Microchip Technology Inc (MCHP) — Q1 2025 Earnings Call Transcript

Good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with 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 comment on our first quarter fiscal year 2025 financial performance. Ganesh will then provide commentary on our results and discuss the current business environment as well as our guidance, and Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website and included reconciliation information in our earnings press release which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis which is based on expenses prior to the effects of our acquisition activities, share-based compensation and certain other adjustments as described in our earnings press release and in the reconciliations on our website. Net sales in the June quarter were $1.241 billion, which was down 6.4% sequentially. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were just below the midpoint of our guidance at 59.9%, including capacity underutilization charges of $36 million as we continue to manage production activities to adjust to the challenging business conditions. Operating expenses were at 28.4% of net sales and operating income was 31.5%. Non-GAAP net income was $289.9 million and non-GAAP earnings per diluted share was $0.53, which was $0.01 ahead of the midpoint of our guidance. On a GAAP basis in the June quarter, gross margins were 59.4%. Total operating expenses were $517.8 million and included acquisition intangible amortization of $123 million, special charges of $2.6 million, share-based compensation of $37.4 million and $1.8 million of other expenses. GAAP net income was $129.3 million, resulting in $0.24 in earnings per diluted share. Our non-GAAP cash tax rate was 13% in the June quarter, which was in line with our guidance. Our non-GAAP tax rate in fiscal year '25 is expected to be about 13%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years. We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. If this were to happen, we would anticipate about a 200 basis point favorable adjustment to Microchip's non-GAAP tax rate in future periods. Our inventory balance at June 30, 2024, was $1.308 billion, which was down $8 million from the end of the March 2024 quarter. We had 237 days of inventory at the end of the June quarter, which was up 13 days from the prior quarter's levels as a result of a lower dollar value of quarterly cost of goods sold from lower sequential revenue. At the midpoint of our September 2024 quarter guidance, we would expect inventory dollars to be up modestly and days of inventory to increase. We also continue to invest in building inventory for long-lived, high-margin products whose manufacturing capacity is being end-of-life by our supply chain partners, and these last-time buys represented 19 days of inventory at the end of June. Inventory at our distributors in the June quarter was at 43 days, which was up 2 days from the prior quarter's level. Distribution took down their inventory holdings in the June quarter as distribution sell-through was about $85 million higher than distribution sell-in. Our cash flow from operating activities was $377.1 million in the June quarter; adjusted free cash flow was $301.3 million in the June quarter. As of June 30, our consolidated cash and total investment position was $315.1 million. Our total debt increased by $179 million in the June quarter and our net debt increased by $183.6 million. The increase in debt was impacted by our refinancing activities in the quarter which included issuing a 0.75% 6-year convertible bond, for which we paid $105 million for a 75% cap call to provide some protection from future equity dilution from stock price appreciation. Our adjusted EBITDA in the June quarter was $456.2 million and 36.8% of net sales. Our trailing 12-month adjusted EBITDA was $2.908 billion. Our net debt-to-adjusted EBITDA was 2.02x as of June 30, 2024, up from 1.29x at June 30, 2023. Capital expenditures were $72.9 million in the June quarter. Our expectations for capital expenditures for fiscal year 2025 is about $175 million and is more heavily weighted in the first quarter of fiscal year 2025 as we had worked with our suppliers to push out capital that was originally planned for delivery last fiscal year. Depreciation expense in the June quarter was $43 million. I will now turn it over to Ganesh to give his comments on the performance of the business in the June quarter as well as our guidance for the September quarter. Ganesh?

Thank you, Eric, and good afternoon, everyone. Our June quarter results were consistent with our guidance, with net sales down 6.4% sequentially as we continue to navigate through a major inventory correction. Non-GAAP gross margin came in just under the midpoint of our guidance of 59.9%, while non-GAAP operating margin was at the midpoint of our guidance at 31.5% as we continued our strong expense control programs. Our consolidated non-GAAP diluted earnings per share came in $0.01 ahead of guidance at $0.53 per share. Our sequential revenue decline resulted in June quarter adjusted EBITDA dropping. And as a result, our net leverage rose to 2.02x. We expect our net leverage to rise modestly for a few more quarters as trailing 12-month adjusted EBITDA drops when replacing stronger prior year quarters with weaker current year quarters. However, our cash generation continues to be solid and we remain committed to our capital return plan. Our capital return to shareholders in the September quarter will increase to 92.5% of our June 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. My thanks to our worldwide team for their support, hard work, and diligence as we continue to navigate a difficult environment and focus on actions that we believe position us well to thrive in the long term. In early July, we announced our entry into the 64-bit embedded microprocessor market with a suite of products, developments to address high-performance embedded processing applications, including AI-enabled edge solutions. This extends 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 to 64 bits as well as FPGAs with a common development 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 June quarter and the general business environment. All regions of the world and most of our end markets exhibited varying degrees of weakness. The exceptions were Aerospace and Defense which was stable and the artificial intelligence subset of data centers which continue to be strong. Our business in Europe and America, which are dominated by industrial and automotive markets, were particularly weak on the heels of a very weak March quarter. Our broad base of customers continue to manage their inventory tightly and adjust their business plans in the midst of a weak macro environment for manufacturing, high interest rates, very short lead times and an uncertain business outlook. This combination of factors we believe is driving inventory destocking as well as reductions in target inventory levels in multiple areas. At our direct customers, at contract manufacturers and distributors who buy from us at our indirect customers who buy through our distributors and in many cases, at our customers' customers. The early signs of green shoots in our business we saw in February, March, and April have continued to progress, although at an uneven pace, with bookings up sequentially in some months and relatively flat sequentially in other months. Although quarterly bookings grew close to 50% in the June quarter as compared to the March quarter, overall bookings were still below where we would like to see them. Bookings, however, continue to age over a shorter period of time. And we continue to see many requests for expedites of new orders and shipment date pull-ins for previously placed orders; requests for cancellations and pushouts continue to subside. Our average lead time continues to be about 8 weeks or less, while the short lead times are resulting in reduced near-term visibility as customers delay placing orders since they have high confidence that supply is readily available. We also believe short lead times during a period of business uncertainty are the best way to help customers navigate the environment successfully and improve the quality of backlog placed with us. We have adjusted our operational systems to adapt to this uncertain environment and preposition semi-finished and finished goods inventory as best as we can to accept and ship the turns orders we need this quarter. Given the severity of the down cycle, our factories around the world are continuing to run at lower utilization rates in order to help control inventory levels. Our internal capacity expansion actions remain paused. We expect our capital investments in fiscal '25 and likely in fiscal '26 as well will be low as we will use the inventory we have invested in as well as our underutilized capacity to support the next upcycle. We're also prepared for the long-term growth of our business. On one hand, in partnership with our foundry and outsourced assembly and test partners. And on the other hand, for our internal factories, with the optionality of deploying capital which we have purchased but not yet placed into service. While neither we nor our customers know the shape of the recovery in the coming months, we do expect it to arrive as advertised in all prior semiconductor cycles. And we believe we are well prepared for the things we can control to exploit whatever the market recovery looks like. On the chip stack front, we continue to work through a number of challenges with the chips office and other government departments in regards to the grants. While the investment tax credit process has been relatively straightforward and we are greatly appreciative of this benefit. The journey to receive grants has taken much longer and been more complicated than we expected. Recall, we announced a preliminary memorandum of terms in early January 2024 and supported the completion of diligence by March. Given that we align extremely well with the U.S. government's goals of shoring up semiconductor supply for national security and industrial security, it would be unfortunate if a pragmatic agreement on the conditions attached to the grants cannot be reached. We continue to persevere through the challenges by collaborating with the chip's office while remaining resolute that whatever agreement we reach must also be consistent with our business values. Before we get into our guidance, I note about the strength of our design-in activity. After 2-plus years of dealing with shortages and redeploying their innovation resources towards mitigating the impact of shortages, our customers over the last year have returned to prioritizing their innovation projects. The result is a strong design-in pipeline for us across all end markets, mega trends and key customers amplified by our total system solutions approach to take advantage of our broad portfolio of solutions. The impact of this growing design pipeline is muted in the current environment where excess inventory gets most of the attention and design-in activity takes time to gestate into production. But design win momentum is the engine of long-term growth that we have always focused on and which we expect will drive above-market long-term growth. Now let's get into our guidance for the September quarter. While we continue to see a number of green shoots in our business indicators, we do need turns orders within the quarter to meet our guidance; operating in a high-turns environment has historically been normal for Microchip but it's challenging to predict during abnormal times as we're in today. We are, however, forecasting strong signs of growth in our data center business beyond the artificial intelligence subset after several quarters of weakness. This is effectively another green shoot. Taking all the factors we discussed on the call today into consideration, especially the very low backlog visibility we are faced with, we expect our net sales for the September quarter to be between $1.12 billion and $1.18 billion. We expect our non-GAAP gross margin to be between 58.5% and 59.5% of sales. We expect non-GAAP operating expenses to be between 30% and 31% of sales. We expect non-GAAP operating profit to be between 27.5% and 29.5% of sales and we expect our non-GAAP diluted earnings per share to be between $0.40 and $0.46. This multiyear semiconductor cycle for Microchip and for the overall semiconductor industry has been like none other we had seen. It started with coveted supply and demand disruptions in the March quarter of 2020 which then continued for many months. This was followed by extreme product shortages resulting in supply chain challenges later that year and for several quarters thereafter. And finally, a substantial inventory correction over the last several quarters. We recognize that on a peak-to-trough basis, our revenue decline has been sharper than many of our competitors. Some of this variance reflects the differences in end market exposure as this cycle has impacted different end markets at different times. Some of the variance is due to differences in non-cancelable, non-reschedulable programs implemented by us and our competitors. And finally, some of the variance is driven by differences in the relative size of business transacted either directly or through the channel. While peak across revenue performance is relevant, we believe a better longer-term indicator is a comparison of the cumulative revenue generated through the entire cycle. Assuming the December quarter of 2019 was the last unaffected or normal quarter, Microchip's cumulative revenue over the next 19 quarters, inclusive of our guidance for the September 2024 quarter when indexed to the December quarter, shows very comparable performance between us and our competitors. This is, of course, excluding the impact of acquisitions for everyone. The revenue peaks and troughs were different for each company. We believe for the factors that we mentioned earlier. However, when we're looking at the cumulative 19-quarter revenue, essentially the area under the revenue curve is what that would represent. While the journey for each company was different, that destination was very similar after 19 quarters. This would suggest that Microchip may be positioned for sharper growth in the coming quarters, although we're not ready to predict the shape of that recovery at this time. My point is that rather than focus on peak-to-trough performance alone, it seems prudent to consider the area under the curve of cumulative revenue performance as well. We believe 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 application of end markets we serve. We remain committed to executing our strategic imperatives which we believe will deliver sustained results and substantial shareholder value. And finally, at a time of macro uncertainty, we remain focused on the things we can control to create long-term shareholder value. With that, let me pass it to Steve to talk more about our cash generation 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 10.7% from the year-ago quarter to a record $0.454 per share. During the last quarter, we purchased $72.7 million of our stock in the open market. We also paid out $242.6 million in dividends. Thus, the total cash return was $315.3 million. This quarter, our total cash return was reduced by the cash outlays for the recent acquisition of BSI and Euronics. When you combine the dividend buyback and acquisition-related cash outlays, this amount was 87.5% of our actual adjusted free cash flow of $389.9 million during the March 2024 quarter. Our net leverage at the end of June 2024 quarter was 2.02x. 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 $4.6 billion to shareholders through June 30, 2024, by a combination of dividends and share buybacks. During this period, our share buyback in the open market was approximately 31.2 million shares, representing approximately 5.8% of our shares outstanding. In the current September quarter, we will use the adjusted free cash flow level from the June quarter to target the amount of cash returned to shareholders. Our adjusted free cash flow for the June quarter was $301.3 million. So our target return to shareholders would be 92.5% of that amount, minus a small payment made for acquisitions. Our resulting cash return to shareholders will be approximately $261 million. Out of that amount, dividends are expected to be approximately $243.8 million and our expected stock buyback will be approximately $17.2 million. Going forward, we plan to continue to increase our adjusted free cash flow return to shareholders by 500 basis points every quarter until we reach 100% of our adjusted free cash flow returned to shareholders through dividends and share buybacks. That will take 2 more quarters and we expect that dividends over the long run will represent approximately 50% of our cash returned. We also announced today that effective at the close of business on August 20, which is the date of our Annual Shareholders' Meeting, I will transition from Executive Chair to being the Non-Executive Chair of the Board. In this role, I will continue to be a resource to Ganesh and to all of Microchip. I want to thank our investors and our employees. It was my highest honor to have served you for 34 years. Let me now turn it back to Ganesh.

Thank you, Steve. On behalf of the Microchip leadership team and all of our employees worldwide, thank you so much from the bottom of our hearts. We have 34 years of service to Microchip. In your Nonexecutive Chair role, you will continue to be an important resource for me personally and for other Microchip team members as well. With that, Stacy, will you please pull for questions?

Ganesh, you mentioned that orders are up 50% compared to the previous quarter, but you also indicated that they are still weak. Can you elaborate on that? Are you suggesting that the book-to-bill ratio remains significantly below 1? Is that the main issue?

Yes. I wouldn't say well below 1; book-to-bill is below 1. It has bookings have been growing. They've been growing unevenly between the months. So it's on the right track, just not as fast as we would like it to. And coming in they're aging faster. So that also helps.

Got it. Can you provide more details about the green shoots? It seems like their progress has stalled somewhat. Can you indicate when this occurred during the quarter? Was it in the last month of the quarter? Also, has this trend continued into the first month of this quarter, and what end markets are involved?

At the end of May, we mentioned at a public conference that bookings were relatively stable for May compared to April, with June showing some improvement. However, the momentum we expected in June was not present, indicating a lack of consistency throughout the quarter. There were no specific issues in the end markets, which include stability in aerospace and defense and growth in the data center market. We are seeing strength not just in the AI segment but also across various data center markets heading into September and December.

Mine is around utilizations and where we go from here. So I think you guys had some shutdowns in June? Are you expecting to continue those into September? And then you also talked about external wafer supply agreements, would you expect those negotiations to go well and to push those out? Or might those affect as well?

So I'll start with internal utilization. So we are not planning on having another two-week shutdown for our wafer fabs in the September quarter. We do not expect production value out of the fabs to be much different quarter-on-quarter. We continue to have attrition and had to lower starts because of that but we'll not be having another two-week shutdown. And in our assembly and test areas, we will continue to have days off for those activities to manage our finished goods assembly and test out appropriately. Ganesh, do you want to comment on foundry?

Yes. We have continued to work with our foundry partners on how to match the wafers coming in to the demand picture as it changes. The degree of how we have worked that out has different results at different foundry partners. But by and large, we are working through those with business arrangements to make sure that we are not receiving substantially more wafers than what we can use with the exception of the last time buy that Eric referred to, where factories are either closing down or processes are being end-of-life where we are buying because those products often have extremely high gross margins and it behoves us to be able to take the inventory and over many years realize very high gross margins on those parts.

And then you didn't call out China as a source of additional weakness. I was wondering if we could maybe get an update there, what you're seeing out of China and/or Asia.

Sure. So in the breakout that we provide that's on our website, Asia. We don't usually break out China but Asia was flattish. The declines were largely in the Americas and to a larger extent, in Europe. And I think China and Asia on current basis is more constructive. The weakness is predominantly in the Americas and Europe. And I think that is, to some extent consistent with if you look at some of the PMI reports and where the manufacturing economy is that just this morning, the U.S. PMI came out last month, the European PMI came out. This is not the first month; there have been many months over which that weakness has been playing out. And I think China was there earlier on as were other parts of Asia. Some of that they have worked out. So, more stability and strength on a relative basis than the Europe and Americas regions.

Ganesh, one of your peers last week talked about customers sort of ordering hand to mouth and potentially even holding too low inventory due to working capital constraints and so on and so forth. Are you seeing that with some of your customers and maybe especially on the industrial side because that's certainly a concerning thing and it certainly may reflect the very low turns orders that you are getting or the very low backlog visibility that you are getting?

No, that is absolutely happening at many, many customers. And I think they have, in some cases, low visibility into their own business as well. So they're reflecting that. Given that there is plenty of capacity and short lead times, right? There's really no reason for them to try to get backlog ahead of time. At some point, that will change and it will correct itself. But yes, what is reflected in the green shoots we talked about when we said we're getting expedite orders where new orders are being placed with short cycle expectation and prior orders that were placed are being pulled in. Those are all reflective of people who are more conservative in how they place orders and then recognizing they need parts sooner. At some point, that will catch up on itself. It's still early but that's how these things usually correct is people tend to go too low and run out of inventory, any strengthening in the business starts to create some urgency for orders that becomes the whole expedite chase. We saw that back in other cycles as well. But that is something we're watching. We're still in the early innings of how that upcycle will play out.

Yes. And related to that, I mean, can you comment on how much turns you need at this point and maybe compare that with previous cycles?

So we don't typically break that out. I think maybe you want to give some historical perspective on where they're at.

So I mean, it is not unusual for us to enter a quarter needing 30%, 40% turns. And with short lead times, we've been able to do that historically now. We're coming off a period up to the last couple of quarters where we were fully booked entering a quarter. So it's definitely a large change for us from what we've seen over the last 2.5 years. But there's a significant amount of terms that we need to take and we've kind of been signaling that to the marketplace that with short lead times that is not outside of what we would expect it to be. And customers are managing their balance sheet and know that we can get them inventory quickly.

Congratulations to Steve on the next step in an incredible career. To start, could you provide more details on your assumptions for the September quarter guidance? I know it's challenging, but is there any way you can give us a relative idea? How much do you expect to be under shipping demand in the September quarter? Is that level decreasing compared to June? Do you feel like you're close to meeting end demand, or is the demand just weak? I would be interested to hear any specifics you can share about inventory levels, both in the channel and with your downstream customers.

So a lot of questions there and I think there's a lot of information that is really not readily available. Clearly, as Eric mentioned, the distribution inventory in absolute terms has been coming down. It's the third consecutive quarter where we brought down distribution. So that is draining. Where is true consumption at - I think that's a $64 million question that I'm not completely sure we know where that is. Anecdotally, when I visit customers and I try to understand where is their business and I try to compare it to where is our business, right? Where is our business; customer business is down more in the 5%, 10%, 15% year-over-year kind of level. We're obviously down in the mid-40s, maybe high 40s with the guidance. So that delta is what you should expect that in time, as inventory drains will get closed with a recovery in our business even when the macro is still weak. But the customers don't really report out inventory to us. We can glean information based on are they placing orders? Are they expediting orders? What are they seeing? And in those patterns, you can begin to form conclusions for a given customer. We have 100,000 customers. It's awfully hard to integrate that. And then from an end market perspective, as we mentioned, both industrial and automotive are both large pieces of our business and where we see the largest weaknesses as well.

Understood. And I mean, it doesn't really seem like it from the gross margin numbers you're putting up. But anything changed as the digestion extends on the pricing front? And in particular, like one of your larger peers, I think, called out some pricing pressure and weakness in general-purpose microcontrollers. Are you observing any of that?

So there's no pricing pressure on the immediate products we are shipping last quarter or this quarter. And there's always the fringes on some of that. But what really takes place is our new designs, all participants who are trying to win a design are going to put their best foot forward which often is their newest and most cost-effective products and are going to be as aggressive as they can be with consistent within their model for that. That is, in fact, happening. But that is always how business has been conducted. And I'm sure there may be a little extra of that when people see the environment is weak. But pricing, in general, is a more strategic exercise both for us and for customers for whom they're making decisions on a platform for multi-years. And price is not the only reason someone makes a decision. It's really value. And it's what else do we bring beside price that brings the overall value equation to match what the customer is willing to accept.

As you guys mentioned, some of your peers in the embedded market, MCU and analog have seen sort of this broad pickup in China back in May, at our conference. I think you did talk about seeing improvements in sell-through by your Chinese customers. It looks like, again, as you guys mentioned, this was reflected in your Asia sales which were flat sequentially. Did Asia sell-through actually grow sequentially in June? And during the September quarter, would you anticipate China and the Asia region revenues this quarter to outperform Europe and North America again?

We don't break out the details of sell-through any longer, right? We provided some information over the last couple of quarters of the amount that sell-through exceeded sell-in. That amount was $85 million roughly in the June quarter and about $125 million in the March quarter. I will just say that China was really the first to go into this. This is similar to Ganesh's comments earlier. And we wouldn't be surprised if they were the first to come out. The June quarter is a little bit hard to judge because the March quarter has a Chinese New Year. So there's just more shipping days. And so you kind of have to look effectively what's happening on a daily basis. But I would say China is our least weak market at this point in time. And I know that doesn't sound great but Americas and Europe are definitely hurting more so at this point in time than what we're seeing out of the Far East.

One of the differences in this cycle is we have typically viewed sell-through as a measure of the consumption, the economic conditions have changed. What we're also seeing is there is inventory sometimes downstream. So a great example, if you take automotive, right, if you look at automotive showrooms, particularly in the U.S. where they have inventory, they have substantially more inventory today than they did a year ago or two years ago. So inventory sometimes is not just what the channel has but also what is downstream from them. And all those play into the final equation of how does the destocking take place. And I think that has been one of the reasons why it has been slower than what most of us have expected. But as every month goes by, it continues to lower the level of water. And I think that just sets the conditions up for when this will revert back and change to those directions.

I appreciate the color there. Obviously, in this kind of environment that you just described, there is a lot of in orders. I appreciate that. But is the team seeing a pickup in cancellations, pushouts, and rescheduling, or is that still at relatively low levels?

No, that has been on a decline and continues to be encouraging. One of the positive developments is that new bookings are still happening, though not as quickly as we would prefer, and we are seeing a decrease in cancellations and pushouts. These are positive indicators.

I guess just from a broader perspective, so you're seeing some green shoots but the revenue decline is getting incrementally worse. So exactly how is that happening? And then when the customers come to you guys, are they saying that it's more their demand trends are a little worse than expected? Or are they just finding too much inventory? Or is it some combination of both? Maybe just take us into the machinations of the quarter of the business?

If you look at the end markets, we have significant exposure to industrial and automotive sectors, which are undergoing considerable adjustments. This is evident when examining broader macro trends, particularly reflected in the PMI, which has shown weakness in the U.S. for 21 consecutive months and around 24 months in Europe. This situation is contributing to a lack of confidence among businesses regarding when changes might occur, leading to hesitance in placing orders in a timely manner. Eventually, we expect this trend to reverse, but we currently lack enough visibility to make definitive statements about the timing and nature of potential changes. Presently, we observe a lack of confidence in the market, indicated by a low backlog and shorter order cycles than would typically be expected. All of these factors contribute to our current guidance.

Sure. And then before I ask my follow-up, I just want to say that Steve, you are a true icon in the industry, especially for those of us that have been around for a long time. And we really appreciated your candor and your honesty over the years; I really mean that. And as my follow-up, just in terms of your two bigger end markets, automotive versus industrial, any qualitative or quantitative comments on which is worse or which is better and why on a relative basis?

Yes. I can't explain why, but from what I've observed, the industrial sector seems to be performing worse. This aligns with a trend where the automotive sector is experiencing some pressure as well, primarily due to inventory levels, but also because consumers are still purchasing cars, which is impacting inventory management. Overall, I would consider that my best assessment of the situation.

Yes. Let me start off. Steve, congratulations. I've enjoyed working with you for all these, I guess, over a decade now. And hopefully, we'll still get to hear your voice on at least some of the calls. Appreciate it. Steve, all the holes that we put in with you and your honesty as somebody else said earlier. I had a question. Let me start off with the product question. Could you just help us understand what kind of end markets you might be able to address with a 64-bit microcontroller? I think you mentioned that the software that will be used on 64-bit is also the same over 8 to 64 and also your FPGA line. Is that actually correct? And how important is that?

Firstly, it's not the software that's common; it's more about the development tools and the related ecosystem we're utilizing. All of this falls under the Microchip branded ecosystem and tools we refer to as MPLAB. It’s designed in such a way that once you're accustomed to that environment, you can easily navigate through it, porting applications between different products. You can start with a bit processor and transition to a 64-bit processor or the other way around, as needed. There is a significant expansion occurring at the higher performance end of processing. This area is more compute-intensive and includes applications in factory automation, machine vision, and AI at the edge. This represents an evolution from where we were with 32-bit microprocessors to now extending to higher-end products that were previously out of reach for us. In some instances, this opens doors to markets that may not have considered us due to the lack of a clear progression from our 32-bit offerings to the 64-bit side. This development will unfold over several years, resulting in a broad portfolio of products needed in this space. It clearly opens up a substantial new total addressable market for us. We estimate that there’s about $3 billion to $4 billion of total addressable market with just the 32-bit offerings, which, when we add 64 bits, nearly doubles that to around $6 billion.

Got it. And maybe for my follow-up, I wanted to ask you sort of talked about industrial versus automotive but maybe you could give us some more color on which other end markets outside of data centers are acting better, and perhaps some that are not acting so well outside of industrial.

There's nothing that is acting better so to speak. Aerospace and defense for various reasons. It's stable. There are pockets of commercial aviation that for the well-known issues are there; space tends to be a very lumpy business for us quarter-to-quarter. Defense is strong for reasons that you can read in the news as well. But I don't have any other end market out as being particularly noteworthy.

Nick Doyle asking about the positive aspect related to the growth in data centers during the September quarter. Can you provide more details on what is driving this growth? Is it coming from general purpose applications, power connectivity, or any specific factors you can highlight?

Yes. So the data center infrastructure, which is kind of where a lot of the business was before the AI wave and the accelerated computing wave came about as that happened, there was some amount of CapEx at many places that moved primarily to the accelerated computing. And we had our share of that with where we were designed in. Now what we're seeing is some of that, and it can be in the backplane, the citing the power supplies; it can be in the storage networks, a number of different areas that all need at some point the data center investment as well. And all of that plays into the data center solutions that we bring. So the AI or the accelerated computing piece is going well. It's just other parts of data center are doing better at this point. Yes. And some of that, you can see also reflected in the CapEx announcements that have been made by some of the data center players out there.

Steve, let me just start off by saying thanks for all the insights over the years, I learned a tremendous amount from you and really appreciate all your help. Moving on to questions, Ganesh, I wanted to go back to the point you made in prepared commentary about the significant reengagement from customers and design-in activity as we got through the supply chain crisis. As you look at how that's manifested across Microchip's business, can you comment a little bit on the notable trends? And from when those engagements result in design or a design win that's going to go to protect production, how should investors think about the gestation period? So when do we begin to see the benefit of this renewed more vibrant engagement that you're seeing from your customers?

So our historical design cycles have been in the 12 to 24 months range. Some of them are a little longer, some maybe shorter. But for the most part, it's in that 12 to 24 months range. And so you would begin to see a lot of this in the next 12 months because we are about 12 months into that process. Now keep in mind that there are a couple of other forces that will make certain adjustments to it. One is when customers have inventory, they will also look to use their inventory and perhaps be a little more of the older generation until they can burn through that inventory before they shift to the newer generation of whatever they build. Second, if the slowdown in the macro persists for some time, historically, what we mean is customers tend to want to delay some of the launch because there's upfront costs associated with the marketing activities there, building of inventory, stocking of channels and all of that. And so there are many things at play here. But it should, in the next 1, 2, 3 years, create a surge of activity from all the work that has been started since about a year ago and it's continuing and will continue. And that surge has the benefit of both Microchip's approach to maximizing the total system solutions. And we do measure that internally, how we look at how many products for Microchip are getting attached to these new designs and how well it attaches to the fastest growing parts of the market. So I think there's a lot coming in the next 1, 2, 3 years from design-in activity over the last year plus, and the design-in activities that are still continuing over the next 1 or 2 years.

That's really helpful. And then for the follow-up one for Eric. Eric, it's clear you're able to keep CapEx pretty low over the next 2 to 4 quarters. I wanted to understand the interplay of that with low foundry utilization that we're seeing and potentially attractive pricing. At the margin, does the current foundry environment with low utilization give you an opportunity to do a little bit more externally or as you look at the mix of internal and external production, are you interested in continuing with the mix that you've had in driving that forward?

I would say the mix that we have is pretty fixed, right? Typically, a product is either designed on a process technology in one of our own factories or an outsourced partner's process. There are limited cases where we have capabilities to do something both externally and internally on the fab side. So I think that mix is going to stay about where it's at. We continue to do some things with technologies that we own to bring them in-house, but we've got this roughly 40% internal, 60% external split for foundry. And I think that will likely stay about that for the coming years.

And where we have opportunities of technologies that can run both inside and outside. And we have done some of the work over the last 2, 3 years towards that. It is far more favorable to load an underloaded internal factory for almost all cases that I can think of, than it is to say, let's continue to underload the internal factory and load more at the foundry.

First, Steve, thanks very much for a nice ride. All these decades and for all you've done for Microchip long-term shareholders. A lot of my questions have been asked.

Janet, I met you 34 years ago when I was raising private financing at a $10 million market cap. Fast-forward 34 years with a $45 billion market cap, you're still there.

I still hold some of that stock, Steve. Thank you for convincing me then to go along with this. So just a couple of quick questions, if I may. Can you give us a sense of what the early design win activity looks like in the 64-bit marketplace? And regarding your comment that May was flat and June was weak, can you provide any additional insights on how July performed compared to June and May?

I mentioned that May was flat, and June actually showed improvement compared to that. The numbers for July are just starting to come in, and I would say they are also flat compared to before. Month-to-month changes are not as significant; we should focus on quarterly performance instead. Overall, it is progressing in the right direction, even if it's not consistent every month or at the pace we would like on a quarterly basis. Regarding the 64-bit question, it's still in the early stages. We don't have any design wins yet, but we do have many early adopters. These customers are interested, seeking product samples and tools, have ideas for designs they want to pursue, and are engaged in detailed discussions with our field and technical teams because they recognize the opportunities within the 64-bit product lines. So, while it's still early, we are optimistic about the prospects.

Just one little thing. If history repeats itself, once you start producing the 64-bit chips, the margins on those new products should really move up the ramp quite a bit faster. Well, they would certainly be faster than the 32-bit would assume given the markets that you're targeting. Is that a fair assumption?

It's a little early for that. Typically, the processor or controller margins have all been within a narrow range between them. I think to some extent, as we find the specific applications, we'll look at that. And we want to look at margin not just on that one chip alone. We want to look at how is it with the entire portfolio that attached to that 64-bit. And so the value for us is not just the one chip but it's really the entire total system solutions that we can bring to that customer.

Okay. Well, thank you, everybody, for coming in and spending some time with us. We look forward to meeting many of you in the coming weeks through the conferences and other meetings that are being set up. So thank you. This concludes this call.