Analyst Conference Summary

semiconductors

conference date: February 6, 2025 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2024 (Q3, third fiscal quarter 2025)

Forward-looking statements

Overview: Still in a big slump as inventories are high from 2023 peak in demand. GAAP loss, but small non-GAAP profit.

Basic data (GAAP):

Revenue was $1.03 billion, down 12% sequentially from $1.16 billion, and down 42% from $1.77 billion in the year-earlier quarter.

Net income was negative $53.6 million, down sequentially from $78 million, and down from $107 million in the year-earlier quarter.

EPS (diluted earnings per share) were negative $0.10, down % sequentially from $0.14, and down from $0.20 year-earlier.

Guidance:

Fiscal Q4 2025 (March quarter) revenue $920 million to $1.0 billion. GAAP EPS loss of $0.14 to $0.24. Non-GAAP EPS profit $0.05 to $0.15. Op ex expected to increase sequentially. Expects to reduce inventories.

Conference Highlights:

CEO Steve Sanghi said "Our December quarter performance reflects the need for the decisive steps we are taking to realign our business, as revenue declined to $1.026 billion and inventory levels reached 266 days. Since returning as CEO in November, we have already initiated several key actions, including restructuring our manufacturing footprint, adjusting our channel strategy and intensifying our customer engagement. Our initial assessment indicates clear areas for operational enhancement, and we are taking a methodical yet urgent approach to evaluating all aspects of our business and implementing necessary changes to strengthen our competitive position. While we have seen substantial inventory destocking at our customers and channel partners, we believe the correction cycle is still not completed. Our March quarter bookings are running at a higher rate than December, though overall levels remain low. With net sales guidance of $920.0 million to $1.000 billion for our March quarter, we maintain a cautious but focused approach and look forward to providing a comprehensive update during our business update call on March 3, 2025." Reducing employee hours and days of work. Backlog was lower at the beginning of this March quarter than it was at the beginning of December quarter. Currently dividends are equal to or more than cash flow. Should fix that with low cap ex going forward.

By March quarter of 2025 hopes to be able to return all free cash flow to shareholders. Declared a 45.4 cent dividend for shareholders of record on F, payable M , 2025.

Revenue was 51.9% from mixed signal MCUs; 26.6% analog; 21.5% other. But all segment revenues were down sequentially.

Microchip has started closing Fab 2. It is on rotating schedules at Fabs 4 and 5. CHIPS Act activity has been paused.

266 days of inventory at end of quarter, up from 247 days at end of September. Targetting 130 to 150 days. Inventory at distributors, 37 days down 3 days sequentially. Some customers pushed out orders. Lead times are very short. Inventories at Microchip ended the quarter at $1.356 billion.

As usual, many new products were added in the quarter, including 64-bit controllers. Microchip conserving capital but supporting new, fast-growing products.

Non-GAAP numbers: Net income was $107 million, down 57% sequentially from $250 million and down 82% from $592 million year-earlier. EPS was $0.20, down 57% sequentially from $0.46 and down 81% from $1.08 year-earlier.

Cash and investments ended at $586 million, up sequentially from $286 million. Cash flow from operations was $272 million. $18 million capital spend in quarter. $253 million free cash flow. Long term debt was about $6.75 billion; $244 million used for dividends. $0 million used for stock repurchases. Issued $2 billion in new bonds, largely used to pay down prior debt.

GAAP cost of goods sold was $465 million, leaving gross profit of $561 million. Operating expenses of $531 million consisted of: research and development $246 million; selling, general and administrative $158 million; amortization $123 million; and special charges $4 million. Leaving operating income of $31 million. Other expense $77 million. Income tax $8 million.

Q&A selective summary:

Where specifically is inventory high? Across the board, not much different by end market. Distribution partner inventory getting closer to normal. Direct inventory for customers is still high, they had higher inventories when the slump began than our competitors.

Earning power over next few years? Can't guide that far out. Working through our 9 point plan. We believe we are positioned for long-term growth.

We will give more data on March 3. We hope higher factory utilization will return us to higher margins, along historic lines.

Customers are re-engaged, making new designs, which should benefit us. Some delayes launching new designs because they had a lot of inventory of old designs.

Pricing? Short term we do expect price decreases, after increasing them the past few years.

Competition is complex, varies by product and market. We have about 120,000 end customers. Nothing is fundamentally broken.

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