Analyst Conference Summary

semiconductors

conference date: May 8, 2025 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2025 (Q4, fourth fiscal quarter 2025)

Forward-looking statements

Overview: Not a good quarter, but beat midpoint of guidance range for sales. Believes quarter was bottom of the current down cycle.

Basic data (GAAP):

Revenue was $0.97 billion, down 5% sequentially from $1.03 billion, and down 27% from $ billion in the year-earlier quarter.

Net income was negative $157 million, down sequentially from negative $53.6 million, and down from $155 million in the year-earlier quarter.

EPS (diluted earnings per share) were negative $0.29, down sequentially from negative $0.10, and down from $0.28 year-earlier.

Guidance:

For the first quarter of fiscal year 2026 (June quarter) Microchip expects revenue of $1.02 to $1.07 billion. On a GAAP basis, EPS a loss of $0.15 to $0.17, but on a non-GAAP basis EPS profit of $0.18 to $0.26. Cap ex $20 to $25 millin.

Conference Highlights:

CEO Steve Sanghi said "Our March quarter revenue of $970.5 million exceeded the midpoint of our guidance, and we believe marks the bottom of this prolonged industry down cycle for Microchip. The decisive actions we have taken under our nine-point-plan are enhancing our operational capabilities through more efficient manufacturing, improving inventory management, and a renewed strategic focus. As we move forward from a challenging fiscal year, we believe Microchip is better positioned to capitalize on growth opportunities as market conditions evolve." Microchip has paused most factory expansion and capital investment, but is selectively adding equipment to expand some production and R&D capacity. Inventory is still too high, but is now shrinking, and expect to shrink more substantially in the June quarter. Book-to-bill was 1.07. But adjusted free cash flow, which had been below the dividend, is expected to go back to being above the dividend, which will allow for resuming debt reduction.

Declared a 45.5 cent dividend for shareholders of record on June 1, payable June 15, 2025.

April bookings exceeded each of the March quarter months.

Revenue was 49.2% from mixed signal MCUs; 27% analog; 23.8% other. But all segment revenues were down sequentially except FPGAs. By end market in FY2025: 30% industrial, 19% data center and computing, 18% aerospace and defense, 16% automotive, 9% consumer appliance, 8% communications.

Microchip is closing Fab 2 in mid-May. It is on rotating schedules at Fabs 4 and 5. CHIPS Act activity has been paused. Reduced workforce by 10%, but revenue to expense ratio still high.

251 days of inventory at end of quarter, down sequentially from 266 days. Targetting 130 to 150 days. Lead times are very short. Inventories at Microchip ended the quarter at $1.294 billion.

Spent considerably more time than usual on products and the industries they serve. Noted new trends are AI and networking connectivity. As usual, many new products were added in the quarter, including 64-bit controllers and high speed peripherals. Microchip conserving capital but supporting new, fast-growing products.

Non-GAAP numbers: Net income was $61 million, down 43% sequentially from $107 million and down 80% from $310 million year-earlier. EPS was $0.11, down 45% sequentially from $0.20 and down 61% from $0.57 year-earlier.

Cash and investments ended at $772 million, up sequentially from $586 million. Cash flow from operations was $206 million. $14 million capital spend in quarter. $192 million free cash flow. Long term debt was about $5.6 billion; $245 million used for dividends. $0 million used for stock repurchases.

GAAP cost of goods sold was $496 million, leaving gross profit of $501 million. Operating expenses of $601 million consisted of: research and development $255 million; selling, general and administrative $152 million; amortization $126 million; and special charges $72 million. Leaving operating income of negative $100 million. Other expense $68 million. Income tax benefit $14 million.

Q&A selective summary:

Demand signals, are there pull ins from tariffs? Starting in January bookings were higher than the December quarter. We have not seen any tariff related pull in. The main reason we are seeing more buying is the depletion of inventories. We saw a lot of design wins in 2024 which are resulting in sales in 2025.

End markets, recovery better in some? Aerospace and defense stands out, it has seen strong growth due to wars going on. US defense budget is likely to be over $1 trillion, and EU in particular is increasing their defense budgets.

Tariff macro impact going forward? Direct impact on our products as they ship into China, for instance. Customers don't know because so far there are really no tariffs on semiconductors. As to the macro effect of tariffs, we don't know. Years ago we moved our production that was in China, about 10%, to other nations, so now China is about 4%. But most of that product goes elsewhere in Asia, it does not come to the U.S. So not that concerned.

Margins higher at same revenue levels in the past? Depends on the slope of recovery, including cost of ramping up factory production. Can't predict margin level at this point.

Could you do a China production for China consumption strategy? We talked about that last quarter. We had a Chinese partner we were going to sell our die to, but that no longer works. So we are redoing our strategy there. We have told the Trump administration that the new policies are causing us to move some manufacturing out of the U.S., to Taiwan.

Gross margins and pricing? Pricing environment we see low single digit increases. Margins slightly below midpoint, several factors, mainly utilization was low because we are still reducing inventory.

September quarter? The backlog today for September quarter is higher than the June quarter was for the same point back in time.

Combined 8-bit and 32-bit because we were not coordinating the transition from 8 bit to 32 bits. We needed 32 bit designs for upgrades from 8 bit rather than just high end 32 bit. First products will be introduced in January.

We do see some of our China customers moving their production facilities to other countries like Vietnam. We see people continuing to build the products, China may have a problem, but the world will not.

We don't believe it is this quarter or next quarter, but some time this fiscal year we could need to start reramping the factories. Depends on inventory levels. We will need to restart some production well before we go below 150 days of inventory.

We do usually eventually sell inventory that we have written off, but the timing is hard to predict.

"When I look across the company, every indicator is starting to move in the right direction."

Possible dividend reduction? No. We brought our debt down, kept a good rating. Now our revenue is improving, we think the risk is behind us.

AI impact? Now AI related products are about 6% of sales and we continue to introduce new products to address that market. We have a special group coordinating new products for this.

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