank you very much.
Jay Rakesh: Just wondering if you're expecting any section to occur due to rollings coming down in terms of trying to bring products back to the US?
Jay Rakesh: Well, I just finish explaining that we're taking product from the US to elsewhere. You know, the current rules are such that produce the product anywhere but don't produce them in China and don't produce them in the US.
Jay Rakesh: You are in best shape if you stay away from US and you stay away from China.
Um...
Jay Rakesh: because you know China has US and US has China so if you produce elsewhere [inaudible]
Jay Rakesh: You love by everybody else, so I think those are the rules away I understand it today.
Jay Rakesh: But you know, we have rules of changing every day and we will do whatever the appropriate thing to do is we have fair amount of overlap in our products where we produce them in US and produce them in Taiwan on many of our products. [inaudible]
Jay Rakesh: and some other products we produce them in Germany and we produce them in Japan, but as the rules contribute to change we will evolve that strategy to ensure that we are best positioned with whatever the final rules are.
Thank you very much.
I'm going. Thanks.
So, you know, so...
You know, we guided that June quarter inventory.
Somewhere between 215 and 225 days.
Jay Rakesh: You know, if I just kind of project ahead in September , I think it drops below 200. I don't know what the exact number would be. And, you know, I'll...
Jay Rakesh: There is a number at which we need to start rehiring people and start growing production because if we wait till the inventory gets into that band
Jay Rakesh: then we'll have to create the full output of a quarter fresh without being able to take it from the inventory. It would be a growth unachievable because that's a hill to climb. So, you know, we understand that how much we can grow per quarter and based on that model.
Jay Rakesh: We think we will start growing the production well before it hits 150 days.
Got it. Thank you.
Jay Rakesh: Thank you. The next question comes from Quinn Bolton from Needham & Co.
Please proceed with your questions.
Quinn Bolton: Hi guys, thanks for taking my questions. Thanks very much. Just a quick follow up on that last question. And you guys start to, you know, you get below the 200 days somewhere between 200 and 150.
Quinn Bolton: You start increasing production. Is that where you could see the incremental margin that you talked about being 85% in the June quarter? Is that where it could start to tick even higher or is there a scenario where you could see better than 85% incremental margins before that point? Maybe just because the reduction in inventory reserves. Thank you.
[inaudible]
Speaker Change: Dr. Prima, Dr. Prima, Dr. Prima, Dr. Prima,
There are a lot of moving parts.
Speaker Change: You know there is a lot of moving parts there is as the inventory comes down you're right off go away
Speaker Change: because even the slow moving parts are no longer higher than 18 months of inventory.
Your utilization starts to improve when you ramp the fab.
Speaker Change: There are a lot of moving parts but I think we can...
You know, roughly keep that sort of...
incremental margin falling to the bottom for a few quarters. [inaudible]
That's sort of the best I can describe.
Chris Denley: Thank you. The next question comes from Chris Danely from Citibank. Please proceed with your questions, Chris.
Chris Denley: Hey, thanks guys, Steve Erich, just a question on the inventory write downs, write offs, et cetera, et cetera. How much of that has been written off written down, and then when will you start to sell that, and what's the impact going to be on the P&L for planning purposes?
Chris Denley: Well, it is, it's a bit unpredictable on when we will see it, right? If we, if we have an order on the backlog today, we wouldn't have written it off this last quarter. So, you know, it's just based on the pattern of orders that...
Come in.
Chris Denley: We know that we are building very long-life products that are going to sell over time, it's just that predicting that is difficult [inaudible]
Chris Denley: But, you know, every quarter we have some sultry of previously written off inventory and because we've written off so much over the last...
Chris Denley: 5 or 6 quarters, that tail end to gross margin is going to come. We don't necessarily think that's happening this quarter, but I think as we progress through fiscal 26, we're going to start to see benefits of that.
I guess we'll be your take on just Microchips.
Chris Denley: Product positioning in the microcontroller market. Maybe, you know, how it's gone over the last year or so and...
Chris Denley: You know, do you think that anything needs to change? Do you guys think you need to, you know, add on anything to the product lines or do anything different layers? You know, sort of autopilot right now. Just appreciate your thoughts on the market share and the product positioning. Thank you.
Well, there's really nothing out of pilot, there is a...
Extreme sense of urgency, Rich and I have brought back. Thank you very much.
to the group, San.
Chris Denley: And we've made number of organization changes, the 8-bit, combining with 32-bit is the most visible to you but we made other changes across the company
Chris Denley: and the new sense of vigor and a new sense of sense of urgency.
Chris Denley: and you're starting to see essentially, you know, when I look across the company, every indicator is starting to move in the right direction. Let's get started.
Chris Denley: revenue growth, gross margin growth, operating margin growth, EPS growth, inventory reduction, you know, product schedule, you know, pricing everything else is really just lining up and customer counts [inaudible]
Chris Denley: So you know all those things are happening so it's nothing business as usual but I think you know when it gets to specific products
Thank you. Good night.
Speaker Change: You can't have a CEO admit on a conference call to all the competitors. [inaudible]
that his products are XYZ. [inaudible]
No, our products are great
But where, where we missed a board? [inaudible]
Speaker Change: You know was in some of the 8-bit to 30-bit transition at the low end and I you know I did admit that I highlighted that and we're correcting it but no you know beyond that I think products are worth [inaudible]
Speaker Change: Yeah, you know what I mean? It's more of this conversion, too, and even in development tools, we're going to make it...
Speaker Change: It's much easier for customers to move between our product lines. A great deal of automation is being given to our customers to help them design in our product, so we are moving very aggressively on a number of fronts here.
Very aggressively.
Speaker Change: So one of the thing I would highlight is really on the development tools. [inaudible]
So the, you know, the path strategy was...
Speaker Change: that Microchip has its own unique development platform on 32-bit microcontrollers. There was harmony.
Speaker Change: and customers have to adopt that development platform to design with our products.
Speaker Change: Now, that was required when our products were with either the proprietary architecture.
which the third parties didn't support.
Speaker Change: Or when very originally we were trying to do MIPS-based products which were not supported by the third party ecosystem and the third party ecosystem.
Speaker Change: Now, since we now are doing most of our 32-bit products on, you know, arm-based architecture, most large customers are using either Kyle or IAR or you know
Speaker Change: You know, many a number of these development platforms which are pretty standard. So, Microchip was pushing its own platform to the people who already had a platform, this providing a sort of resistance path.
for adopting our products [inaudible]
So I think what we have done very recently... [inaudible]
Speaker Change: is changed that strategy and now we are up and running to all of these property platforms.
Speaker Change: So, therefore, when we go into a large customer we just have to position our products and not ask them to change their development platform and that has really dropped one barrier and we are succeeding in getting new designs.
Alright, thanks a lot guys, that's great. Thank you.
Speaker Change: Thank you. The next question comes from Joe Moore from Morgan Stanley . Please proceed with your questions, Joe.
Joe Moore: Great, thank you. I know the dividend has always been a big priority. Is there any scenario where you could see that coming down in different economics or constants? I'm just asking to get the question a lot.
You know could be downgraded, we took strong action last quarter.
Joe Moore: and brought a debt level down by about $1.1 billion. You know, with that, we reaffirmed our investment and grading by both grading agencies and kept the dividend intact.
Joe Moore: Now as we look at it going forward with a revenue increase in cash getting liberated from
Joe Moore: You know, we're talking about 85% of the incremental revenue fall through I don't really think you know where any situation where there is risk so I think we have put that behind us [inaudible]
Speaker Change: Okay. I appreciate that. Thank you. And then I've also gotten questions on the non-GAAP adjustments, the preferred dividend coming out of the non-GAAP numbers. You know, can you just describe the rationale for that? Yeah.
Speaker Change: Well, it's a dividend, right? So for gap accounting purposes, the preferred dividend is shown on the income statement, but there are many companies that have these mandatory preferred and placed and exclude them from the non-GAAP results, because it's really an equity instrument. It's not a dead instrument.
Got it, Mason, sorry, thank you.
Speaker Change: Thank you. The next question comes from Janet Ramkissoon from Quadra Capital. Please proceed with your questions.
and Janet.
Janet Ramke-Soon: Hi Steve, thanks, great job and what you've been able to accomplish in such a short period of time.
Speaker Change: I wanted to draw down a little bit on the aerospace and defense. I was a little bit surprised that it's up to 18%
Speaker Change: and there are a lot of changes in the defense area where we see a lot of the traditional defense companies working more with some of the new players in market.
Speaker Change: SpaceX, and World Industries, and guys who were making drones and robots.
Speaker Change: Can you give me a sense of what your exposure is to some of these new markets? [inaudible]
Speaker Change: And I noticed you did say that one of the focus was to switch from 5G to AI. How does that tie into this?
Speaker Change: DeFence Business, and addressing some of the newer opportunities with some of these more innovative players in the space.
Speaker Change: So, you know, a good question on that. So, when it comes to new space, we've been working at those customers for quite some time, and now there's this new generation of new defense customers coming up.
and what we'll be doing is...
Speaker Change: Taking some of our products instead of rat hard, you become rat tolerant
Speaker Change: We've been now introducing more plastics into our aerospace and defense product line.
Speaker Change: and then working with our different product be used to convert more products to that rad tolerance or plastic product line.
Speaker Change: that is more focused towards these new defense or new space customers.
Speaker Change: Can you give me a sense of how you characterize the opportunity for you, how large is it? Is this just a small thing, or is it could this be emerging to a good growth area for you? [inaudible]
Speaker Change: So, I think Janet, you know, all these new things, you know, is an opportunity and we're engaged with everyone.
Speaker Change: But I think where the real growth is going to come from is two factors.
Number one, US Defense is talking about rebuilding its arsenal. No.
Our Defence Arsenal and we are in everything.
Speaker Change: There's nothing in our US defense, no battle tank, no plane, no missile, no nothing that Microchip is not in it. We are in everything.
Speaker Change: So I think that's where the growth comes in US. Now you can add to that drones and SpaceX and all that, but those are not multi-billion dollar opportunities.
Speaker Change: And the second piece on the growth is really what's happening in NATO. NATO is going to double and triple its budget over the next two years, three years.
Speaker Change: and because they are being pushed to invest for the defense. So they are rebuilding their arsenal, rebuilding missiles and tanks and rifles and drones and radars and all that and we are in all that stuff.
Speaker Change: So we are already hearing from defense customers in Europe about a significant opportunity
Speaker Change: Just about four weeks ago, one of the major customer from France, [inaudible]
Speaker Change: You know, heard about that we were closing fab two, you know, Tempe fab, and he flew down to Chandler to come see me, you know, confronting me on, he's planning to double his business, why am I closing fab? [inaudible] We're closing fab, we're closing fab
Speaker Change: Then I explained him that his father's products were not made in fab two, his products are very hard or whatever they made in other fabs and
Speaker Change: In one or two items, they may be in fab two, we have inventory and we're transitioning them to other fabs, so you could kind of see that customers are looking for significant growth and they want to ensure that Microchip is in a position to meet their needs.
[inaudible]
Thanks, that's very helpful. [inaudible]
Thank you.
Speaker Change: Thank you. The next question comes from Christopher Rolland from Siskihana International. Please proceed with your questions, Christopher
Christopher Rowland: Thanks for the question. I'll try to be brief. Steve, how do you see market share dynamics and microchip? The actual MCU market playing out? Do you see China taking share? Are there any more preventable competitors?
and you expect your share to increase. Thanks.
Christopher Rowland: I absolutely expect our share to increase in MCU in the coming, you know, a couple of years and...
Christopher Rowland: Some of it has to be, some of it is driven by many of our microcontroller customers that have been
Christopher Rowland: You know, sitting on a significant inventory haven't been buying the full boat of products [inaudible]
Christopher Rowland: and just starting this quarter, we're starting to see, increase bookings from them, increase purchasing from them, our guidance for the June quarter is on the upper end of the industry.
And I think the market share gains are reflected in them.
Speaker Change: Thank you Steve. One other and I apologize if this was asked but...
Christopher Rowland: AI is a percentage of revenue and you in a bunch of new looks like AI product announcements, optical power, PCIe.
Speaker Change: Are you expecting any of these to be really needle-moving and are of particular emphasis for you guys moving forward? Thanks Thank you.
Speaker Change: So, you know, we continue to see the percentage of cells that increasing. I think we had given a number last year, it was about 4% of cells.
Speaker Change: as of the latest measurement, it's just over 6% of sales, so we continue to see strength in that particular marketplace for us.
Speaker Change: and we continue to introduce new product lines within that area.
Speaker Change: In fact, one of the reorganizations that we did was we created an AIML product group
Speaker Change: to help, we've got almost eight different reuse within the company that need either models or model zoos or accelerators on their products. That group is helping coordinate that activity within the organization. Thank you very much.
Great, thank you
Thank you, the next question comes in.
John Craig Ellis from B Riley Securities, please.
to see if it's your question, Craig.
Speaker Change: Yeah, thank you for taking the question. I've wanted to go back to the point that Rich made earlier about the significant changes that Microchip had made to improve.
Product Development and Product Development, Deficiency Procustomers
Speaker Change: What I was hoping you could do is just share an example or two of what those changes are and more importantly help us understand when would investors see the benefit of the changes that you've made and how material could they be in say 2026 and yours beyond. Thank you.
[inaudible]
Thanks.
Speaker Change: You know, that's what we've helped customers do is essentially speed up their development time And so, you know, it becomes a productivity tool in terms of time to market [inaudible]
Speaker Change: So we've been training an eternal model for almost two years in terms of riding code for our products.
Speaker Change: We decided to provide that tool that we've been using internally with over 1000 engineers for their own productivity, free of charge.
Speaker Change: and so we've essentially handed our customers an internally trained tool that we found is 40% plus percent productivity improvement to help their own embedded control designers.
Speaker Change: And we continue to have any enhancement that we make internally for our internal designers. We are now passing that on to our customers as well.
Speaker Change: And so we've gotten great feedback from customers that have started using it in terms of productivity improvements, in terms of relating that to revenue, that is difficult to say at this point Our goal is
Speaker Change: to make our customers life easier, and to make the transition to microchip development environment or using microchip as a whole easier.
Speaker Change: and also making customers tend to choose microchip over someone else because of the ease of designing in a microchip product. That's the goal.
Speaker Change: And is there anything about those tools, Rich, that would help them if they're going to use Microchip in one product on a system board, more easily designed in Microchip products for other parts of that system board so that
Speaker Change: The total system solution ambition that Microchip has had is something that's facilitated with the capability you've developed.
Speaker Change: Yeah, so we have work going on, so we actually have AI product recommenders that actually do that now for customers, we've started unleashing that to them.
Speaker Change: But later in the year, we will actually be offering board related support.
for TSS-type solutions.
Speaker Change: and so you can see where we're going. So now you've got product recommenders, now you've got software development tools, now you can start to combine product recommender with software development tools and you can start recommending blocked diagrams and putting that all together.
Thank you.
Thank you, Rich
Speaker Change: Thank you. They all know for the questions at this time, and now I'd like to hand over to Mr. Sanghi for closing remarks. Thank you so.
Sanghi: Thanks everyone for joining us, as you can see from our report that...
Sanghi: We are turning the corner and we are looking for significant improvement in our financial performance in this fiscal year and I will see many of you on the road as we go to the conferences this quarter. Thank you.
Go to Beadaholique.com for all of your beading supply needs!
Sanghi: Thank you very much, ladies and gentlemen, that does conclude today's helicom
Conference, thank you very much for joining us.
You may know.
Thank you for watching!
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