Microchip Technology Inc (MCHP) — Q4 2024 Earnings Call Transcript

Thank you and good afternoon everyone. During this call, we will be making projections and forward-looking statements about future events and the company's financial performance. We want to remind you that these statements are predictions and actual events and results may differ significantly. Please refer to our press release issued today and our recent SEC filings, which outline important risk factors that may affect Microchip's business and results. Joining me today are Ganesh Moorthy, Microchip’s President and CEO; Steve Sanghi, Microchip’s Executive Chair; Rich Simoncic, Microchip’s COO; and Sajid Daudi, Microchip’s Head of Investor Relations. I will present our fourth quarter and full fiscal year 2024 financial performance. Ganesh will then discuss our results, the current business environment, and provide guidance, and Steve will update us on our cash return strategy. We will also be available to answer specific questions from investors and analysts. Our press release and this call will include information related to various GAAP and non-GAAP measures. A full GAAP to non-GAAP reconciliation is available on our investor relations page, and we have included this information in our earnings press release for your reference. Additionally, we have provided a summary of our outstanding debt and leverage metrics on our website. Now, I will review some operating results including net sales, gross margin, and operating expenses. Aside from net sales, I will refer to these results on a non-GAAP basis, excluding the impacts of acquisition activities, share-based compensation, and certain other adjustments as detailed in our earnings press release and reconciliations on our website. Net sales for the March quarter were $1.326 billion, reflecting a 24.9% decline sequentially. We have provided a summary of our net sales by product line and geography on our website for your convenience. On a non-GAAP basis, gross margins were 60.3%, which included capacity underutilization charges of $32 million. Operating expenses accounted for 27.4% of sales, and operating income was 32.9%. While our operating income exceeded the midpoint of our guidance, our cash taxes were higher than expected. Non-GAAP net income was $310.3 million, with non-GAAP earnings per diluted share at $0.57, matching the midpoint of our guidance. On a GAAP basis for the March quarter, gross margins were 59.6%. Total operating expenses reached $536.4 million, including acquisition and tangible amortization of $151.2 million, special income of $16.9 million primarily from a settlement related to unclaimed property audit, share-based compensation of $37.4 million, and $1.1 million in other expenses. GAAP net income was $154.7 million, resulting in a diluted earnings per share of $0.28. For fiscal year 2024, net sales totaled $7.634 billion, down 9.5% from fiscal year 2023. On a non-GAAP basis, gross margins were 65.8%, operating expenses were 22% of sales, and operating income was 43.9% of sales. Non-GAAP net income was $2.698 billion, with an EPS of $4.92 per diluted share. On a GAAP basis, gross margins were 65.4%, operating expenses were 31.8% of sales, and operating income was 33.7% of sales. Net income was $1.907 billion, translating to an EPS of $3.48 per diluted share. Our non-GAAP cash tax rate was 18.8% for the March quarter and 14.5% for fiscal year 2024. We expect our non-GAAP tax rate for fiscal year 2025 to be around 13%, excluding the transition tax and any audit settlements related to past accrued taxes. We remain optimistic that rules requiring companies to capitalize R&D expenses may be postponed or repealed. If that occurs, we would expect a favorable adjustment of about 200 basis points to Microchip’s non-GAAP tax rate in future periods. Our inventory balance as of March 31, 2024, was $1.316 billion, corresponding to 224 days of inventory, which is up 39 days from the preceding quarter, aligning with our expectations given the challenging revenue quarter we encountered. For the midpoint of our June 2024 quarter guidance, we anticipate a modest increase in inventory dollars and an increase in days of inventory due to lower cost of goods sold stemming from the current revenue downturn, which we believe represents the low point of the cycle for Microchip. We are also continuing to invest in building inventory for high-margin, long-lived products that are being phased out by our supply chain partners, which accounted for 14 days of inventory at the end of March. Inventory at our distributors in the March quarter stood at 41 days, up 4 days from the prior quarter. Distributors reduced their inventory in the March quarter as their sell-through exceeded sell-in by about $125 million. The rise in inventory days is attributed to a lower cost of sales for Microchip during the March quarter used in this calculation. Our operating cash flow for the March quarter was $430 million, and our adjusted pre-cash flow was $389.9 million. As of March 31, our total cash and investments reached $319.7 million, with total debt increasing by $312 million during the March quarter and net debt rising by $273.3 million. Our adjusted EBITDA for the March quarter was $503 million, representing 37.9% of sales. Over the trailing 12 months, our adjusted EBITDA was $3.623 billion, with a net debt adjusted EBITDA ratio of 1.57 as of March 31, 2024, up from 1.45 as of March 31, 2023. Capital expenditures were $40.1 million for the March quarter and totaled $285.1 million for fiscal year 2024. We forecast capital expenditures for fiscal year 2025 to be approximately $175 million. Depreciation expense for the March quarter was $45.8 million. Now, I will hand it over to Ganesh to share his insights on our performance in the March quarter and provide guidance for the June quarter.

Thank you, Eric, and good afternoon, everyone. Our March quarter results were consistent with our guidance, with net sales down 24.9% sequentially and down 40.6% from the year ago quarter, as we endured through a major inventory correction. Non-GAAP gross margin came in as expected at 60.3% and non-GAAP operating margin was better than expected at 32.9% due to the strong expense control programs we had in place. However, as Eric mentioned, our tax rate was higher than expected, and as a result, our consolidated non-GAAP diluted EPS only met expectations at $0.57 per share. Our revenue decline resulted in March quarter EBITDA dropping, and as a result, our net leverage ratio rose to 1.57x. We expect our net leverage to rise modestly for a few quarters, as trailing 12-month adjusted EBITDA drops when replacing stronger prior year quarters with weaker current year quarters. However, our cash generation capability remains strong, and we are committed to our capital return plan. Our capital return to shareholders in the June quarter will increase to 87.5% of our March quarter adjusted free cash flow as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025. Reflecting on our fiscal year 2024 results, it was a roller coaster year with a positive start that was followed by a major inventory correction. As compared to fiscal year 2023, revenue declined 9.5% to $7.6 billion. Non-GAAP operating margin was resilient at 43.9% as we took the actions required to respond to the major inventory correction. Capital return to shareholders through a combination of dividends and share buybacks in fiscal 2024 was $1.89 billion, representing a 15.4% growth as compared to fiscal year 2023. My thanks to our worldwide team for their support, hard work, and diligence as we navigate a difficult environment and focus on actions that we believe position us well to thrive in the long-term. Taking a look at our fiscal year 2024 net sales from a product line perspective, our mixed-signal microcontroller net sales were down 10.2% and represented 56% of Microchip's overall revenue. Our analog net sales were down 15.2% and represented 26.4% of Microchip's overall revenue. While we don't normally break out our FPGA product line results, it is noteworthy that our fiscal year 2024 FPGA revenue exceeded $679 million and set another record. FPGA revenue grew over 22% as compared to fiscal 2023 and delivered operating margins above corporate average. We deliver market-leading mid-range FPGA solutions with best-in-class low power, reliability, and security, and are especially well-suited for the fast-emerging opportunities around artificial intelligence at the edge. Our overall FPGA design win momentum is strong across multiple end markets. A few other product line notes of significance: Early in April, we closed our acquisition of Seoul, Korea-based VSI, an ADAS and Digital Cockpit Connectivity Pioneer, to extend our Automotive Networking Market leadership. This acquisition adds Automotive SerDes Alliance Motion Link technology, otherwise known as ASA-ML, to Microchip's broad Ethernet and PCIe automotive networking portfolio to enable next-generation software-defined vehicles. With the anticipated increase in the adoption of advanced camera-based driver assistance systems, in-cabin monitoring, safety and convenience features, and multi-screen digital cockpits for next-generation software-defined vehicles, there is a growing requirement for more highly asymmetric raw data and video links and higher bandwidths, which the ASA Motion Link Open Standard supports. Also last month, we closed our acquisition of Neuronix AI Labs, whose innovative software technology enhances AI-enabled intelligent edge solutions and increases neural networking capabilities. This technology expands our capabilities for power-efficient AI-enabled edge solutions deployed on FPGAs. Neuronix AI Labs provides neural network sparsity optimization technology that enables the reduction in power, size, and calculation for tasks such as image classification, object detection, and semantic segmentation while maintaining high accuracy. Finally, in July, we expect to announce our entry into the 64-bit embedded microprocessor market with a suite of products, development tools, and other support requirements to address high-performance embedded processing applications, including AI-enabled edge solutions. This will extend our strong 32-bit embedded microprocessor portfolio to higher performance and increased capabilities while preserving Microchip's historically strong ecosystem of leading development tools to make adoption easy for embedded system design engineers. Microchip is the only company to offer the widest embedded control and processing platform from 8-bit to 64-bit, as well as FPGAs, with a common development tool ecosystem that's empowering customers to innovate and reuse their work across a wide spectrum of markets and applications. Now for some color on the March quarter and the general business environment. All regions of the world and most of our end markets, with the exception of aerospace and defense and the artificial intelligence subset of data centers, were weak. We believe that our product shipments were significantly lower than the end-market consumption of our products as our distribution channels drained inventory during the quarter. Our broad base of customers continued to lower their inventory and adjust their business plans in the midst of a weak macro environment and an uncertain outlook. With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe that as inventory destocking as well as the reduction in target inventory levels that is underway at multiple levels, that our direct customers and distributors buy from us, our indirect customers who buy through our distributors, and in some cases our customers' customers. We are however, also seeing early signs of green shoots in our business. First, the level of requests to cancellations and push-outs has started to subside. Second, our bookings have started to pick up, albeit from low levels. February bookings were the highest in eight months. March bookings were the highest in all of fiscal 2024, and April bookings were higher than March. Third, the new bookings are aging over a shorter period of time. And fourth, the number of expedites and shipment pull-in requests are growing. Collectively, these green shoots, we believe, are pointing to the formation of a bottom. Our average lead times continue to be eight weeks or less. During a period of business uncertainty, we believe short lead times are the best way to help customers navigate the environment successfully and improve the quality of backlog placed with us. However, the significant reduction in lead time is also resulting in reduced near-term visibility for our business. Given the severity of the inventory correction, our factories around the world are running at lower utilization rates. And our pre-major fabs will take another two-week shutdown in the June quarter to help control the growth of inventory. Our internal capacity expansion actions remain paused. We expect our capital investments in fiscal year 2025 will be low, even as we prepare for the long-term growth of our business. On the CHIPS Act front, we have nothing new to report. The CHIPS office has completed their diligence for the grants we are seeking, and we are working towards an agreement. At this stage of a major inventory correction, we believe that the days of inventory metric, whether for Microchip or for our distributors, can be deceptive, as this is a backward-looking indicator measuring off of the baseline that is well below where we believe end-market consumption is at. For inventory planning, we are, therefore focused on where we believe consumption is running and will likely run in the coming quarters. We continue to work with our distribution partners to attempt to find the right balance of inventory required to serve their customers, manage through their cash flow requirements and be positioned for the eventual strengthening of business conditions. The operating expense reduction efforts we implemented last quarter, including broad-based salary sacrifices, are continuous this quarter. The shutdown for manufacturing team members and pay cuts for non-manufacturing team members are consistent with our long-standing culture of shared sacrifices and down cycles and shared rewards and up cycles. Our culture of shared sacrifice protects our valuable employees from layoffs, helps enable us to support customers and maintain our design win momentum, helps ensure that manufacturing capacity can be turned on quickly as business conditions strengthen, and helps enable our product development teams to maintain their pace of new solution introductions. Now let's get into the guidance for the June quarter. While we see a number of green shoots in our business indicators, we still need turns orders within the quarter to meet our guidance. Operating in a high turns environment has historically been normal for Microchip. It is just not a position we have found ourselves in over the last few years due to the supply-constrained high backlog environment, we and the industry have experienced. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the June quarter to be between $1.22 billion and $1.26 billion. We believe that the June 2024 quarter marks the bottom of the cycle for Microchip and that our business will return to sequential revenue growth in the September 2024 quarter. We expect our non-GAAP gross margin to be between 59% and 61% of sales. We expect non-GAAP operating expenses to be between 28.25% and 28.75% of sales. We expect non-GAAP operating profit to be between 30.25% and 32.75% of sales, and we expect our non-GAAP diluted earnings per share to be between $0.48 and $0.56. We believe that the fundamental characteristics of growth, profitability, and cash generation of our business remain intact. We are confident that our solutions remain the engine of innovation for the applications and end markets we serve. Our focus on total system solutions and key market megatrends continue to fuel strong design win momentum, which we expect will drive above-market long-term growth. We remain committed to executing our Microchip 3.0 strategic imperatives, which we believe will deliver sustained results and substantial shareholder value. Last but not least a month ago, we appointed Rich Simoncic as Chief Operating Officer. Rich is a Microchip Lifer who has been with us for 35 years in many different capacities, which has been expanding his role over the last few years, and he and I will jointly lead the Microchip global enterprise so that we can apply our combined leadership capacity to engage the opportunities and challenges that are ahead of us. With that, let me pass it back on to Steve to talk more about our cash return to shareholders.

Thank you, Ganesh, and good afternoon, everyone. I would like to provide you with a further update on our cash return strategy. The Board of Directors approved an increase in the dividend of 18% from the year ago quarter to a record $0.452 per share. During the last quarter, we purchased a record $387.4 million of our stock in the open market. We also paid out a record $242.5 million in dividends. Thus, the total cash return was a record $629.9 million. This amount was 82.5% of our actual adjusted free cash flow of $763.4 million during the December 2023 quarter. Our net leverage at the end of March 2024 was 1.57 times. Ever since we achieved an investment-grade rating for our debt in November 2021 and pivoted to increasing our capital return to shareholders, we have returned a total of $4.23 billion to shareholders through March 31, 2024, by a combination of dividends and share buybacks. During this period, our share buyback in the open market was approximately 30.4 million shares, representing approximately 5.7% of our shares outstanding. In the current June quarter, we will use the adjusted free cash flow level from the March quarter to target the amount of cash returned to shareholders. The adjusted free cash flow excludes amounts we collected from our customers for long-term supply assurance payments; these payments are refundable when purchase commitments are fulfilled. Our adjusted free cash flow for the March quarter was $389.9 million, so our target return to shareholders would be 87.5% or $341.2 million of that amount. However, as Ganesh mentioned, we did complete two small acquisitions in this June quarter. So we are reducing our share buyback amount to reflect the cash outlay for those deals. Thus, in the June quarter, our cash return to shareholders is expected to be $315.3 million, out of which dividends are expected to be approximately $243 million and our expected stock buyback will be approximately $72.3 million. Going forward, we plan to continue to increase our adjusted free cash flow to return to shareholders by 500 basis points every quarter until we reach 100% of adjusted free cash flow returned to shareholders through dividends and share buybacks. They will take three more quarters, and we expect that dividends over time will represent approximately 50% of our cash returns. With that, operator, will you please poll for questions.

Thanks for taking my question. Ganesh, you were suggesting June to be the bottom-line for September to grow sequentially because of green shoots. But to be fair, green shoots were suggested on the last call also. So what's the difference between the last call and this call and if you could help us maybe quantify what has been maybe the base of bookings increase year-on-year or quarter-on-quarter so far, so we can get sense for a base of recovery into September, and then maybe if I could also ask Eric on a related note is, 60% also the trough for gross margin, if June is the bottom, does it also mean 60% is the trough for gross margins? Thank you.

Great. Thank you, Vivek. I don't think we mentioned green shoots at the last earnings call, but we did say that one of our banking sessions that we were at. And that was the first time we began to see it was in the March time frame. And the momentum is picking up, right as we go through March and April and May. I mentioned what the bookings we are doing on a relative basis over that time. We can see how many more people are asking for pull-ins and expedites and all of that. So it's a qualitative view looking at how we integrate the last two or three months of where momentum is coming in, where the customer feedback is coming in that reflects our view that the June quarter is the bottom, and September quarter is growth.

And then the follow-up question for me on that was on gross margin. And would I expect if June is the trough in revenue if gross margin would bottom-out. And I believe that to be the case. I mean, obviously, we haven't given guidance yet, and there's factors that apply to that, that we don't know yet in terms of product mix and where we'll be running our factories. But I think that we are bouncing along the bottom on gross margin.

Great. Thank you.

Thank you.

Yes, thank you. Good afternoon. I guess the question is if there's any difference that you are seeing from any of the different end-markets? I mean, you talked about some of the booking stabilization improvement that you've seen. How would you characterize that among the different end markets?

I can't point to a specific end market that is performing better or worse. Overall, aerospace, defense, and the AI segment of data centers are doing well, which is helping to improve performance. However, some industrial customers are still experiencing weakness, while others are beginning to show signs of recovery with increased rush orders that affect other end markets as well. There is no distinct trend in any particular end market regarding inventory levels.

Thanks. As a follow-up, Eric you talked about perhaps if still things go well, June the trough and then June is likely the bottom for gross margins as well. As you go forward, as we pull our way out of this, what do you think would be the trajectory of gross margins? And I guess I asked that taking consideration the fact that your internal inventory is still high. So how would we think about gross margins in the context of recovery as you have to bring your own inventories down to normal?

So it does depend on the revenue trajectory and then how we would run our factories to respond to that. And so it's not a question that I can 100% answer today. But our cost structures are still in good shape. Average selling prices are absolutely hanging in there. So with that, we have confidence in our long-term model and our ability to get back there, but the trajectory and how we get there is going to very much be revenue dependent, which will drive certain actions to increase output from our factories. So I know that's not specifically answering your question, but I think that's the best we can do right now.

Okay, fair enough. Thank you.

Good afternoon. Thanks for taking my question. Can you just talk about channel sell-through dynamics from your global distributors? In March, you mentioned sell-through $125 million higher versus sell-in. Is that a similar delta here in the June quarter? And if excess inventories at end customer of distributors are coming down, I would assume that distribution sell-through is starting to grow. Are you seeing that this quarter? And is this maybe what's also giving you confidence that June is the bottom?

So Harlan, thanks for the question. The level of inventory that is past what our distributors had that has been with our customers is not always visible to us. I think we can get some sense of that from what the distribution sell-through is. But there is also a second factor, which is some of those customers are also reducing the months of inventory they want to carry. So it's a multipronged answer to it. But what we can see is that distribution is part of the placing of additional orders on us. So they are seeing how they are managing their end customers, their inventory and placing incremental orders on us. So that must have some relevance to how they're viewing things, but I don't have a definitive answer on where sell-through is going to end up versus sell-in here in the June quarter, at least not at this time.

Thank you for that. And then just a quick follow-up. So direct customer shipments were almost down nearly 30% sequentially, while these shipments were down only about 20% sequentially in March. Does that suggest that excess inventories are maybe a bit more pronounced at your direct customers? And if your lead times are sub-eight weeks, you guys only have visibility through the end of this quarter. So what gives the Microchip team confidence that shipments to direct customers post-June will be growing sequentially as you aren't looking beyond that and you don't really have visibility into their sell-through dynamics?

So we know customers are placing backlog into the September quarter and into the December quarter. So there's not a single answer that everybody is following. And we can see that as the bookings are rising, they are placing them into the next three months to six months on a more predominant basis. So that level of where the momentum is coming in or how backlog is coming in is what gives us a sense of where the bottom is and how things are going to be as we are into the September and December quarters.

Thanks Ganesh.

Thank you.

Hi everyone. Thank you for taking my question. I understand you have managed to keep operating expenses lower than expected, currently at about $355 million on a non-GAAP basis. My question is, how long can you maintain that level? Additionally, are there any provisions for recouping lost wages during this temporary salary reduction? I'm trying to understand how we should anticipate operating expenses to increase alongside revenue growth.

I'll start with the response and Ganesh can add to it if he wants to. So there is not a clawback in terms of what we're doing from a salary sacrifice for our employees. We have the shared sacrifice share reward program. And in the past, when we have implemented something like this that has worked out well for our employees, we keep everybody working on the things that are important to drive the revenue growth as the cycle turns upward, and we've gained market share through that. And so we've had great financial results coming out of it and then been able to share those rewards with employees through higher bonuses and taking away the pay cuts at the appropriate time. So we are going to have to see how this plays out from a top-line revenue perspective. It would be my perspective that we will achieve the same types of results this go around with the actions that we've taken, but there's no promise to employees that they're going to get this money back. There's no retroactive clawback that would be implemented.

This is a part of our culture that is not always as easily appreciable from an investor community. We have 98% of employees around the world that are participating in this voluntarily. We have another 700 employees who have volunteered for a higher salary reduction than what we have requested from them. It's very difficult to quantify how powerful culture plays a role in these types of difficult situations and how much that the employees that are part of the solution. And of course, they are part of the shared rewards that come up as we get into better times as well. So this is very much of a program that has worked many times in the past and is another time we're applying it, and we expect it to be successful.

I think the other thing that I'd add is we know this is difficult for employees. The inflation still exists, and this is a challenge for employees. So it is not that we want to keep these in place. But at the time, with where we're guiding revenue for the current quarter of revenue and earnings it's appropriate. And we hope that we can restore these things back to normal salary levels as soon as possible.

Thank you for that color. This is my follow-up, I wanted to perhaps strike a more positive chord and ask about design win metrics for the fiscal year. I don’t know if you have those stats on handy with you, but maybe if you can just give us some qualitative or quantitative measure of the lifetime value of the design wins.

So we don't usually break that out and we have slightly different ways in which we look at this. What we do constantly look at is how is the design pipeline progressing. And in the course of 2023 in addition to all the work that we did, we also saw customers shifting their priorities from doing triage for some of the shortages that they were running into, bringing back the innovation program that they had put on hold. And so if you put all of that together, the design win pipeline is strong. There’s a lot more design activity in the last 12 months than there was in the prior 12 months, just simply because customer bandwidth was there to be able to run the development program that they were progressing with.

Thanks Ganesh.

Thank you.

Hi, it's Tim on. So Ganesh, can you give us a sense of book-to-bill? It sounds like it was below one for March, but I just wanted to confirm that. And I know that you did say that orders are getting better month by month. But is the message that you think book-to-bill could be above one for the June quarter. So I'm just wondering if you can talk to book-to-bill? Thanks.

Book-to-bill was below 1. However, we have never viewed book-to-bill as a strong indicator of our future business direction; it serves more as an indicator of our lead times. During the shortages in 2021 and 2022, we experienced book-to-bill ratios that were multiples of our current levels, reflecting extended lead times. With our current shorter lead times, we anticipate a lower book-to-bill ratio. However, bookings are increasing, and it's uncertain what the results for May and June will be. Consequently, we don't consider book-to-bill as a definitive measure of future growth; it mainly reflects how shorter lead times influence bookings.

Got it. Okay. Eric, I have a question for you. The inventory was a bit higher at the end of March than some of us had anticipated. Can you discuss the loadings in the factory and your thoughts on loadings into June? Are you considering when to reduce inventory on the balance sheet in June? Please share your insights on this and its effect on gross margin.

I'm not completely certain about the model's status. In our previous conference call, we mentioned that we expected inventory days to be around 225 to 230 at the midpoint, and we actually reported 224. This aligns with our earlier commitments. Regarding our current quarter's utilization, we've experienced some employee attrition in our factories, which means we can start fewer wafers each month. However, this impact is relatively modest in the grand scheme of things. I anticipate that utilization will remain similar to what we saw in the March quarter, possibly just slightly lower.

Well, thank you Eric. Thank you.

Thank you. I would like to shift from cyclical questions. I have a question regarding 64-bit microcontrollers. You also made an AI acquisition during the quarter. Ganesh, in your discussions with customers, we often hear about AI at the edge, but it's challenging for us to truly gauge that. When do you anticipate Edge AI becoming a substantial part of your revenues?

Our target markets for Edge AI predominantly in industrial, smaller extent, automotive, some in medical. The medical segment of industrial factory automation, all that. So they are designs in progress and they've been taking place over the last six months to 12 months. They probably will just state over 24 to 30 months of time. So it's in that time. There's some of it small amounts that are already taking place, but I think it becomes a more and more meaningful part as time goes on. And each of these either product line announcement or some of the acquisitions, which give us specific technologies, just accelerate where those designs can go and how our solutions can be differentiated from others providing similar solutions.

Great. And as my follow-up, you said that you're basically shipping below consumption. You're about $1 billion from your trough. Obviously, you're running inventory at a certain level. So you must have some idea where the consumption is. Is that a number you could share with us?

Not with any level of precision. I think that taking a four-quarter revenue divided by four starts to get you into the ballpark. But even that is unclear. So I think that number will get clearer as people begin to book and buy at a level that they need to, excluding any quote just to get back to consumption. But there's not an easy way to make that number determinable. It's clearly between where our peak a year ago was in the June quarter to where you're seeing the guidance for this quarter.

That’s helpful. Thank you.

Hi good afternoon. Thank you so much for taking the questions. I had two quick ones. First, on inventory, maybe for Eric. So how should we think about inventory management through cycle or longer-term? I know you've got strategic inventory. I know you want to better service your customers on the way up. But when you think 12 months out, 18 months out, whether be in dollars or days, what are you managing the business to? And then quick follow-up on pricing. I think you mentioned that in the near term, pricing is holding up. But as you think about calendar '25, I think some of your peers have talked about pricing trends potentially reverting to pre-pandemic patterns down, call it low singles. Is that a view that you would agree with or share? Or do you feel or think differently on pricing? Thank you.

On inventory days, our long-term model targets 130 to 150 days, which remains unchanged from what we discussed during our Analyst and Investor Day. We are quite a distance from that goal currently, and I won't specify a timeline for achieving it, but that is our aim. We believe that maintaining this inventory level in a more normalized environment will allow us to have shorter lead times and appropriately support our customers. Now, I'll pass the pricing question to Ganesh.

And I would add one more thing, which is we also have these last-time buys that we put into place on very high gross margin product lines, and those will be additive and they are situational depending on when we're faced with that kind of situation. On the pricing itself, our pricing is predominantly a function of what we have to compete with at the point of design. And so in the near term, pricing is really driven by where designs were historically what we won them at. And a lot of these are products going into applications that have long life cycles and they don't really change, unlike consumer electronics or other end markets; they don't really every 9, 12 months change things out. We have products that have been in designs for five, seven, nine, ten years in many cases as well. We are being competitive on new designs with pricing where we need to be, but we also have new products that we compete with. And so the most competitive new products are what we use to go fight in the most price-sensitive new design applications. And that's been historically how we've done it. And we have a lot of business that continues, that will be existing business at existing prices for a long, long time to come. And then we'll have new business at new pricing. And that new pricing, we expect will have good gross margins as time goes on.

Great. Thank you.

Hi guys. Thank you for taking my questions. To start, I’d like to follow up on the previous point. You mentioned that pricing is stable overall, but you are focusing more on securing new design wins. Are you noticing that these new design wins are becoming more sensitive to price or more competitive as the shortages have eased and we’ve entered a correction phase? Or are conditions still operating normally and competitively? Thank you.

New designs have always been highly competitive. It's where people are trying to work on winning platforms with multiyear implications. So it is in the couple of years of constraints, there were fewer new platforms, new designs that customers are doing. But in the sense of having to be competitive and the competitive intensity for new designs, yes, it is different from the last two years or three years, but it is consistent with what it has been over 20 years before that.

That's clear. Thank you. I appreciate the color there. And then for my follow-up, the CapEx guidance is obviously down meaningfully off of what was likely a peak two years ago. Could you maybe just speak to your confidence in having enough capacity both internally and perhaps more importantly, investment from your foundry partners at the process geometries that you ship your products on? Thank you.

Yes. When we mention our planning, it's a consistent approach that we evaluate in the short, medium, and long term. We are very confident in our internal capacity, including what is currently installed and underutilized, what is readily available, and potential future additions. Additionally, we collaborate with our partners, including foundries and OSATs, on their capacity planning over the timeframes they consider. We recognize that we are just a small part of a much larger operation they manage. Currently, we do not have any significant capacity constraints that worry us. This could change as demand begins to rise, especially if some predict a sharper increase. However, at this moment, we are quite assured in both our internal capacity and that of our partners for the business we are conducting.

Thank you.

Hi, thanks guys. So now that we're yet another quarter into the correction and hopefully coming out of it, if we look at your total drop in terms of revenue, it is probably going to be like 45%, something like that. And that's worse than most of your competitors. So I guess, why do you think that is? Do you think that the PSP program encouraged a little double ordering? Is there some geographic or something else going on? Just looking for some for your take on why that's happened?

No, great question, Chris. When you look at peak to trough, it’s always a question of when does it start? And when does it bottom out, right? You've seen one of our peer group companies that try to do a peak to trough in one quarter. And you could say, boy, that was one way to do it. Our objective has always been to try to respond as the business is changing. And so we've had different end markets responding at different times. We had a lot of automotive and industrial. They were later in the cycle. And our mix is higher in some of those markets as well. And in this case, the downturn is substantially deeper than what anybody had expected on that. And that's probably a component of PSP that may have amplified some of those things, et cetera. But a lot of it has to do with we started later, and we are correcting stronger, and the end markets that we are predominantly represented in were the ones with the later in the cycle correction than perhaps those that are more consumer or phone or PC, that kind of exposure.

Got it. Thanks Ganesh.

You’re welcome.

Yeah. Just a quick question on the competitive landscape, I guess, especially as you look at kind of China supply. Is there any worry around them being aggressive on the microcontroller supply coming out from there? What are you seeing in those trends?

China has always been a competitor in many of the spaces that we're in. Their approach is a little bit different. They have a lot of their attention going into things that can be faster to market quicker. And those tend to take them into places like consumer electronics and other areas that are faster designed in cycle, a lot of the power supplies for cell phones and those kind of things. Clearly, they are also making products that can go into other end applications. And that’s a competitive environment that is not different today. You could argue perhaps that there's a lot of attendant priority that they have. But we win with new products, we win with competitive solutions that we have. And we win by providing the customer with a solution that is better than what they can get otherwise. And that remains the way in which we've gone to market, and we'll continue to fight for new business in China and anywhere else.

Got it. And then as you look at the utilization, I don't know if you give a hard number there. But how do you see that playing out through the rest of the year? I know there's a lot of moving parts to that. But any way to look at what utilization looks like? I know you cut CapEx pretty significantly to so that should help.

We don't disclose a specific total utilization, as it varies significantly by factory. We've experienced some attrition in our employee headcount, which I mentioned earlier. As we progress through the months without rehiring, capacity utilization is expected to decrease mildly. I don't anticipate a significant change from March to June, perhaps just a slight decline. Future actions will depend on our revenue and inventory outlook, influencing how the remainder of the year will unfold as we gain more confidence in understanding the direction of the business in the coming months.

Got it. Thanks.

Great. It was interesting to see a couple of tuck-in acquisitions this quarter. I'm wondering if you could talk about the relative focus of that approach to capital deployment or, let's say, product development going forward relative to internal development?

So we have an internal development that works on the model that we have provided that over the long term is the 68% gross margin, 23% operating expense, 45% operating margin. That allows for the prioritization of our internal activities and where we want to apply it for different opportunities that we have in front of us. From time to time, we find our external opportunities where the speed at which we could do something or the time that it would involve in trying to get to a solution can be a lot longer if we were to do it just organically. And there, we have applied these tuck-in acquisitions as a way to speed up what we're able to do, consistent with the direction that we are interested in or have been following for a while. And we've done about six or eight of them now in the last four or five years of time ever since Microsemi was the last major public acquisition we did. We've done about six to eight smaller ones since then. And it always to speed up our agenda with a very tactical and pinpoint strike on what the acquisition can do for the areas that we're driving growth in. And we will do more of those as we continue on as well. Let's say we've always been public. That's an essential part of our strategy.

As a follow-up, it seems that while you expect revenue to increase in September, the inventory depletion may not be complete by the end of June. Can you clarify when we might see a point where your revenue aligns with demand? In other words, when will the inventory reductions be mostly finished? Did I misunderstand you that this could happen in June, or do you anticipate it being more likely in September or even later? Thank you.

I will begin with the response. The key point is that with 125,000 customers, it is impossible to determine exactly when the inventory corrections will be complete. Most customers have adjusted their inventory to what they believe is the appropriate level, but this is a constantly shifting target as lead times change based on our current cycle. Therefore, we do not have a definitive answer to your question at this moment. We will provide guidance for the next quarter and will have more information to share at that time. However, it seems clear that this inventory correction will extend beyond this quarter.

Yes. I think many customers made their own mistakes on how they viewed their business, what they thought the prospects were. Many other customers were very thoughtful, continuing to be strong players and where they're at. And as we gave you some indications of certain end markets where there is strength as well. So it's all over the place. And just as a preponderance of people who are done with their inventory correction and are now going back into buying for their consumption and/or into growth that they may be seeing. The weighted average begins to shift, and that's the weighted average that begins to shift in September.

Hi, thanks for taking my questions. Two from my side. Maybe firstly just on the green shoots, can you talk about them from a geographical perspective? Is it mainly China driven? And now you're seeing that continue in Europe and the US? Or how would you describe it geographically?

Yes. So the green shoots are not limited to any one geography, not limited to any one end market. it's really across all of them. And as I mentioned, you're going to have in a geography or in an end market, both customers with continued pain and other customers who are starting to look at how to get back into growth mode and what they're doing. So no specific end market or geography leading to the green shoots.

Okay. Got it. Thanks for that. And then maybe just on the acquisition, the Neuronix Labs acquisition. It seems like it helps you address the AGI market with your MCUs, can you maybe talk about the kind of content tailwind for your MCUs for AGI that this can generate? Or how much of your MCU portfolio are customers looking to add AI content in the next-gen products to kind of run those AGI models? Can you give us any more color on that would be helpful. Thank you.

I don't know if there's a specific numerical way to quantify that. What I can say is that our embedded customers are considering how AI can enhance their solutions compared to previous versions. Historically, around 20 to 25 years ago, the initial move was to integrate intelligence into products to improve them. Over time, connectivity was added to enhance functionality further, followed by security features. Now, AI represents the next step in enhancing product capabilities. This is a journey, and some customers may not feel the need to engage with AI, while others are eager to seize the opportunity to incorporate it into the next generation of their products. It's important to view this as a continuum of customers, all of whom are seeking innovation. AI presents them with an additional opportunity to improve their platforms and offer superior products compared to earlier iterations.

That’s helpful. Thanks Ganesh.

Thank you.

Thank you for taking my question. I would like to ask Ganesh or Steve about the difference between Microchip's business setup over the next six months and the typical setup at the bottom of every cycle. I notice many similarities and would appreciate your insights on the differences. The similarities I observe include a demand shock or significant inventory buildup, leading our customers and their downstream supply chains to respond by depleting their inventories, canceling orders, or reducing order quantities, which in turn results in reduced visibility. Consequently, you and your peers lower your utilization rates and may even temporarily shut down fabs. Later, customers realize they have overcorrected on the downside, and in three to four quarters, everyone starts increasing their forecasts and scrambling to acquire components. Those are the similarities I see. What are the differences? Additionally, if there are any disagreements regarding these similarities, I would be interested in hearing those as well. Thank you.

Mark, I think you have answered your question. We couldn't say any better. You asked the question when you answered it, I think it's perfect.

Mark, I was going to welcome you back and respond as well. As you mentioned, I think this is a cycle we've observed repeatedly, and the factors you pointed out are present. I'm not sure there are any differences in this instance. Certainly, the duration of the up cycle can sometimes influence the intensity of the down cycle, but aside from that, the factors are quite similar.

So last is repeat off the bottom?

Yes. Mark, from time to time, some people have written or talked about the industry has matured, and there will not be any cycles anymore. I think, all those predictions have been wrong. The industry has always been cyclic and will always be cyclic. I think our customers, our distributors, vendors, and suppliers, they don't learn. And I think, people change, new purchasing managers come in, new people come in. And as Ganesh described, the lessons I've forgotten very rapidly, leading just these cycles never going away. And this one was the most pronounced cycle, both on the upside and now we're seeing on the downside.

Yes. I was just going to make the point is I view this as an inventory correction on steroids, right? I mean we had not seen our lead times for the vast majority of our products go to 52 weeks before and then they contracted over a period of 12 months down to these very short lead times that we have today.

Very helpful. Thanks everybody.

Thank you Mark.

Thank you. Can you provide some insights into the FPGA business? It appears there has been significant growth compared to peers for the fiscal year. Could you discuss the trajectory of that growth? Given the challenges faced by the FPGA market, does this situation mirror the overall performance of your business? Is there any outperformance noted? Additionally, could you share your outlook on market share prospects in this area moving forward?

Sure. Our FPGA business has actually performed better than our other operations. This is partly due to its significant involvement in the aerospace and defense sector, which remains strong. Over the past four to five years, we have been developing new design opportunities to promote long-term growth in industrial and automotive sectors, as well as in the historical markets that Microchip engaged in prior to acquiring the FPGA business. While it is not insulated from market trends, the FPGA sector has a more favorable market mix compared to some of our other areas and has therefore shown better performance. Additionally, we are gaining new designs as we capitalize on the opportunities arising from former Xilinx and Altera as they shift their focus away from mid-range products or phase out certain offerings. This creates significant opportunities for our FPGA business, and I am very optimistic about its future prospects.

Great. Thank you.

Hi guys. Thanks for the question. I guess, first of all, Ganesh, like in terms of this inventory, are there any products or markets that have surprised you either that they burn inventory and a normalized quicker than you expected or that this is going to take longer for these products or markets?

I think not so much my product, but I think if you look at specific customers, in many cases, even in the same market, right? So we can have an end market, say, industrial. And we have examples of certain customers who have burned through their inventory and they're back asking for new orders at expedited times. We also have other customers, same industry who are still burning through inventory and taking longer where it goes. So I think a lot depends on a customer, their market prospects, what did they do to create and grow their business and how well are they executing? And so that's really been the difference is that it's customer by customer; the stories are different.

Yes. Understood. And then if I'm hearing you correctly, you think June is the bottom. A lot of that is inventory-based. I'd like an idea of how you're looking at the inventory position in September at your customers more generally? Do you think we can get back to seasonal trends in September and going forward? Or is there still this inventory drag overall?

No, I think there's going to be customers at different points in the correction cycle. Some will have corrected and moved on, others will still be correcting. So I think seasonality is perhaps one of the things which you need a level of normalcy for some period of time before you can say, okay. We now have all these variables that have been taken out. So I can't say we have seasonality in the September quarter. I can say that incrementally, on a weighted average basis, there are more customers who are going to be out of their inventory correction, but not that they're all done.

Yes, thank you. Just one quick follow-up. Ganesh, you said that you still need quite a bit of turns this quarter. Just wondering what is the turns requirement? And how does that compare with the previous cycle troughs? Thank you.

So we are not going to break out the amounts of turns that are required, but we do have turns and take to meet our guidance, and our guidance is obviously to have another down quarter. But lead times are short. We are getting these requests for pull-in. I don't have a good comparison to give you in terms of prior cycles. If this turns out to be the bottom for us, which we believe it will, we can probably give some commentary when we talk about our September guidance as we kind of hit and move through that bottom.

One challenge we face is that people typically discuss turns in a stable environment without excess inventory. In situations where inventory exists, we can't accurately project turns based on historical data, as consumers will utilize existing inventory before making new purchases. This creates some hesitance in our ability to provide clear insights due to the uncertainty involved. We've made our best assessment of expected turns and incorporated that into our guidance. It's important to understand that we've considered the risks posed by inventory, which could negatively affect turns during the quarter.

Very clear. Thank you.

Hi, thanks for the quick follow-up. I just wanted to clarify what is the contribution of the acquisitions in the June quarter or in fiscal '25? And then, Ganesh, back to the September quarter, I think you did say that you expect it to grow. I understand that it's hard to put a seasonal number on it. But based on what you have seen in prior downturns, just the fact that Microchip has gone down so much from peak to trough, should we also expect kind of sharper recovery back to when you do start recovering?

To address your first question, these are small tuck-in acquisitions aimed at boosting our design-ins and design-wins initiatives. They have not contributed to revenue in the June or September quarters. Regarding revenue and the expected correction, at some point—though I can't specify if it's September or December—we anticipate a sharper recovery. This pattern has been observed in previous cycles. The recovery process has two stages. The first involves companies needing to replenish their inventory after depleting it, returning to buying levels aligned with consumption. The second phase looks at macroeconomic factors and whether they will generate additional growth beyond their stabilized consumption levels. Looking ahead to the next 12 months, all these factors suggest a sharper recovery.

Thank you.

Great. I want to thank everybody for joining us on the call. I know we ran over a little bit. But I appreciate the questions, and we look forward to seeing and talking to many of you in the coming days as well as many of the conferences that are coming up. Thank you.