Earnings call transcript: Microchip Technology beats Q1 2026 earnings forecast

Microchip Technology Inc. (MCHP) reported its first-quarter fiscal year 2026 earnings, surpassing expectations with an EPS of $0.27 against a forecast of $0.24. Revenue reached $1.08 billion, exceeding the anticipated $1.05 billion. Despite these positive results, the company’s stock saw a premarket decline of 5.74%, trading at $62.42. According to InvestingPro data, the stock has shown significant volatility, with a beta of 1.54, though it has achieved a notable 29.57% return over the past six months.

Key Takeaways

• Microchip Technology’s Q1 FY2026 EPS of $0.27 beat estimates by 12.5%.
• Revenue of $1.08 billion exceeded forecasts by 2.86%.
• Stock price fell 5.74% in premarket trading.
• The company introduced new AI and FPGA products.
• Strong recovery noted in key markets, including automotive and aerospace.

Company Performance

Microchip Technology demonstrated robust performance in Q1 FY2026 with a 10.8% sequential growth in net sales, reaching $1.075 billion. The company continues to capitalize on its strong position in the microcontrollers market and has gained traction in the aerospace and defense sectors. The introduction of new AI and FPGA products further strengthens its competitive edge. InvestingPro analysis shows the company maintains strong financial health with a current ratio of 2.59, indicating solid liquidity. Additionally, Microchip has maintained dividend payments for 24 consecutive years, demonstrating consistent shareholder returns.

Financial Highlights

• Revenue: $1.08 billion, up 10.8% sequentially.
• Earnings per share: $0.27, exceeding guidance by $0.01.
• Non-GAAP gross margin: 54.3%.
• Non-GAAP net income: $154.7 million.
• Cash flow from operations: $275.6 million.
• Adjusted free cash flow: $244.4 million.

Earnings vs. Forecast

Microchip’s actual EPS of $0.27 surpassed the forecasted $0.24, marking a 12.5% surprise. Revenue also exceeded expectations by 2.86%, coming in at $1.08 billion compared to the $1.05 billion forecast. This performance reflects the company’s ability to navigate market challenges effectively.

Market Reaction

Despite the earnings beat, Microchip Technology’s stock fell 5.74% in premarket trading, dropping to $62.42. This decline might be attributed to market volatility or investor caution regarding future growth prospects. The stock remains within its 52-week range, with a high of $82.87 and a low of $34.13. InvestingPro subscribers have access to 12 additional exclusive insights about Microchip’s performance and valuation, including detailed analysis of its trading multiples and growth prospects. The company’s comprehensive Pro Research Report, available to subscribers, provides in-depth analysis of its market position and future potential.

Outlook & Guidance

For Q2 FY2026, Microchip forecasts net sales of $1.13 billion, plus or minus $20 million, and a non-GAAP EPS between $0.30 and $0.36. The company anticipates above-seasonal growth in the upcoming quarters and plans to increase wafer starts by December. This outlook aligns with InvestingPro data showing analysts expect the company to be profitable this year, with an EPS forecast of $1.42 for FY2026. The company’s strong market position is reflected in its robust gross profit margin of 56.07%.

Executive Commentary

CEO Steve Sanghi emphasized the company’s strong recovery in key markets, stating, "We are seeing recovery in our key end markets." COO Rich Simonsek highlighted the growth potential in AI, noting, "The AI build out continues to create substantial opportunities across our portfolio."

Risks and Challenges

• Potential tariff impacts could affect costs and supply chain dynamics.
• Macroeconomic pressures might influence demand in key markets.
• Inventory management remains a focus, with a target reduction of $350 million for the fiscal year.
• Factory underutilization charges and inventory write-offs, though reduced, still present challenges.

Q&A

During the earnings call, analysts inquired about inventory correction dynamics and lead time extensions. The management addressed these concerns, emphasizing strategic adjustments and ongoing product development efforts.

Full transcript - Microchip Technology Inc (MCHP) Q1 2026:

Conference Operator: Good afternoon, ladies and gentlemen, and welcome to the Microchip Q1 Fiscal twenty twenty six Financial Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. Please press 0 for the operator. This call is being recorded on Thursday, 08/07/2025.

And I would now like to turn the conference over to Mr. Steve Sanghi. Thank you. Please go ahead.

Steve Sanghi, CEO, Microchip Technology: Thank you, operator, and 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 Rich Simonsek, Microchip’s COO Eric Bjornholt, Microchip’s CFO and Sajid Dowdy, Microchip’s Head of Investor Relations.

I will provide a reflection on our fiscal first quarter twenty twenty six financial results. Eric will go over our financial performance, and Rich will then review some product line updates. I will then provide an overview of the current business environment and our guidance for 2026. We will then be available to respond to specific investor and analyst questions. Microchip employees are often referred to as chippers.

I will begin with a question for all of you, and then I will provide the answer. How many chippers does it take to deliver a good quarter? The answer is that it takes quite a few, but they all showed up to deliver an outstanding quarter like we produced in the June 2025. And that is a point I want to make. 18,000 employees of Microchip worked all last year on a pay cut, have not received a bonus or a salary increase in a year and a half, and suffered through a gut wrenching global layoff earlier this year, in March.

These employees working with high morale came together to deliver an outstanding quarter. I tip my hat to all 18,000 employees of Microchip worldwide. I will highlight a few salient points of our financial results. 10.8% sequential sales growth. Net sales were up sequentially in all geographies.

Sales from our microcontroller and analog businesses were both up in double digit percentages sequentially. Non GAAP gross margin was two thirty basis points sequentially. And incremental non GAAP gross margin was 76% sequentially. Non GAAP operating margin was up six seventy basis points sequentially, and incremental non GAAP operating margin was 82% sequentially. Inventory went down by $124,000,000 sequentially.

Our target for the whole fiscal year is a $350,000,000 reduction. So we are off to a very good start. Inventory days were two fourteen days. Our inventory over two quarters has gone down from two sixty six days to two fifty one days to two fourteen days. We expect inventory at the September to be between one hundred and ninety five and two hundred days.

The inventory write off in the June was $77,100,000 down from $90,600,000 in the March. The inventory write offs are expected to decrease again in the September. Under utilization in our factories in the June was $51,500,000 down from $54,200,000 in the March. We expect the under utilization will modestly decrease again this quarter with a more significant decrease in the December. Adding $77,100,000 of inventory write off and $51,500,000 of underutilization charge makes a total of $128,600,000 of charges.

Divide that by the net sales of $1,075,000,000 and you get a non GAAP gross margin impact of 12 percentage points. Adding it to the reported non GAAP gross margin of 54.3% indicates that the product gross margin was 66.3%. The point is, as inventory write off and underutilization charges decrease, we believe our long term non GAAP gross margin target of 65% is achievable. We have accrued about $5,500,000 from the upside profits to provide a small bonus to our 18,000 employees who deserve it very much. The net impact from this accrual is less than a penny per share.

And with that, I will pass it on to Eric Bianhold, who will take you through our more detailed financial performance last quarter. I will come back later to discuss the business environment and provide guidance for the second quarter. Eric?

Eric Bjornholt, CFO, Microchip Technology: Thanks Steve, good afternoon everyone. We are including information in our press release and on 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 described in our earnings press release and in the reconciliations on our website. Net sales in the June were $1,075,000,000 which was up 10.8% sequentially and $5,500,000 above the high end of our updated June guidance provided on May 29. 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 54.3% including capacity underutilization charges of $51,500,000 new inventory reserve charges of $77,100,000 operating expenses were at 33.7% of sales and operating income was 20.7% of sales. Non GAAP net income was $154,700,000 and non GAAP earnings per diluted share was $0.27 which was $01 above the high end of our updated guidance.

On a GAAP basis in the June, margins were 53.6%. Total operating expenses were $544,600,000 and included acquisition intangible amortization of $107,600,000 special charges of $22,200,000 which was primarily driven by foundry contract exit costs and our activities associated with the closure of Fab two, share based compensation of $45,200,000 and $7,500,000 of other expenses. The GAAP net loss attributable to common shareholders was $46,400,000 or $09 per share. Our non GAAP cash tax rate was 11.25% in the June, and we expect to record a non GAAP tax rate of about 9.5% in the September. Our non GAAP tax rate for fiscal year twenty twenty six is expected to be about 10.25%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years and was positively impacted by the impacts of the recently passed One Big Beautiful bill.

Our inventory balance at 06/30/2025 was $1,169,000,000 and down $124,400,000 from the balance at 03/31/2025. We had two fourteen days of inventory at the end of the June, which was down thirty seven days from the prior quarter’s levels by our inventory reduction actions is what drove this. Included in our June ending inventory was sixteen days of long life cycle, high margin products whose manufacturing capacity has been end of life by our supply chain partners. Inventory at our distributors in the June was at twenty nine days, which was down four days from the prior quarter’s level. Distribution sell through was about $49,300,000 higher than distribution sell in.

Our cash flow from operating activities was $275,600,000 in the June. Our adjusted free cash flow was $244,400,000 in the June. And as of June 30, our consolidated cash and total investment position was $566,500,000 Our total debt decreased by $175,000,000 in the June and our net debt increased by $30,200,000 Our adjusted EBITDA in the June was $285,800,000 and 26.6% of net sales. Our trailing twelve month adjusted EBITDA was $1,167,000,000 and our net debt to adjusted EBITDA was 4.22 at 06/30/2025. Capital expenditures were $17,900,000 in the June and we expect capital expenditures for fiscal year twenty twenty six to be at or below $100,000,000 Depreciation expense in the June was 39,500,000.0 And I will now turn it over to Rich, who will provide some commentary on our product line innovations in the June.

Rich?

Rich Simonsek, COO, Microchip Technology: Thank you, Eric, and good afternoon, everyone. I am pleased to share our operational progress this quarter, highlighting strong momentum across aerospace, defense, AI applications, and network connectivity. As a leading semiconductor supplier to the Department of Defense and our NATO allies, our aerospace and defense business continues to strengthen amid increased global defense spending, driven by geopolitical tensions and NATO monetization. With over sixty years of aerospace and defense heritage, including from our acquisitions, we have recently achieved significant defense industry device qualifications and continue to expand our product portfolio to support commercial aviation, defense systems, and space application. Microchip plays a key role supporting products to many modern defense platforms.

Also, our radiation tolerant FPGA solutions can deliver up to 50% power savings while maintaining the highest levels of security and reliability. We have recently expanded our FPGA portfolio by introducing cost optimized solutions that deliver up to 30% cost reduction while maintaining industry leading performance and security. This positions us firmly across both high reliability defense applications and broader industrial markets. Microchip continues to be a leader in the microcontroller industry and enabling customers with our AI coding assistant, aiding customers to achieve up to a 40% productivity improvement in programming our microcontroller devices. At Masters, our major technical conference this week, we previewed further advancements for the attendees with the inclusion of AI agents into the AI Coding Assistant that will be released into the market in September, further improving productivity and reducing time to market for our customers.

The AI build out continues to create substantial opportunities across our portfolio. We have secured design wins in data center infrastructure, spanning AI acceleration, storage, and network infrastructure with tier one cloud providers and enterprise leaders. We have strategically expanded our connectivity, storage, and compute offerings for AI and data center applications, as well as intelligent power modules for AI at the edge. Security remains paramount as defense and AI deployments proliferate. We have made significant advances with embedded controllers that feature immutable post quantum cryptography support, which was recently mandated by the NSA.

This support enhances the security of platforms using our digital signing for secure boot and secure firmware over the air updates. These capabilities are essential enablers to protect our defense, industrial, and AI applications well into the future in compliance with critical standards such as CNSA two point zero and the European Cyber Resiliency Act. With that, I will pass the call to Steve for comments about our business and guidance going forward. Steve?

Steve Sanghi, CEO, Microchip Technology: Thank you, Rich. During the last quarter’s earnings conference call, I talked about a trifecta effect on our revenue growth. We saw that effect in action last quarter. First, our distributors’ customers’ inventory is getting corrected, and we saw the first sequential increase after two years in distribution sales out last quarter. Second, the distributors’ sell in versus sell through GAAP shrunk from $103,000,000 in the March to only $49,300,000 in the June.

So distribution sell in is rising to meet the sell through. And we believe there is more to go. And third, our direct customers inventory is getting corrected and we saw the first sequential increase in direct sales in two years. This trifecta effect led to a 10.8% sequential growth in our net sales in the June. We believe that this dynamic is still in effect.

Importantly, we believe we are seeing, represents structural demand recovery as we remain below normalized end market demand levels. After two years of correction, we believe we are feeling a supply chain deficit rather than experiencing any significant pull forward activity. The second effect I have spoken about is the impact on gross margins. As the inventory comes down, our inventory write off will decrease, thus growing our gross margin percentage. And as the inventory comes down, and we start to grow the factories again, our underutilization charge will decrease and will further grow the gross margin.

We saw these two effects in action last quarter. Our inventory write off decreased from $90,600,000 in the March to $77,100,000 in the June. Our factory underutilization charge dropped from $54,200,000 in the March to $51,500,000 in the June. This combined effect is adding to our gross margin. We expect the increase in gross margin percentage will continue as the inventory write off continues to decrease, and we ramp the factories, which will lower the underutilization charge.

We currently plan to start increasing wafer starts in the December. Now, the market environment. We are seeing some recovery in our key end markets Automotive, industrial, communication, data center, aerospace and defense markets, and consumer are all looking somewhat better. While we have not seen any material tariff related pull ins in April and May, we saw some selective acceleration of orders from Asia which appear to be tariff related. We believe that such pull ins amounted to only mid to high single digit millions.

However, it is important to provide context on pull ins more broadly. We are still shipping below normalized end market demand across most of our markets after two years of inventory correction, this deficit to normal demand level means that any pull in we are seeing represents underlying demand where the inventory has run out at the customers rather than borrowing from future quarters. Now let’s go into our guidance for the September. We believe substantial inventory destocking has occurred at our customers, channel partners, and downstream customers, and the trifecta effect is in play. Our backlog for the September started higher than the starting backlog for June, And as of this time, the backlog for September is comfortably higher than the backlog for June at the same point in time.

The bookings for July were higher than bookings for any month in the last three years. I will make a comment about lead times. While lead times for products have been four to eight weeks for some time, we are experiencing a lead time bounce off the bottom and increases on some of our products. While we have sufficient inventory, it is mostly held in the die form. We still have to package and test the products.

We’re running into challenges on certain kind of lead frames, substrates, and subcontracting capacity. While these challenges are isolated to specific areas, we expect them to broaden and lead times go from the four to eight weeks range to more like six to ten weeks range. Out in time and on certain products, they’re likely to go to eight to twelve weeks range. The customer and distributor inventories have begun to run low on many products. We are increasing increasingly getting short term shipment requests and pull ins of the prior orders.

Our customers will be well advised to manage their backlog, and have twelve to sixteen weeks of their needs on backlog, so they are not caught short. The emerging lead time pressures and increasing customer requests for expedited shipments reflect the reality that inventories have run too low on certain products. This dynamic supports our view that we are seeing demand normalization from a severely corrected starting point rather than speculative buying on any significant pull forward activity. Taking all of these factors into account, we expect our net sales for the September to be $1,130,000,000 plus or minus $20,000,000 We expect our non GAAP gross margin to be between 5557% of sales. We expect our non GAAP operating expenses to be between 32.432.8% of sales.

We expect our non GAAP operating profit to be between twenty two point two percent and twenty four point six percent of sales. We expect our non GAAP diluted earnings per share to be between $0.30 and $0.36 per share. I want to again highlight the leverage in our business model. With a 54,500,000 sequential increase in net sales at the midpoint, we would expect to see approximately 77% of such amount go to the bottom line as non GAAP operating profit. As the inventory drains further and inventory write offs decrease, we expect our gross margin recovery will accelerate, and with the incremental profits going to the bottom line, we will have tremendous leverage.

Finally, a comment on our capital return program for shareholders. After this September, we expect our adjusted free cash flow to exceed our dividend payment, driven by increasing revenue and profitability, low CapEx, and liberating cash from the inventory. Therefore, we do not expect to have to borrow money to pay our dividend after this quarter. In future quarters, we intend to use this excess adjusted cash flow to bring down our borrowings. With that, operator, will you please poll for questions?

Conference Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. And should you wish to cancel your request, please press star for beta two. I would like to advise everyone to have a limit of one question and a brief follow-up. If anyone have an additional question, you can put yourself back in the queue by pressing star one again.

Thank you. And your first question comes from the line of Vivek Arya. Thank you. Please go ahead.

Vivek Arya, Analyst: Thank you for taking my question. Steve, many of

Vivek Arya, Analyst: us equate better than seasonal sequential trends as a sign of recovery. So when you look at your September outlook, sales up 5% or so sequentially, would you call that seasonal, above seasonal? I think basically what we are all trying to get our hands on is that yes, there is a recovery, but are we done with that stronger recovery as in lot more above seasonal quarters. So just how would you describe September seasonal, above seasonal? And then what does that kind of inform us as to how December could shape up in kind of similar terms?

Steve Sanghi, CEO, Microchip Technology: So thanks, Vivek. September guidance of 5.1 up sequentially would be considered well above seasonal. You know, our seasonal increase usually per quarter are really in the 3% range, in the September quarter. And December quarter usually is the weakest quarter of the year. Ordinary times, totally normal inventory times, December quarter will be sequentially slightly down, and March quarter will be up again.

So we were strongly above seasonal in the June quarter, We’re strongly above seasonal in the September quarter. And I would expect that we’ll continue to be above seasonal in December and March.

Vivek Arya, Analyst: Alright. Thank you, Steve. And,

Vivek Arya, Analyst: you know, when we look at several of your peers, they had a strong June. You know, they kind of guided September line ish, but they expressed some caution as they looked at December onwards, mainly because there seems to be kind of this renewed threat about the delayed impact of tariffs and whatnot. What’s your read, Steve, of the macro environment? Do you think that as you look out beyond September that the recovery is as strong as you thought three months ago? Just how would you kind of contrast the kind of recovery you are seeing versus the slightly more conservative tone that some of your analog peers have indicated on their earnings calls?

Thank you.

Steve Sanghi, CEO, Microchip Technology: Vivek, you know, our sales went down much more significantly than others because of really excessive inventory at the direct customers as well as channels, driven by our PSP program, which was launched during the COVID years and continued well afterwards. Many of our competitors and peers got off the non cancellable, non returnable treadmill, I think a year earlier than Microchip did, and therefore we continue to ship large amount of products to our customers and distributors in accordance with the PSP rules. So therefore, when we eventually corrected, our sales went down much much harder than others. So what we’re seeing right now is the trifecta effect we talked about. Inventory is going down at our distributors customers.

They’re going down at distributors. Our sales in are catching to sales out from distributors. Our direct customer inventory is going down. So we believe the dynamics that are taking place at microchip are more driven by those kind of factors and not any kind of tariff related pull in. We have done substantial analysis on the tariff question.

Part of our normal process each quarter is to ask our distributors to explain any significant fluctuations in their customers quarterly sales. This is done at a very forensic level, so covering a large percentage of our customer base. We did this and we identified a small number of customers that identified tariffs as a reason for the sequential change in their revenue. When we extrapolated this data, we believe the impact came out to be only mid to high single digit, $7.08, $9,000,000 range. We have no direct customers that indicated that tariffs were the reason for their increase in revenue.

I also want to remind investors that a very high percentage of our direct customer exposure in China actually is manufactured in free trade zones that are not impacted by tariffs. So therefore, the phenomena we’re seeing at microchip is really related to inventory digestion than any kind of tariff plan activity.

Timothy Arcuri, Analyst, UBS: Thank you.

Conference Operator: Thank you. And your next question comes from the line of Harsh Kumar. Thank you. Please go ahead.

Harsh Kumar, Analyst: Yes. Hey, Steve. I’ve got two as well. Steve, I was hoping that for September, you could help us understand the growth between the two key end markets, auto and what I would call as pure industrial. Why I’m saying pure industrial is because you’re in defense, and defense is very strong for obvious reasons, and it’s queuing things for the industrial category.

So I was hoping that just outside of defense, if you could just talk about in September, which ones, you know, how do you see auto versus pure industrial playing out?

Steve Sanghi, CEO, Microchip Technology: So, you know, with such a strong growth of 10.8% sequentially, which you annualize it, it’s a phenomenal enormous rate of growth. So with a very, very strong June, we actually saw growth across all of our product lines, end markets, microcontrollers, analog. So it was very, very broad based in all geographies. So therefore, I think my my simple answer would be we saw recovery pretty much in all end markets.

Harsh Kumar, Analyst: Okay. Fair enough. Can I ask you, Steve, if at this point, you feel like sell through is equal or higher than selling at your distributors? And if there’s a gap, what kind of gap there are, you know, to the best of your knowledge, I know it’s a difficult one to answer, what kind of gap exists? And your inventory dollars came down, I think by 124,000,000, which is a big number.

How far do you think you are from where you wanna be in terms of optimal inventory level.

Steve Sanghi, CEO, Microchip Technology: Well, I think we gave you the number in our prepared remarks. Let me pull it out again.

Harsh Kumar, Analyst: So Maybe I missed this, Steve.

Eric Bjornholt, CFO, Microchip Technology: Sell sell through and distribution was $49,300,000 higher than what sell in was. And you know, that’s just the distribution piece of our business, which is a little less than 50%. We absolutely believe that our direct customers are draining inventory too and consuming more that we’re shipping to them, but we just don’t have real time data to show you. That 49,300,000.0 compares to $103,000,000 the quarter before. So the gap is shrinking, but there’s still a gap.

Steve Sanghi, CEO, Microchip Technology: There’s still a $49,300,000 gap. So selling is rising to meet sell through. Now we closed half the gap last quarter and, you know, we don’t know. It could take a couple of more quarters to close the rest of the gap.

Blayne Kirkland, Analyst, Jefferies: And the other

Harsh Kumar, Analyst: question can’t be

Eric Bjornholt, CFO, Microchip Technology: Yep. Progress we’re making towards inventory. Right? The inventory target overall. And Steve, do wanna address it or do you want me to?

Steve Sanghi, CEO, Microchip Technology: Yeah. So I’ll I’ll address it. So we we are bringing inventory down in days of sales in pretty heavy chunks. It was two hundred sixty six days of inventory at the December. That came down to two hundred fifty one days at the March.

Came down to two hundred fourteen days, very large drop, at the June. And we are forecasting that we’ll break the 200 and be between one hundred ninety five and two hundred at the September. In dollars of inventory reduction, we reduced inventory last quarter by $124,400,000. So we’re making massive progress by shutting down one of our fab, the Tempe fab two, and a substantial scaling down of our other fabs. We are producing products in our factories which is well well below the rate of consumption.

That’s why the inventories are dropping by a very large amount. That essentially will continue. We will start growing wafer starts in December, as I said in my remarks. Not that our inventory has fully come down, but if we wait till our inventory is totally normal to then start growing the fabs, we’re gonna have to grow the fabs by 40% in a single quarter. And that’s not possible.

It you know, so therefore, we have to start early and asymptotically reach the number where the fabs need to run.

Harsh Kumar, Analyst: Understood, Steve and Eric. Thank you so much.

Conference Operator: Thank you. And your next question comes from the line of Chris Caso from Wolfe Research. Please go ahead.

Vivek Arya, Analyst: Yes. Thanks. Good evening. I guess the first question, maybe following on some of your prior comments is, you know, just getting a sense of how far below end demand, you you think you’re really shipping now. And recognize you have your best data with distributors.

And you talked about how low point of sale is. And I guess the quick math, it would seem like, I guess you’re about maybe 10% below point of sale and distribution, but the distributor inventories also not at bad levels. Do you have a sense of how much by how much you might be under shipping real end demand at your direct customers?

Steve Sanghi, CEO, Microchip Technology: We have a sense, but the sense is not audit proof and really can’t be discussed outside. The number that we could share and we have shared is the gap between sell in and sell out, because those are two actual numbers. Other than that, how much inventory our distributor customers have is very anecdotal. By asking our distributors, by asking some of the customers that we jointly visit, and since the customer base is so broad, having 110,000 plus customers, you know, if you do the analysis based on larger customers, it’s really, you know, it’s not audit audit proof. And then when you get to your direct customers, the analysis is even more difficult.

Many of our large industrial customers buy, 900 different line items and produce the product in 26 different factories around the world. And and some products have inventory and some products are short, and they’re expediting those products. So to get a total feel for it is very difficult. Anecdotally, as we do the analysis, we know many, many line items that have a run rate, and and they’re not buying because they still have inventory. And on other line items, they were not buying two months ago or three months ago, and they’re buying now, which means the inventory is running low.

So I think when I put it all together, I I believe inventory correction will continue for some time, and our sales will continue to grow towards the more normalized levels. Exactly how far are we and when will that end, I don’t think I can put a number with very high confidence.

Vivek Arya, Analyst: Right. I mean, it sounds like and and maybe if I could ask a different way, which would be easier to answer. Do you think that you’re under shipping the direct customers by more or lesser, more or less than than than the distribution customers based on the rough analysis you’ve been able to do?

Steve Sanghi, CEO, Microchip Technology: Again, just directionally, during the go go days, we prioritized shipping to direct customers more than to distributors. So direct customers got a more than fair share of the product. And therefore, direct customers in most cases build higher amount of inventory, you know, than the distributors were able to do. So, you know, I think just by, you know, by that statement, I would say the inventory at direct customers is probably higher than the inventory at distributors.

Harsh Kumar, Analyst: Right. Alright. That’s helpful color. Thanks, Steve.

Conference Operator: Thank you. And your next question comes from the line of Blayne Kirkland from Jefferies. Please go ahead.

Blayne Kirkland, Analyst, Jefferies: Hey, guys. Good afternoon. Thanks for taking my question. I wanted to maybe I missed it. I just wanted to know the timing.

You talked about lead times extending from four to eight, six to ten, eight to twelve. Is that now or is that where you expect it to go?

Steve Sanghi, CEO, Microchip Technology: So lead times, broadly on most of our products, times are four to eight weeks. But on certain products, like I said, in certain pockets, the lead times have gone longer. And some of them are six to ten weeks, and some are even headed towards eight to twelve weeks. And those are cases where we are short of lead frames, short of substrates, in a given pocket, given package type, our subcontractors are overbooked, we’re trying to find and negotiate a place. So this always starts partly like this, we have a substantial recovery to go through in our sales still because we’re shipping so much below the end consumption.

So this is just a warning shot to our customers, you know, to really bring their backlog healthy because lead time being short, you get very short term bookings, you get very short term visibility. So it’s it’s a message to our investors, but more than that, it’s a message to our customers to make sure that they look at their demand for twelve to sixteen weeks and give us that backlog so we can buy lead frames and substrates and start wafers and do everything in the right mix to be able to meet their needs.

Blayne Kirkland, Analyst, Jefferies: Got you. So I think you kind of answered it, but you said that you had more bookings at this time versus last time, the same time frame last quarter. I guess, lead times kind of the duration is the part we don’t know. Is the when you look at how you set the guide, is the level of churns you’re looking for in the quarter the same? Or is it different?

Steve Sanghi, CEO, Microchip Technology: Yeah, July bookings were the largest bookings for any month in the last three years. Any month of June quarter, but any month of the prior three years. So we had a very, very strong month of July. Now, bookings every quarter are different based on how much backlog you begin with and what the lead times are. If the lead times are short, you get higher terms.

If the lead times are longer, you get less terms. And our backlog started in September stronger than June. And the turns requirement is about the same. And with the same kind of turns requirement roughly, I think we’ll have a good quarter.

Joshua Buchalter, Analyst, TD: Thank you.

Conference Operator: Thank you. And your next question comes from the line of James Schneider from Goldman Sachs. Please go ahead.

Steve Sanghi, CEO, Microchip Technology0: Good evening. Thanks for taking my question. I was wondering if you could maybe comment on any end markets that you think are materially lagging in terms of end demand. Steve, I know you talked about a number that are they’re doing well as most of them, I believe. Any that are lagging?

And do you see any improvement in the ones that are lagging? The reason I asked the question is because I believe your other products didn’t really grow much sequentially and think they were down slightly sequentially. Just trying to understand what happened there.

Rich Simonsek, COO, Microchip Technology: This is Rich Simonteck. I would say automotive is still lagging more than any of our other markets today, if you wanted to be specific about that. AI data centers or data centers are doing very well and recovering. Industrial, some of the smaller and medium sized customers are starting to recover. It seems that the one that’s probably lagging the most is automotive at this point in time.

Eric Bjornholt, CFO, Microchip Technology: Yeah, and that other category of revenue that you’re referring to is everything other than the microcontrollers and analog and includes licensing and some other things that tend to be a little bit more lumpy. That can drive some of that fluctuation quarter to quarter, Jim.

Steve Sanghi, CEO, Microchip Technology0: Okay. That’s helpful. Thank you. Then maybe just as a follow-up, relative to the President Trump’s press conference yesterday, where he talked about tariff exemptions for companies with U. S.-based investment or increased U.

S.-based manufacturing investment. Just wanted to confirm, is it your understanding that your existing US manufacturing investments qualify you for that exemption? Or do you have to do more or do you not know yet?

Steve Sanghi, CEO, Microchip Technology: Yeah, I think anything President Trump says is never clear, and often changes a week or two weeks later. But the way we understand what

Harsh Kumar, Analyst: he

Steve Sanghi, CEO, Microchip Technology: said is it’s not by products that are made in US and the products that are made overseas. So we make some products here and we make some products overseas in TSMC and other places. So it’s not that you have to pay a tariff on the products that are made overseas, but you qualify as a company. Now as a company, we make large amount of manufacturing in US, and then we also buy wafers from foundries outside. So because we make so many investments in US, and large amount of our manufacturing in US, our interpretation is that we will qualify to be exempt from tariffs.

And if that is the case and if that holds, then I think we are okay. And maybe in better shape than some of our competitors, like the Japanese competitors and others.

Steve Sanghi, CEO, Microchip Technology0: Thank you very much.

Conference Operator: Thank you. And your next question comes from the line of Timothy Arcuri from UBS. Please go ahead.

Timothy Arcuri, Analyst, UBS: Thanks a lot. Steve, you said bookings are the highest since July 2022. But in reference to a you know, another question, you’re guiding up 5%. Yes. It is better than seasonal, but it’s not that much better.

And then you just said the turns are about the same in q three, unless I misunderstood what you said. So to me, that kind of implies that a lot of these bookings are filling in q four, as in as in the December, you know, rather than, you know, calendar q three. So is it fair that you can say at this point that December should be another really good quarter?

Steve Sanghi, CEO, Microchip Technology: Yeah. I think I’m not willing to get that far. I think I said in my commentary that I expect us to continue to be above seasonal in September, December, and even into March. Know, good quarter is anybody’s definition. I don’t know without numbers what that means.

But what happened in on on July 1, our our backlog for the September was meaningfully higher than our backlog for the June quarter on April 1. And if we get about the same amount of turns this quarter as we got last quarter, then we’ll have a good September quarter. Having said that, there are strong bookings this quarter, summer turns and summer going into the calendar fourth quarter.

Timothy Arcuri, Analyst, UBS: Okay. Thanks. And then you did say that lead times are lengthening and and you actually said you’re encouraging customers to expedite orders. I think a lot of us see what happened to, you know, last cycle and worry that we that when we hear that, that it could scare customers off a little bit because of the potential to get back into, a PSP sort of a dynamic. So if lead times are already sort of doubling for some products and you barely even come off the bottom, how are you managing this messaging to customers to avoid what kinda happened last cycle?

Thanks.

Steve Sanghi, CEO, Microchip Technology: So first of all, we’re not asking any customers to expedite orders. We’re simply asking them to place the order with a scheduled backlog. So today, a lot of the orders are very short term orders because lead times are very short. And what they need in q four, they think they can place the order in late September and still get the product. And we’re simply saying, look a little bit farther ahead and lay it in the backlog for every month going out four months, which is not the same as expediting orders.

We’re not asking them to take the product early, we’re not trying to ship above demand. We’re simply asking them to place the orders. Secondly, we’re not changing the rules of cancellation. So if they give us a higher visibility and their demand changes, higher or lower, or they wanna change the product, the product is cancelable. It’s not non cancelable order.

So they have complete flexibility. Therefore, there is no comparison to a PSP environment here.

Eric Bjornholt, CFO, Microchip Technology: Right. The other thing that we are seeing from customers, and Steve kind of alluded to this earlier, is we are seeing them, they’ll have an order already on the books and then they ask to pull that in. And sometimes that can be challenging without visibility to be able to meet their new requested dates. So having better backlog visibility helps us better service the customer. So that’s really all we’re saying here.

Rich Simonsek, COO, Microchip Technology: Yeah, and at least having the extended backlog, even if they do wind up pulling that in, that is still better for us because it allows us to plan capacity and purchase materials that we may need to build that product.

Timothy Arcuri, Analyst, UBS: Okay, thank you all.

Conference Operator: Thank you. And your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.

Steve Sanghi, CEO, Microchip Technology1: Hi, good afternoon. Thanks for taking my question. Steve, on the accelerated demand signals from Asia, Asia was up about 14% sequentially versus Europe and North America at about 8%. Even if I exclude the mid to high single digits millions of dollars, which may be pulled forward, Asia was still up strongly at about 12% or 13% sequentially. And then on a year over year basis, Asia in the first half was down only about half of what The U.

S. And Europe was through the first half of the year. So what’s driving the relative strength in Asia both sequentially and through the first half of this year?

Steve Sanghi, CEO, Microchip Technology: I think a lot of the Asia strength is a proxy on what’s happening in US and Europe. Because we build our customers, European and US customers build a lot of their product in Asia. So we we report sales by where we sell, where we ship the product, not where it is designed or where the origin of the customer is. So a lot of our US customers are asking us to ship the product in China or Taiwan or Vietnam or Asia or wherever. So I don’t think you can quite look at it.

By numbers you could say, Asia is stronger, but a lot of that strength is coming from US and European customers.

Eric Bjornholt, CFO, Microchip Technology: Yeah, I think another impact that we see and saw in the June is you’re comparing it to the March, which has the Chinese New Year, Right? So there’s some of that effect that’s reflected in the June results. That’s true.

Steve Sanghi, CEO, Microchip Technology: More shipping days.

Steve Sanghi, CEO, Microchip Technology1: Yeah. That makes a lot of sense. Okay. And I apologize if I missed this. I think you did mention something about business, in addition to the strong rising orders that you saw in March, June and a cyclical recovery, we typically do see stronger turns business, right?

Orders placed and fulfilled in the same quarter. I know your turns business rose as a percentage of sales in March. Did that turns percentage grow in the June? And what are you guys seeing thus far here in the September?

Eric Bjornholt, CFO, Microchip Technology: Yes, I would say that turns were strong in the June. And that’s not surprising because we obviously beat on revenue. So turns were turns were higher and and lead times are really short for the vast majority of products. We would expect turns to continue to be a pretty high number for us, given where lead times are today. And I’ve obviously, if lead times stretch, that’ll change over time.

Steve Sanghi, CEO, Microchip Technology1: Great. Thank you.

Conference Operator: Thank you. And your next question comes from the line of Quinn Bolton from Needham and Co. Please go ahead.

Steve Sanghi, CEO, Microchip Technology2: I just wanted to ask on the gross margin guidance. Can you give us some sense what total charges for underutilization and write offs you’re assuming in that 55% to 57% range?

Eric Bjornholt, CFO, Microchip Technology: So we don’t break that out. We did say that we’d expect the underutilization charges to be modestly lower. And I would say that is mainly driven by activities increasing in our backend factories that’s driving most of that. Wafer starts, as Steve indicated, are really planned to go up in the December. And we expect the inventory write offs to be lower.

It’s hard number to forecast quite honestly, but we do expect it to be lower as the comparison because we start this by looking at twelve months of trailing demand for the calculations. And that is getting to be a better metric for us with the revenue increases that we’re seeing. And then obviously, our our overall inventory dollars are coming down also, which which helps with that. So it will be lower, but giving you an exact number is is difficult to do.

Steve Sanghi, CEO, Microchip Technology: We ship hundreds of thousands of SKUs in the quarter. So and this write off, inventory write off is SKU by SKU. You know, looking at every skew, what its inventory is, and comparing it to last twelve months of shipments. So it’s a, you know, it’s a complicated calculation, and you can’t make an accurate forecast of it.

Vivek Arya, Analyst: Understood. Okay. And then the second question

Steve Sanghi, CEO, Microchip Technology2: I have is just on those products where you’re seeing lead time stretch out to the size six to twelve weeks. How much of that is sort of substrate or packaging related versus wafer related? And if it’s wafer related, is it mostly outsourced wafers or internal wafers? Because obviously, wafers take probably the longest in the manufacturing cycle. So I’m kind of wondering on at least on those products where you’re seeing lead times extend, why you wouldn’t be increasing the wafer starts now rather than waiting to December?

Rich Simonsek, COO, Microchip Technology: Majority of that is in substrate or packages and that’s typically how that all starts as business starts to turn around. We still have quite a bit of dye stores or dye inventory on many of our devices. So it tends to be a matter of just pulling that product out of die stores and ensuring that the substrates and the rest of the assembly materials are in place to bring that out. That’s what shifts it a few weeks at a time.

Steve Sanghi, CEO, Microchip Technology: Yeah, we’re not seeing Got on our internally produced product yet. It’s mostly back end like Rich said, and there could be one or two places where we have our products coming from large number of fabs at foundries because this company is built up of acquisitions with Microsemi and Atmel and SMSC, and everybody bought product from different fabs. So we buy product from large number of fabs, and I think there are, you know, handful of fabs where certain nodes are constrained. So just very very spotty, there are few places where, external die is constrained, we’re trying to beef that up. But all the rest of it in foundry and all of the technologies internally, we have plenty of capacity and we have plenty of die.

Steve Sanghi, CEO, Microchip Technology2: But it sounds like it’s more back end than front end at the current point in time.

Rich Simonsek, COO, Microchip Technology: You’re correct. Yeah.

Joshua Buchalter, Analyst, TD: Yeah, okay, thank you.

Conference Operator: Thank you. And your next question comes from the line of Joshua Buchalter from TD. Please go ahead.

Joshua Buchalter, Analyst, TD: Hey, guys. Thank you for taking my questions. Maybe a follow-up on Quinn’s. Can you maybe speak to us about what you’re looking for that’s going to give you the signal that it’s all clear to raise utilization rates? Is there a certain inventory target?

Is there sell through demand that you’re looking for? I guess I’m curious to hear why there’s so much conviction that December will be the right time given you are seeing some cyclical signals improving while at the same time inventory levels are elevated. Just curious to how you’re thinking about that holistically. Thank you.

Steve Sanghi, CEO, Microchip Technology: So so I think the, you know, the fact is that our current production output from our two fabs with third fab closed is so far below our shipment rate that if we do not start increasing utilization in the fabs, then there will be a point where we’ll have to double the capacity just to get to the shipment rate. And fabs take long time to ramp. You can, you know, grow certain percentage every quarter. So therefore, we have a forecast over the next two years, and how much dye will be needed for that, bounce off the dye inventory, how long will it take for that to deplete, And then what is the rate of growth by which we can grow our both Oregon and and the other fabs? And then that is solving a math problem on when we need to begin.

Joshua Buchalter, Analyst, TD: Okay. Thank you. And Oh, go ahead.

Steve Sanghi, CEO, Microchip Technology: So you just have to begin well before, you know, well before your die inventory goes too low. Because once the die inventory goes too low, you know, then you get in trouble very rapidly because we’re producing only half the product that we need every quarter.

Joshua Buchalter, Analyst, TD: Okay. Thank you. And and I guess on, you know, on that note, I understand you don’t want to break out the underutilization and write down charges by quarter, but any rules of thumb that we should think about as to how those charges should unwind? Is there a certain revenue level or or any other factors that we could think of, again, as we think about modeling those charges coming out coming out of the model? Thank you.

Steve Sanghi, CEO, Microchip Technology: I think we gave you incremental gross margin. Didn’t we give you incremental gross and operating margin?

Eric Bjornholt, CFO, Microchip Technology: We did, but maybe it’d be helpful to say that we expect those underutilization charges to take longer to come out of the system than the inventory write downs. The inventory write downs happen quicker and the ramping of our factories will be gradual over time. So hopefully that helps a little bit.

Joshua Buchalter, Analyst, TD: Okay, thank you both.

Conference Operator: Thank you. And your next question comes from the line of William Stein from Juest. Please go ahead.

Steve Sanghi, CEO, Microchip Technology3: Great. Thanks for taking my questions. Product gross margin, as you highlighted, was 66.3%. And your long term target is lower than that at 65. And I wonder, does that imply that there’s that you are somehow exceeding your long term target because of mix or pricing?

Or may maybe help us reconcile why product gross margin once these unusual charges go away would decline from where it is now.

Steve Sanghi, CEO, Microchip Technology: But, you know, number one, charges don’t ever go to zero. You know, there’s always some mix issues where certain product is built and the demand went away. You know, number two, when you’re 12 percentage points away, I wouldn’t quibble about a percent here and there. What I’m simply trying to say is many investors ask us, how are you confident that you’ll get to 65% gross margin? And we’re saying that, you know, that that is achievable based on the math.

Steve Sanghi, CEO, Microchip Technology3: But is is I’m I’m really trying to ask is mix or something else going to change such that, you know, perhaps it’s the defense end market exposure that’s, you know, quite high now. And as that mix normalizes, does that have an effect of dragging gross margins?

Steve Sanghi, CEO, Microchip Technology: You know, we we ship hundreds of thousands of SKUs every quarter. We, you know, have 20 business units, some exchanges every quarter. You know, some of our you know, so so I think you’re making too much of that, 65 versus 66, I don’t differentiate those two numbers.

Eric Bjornholt, CFO, Microchip Technology: Yeah, I would agree with that. And you shouldn’t look at this, but long term we think that our product gross margins are going to go down. We’re introducing lots of really high margin products. We talk about 10 base T1S, our Ethernet products, those are gonna be higher than corporate average. We have a lot of confidence in how our FPGA business is gonna grow over time.

That’s higher than corporate average. So it’s, there’s a lot of moving parts there. Well, I understand your question, but as Steve said, we’re really just trying to frame this, that we have confidence in getting to our long term model and the mix will have some effect over time, but we’ve got high confidence that we can get there and it’s just gonna take us some time.

Steve Sanghi, CEO, Microchip Technology3: That helps a lot. If I could squeeze one more in, if sell in and sell through sort of continue in September as they did in June, you should be pretty well aligned by the end of the quarter. Is that the right way for us to think about this such that maybe by the time we get to December, we’re looking at sell in being aligned or maybe even higher than sell through?

Steve Sanghi, CEO, Microchip Technology: I would not think that. I think there is a lot of slow moving product in distribution. We call it sludge, and it’s just not perfect mix. You know, the product, it was bought two years ago in certain mix and the demand always comes out in a different mix. So I I think this will take more than just a September to close.

We’re not we’re not telling you that September will be sell in and sell through will be equal.

Eric Bjornholt, CFO, Microchip Technology: Yeah. There’ll be there’ll be a difference still. And, you know, I I’ve kinda been saying, you know, I think maybe by the end of the fiscal year, we’re pretty much aligned, but that that’s a guess. Yeah.

Steve Sanghi, CEO, Microchip Technology3: Thank you.

Conference Operator: Thank you. And your next question comes from the line of Chris Stanely from Citi. Please go ahead.

Vivek Arya, Analyst: Hey, thanks guys. Just real quick on the incremental gross margins, Eric, think you said 76% for the September excuse me, for the June. For the December, since you guys are turning the fabs back on or at least increasing utilization rates, would that incremental gross margin go up? If so, roughly how much?

Eric Bjornholt, CFO, Microchip Technology: No, I think it will be roughly in that same ballpark. If you look at our guidance, you’d look at the revenue change and where we’ve guided gross margin to. I think it’ll be about the same and I think our fall through to operating profit too would be in a similar range to what we saw in the June.

Vivek Arya, Analyst: Great, thanks. Super helpful. And then a question for Steve. So Steve, now that you’ve been back in the front seat of the Microchip minivan here for, you know, a good nine months, how would you describe Microchip’s competitive positioning, especially on microcontrollers? Are you, you know, have you seen any improvement?

Has it been better than you thought? Worse than you thought? How do you see your share going forward? Maybe talk about a, you know, path to gaining back market share. Anything there?

Steve Sanghi, CEO, Microchip Technology: So I think market shares are kinda hard to decipher when you’re dealing with such a large inventory change. When you know, simply measure by revenue divided by the total revenue of the industry, it would seem that the market share is much lower. But if some of that revenue comes back when our customers’ inventory goes away, and if you grow higher than, you know, the overall industry, which seems to be the case, I have compared, you know, our numbers against semiconductor industries, June ending report for microcontrollers, and we grew substantially more in microcontrollers. Didn’t we grow double digits, roughly? We did.

Yes. Yeah. The industry was up only about six, six and a half percent sequentially. So that means, you know, we gained share in the June. So some of that share gain is coming back.

I think it’s gonna take a little longer for us to go down this journey before we can really tell what happened. But one of the things which we have corrected is we we were weaker at the very low end of 32 bit microcontrollers because we were serving those functionalities with eight bit microcontrollers. And as customers wanted to be in 32 bit microcontrollers, we had a good portfolio of mid range parts and high end parts, but we didn’t have entry level parts. You know, we were competing with eight bit on that. And I think that’s one thing I corrected after I returned.

And there are, you know, couple of very, very good low end 32 bit parts that we’re developing at a very, very good price point. So first one of them gets introduced to the market nearly the start of the next calendar year. So those would be those will strengthen our position further. But I think more than that, there are a few things we have done. One other thing was, for eight bit and 16 bit, we had our own proprietary architecture, PIC architecture.

We didn’t use ARM or anybody, any industry standard architecture. So therefore, all the tools were ours. We developed our own tools. So we went when we went to 32 bit microcontrollers and and adopted ARM as well as MIPS architectures to build it, our internal strategy remained that we brought those parts on our own tools, which were proprietary tools. And ARM has a substantial market share at a 32 bit level, and all other competitors build ARM based products.

And and many of those companies don’t even build the tools because they just simply send the customers to more industry standard tools from like IAR and Seger and others, Kyle and a number of other companies. So so basically, when we compete with at a customer, you know, we’re trying to jam our proprietary tool where the customer already has an industry standard tool. And if our products will simply work on that industry standard tool, we’ll have a lower resistance level. So I think that’s one thing we have changed in the last nine months where we have enabled all of our 32 bit products to be able to run on industry standard tools. And we’re even working with one company at least who will even support our 16 bit DSPIC on industry standard tools.

So there are, you know, things we are doing to make our lines more competitive, make it easier for our customers to do business with and adopt our products. The other thing that Rich talked about was this coding assistant that we have developed, which is the first in the industry, and we’re giving it to our customers. It saves almost 40% time for development. It basically writes a code for you. And nobody else has come up with a tool like that.

Everybody would, but we’re the first. So I would say, I think our position is still good, still very competitive. But we did lose share with our PSP strategy. And we hope that some of it is not permanent and as sales are growing, we will come back.

Vivek Arya, Analyst: All right, thanks a lot, Steve.

Conference Operator: Thank you. And your next question comes from the line of Tore Svanberg. Thank you. Please go ahead.

Steve Sanghi, CEO, Microchip Technology4: Yes, thank you. I had a question on the pace of the decline of the underutilization charges. So I appreciate you’re going to start increasing utilization in the December. And I think right now, obviously, those charges are coming down by a few million dollars, obviously, because you still have inventory. But when do we see more step function, you know, declines in the utilization charge?

Is that gonna be when you get to that 130, 150 inventory target, or could we potentially already see it before you get to that level?

Steve Sanghi, CEO, Microchip Technology: It would happen well before that. As I as I said, if we wait till the inventory comes down to between hundred thirty to hundred fifty days, then we’re going to require a very large step function increase in our fabrication output in the following quarter, which is impossible. So therefore, you have to grow over five, six quarters, and we have to start much earlier. So utilization will start improving well before our inventory gets to those kind of levels. I think you should see a substantial improvement in utilization probably in December and then continue every quarter after that.

Steve Sanghi, CEO, Microchip Technology4: Yeah. That’s that’s great color. And and then on on your cash flow, so great great to see the cash flows are now gonna be big enough to to cover the dividend. You did say that any excess cash flow is going to be used to pay down debt. What’s sort of the new target level for debt so that we can try and understand when the buybacks are going to start to pick up again?

Steve Sanghi, CEO, Microchip Technology: So I think what we have said is, and I have this only number as approximate, Eric may have more number, I think we have borrowed about, through this quarter, we would have borrowed about $300,000,000 It’s about $3.50. About $3.50. Dollars $350,000,000 to cover the dividend in the last x number of quarters since our cash flow became less than the dividend. So next three fifty million dollars of excess cash flow over dividend will go to bring that debt back to where it really was. So that’s factor number one.

And factor number two is, our leverage is still very high. We just finished the quarter with a leverage of 4.2. And if you recall, when we started to increase the dividend and started to buy back stock and all that, we had said we want the leverage to be one and a half or lower. So it’s quite a way to go before we, you know, get back to that kind of leverage and a very strong investment grade rating. So I wouldn’t I wouldn’t look for a, you know, stock buyback in the near term.

Steve Sanghi, CEO, Microchip Technology4: Great color. Thank you, Steve.

Conference Operator: Thank you. And your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.

Steve Sanghi, CEO, Microchip Technology5: Yeah. Hi, Eric and Steve. Just a quick question on the under under utilization. I guess, I think your inventory write downs and under utilization is kind of running fifty fifty. Do you guys think most of the inventory write downs get done by the September?

Eric Bjornholt, CFO, Microchip Technology: I don’t. I don’t. I think I think it takes longer than that, Vijay. But what we expect is that the amount of the inventory write downs will continue to decline as we move through the fiscal year. So it’s going to take some time, but the charge dropped from $90,000,000 to $77,000,000 last quarter.

We expect it to be lower than the $77,000,000 this quarter and that cadence to continue now for multiple quarters as we see into the future. And underutilization, think we’ve talked about a little bit more in response to some of the other analyst questions. It’s going to go down modestly this quarter. And when we increase wafer starts in the factories in the December quarter, it will take another step function down. But that one’s going to take a little bit longer is because we are significantly underutilizing our factories today.

And we’ll we’ll grow it back over time as inventory declines and revenue improves.

Steve Sanghi, CEO, Microchip Technology5: Got it. And Steve, in response in in your plan section two thirty two on some of the exceptions that Microsoft could get with the with investing in The US. Is your understanding that puts you at a much better position versus this STMicro and Infinion and Renesas and some

Harsh Kumar, Analyst: of your peers there? Thanks.

Steve Sanghi, CEO, Microchip Technology: Well, I would hope so. I I don’t really know fully, you know, what the rules are. But I think we produce higher percentage of our product in US, you know, than some of the companies you mentioned do. But I don’t know whether it makes a difference what percentage it is. I think it’s going to be more black and white.

If you do some manufacturing in US, then, qualify for no tariff. I don’t know what the rules will be. I think some of those companies have fabs in US, some others don’t. And I I don’t know the rules clear enough to be able to interpret that. I hope we have an advantage, but I’m not sure.

Harsh Kumar, Analyst: Got it. Thank you.

Conference Operator: Thank you. And your next question comes from the line of Christopher Rolland from Susquehanna. Please go ahead.

Steve Sanghi, CEO, Microchip Technology6: Hey, thanks for the question. Just maybe a clarification or just understanding tone here. I guess, first of all, typical seasonality for December and March, I know it changed since the addition of Apmel. I think the last update was maybe down 5% in December and negligible for March, but down a little bit. Maybe if you could update there us on that.

And then Steve, you said you thought you’d be better than the seasonal, but I think the Street was at plus 5% or something like that for the December quarter. So like is that tone as much as 1,000 basis points better than seasonal? If you could update us there, that’d be great.

Eric Bjornholt, CFO, Microchip Technology: Let me maybe start by saying I don’t think seasonal in December is down 5% for us. I think maybe it’s down a couple percent. And then maybe seasonal. It’s been a long time since we’ve been seasonal, but maybe seasonal in March would be up a couple percent. So maybe start with that.

And we are not at a point where we want to provide any guidance or able to provide any guidance yet for December. We think our business is trending in the right direction, but, we’re not ready to provide guidance. So I’ll start with that and see if Steve wants to add anything to it.

Steve Sanghi, CEO, Microchip Technology: I think exactly I wanted to say that, you know, your numbers have a larger bracket on it. I think December is usually down a couple and March is up, you know, two or three maybe. I’m sorry, up up by, you know, two or three. And and my expectation is that the business would be better than seasonal in those both quarters without being able to put numbers on it.

Steve Sanghi, CEO, Microchip Technology6: Okay. Thank you for that. And then secondly, maybe on AI, I know there was some stuff in the prepared remarks, but if you guys had any updates on the percentage or the dollars contributed from AI and if there were any products that are just going gangbusters just above your expectations, whether they’re like PCIe switches or retimers or FPGAs or timing products, Just anything that’s significantly outperforming your expectations around AI, that would be great.

Rich Simonsek, COO, Microchip Technology: We haven’t broken that out, but we are seeing more and more uptick from our customers using the tools. It’s still relatively new. We just launched this in the February timeframe in terms of AI code support. It’s been used behind our firewall for over a year by our internal engineers and our support engineers supporting customers. And it’s improved productivity within our own engineering force quite a bit.

On the FPGA front, where we’re seeing most of the uptick or use of AI is in vision detection or vision systems for detecting people or visual inspection in factories are probably the fastest growing areas that we’re seeing AI and acceleration used in our products.

Steve Sanghi, CEO, Microchip Technology6: Yeah, any data center products, not the AI coding tool, I apologize.

Rich Simonsek, COO, Microchip Technology: No, we have not put out data pertaining to the AI coding tool in terms of what it benefits. Right now, the only number that we’ve given is that typically customers and engineers that are using reporting about a 40% productivity improvement, which in the end translates to time to revenue improvements.

Steve Sanghi, CEO, Microchip Technology6: Thanks, guys.

Conference Operator: Thank you. And your next question comes from the line of Janet Ramkison from Quadra Capital. Please go ahead.

Steve Sanghi, CEO, Microchip Technology7: Congratulations on a nice turnaround, guys. Most of my questions have been asked, but just a couple of little things. Given the recent decline in the US dollar, how does that affect you? And if we see higher budget deficits and higher need to sell more debt, which may lead to a further decline in the dollar, how is that likely to affect you in the next couple of quarters?

Steve Sanghi, CEO, Microchip Technology: You want to take that?

Eric Bjornholt, CFO, Microchip Technology: Yes. So the foreign currency fluctuations don’t have as large as impact on us and some of our competitors that are not as U. S.-based as us. We really sell 99 percent plus of our revenue is in US dollars. A lot of our assets are going to be US dollar based.

So I think that the impact to us is smaller than what you would see with some of our European competitors as an example.

Steve Sanghi, CEO, Microchip Technology7: Okay. And secondly, if I may, any comment about your Chinese business or trends? Any insights on what’s going on in that market? Thank you.

Steve Sanghi, CEO, Microchip Technology: Chinese what?

Harsh Kumar, Analyst: Chinese business.

Steve Sanghi, CEO, Microchip Technology: Chinese business. I think our, you know, business in China was very strong. It bounced back very strong from March, which is Chinese New Year quarter to June, up I think 14% or something. So our business is doing very, very well. You know, everybody is talking and concerned about what’s gonna happen with tariffs, and I think that’s dominating the agenda, but on a business level, it’s not really having impact today.

Steve Sanghi, CEO, Microchip Technology7: Okay, thanks very much. Congrats Thank

Conference Operator: you. There are no further questions at this time. I wanna hand the call back to Steve Sami for any closing remarks.

Steve Sanghi, CEO, Microchip Technology: Well, I want to thank all the investors and analysts for hanging in with us. I think we’re on our way making a very, very strong recovery from the, you know, lows in the business environment. And we’ll see many of you at a number of conferences we’ll go to starting early September, I think.

Eric Bjornholt, CFO, Microchip Technology: Yeah. We actually had a conference as early as next week. So we’ll we’ll be we’ve got a lot of conferences this quarter, and we look forward to further discussions with everybody.

Steve Sanghi, CEO, Microchip Technology: Yeah. Thank you.

Conference Operator: This concludes today’s call. Thank you for participating. You may all disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.