Microchip Technology Inc (MCHP) — Q2 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; Rich Simoncic, Microchip’s COO; and Sajid Daudi, Microchip’s Head of Investor Relations. I will comment on our second quarter fiscal year 2025 financial performance. Rich will then review some product line updates and Ganesh will then provide commentary on our results and cash return strategy as well as an overview of our current business environment. 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 at www.microchip.com 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 reconciliation on our website. Net sales in the September quarter were $1.164 billion, which was down 6.2% sequentially. We recently settled an ongoing legal matter with one of our licensees. The impact of this settlement was the release of a $13.3 million accrual, which increased revenue and gross profit by $13.3 million in the September 2024 quarter. 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 above the midpoint of our guidance of 59.5%, including capacity underutilization charges of $25.9 million as we continue to manage production activities to adjust to the challenging business conditions. Without the benefit of the legal settlement mentioned earlier, the non-GAAP gross margins would have been 59.1%. Operating expenses were at 30.3% of net sales and operating margin was 29.3%. Non-GAAP net income was $250.2 million and non-GAAP earnings per diluted share was $0.46, which was $0.03 ahead of the midpoint of our guidance and positively impacted by $0.02 from the aforementioned legal settlement. On a GAAP basis in the September quarter, gross margins were 57.4%. As you may recall, on August 20, we announced that a cybersecurity incident had impacted our business operations, and on September 4, we announced that this incident was unlikely to materially impact our financial condition or results of operations. During the close process for the September quarter, we evaluated the financial impact of the breach including unscheduled factory outages, and although the incident did not materially impact our financial condition or results of operations, we determined that the total cost impact of the incident was approximately $21.4 million. The majority of this cost is attributed to incremental factory underutilization charges resulting from a cybersecurity incident. Total operating expenses were $521.9 million and included acquisition intangible amortization of $122.7 million, special charges of $1.5 million, share-based compensation of $42 million, and $3.6 million of other expenses. GAAP net income was $78.4 million, resulting in $0.14 in earnings per diluted share. Our non-GAAP cash tax rate was 13% in the September quarter, which was in line with our guidance. Our non-GAAP tax rate for fiscal year 2025 is expected to be about 13%, which is exclusive of the transition tax and any tax audit settlements related to taxes 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 points favorable adjustment to Microchip’s non-GAAP tax rate in future periods. Our inventory balance at September 30, 2024, was $1.34 billion, which was up $31.6 million from the end of the June 2024 quarter. We had 247 days of inventory at the end of the September quarter, which was up 10 days from the prior quarter’s level. At the midpoint of our December 2024 quarter guidance, we would expect both inventory dollars and days to increase. We also continue to invest in building inventory for long-lived high margin products whose manufacturing capacity is being phased out by our supply chain partners, and these last-time buys represented 18 days of inventory at the end of the September quarter. Inventory at our distributors in the September quarter was at 40 days, which was down three days from the prior quarter’s level. Distribution took their inventory holdings in the September quarter down as distribution sell-through was about $95 million higher than distribution sell-in. Our cash flow from operating activities was $43.6 million in the September quarter and was negatively impacted by the timing of interest and tax payments, including the transition tax payment that is paid annually and was part of the 2017 Tax Cuts and Jobs Act. We have one more transition tax payment that is due in the September quarter of 2025. Hence, our adjusted free cash flow was $14 million in the September quarter. As of September 30, our consolidated cash and total investment position was $286.1 million. Our total debt increased by $256 million in the September quarter and was negatively impacted by the higher tax and interest payments than the previous quarter. Our adjusted EBITDA in the September quarter was $405.7 million, representing 34.9% of net sales. Our trailing 12-month adjusted EBITDA was $2.161 billion. Our net debt to adjusted EBITDA ratio was 2.85 at September 30, 2024, up from 1.28 at September 30, 2023. Capital expenditures were $20.8 million in the September quarter. Our expectation for capital expenditures for fiscal year 2025 is about $150 million and we expect fiscal year 2026 capital expenditures to be lower than that as we have a lot of capacity to grow back into as well as capital that we purchased during the up-cycle that has not yet been placed in service. Depreciation expense in the September quarter was $41.2 million. I will now turn it over to Rich, who will provide some commentary on our product line performance and innovations in the September quarter.

Thank you, Eric, and good afternoon, everyone. We are strategically investing in and launching innovative technologies across high-growth sectors. We believe these advancements are positioning us to capture emerging opportunities and drive long-term value creation. In the Microcontroller space, our new dsPIC33A Digital Signal Controller core, with its 32-bit architecture and double precision floating-point unit, is driving innovation in critical sectors. In industrial automation, it’s enabling more precise, energy-efficient motor control for smart factories and renewable energy systems, powering advanced grid inverters and solar installations as well as power supplies for GPU and CPU-based data centers. We believe this positions us strongly in a growing clean energy market as evidenced by recently released Electric Vehicle Charger Reference Designs. We have further expanded our MPU offerings with our PIC64GX multicore 64-bit microprocessors, targeting secure intelligent edge systems that require multiple applications to run simultaneously on a single platform. Similarly, our new PIC64 high-performance space computer radiation-hardened MPU, complete with built-in AI accelerators and advanced Ethernet connectivity, represents a significant step forward for the compute needs of space exploration and satellite deployment. For high-performance space computers, we are sole-sourced in aerospace and defense applications for this compute function and working with numerous customers on early development of applications. In our data center and networking business, we are focused on evolving data center needs. Our family of PCIe switches and high-performance PCIe SSD controllers are now in mass production and widely adopted by customers. These product families are designed and optimized to meet the high-speed connectivity and high-performance storage needs of standard and AI-accelerated servers. We’re also seeing increased end-customer qualification activity with our CXL controller solutions, which will enable larger server memory footprints and improve the efficiency of data center servers. We believe these solutions position us well to address the evolving needs of next-generation data centers. In the automotive sector, we are expanding our Single-Pair Ethernet portfolio with our new 1000BASE-T1 PHYs supporting extended cable links. Additionally, we are excited about the launch of our VelocityDRIVE software platform and automotive-qualified multi-gigabit Ethernet switches, which are now available to support the next generation of software-defined vehicles and industrial applications. These innovations underscore our commitment to providing cutting-edge solutions across renewable energy, automotive, aerospace, defense, and data center sectors. We are making it easier for our customers to build smarter, more efficient products, laying the groundwork for future growth in these dynamic marketplaces. With that, I will pass the call to Ganesh for comments about our business and guidance going forward.

Thank you, Rich, and good afternoon, everyone. As Eric described in his prepared remarks, our September quarter results benefited from the settlement of a legal matter with one of our licensees. Including this benefit, our net sales were down 6.2% sequentially and our non-GAAP gross margin, non-GAAP operating margin, and non-GAAP diluted EPS were all better than the midpoint of our guidance. Excluding the benefit of the legal settlement, our September quarter results were consistent with our guidance with net sales down 7.3% sequentially as we continue to navigate through an inventory correction that’s occurring in the midst of significant macro weakness from manufacturing businesses, especially those in the industrial end market. Excluding the legal settlement benefit, non-GAAP gross margin came in just over the midpoint of our guidance at 59.1%, while non-GAAP operating margin came in at the midpoint of our guidance at 28.5% as we continue to manage our expenses by balancing the short-term realities and the long-term growth opportunities. Our consolidated non-GAAP diluted earnings per share came in a $0.01 ahead of guidance at $0.44 per share. My thanks to our worldwide team for their support, hard work, and diligence as we continue to navigate a difficult environment and focus on controllable actions that we believe position us well to thrive in the long-term. Now, for some color about the September quarter and the general business environment. All regions of the world and most of our end markets exhibited varying degrees of weakness. The exceptions were aerospace and defense and the artificial intelligence subset of data center. Our business in Europe, which is concentrated in the industrial and automotive markets, was particularly weak with revenue down almost 22% on a sequential basis. Our broad base of customers continue to manage their inventory tightly and adjust their purchasing plans in the face of a weak macro environment for manufacturing, high interest rates, inventory in their channels, very short lead times for our products, and an uncertain business outlook. This combination of factors we believe is driving lower consumption and continuing inventory destocking as well as reductions in target inventory levels at multiple levels at our direct customers, at contract manufacturers and distributors who buy from us, at our indirect customers who buy through our distributors, and in many cases at our customers’ customers. The early signs of green shoots in our business we saw in the March and June quarters progressed at an uneven pace with bookings staying flat on a quarterly basis, but continuing to age over shorter periods of time with an increasing number of requests for expedites of new orders as well as shipment date pull-ins for previously placed orders and with cancellations and push-outs declining to normal levels. We believe these factors are positive signs for the formation of a bottom in our business despite low customer confidence in the macro environment and resultant low visibility for our business. Our average lead times continue to be about eight weeks or less, while the short lead times are resulting in reduced near-time 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 helping customers navigate the uncertain environment successfully and improve the quality of backlog placed with us. We have adjusted our operational systems to adapt to this uncertain environment and pre-positioned semi-finished and finished goods inventory as best as we can to be able to accept and ship the turns orders we need for the December quarter. 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 and we expect our capital investments in fiscal year ‘25, as well in fiscal year ‘26, will be at or below the low-end of our long-term range of 3% to 6% of revenue as we plan to use the inventory we have invested in as well as our underutilized capacity to support the initial phases of the next upcycle. We are also prepared for the long-term growth of our business, on the one hand, in partnership with our foundry and outsourced assembly and test partners, and on the other hand, with the optionality of deploying capital, which we have purchased but not yet placed into service for our internal factories. While there remains uncertainty about the shape of the future recovery, we do expect it to arrive as it has in all prior semiconductor cycles, and we believe we are well prepared for the things we can control to exploit whatever the market recovery will look like. On the CHIPS Act front, we are making progress towards concluding a final agreement that is consistent with the goals of the CHIPS program and with our business values. We are cautiously optimistic that this could happen no later than the end of December. Now, let’s get into the guidance for the December quarter. While we believe substantial inventory destocking has occurred at our customers, channel partners, and their downstream customers, we remain in an environment of continuing macro uncertainty for our customers resulting in low visibility for us. Additionally, the December quarter has historically been our seasonally weakest quarter, and it’s when there are the most manufacturing holidays, especially in Europe and the Americas. And it is also the time of the year when customers tend to reduce inventory on the year ending balance sheet. In the current economic environment, many customers have also indicated that they intend to take an extended year-end shutdown. While we need turns orders and customer-driven pull-ins within the quarter to meet our guidance and operate in a high-turns environment has historically been normal for Microchip, it is challenging to predict and plan for during abnormal times as we’re in today. Taking all the factors we have discussed on the call into consideration, we expect our net sales for the December quarter to be between $1.025 billion and $1.095 billion. We expect our non-GAAP gross margin to be between 57% and 59% of sales. We expect our non-GAAP operating expenses to be between 33.2% and 34.8% of sales. We expect our non-GAAP operating profit to be between 22.2% and 25.8% of sales. And we expect our non-GAAP diluted earnings per share to be between $0.25 and $0.35. We expect our long-term growth to be driven by a combination of our new product innovation as well as the strength of our design-in activity. Rich has already provided a summary of several of the new product innovation results. On the design-in front, after two plus years of dealing with shortages and redeploying their innovation resources towards mitigating the impact of shortages, our customers for the last year plus have returned to prioritizing their innovation projects. The result is a strong design-in pipeline across all end markets, megatrends, and key customers, which is amplified by our total system solutions approach to take advantage of our broad portfolio of solutions. 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 what we expect will drive above-market long-term growth. We believe the fundamental characteristics of growth, profitability, and cash generation of our business remain intact but are suppressed in the current business environment. We’re confident that our solutions remain the engine of innovation for the applications and end markets we serve. This down cycle we’re in has been the most prolonged and challenging down cycle I can recall during my 43 years in the industry. We believe it could set up a strong cycle reversal at some point in 2025, and we remain committed to executing our strategic imperatives which we believe will deliver sustained results and substantial shareholder value. Let me wrap up with an update about our capital return to shareholders. In the September quarter, we returned $261 million to shareholders through a combination of $243.7 million in dividends and $17.3 million in stock purchases in the open market. This represented 92.5% of our adjusted free cash flow in the June quarter. Since achieving an investment-grade rating in November 2021, we have returned $4.8 billion of capital to shareholders through the September 2024 quarter, of which $2.4 billion represented shares we purchased, which is about 5% of our shares outstanding. We are continuing towards our target of returning 100% of our adjusted free cash flow to shareholders for the March 2025 quarter, with the dividend being the fixed component and share buybacks being the variable component. We expect that due to the timing of cash payments, occasionally our adjusted free cash flow may dip below the fixed component represented by the dividend. In such situations, as you heard during Eric’s prepared remarks about the September quarter, we expect to temporarily increase our borrowings to pay the dividend and then repay those borrowings in subsequent quarters from the free cash flow generated that is in excess of the dividends paid. With this approach, we aim to stay consistent with our capital return strategy without causing it to increase our debt permanently. With that, Matt, would you please poll for questions?

Thanks a lot. Ganesh, I kind of wanted your perspective on how long you think it could take the distribution channel to sort of get back to normal. If I look at your drawdown in revenue, basically, it was all of distribution this quarter. So, it seems like things are actually relatively okay beyond that channel. So, if you kind of look at inventory days, it’s about 2x what it was before COVID. I mean, do you think that 20 days of inventory is still what that channel wants to hold? And, sort of given your discussions with them, how long do you think it could take to sort of clear that channel?

So, maybe two points of data first. 20 days was towards the low-end of where we were during COVID. If you look at over time, closer to 30 plus or minus is where distribution days of inventory have been. Second, those days of inventory are calculated on a backward-looking revenue basis. And when you are in a steep decline and expecting to bottom and grow again, the backward-looking days of inventory isn’t always the most helpful calculation, although it is the calculation that is consistent across quarters. Now that said, in this cycle, the distribution inventory is not just driven by what are they carrying, but sometimes their customers and their customers’ customers and their customers’ channels also have inventory that is destocking. And so, what we’re seeing is depending on which customer, what region, which distributor, there’s some of this where the distribution destocking is taking place, but what is less visible is destocking taking place at other places farther downstream that had all been collecting during the strong quarters as we were in 2023 and 2022 as well.

Thanks a lot. And then Eric, just a question on underutilization and how it could affect the shape of the gross margin recovery. The last quarter where you didn’t take charges, I think was the end of ‘23 when revenue was like 1.8 a quarter. And so, if your capacity hasn’t really changed since then, does revenue have to get all the way back to 1.8 before you’re no longer burdened by underutilization? Can you kind of talk through all that? Thanks.

Yes. So, that kind of depends on what the slope of the revenue curve is and what our forecast is out in time when we get to that point in terms of how we’re going to be ramping. So, I can’t put a revenue number around it of where that’s going to be, but we’re significantly underutilized today. That’s going to continue obviously in the current quarter and then we’ll just gauge it as we go. But underutilization charges are having a pretty significant impact on our gross margin and our operating results. On top of that, then we’re building inventory, and because we don’t have great historical sales at this point in time, looking backward a quarter, and then as we look forward don’t have a lot of backlog, our inventory reserve charges have been quite high also. And that at some point in time is going to provide a tailwind to gross margin as the environment improves.

Thank you.

Thanks for taking my question. Ganesh, when we look across the space, there seems to be kind of a wide range of corrections that we have seen across the diversified names, right? It seems like microcontrollers have been more impacted than analog, industrial more exposed than autos, but this combination of microcontrollers and industrial has corrected the most. What would you attribute that deal, because, it’s just hard to imagine this kind of 50% plus peak hopefully trough correction? And then, what is giving you the confidence that this is an industry and a cycle issue and maybe is there something company-specific in terms of share shifts or China in sourcing? But, just give us kind of the perspective of how is Microchip stacking up versus the industry that you’re in.

No, I think you’re right that this is an asynchronous up cycle and down cycle. And so, depending on exposure to end markets and exposure to certain regions of the world, results are going to be different. I think as I mentioned a quarter ago at our conference call, there were also different ways in which people tried to deal with the up cycle and how to tackle the demand ferocity that was taking place at the time. And so, there is an overhang obviously that Microchip has, and I think many others have had, but to different degrees, that is based on what people were buying in excess of what they needed. And so, all of that has to correct and come through. Now, what gives us confidence in our business is the connection to the customers that we have on programs, on plans that they have. And really, as they give us more visibility into what is happening with their customers and their channels, the change in revenue isn’t because revenue is moving from one supplier to a different supplier. It’s really customers who got very, very optimistic, built ahead of demand thinking that their historical in ‘21, ‘22 timeframe was going to be persistent demand, and then they ran into a macro issue where not only do they have high growth plans, higher inventory but a much slowing demand. So, those are all what is correcting through. The customers we have remain the customers that are working with us. We are working with them on next-generation programs that they will launch as they get to the point where the current inventory is burned off and the new product can be launched. But, our confidence comes from this is a market that has long cycles, long design-in, and long production cycles, and we just need to get through. We’re not in the early innings of a correction. We’re in the later innings of the correction. And that’s why our confidence is that this thing will turn around. It has turned around. And just as when we were on the upside, it looked like it was impossible to know how could we ever satisfy the demand. On the down cycle, you get the sense that how can we ever turn this thing around. But it does happen. It is a cyclical industry, and it will happen.

Got it. For my follow-up, just kind of near-term clarification, what is the level of turns business that you are assuming for December versus normal? And then, I know March is still a little bit further away, but if I go back in history pre-COVID, usually your March sales tended to be flat to up 1%, 2%. So, any conceptual way you would help us kind of think through what March might look like? Thank you.

Let me take the second one, and then I’ll let Eric speak to the first one. I think it’s with that little visibility as we have, we have a hard enough time trying to call the December quarter, let alone the March quarter. But the puts and takes of March typically are we’ll see the Chinese New Year, and usually there’s about a 10-day or 14-day impact that comes. So, that’s the headwind. The tailwind is we have fewer production holidays in the Western countries in Europe and the Americas. And so, you get more production days that happen, and typically those have strength. And then you have to put into place whatever else takes place in terms of inventory that has been destocked and needs to be starting to build closer to consumption. So, a lot of puts and takes that go with it, but we’re far away from trying to have visibility into the March quarter as we struggle through getting enough visibility into the December quarter. I’ll let Eric answer the first question relative to the turns.

Yes, so we don’t break out turns specifically. Ganesh gave commentary that bookings continue to be weak in the September quarter. They were pretty much in-line with where bookings were in the June quarter, and our book-to-bill was below parity. So, our visibility continues to be not great out in time, but we’ve got short lead times and inventory available and can respond quite quickly. And the orders that we are receiving from customers now are more in-line with where our lead times are, and we’re well-positioned for that. So, the level of turns that we need is not outside of what we’ve seen historically, and it is obviously contemplated in the range of guidance that we gave today.

Thank you.

Hi, good afternoon. Thank you so much for taking the question. I had two questions as well. My first one, I’m just curious how you’re thinking about the gap today that exists between what you’re selling in versus what is being sold through. And I know you don’t have perfect visibility, but your December quarter revenue outlook, I think at the midpoint is 20% or 25% below where you were pre-pandemic. And if I recall correctly, late 2019, back then you were going through a cyclical correction. So, you must be shipping well, well below what’s being consumed. I’m curious if you have an estimation of how big that gap could be today?

So, we absolutely agree with you. We are shipping considerably under where consumption is taking place. As I speak to our customers, define how are they seeing the business, right? It is nowhere close to the magnitude of what our business is going through. I think that is the bullwhip effect we’re seeing on the reverse side, where they’re trying to manage through their inventory, their channels, and where they’re at, plus some macros that they’re good macro thing they’re going through. But our customer business is down substantially less than what our business is down. And that is what gives us the comfort that as they correct the inventory, they have to go back to a consumption level that is a lot higher than where we’re at today.

Got it. And then as my follow-up, I’m curious how you’re thinking about blended pricing into calendar ‘25. And I know Ganesh, historically you’ve said that you operate a strategic business and it’s less transactional than it used to be back in the day. But, you’ve had a couple of peers point to low-single-digit declines in next year, mid-single-digit declines in next year. I’m curious how at Microchip you’re thinking about pricing as of today? Thank you.

I think in general, our direction hasn’t changed. Our pricing is pretty consistent year-over-year. The environment for new designs is, of course, a lot more competitive. There are players who are, in some cases, being more aggressive than they were historically at, and we will match them to make sure that in the business that is important to us. But we also have substantial discipline in our process and how we go run it. And remember, it isn’t just pricing, but we also have cost reductions that we’re bringing on, which is what are we doing from in terms of design shrinks and other things we can do to be able to drive the margin side of the equation as well. So, will there be pricing pressure as we go throughout 2025? Yes. But a lot of it is going to be on new designs as they start to go into production. And we’ll have a substantial amount of existing designs that will continue to stay with where our pricing and turns are today.

Yes, thank you. I guess, first question is on what you’ve been seeing by geography. It looks like there are some sharp differences there with particularly what you’re seeing in Europe. Is that just simply end market dependent, I guess, saying that with the exposure to industrial and auto there? In addition, we’ve seen some others in the space talk about some strength in China. Can you speak to that and if that’s been a partial offset for you?

Sure. So, Europe has a couple of factors in it. Historically, I don’t know for whatever reason, Europe seems to enter cycle one to two quarters behind when we see it in the Americas. So, on a down cycle, they start a little bit slower than that. But a big part of what we’re seeing in Europe and the large sequential decline that we have seen and year-over-year declines we’ve seen have been the high percentage of industrial and automotive end market customers that we have there. So yes, and I think you’ve seen that in the commentary for many others, and I see that in the commentary for many other industries with high exposure to Europe as well as that’s where the biggest challenges are for anyone with a large industrial and automotive side of the business. With respect to the other geographies, your question was about China. I would say that, and we don’t quite break out China, but when you look at Greater China for us, which is Taiwan, China, Hong Kong, all combined on it, of the four regions or the three regions, the subset of Asia that represents Greater China would be the one where at least there is not weakness. There’s not great strength, but it doesn’t have the same weakness as we see in Europe and the Americas. That said, we still see an immense potential for growth in these markets, and we are cautiously optimistic about our future prospects there.

Got it. As a follow-up, you mentioned in the prepared remarks about some borrowing that you were contemplating around the dividend. I wonder if you could give some details around that, some of the background of why you’re choosing to do that. And maybe more broadly, given the downturn that’s lasting longer than most of us have thought, what’s kind of your general view towards the borrowing levels right now?

Sure. So maybe I miscommunicated in my prepared remarks. So let me go through them again. In any given quarter, the adjusted free cash flow we generate will vary depending on various actions, particularly when we have concentrations of tax payments or interest payments, which happen a little bit more lumpy. In that quarter, we may generate lower adjusted free cash flow than the dividend that we pay. And all that I was trying to say is that in subsequent quarters, what we would do is take some of the adjusted free cash flow that was in excess of the dividend and compensate for that so that we didn’t have a net borrowing between quarters where the adjusted free cash flow was less than the dividend payment. So, it’s really borrowing from within Microchip, not so much borrowing from the bank. We did in the last quarter, as Eric said in his prepared remarks, have to increase the debt in order to pay the dividend because our adjusted free cash flow was lower than what the dividend payment was. And there will be subsequent quarters as we go back into a recovery where we will generate more. And what we will do is just bring the debt level down so that the 100% capital return can still happen without raising the aggregate debt.

Just maybe take a real simple example. So if, for example, the dividend in the current quarter is in excess of the prior quarter’s free cash flow calculation by $100 million and then we fast forward to the June quarter of next year and hypothetically the adjusted free cash flow is $200 million higher than what the dividend would be. But forward we would start buying back stock, we would back out that $100 million that in Ganesh’s kind of terminology we borrowed in the current quarter to pay the dividend. So, over the course of time, it’s 100% free cash flow return.

Without a structural increase in debt levels, yes.

That’s exactly what we’re targeting.

And a commitment to our shareholders that the dividend is strong and continues to be there and that our cash generation continues to be strong over the long-term.

Hey, good afternoon. Thanks for taking the question. I have two. Just kind of curious on the message on the guidance. So, it sounded like last quarter you were hopeful of some green shoots. You said they were uneven. So, I’m just kind of curious, are you seeing any areas either product wise or geography that you’re feeling better about? And then I guess for the guidance, it sounds like you’re just assuming less turns. Is that anything you’re seeing? Or is it just as you explained seasonal and you’re just being conservative on that?

So, as I mentioned, the two places where we continue to see strength are in aerospace and defense as well as the AI subset of data centers. So that has been continuing now for multiple quarters. I think in this quarter, beyond the normal macroeconomic forces and all that stuff also is we know that the quarter ends in December when there are more holidays and so less production days, and people will take the opportunity to tamp down any production plans as well as to cut back on inventory because many of them have year-end for their balance sheets and they want to have a balance sheet without excess inventory sitting on it. And we’ve already heard from some customers who have production shutdowns that are in the latter part of the quarter. So, I think all of that plays into us trying to get a sense of kind of where this quarter is going to go. And at this point in time, I think the guidance tries to reflect that combination of what are we able to do, what are we expecting will come, and where are the places where there are going to be some challenges to work through.

Right. And just to clarify, we didn’t break out the turns percentage. We aren’t necessarily expecting less turns, but our backlog has continued to fall as our book-to-bill has been less than 1%.

Got you. And then maybe just on OpEx over the next couple of quarters here. I had thought that you had some pay cuts that would kind of come back in. I’m assuming with lower forecast though maybe the variable comp is down from I think you’re guiding it up $12 million sequentially for December. But how do you think about the next few quarters beyond that?

Yes. So, on a non-GAAP basis, it’s a little bit more at the midpoint of guidance, a little bit more than $8 million up quarter-on-quarter, December to September. And then we are reinstating the salary cut, taking the majority of employees that are kind of below a director level back to 100% salary this quarter, and that is factored into that $8 million increase. And so I would expect that OpEx, because we’ll have a full quarter of that effect in the March quarter will go up again in dollars and we’ll see where the revenue comes in terms of percentage of sales and all that. But those are things that we feel that we need to do. Our employees will have been on a pay cut for nine months and we want to make sure that we’ve got an engaged group that is being compensated for the work that they’re performing.

Thank you.

Hi, guys. Thanks for the question. You had some comments about some data center products, which was nice to see, PCI switching, some SSD, SXL, some other stuff as well. I guess a couple of questions here, like is there a home run product amongst this group? Is this outgrowing, I would assume, the rest of your other end markets? The last update that you guys had, I think data center was 18% of revenue, but it hasn’t necessarily grown over time. Would you expect given this product lineup for data center to expand as a percentage of your total over time? Thanks.

So, in the long run, we are very confident about data center as an end market, as a megatrend, and our participation in the opportunities within that. And it’s pretty broad in terms of what all we bring in there. In the short run, the data center subset, which is driven by accelerated computing or the AI portion of the subset. And we had estimated that to be about 30-ish percent of the overall data center revenue we have. That is, in fact, continuing to be strong and growing. But as you know, overall data center budgets are being squeezed on the non-AI portion of what they’re spending. And eventually, it will come back because they do need to go back and put some of that infrastructure in place. But today, the data center overall growth is constrained because the non-AI portion does not have the same capital expenses that end customers are placing while they build out some of the AI infrastructure at the pace that it’s going on. But long run, AI or the data center is a huge opportunity for us with multiple growth areas inside of it.

Okay. Well, I’ll answer the CapEx question. So, our CapEx for the current fiscal year, which will end in March is expected to be about $150 million. It was pretty front-end loaded, where we had about $70 million in the June quarter and then it’s going to be at this lower rate through the end of the fiscal year. We do expect fiscal ‘26 CapEx to be even lower than fiscal ‘25, and that’s because we’ve made a lot of investments in capacity that we need to grow back into. During the up cycle, we were planning for growth and brought in a bunch of equipment that has been received now that is sitting in an undepreciated state that we can deploy. So, we’ve got maintenance CapEx, obviously we’ll be investing in growth areas of the business, but CapEx, I expect to be quite low again in fiscal 2026.

For CHIPS Act, I’ll turn it back to Ganesh. So, we don’t yet have an agreement on the CHIPS Act. We’re working through it. We’re optimistic about it. I think the CHIPS Act has a piece of it, which is the investment tax credit. It’s been taking place over some time. But we would need to be deploying capital to be able to take advantage of that, and that will happen in time, but it’s not something near-term we need to go off and do. And then there are grants, and those grants are the ones we’re still negotiating. And those would be determined based on when would we bring on capabilities or capacity consistent with what those grants were delivered for. So I’m not looking for any short-term benefit that comes out of the CHIPS Act in the next one, two quarters or so. But over a three, four, five-year period of time, as demand returns, as we continue to expand and deploy the capital we have and live up to the commitments that we’re making into the CHIPS Act, they will all be beneficial to us.

Great. Well, thank you, everyone, for your patience in sitting through the meeting. We appreciate the questions, and we look forward to meeting many of you on the road in the coming weeks. Thank you.