Microchip at Bank of America Global Tech: Strategic Inventory Moves

On Wednesday, 04 June 2025, Microchip Technology Inc (NASDAQ:MCHP) participated in the Bank of America Global Technology Conference 2025. The discussion, led by CFO Eric Bjornhardt, highlighted the company’s strategic focus on inventory reduction amidst a rebound in the semiconductor industry. While the company sees positive trends, challenges such as tariff impacts and debt management remain in focus.

Key Takeaways

• Microchip’s May bookings reached a two-year high, reflecting a positive industry trend.
• Inventory management is central to Microchip’s strategy, with a projected decrease of $350 million this fiscal year.
• Tariffs affect 14% of revenue, but the company anticipates minimal direct impact due to supply chain flexibility.
• The company is committed to maintaining its dividend while focusing on reducing leverage.

Financial Results

Microchip’s financial performance has been impacted by significant inventory write-offs and underutilization charges, which affected gross margins in the March quarter. However, when adjusted for these charges, the underlying product gross margins were nearly 67%.

• Non-GAAP gross margin target is 65%, with March quarter adjustments showing almost 67%.
• Operational expenses are guided to $356 million, considered a low point without variable compensation.
• Revenue peaked at close to $2.3 billion per quarter but fell to $970.4 million last quarter.
• The company borrowed $300 million to pay dividends, aiming for a net leverage target of 1.5 times.

Operational Updates

Microchip is actively managing its operations to navigate current industry challenges and capitalize on recovery opportunities.

• About 14% of revenue is potentially subject to US-China tariffs, but manufacturing can be shifted to Taiwan foundries.
• Factory utilization is expected to rise by September, following a restructuring that removed Factory Two from operations.
• Customer relationships have improved for 24% of clients, with efforts to mend damaged relationships ongoing.

Future Outlook

Microchip is optimistic about its future, with strategies in place to support growth and operational efficiency.

• The company expects multiple quarters of inventory replenishment, with limited impact from seasonality.
• Gross margins are projected to exceed 60% by the end of the fiscal year.
• Focus remains on reducing operational expenses and leverage, with stock buybacks not prioritized at this time.

Q&A Highlights

During the Q&A session, key topics such as demand drivers and pricing strategies were discussed.

• Current demand is primarily driven by inventory replenishment across all markets and regions.
• Microchip adopts aggressive pricing for new product designs while maintaining stable pricing for existing products.
• Pricing concessions are exceptions aimed at securing new designs.

In conclusion, Microchip’s strategic focus on inventory management and operational efficiency positions it well for recovery in the semiconductor industry. For further details, please refer to the full transcript below.

Full transcript - Bank of America Global Technology Conference 2025:

Vivek Arya, Analyst, BFA: Good morning. Welcome. Let’s get started. I’m Vivek Arya from BFA’s semiconductor, semi cap equipment research team. Really delighted to have Eric Bjornhardt, the CFO of Microchip join us this morning for a fireside session.

I’ll go through my questions, but please feel free to raise your hand if you’d like to bring up anything in between. But a very warm welcome to you, Eric. Really appreciate you joining us. And maybe as a start, know that Microchip recently updated the guidance upright. So thank you for doing that a few days ahead of our conference.

And I think you mentioned that Steve also gave some incremental details about your inventory write offs. So maybe just, you know, give us a start with State of the Union, how you’re seeing demand and then what led to the raise in guidance.

Eric Bjornhardt, CFO, Microchip: Okay. All right. So thanks for hosting me by the way. Appreciate that. Thanks everybody for attending.

During the course of this discussion, I’ll be making certain forward looking statements about the future financial performance of Microchip. And I refer you to our filings with the SEC that identify important risk factors about the company. So we did update our guidance last week. Essentially, we removed kind of the low end of the range and the things are trending well in the quarter. We noted that bookings for the month of May were the highest level of bookings that we’ve seen in in monthly bookings for a couple of years.

So that’s all good. You know, turns into the quarter have been a little bit stronger than anticipated. And because of that, we updated the guidance around the previous midpoint and the high end of the previous guidance. So that that’s going well. You know, clearly, we have been executing on Steve Sanghi’s nine point plan since he returned to the company and kind of the big focus areas have been inventory reduction.

We did some, you know, fat consolidation, and I think we’ll get into some of those questions as we go through this. But, you know, incrementally what Steve shared with the street yesterday is we hadn’t been as specific about breaking out what our inventory write off charge impacts were on gross margin. And, you know, that was over $90,000,000. I think it was 90.4 or $90,600,000 in the March. And combine that with our underutilization charges, which were about $54,000,000, you know, combined that’s almost a hundred and $45,000,000 in charges that as the factories ramp, as things improve in the business environment, those charges will be reduced.

Now inventory reserve charges never go to zero, but, you know, we’ve got clear line of sight to getting to our 65% non GAAP gross margin targets. If you just add those charges that I just went through back into the March non GAAP gross margins, the underlying product gross margins were almost 67%. So that that that’s the good news in the business. Obviously, we have a ways to go to get there. But what happens with these inventory reserve charges is it’s an accounting charge.

Right? We’re building inventory that we believe will eventually sell. You know, whether it sells in nine months or four years from now is hard to predict, but our products have very long useful lives, ten, fifteen, twenty plus years. And with that, we’re building inventory that we think eventually will sell. So anyway, with that, let’s open it up to your Yes, absolutely.

Thank you, Eric. So the rebound the industry is seeing right now, is that because you think the end demand is improving and or do you think that inventory has got so low and so depleted that it is a matter of just getting them back to a trend line? Yeah. So Microchip peaked out in revenue at close to $2,300,000,000 per quarter during the up And clearly there was distribution inventory build, customer inventory build, contract manufacturer inventory build reflected in those numbers. You know, we fell as low as 970,400,000 in revenue last quarter.

And clearly on the upside, we were over shipping and consumption, and on the downside, we’re significantly under shipping. And so I I think this is a matter right now of inventory replenishment that is needing to happen after a couple of years of of inventory being drained off. And as our distributors and end customers are getting pockets of their inventory that is now getting too low, they’re having to place orders, and we’re seeing that reflected in bookings. And this just isn’t, bookings that they need immediately delivery on. It’s in line with our lead time so we can see our backlog building into the September where our September backlog is significantly higher than where the June backlog was at the same point in time.

Oh, excellent. Okay. And

Vivek Arya, Analyst, BFA: is this recovery being driven by distribution or by direct customers? What does the difference tell us about the state of this recovery?

Eric Bjornhardt, CFO, Microchip: Yeah. So it’s combination of both those things. So, you know, inventory was built up at the direct customers. It was built up at distribution and at our distribution customers. So the June is the first quarter in many quarters that we expect our distribution sell through to increase.

So that’s a reflection of the inventory at the distributors customers starting to work its way through and improve. And then they will they will need to start order placing orders under distributors that will pass it on to us. Distribution has been draining inventory for quite some time for us. I think if you look over the last five quarters, our distribution sell through, which we get reports from distributors every month that reflect that compared to what our reported revenue based on sell in was, it’s like a $530,000,000 difference. Last quarter alone was a hundred and $3,000,000 difference between distribution, sell through and sell in.

So, you know, I expect that during this fiscal year, which will end in March, that that gap is going to converge and get close to zero because, you know, distribution is starting to place orders at a higher level. We talked about that back in Steve’s March third update to the street that we were seeing strength in distribution. Now we’re also seeing strength from direct customers today. And so I think that inventory replenishment is happening across the board with customers.

Vivek Arya, Analyst, BFA: I see. And any certain applications or geographies that stand out in terms of

Eric Bjornhardt, CFO, Microchip: who is driving this recovery? So it’s really broad based, you know, obviously when lead times pushed out, it, you know, took no prisoners and it wasn’t just one end market. So it’s really all end markets, all geographies are seeing these same trends.

Vivek Arya, Analyst, BFA: Got it. And I know you look at industrial and automotive on an annual basis. Is there some relative comparison between the two where you are seeing a better recovery on the industrial side versus the automotive side, etcetera. So where do you think we are, know, Microchip is feeling more confident about this pace of recovery and where, you know, the goodness is still to come?

Eric Bjornhardt, CFO, Microchip: Yeah. So we can’t really make a large distinction between industrial automotive. I think, you know, depending on the customer’s appetite for holding higher levels of inventory during the up cycle and making those purchases, you know, inventory was built across the board. So Right. I we we are seeing recovery across all of our end markets, including industrial and automotive.

Industrial is our largest end market. Excluding aerospace and defense, it’s about 30% of our business, and then the a and d portion is about 18%. So by far, that’s our largest end market.

Vivek Arya, Analyst, BFA: I see. And Eric, if you look at this, the 3,000,000 gap, you know, relative to we can either take total sales, which are, you know, in the zip code a billion, right, billion plus, or we can take just the distributor sales, right, that are obviously, I think about half of that. Then is that the right way to quantify how much you are quote unquote under shipping versus where distribution? Like how do we get a sense for where you are relative to what that trend line should be?

Eric Bjornhardt, CFO, Microchip: So, you know, that’s a question that everybody would like answered. And quite honestly, we don’t know the specific answer of that, but the $103,000,000 difference between distribution sell in and sell out only represents what’s happening at the distributor. What’s also it doesn’t represent as what’s happening at their end customer. And as I indicated, the sell through had been falling for many quarters and now that’s starting to turn where this is the first quarter we think that sell through is going to increase. So I think there’s multiple levels of inventory and the hundred and $3,000,000 difference in distribution sell in versus sell out is just is just a piece of that.

Vivek Arya, Analyst, BFA: I see. Do you have any similar metrics or anything representative for your direct customers? Also, appreciate that it’s harder to get a good sense for where you are. But if you were to look at historical trends, imagine that I don’t use AI or something that gives you a sense of where inventory should be and, you know, where it is right now.

Eric Bjornhardt, CFO, Microchip: So it it’s really impossible to do. We know our our direct customers don’t give us an inventory report of their holdings of microchip stock. Right? So there’s obviously conversations. We know that if a customer is buying a hundred products from us that, you know, maybe 25 of those have bottomed out and they’re having to buy those again.

And, you know, those other 75 will come over time. That’s just a hypothetical example, but distribution is easy, right? Because our partnerships with distributors require them to provide us detailed inventory reports at the end of each month as well as sell through so we can see part by part how inventory is trending and make assumptions from there where it’s heading. I see.

Vivek Arya, Analyst, BFA: And from this data, is there a way that, you know, the investment community can get a sense for, you know, we we equate under shipment as the potential for above seasonal quarters. Right? That that’s kind of the simplistic correlation that that has made. So from this data, is there a way to say that, you know, we have x more quarters of above seasonal opportunity? So, you know,

Eric Bjornhardt, CFO, Microchip: we we guide one quarter at a time. It it’s hard to tell. You know, I I think there’s multiple quarters in front of us, but, you know, how this thing returns to a more normal level of shipments is hard to tell. And again, with a 10 or a 20,000 customers, it’s very difficult for us to know that x percent of the customers have corrected or are now back to normal and many are still have a long ways to go. It’s a mix.

Vivek Arya, Analyst, BFA: Right. If we zoom out, Eric, and look at where microchip is relative to kind of the pre COVID levels, right, it is still below, right, that even that run rate, even though the industry has experienced a lot of pricing gains in in between. Do you think the nine point plan that Steve has proposed that is enough to kind of get you back on trend? Like, is I don’t want to revisit too much of the history, but what are the two or three things that you think are happening to help microchip kind of

Eric Bjornhardt, CFO, Microchip: get back to a positive slope versus that baseline? Yeah. So the nine point plan encompassed a lot of different things, right? And, you know, a heavy focus early on was what we needed to do to correct inventory. But, you know, one of the major pieces there was assessing where our customers are at and how they’re feeling about Microchip.

Obviously, when lead time stretched out, non cancelable, non returnable programs were in place, there was some fear by the investment community and, you know, even at Microchip that, hey, we’re customer relationships damaged. And we’ve been through a pretty detailed process and meeting with customers, surveying them, getting feedback. And, you know, actually that survey results on which we shared back on March 3 showed that actually 24% of the customer relationships of those seven or 8,000 customers that we hold that the relationship had improved because they were serviced well by our PSP program. Right? But there was about 12% of customers where the relationships were damaged and we had been, you know, deemphasized by them.

So those are the customers that we really focused on. And at this point, you know, we have met with, you know, the vast majority of those customers, fell on our sword, apologized, you know, made sure that our product roadmap is there for them, ask them how we can support them. And there’s a very, very small percentage of those customers that haven’t moved us back to kind of a regular routine with MicroPIP in terms of engaging with them. That’s well. So we think our customer relationships are in good shape and, you know, over time, we are very confident in our ability to return to higher levels of revenue, gain market share and be quite competitive in these competitive markets that we participate in.

Got it.

Vivek Arya, Analyst, BFA: You know, the skeptics would say, not for Microchip specifically, but for the industry that look, the industry was not very good at spotting when it was going into over shipment. So why should we believe the industry when they say we are very good at spotting the under shipment? Right? So how do you what specific kind of checks do you have in the system to give you a sense that what your shipping is not for some kind of pull in or trade or tariff related situations? And that, you know, this is just a two or three quarter kind of inventory build and then, you know, things will, you know, may trend in a different direction.

Eric Bjornhardt, CFO, Microchip: Yeah, well, so I think I’ll start by saying, you know, from where we peaked in revenue to where we troughed was very significant. And, you know, clearly there, you know, I I think it’s clear to investors that Microchip is significantly under shipping what end consumption is. Now in the customer discussions, you know, obviously, we’ve seen a very nice trend of improving bookings. You know, the the bookings activity from January through May has been very healthy. Our backlog has been building.

We had a positive book to bill last quarter. I mentioned that backlog for the for the September is building nicely. So that and then you add in customer discussions where, you know, all of our large customers that have come in and we’ve talked to them or we’ve met with them in their offices, we ask them the specific question, you know, are you doing anything differently because of tariffs? And the vast majority of the responses of that is no, right? The the tariff on situation is uncertain.

You know, the vast majority of our products are exempt from tariffs today, but that doesn’t mean that a customer couldn’t be building their systems because they’re trying to get out in front of it. But, you know, the feedback we’re getting is no. I specifically asked the the person that runs our global sales support team, is she getting any feedback from customers that they’re doing anything abnormal because of tariffs? And the answer is, you know, come back as a unanimous no.

Vivek Arya, Analyst, BFA: I see.

Eric Bjornhardt, CFO, Microchip: So it’s customer discussions now with a 10,000 customers. Can I say that there’s no customer out there that hasn’t done something different because of tariffs? I can’t, but I think it’s very small if it’s happened.

Vivek Arya, Analyst, BFA: I see.

Eric Bjornhardt, CFO, Microchip: I think there’s as many customers that have frozen and say, hey, let’s wait to see where this settles rather than pulling in. And, you know, if if we were getting massive amounts of orders because of tariff situation, you would think that those orders would be placed today and deliver immediately or deliver as fast as you can. And that’s not what we’re

Vivek Arya, Analyst, BFA: seeing with the orders that are coming in. So there is no specific geographic or concentration or application type concentration to these? These are broad based like exactly like that.

Eric Bjornhardt, CFO, Microchip: That’s correct. Got it.

Vivek Arya, Analyst, BFA: And I’m also curious, you mentioned there was a certain proportion of customers who didn’t have the best experience, right? During the PSP program. Does this broad based recovery apply to, are you seeing reengagement with those customers also or are they still kind of sitting on the sidelines?

Eric Bjornhardt, CFO, Microchip: We absolutely are seeing reengagement and these customer discussions that we’ve been having have been quite positive. You know, all of our competitors had challenges during that period too, where lead time stretched out significantly and many had these non cancelable programs. And, you know, Microchip clearly waited too long to take our foot off the gas pedal on that program. And, but, you know, we’ve capitulated on that obviously quarters ago now and, you know, customer relationships are in a good position. I see.

Vivek Arya, Analyst, BFA: One other explanation that sometimes people have given for PSP is that, Microchip was almost kind of required to make that priority call, because you don’t have access to too much capacity. And people will always draw the contrast with you and your other US peers who are building out a lot of capacity. So you think so first of all, is that a valid explanation for why you would almost kind of, I don’t want to use the word forced, but had to make a priority call on PSP because your capacity access was limited. So if that is the case, do you think that you’re now putting in enough plans to build capacity so you never have to do a PSP like program again?

Eric Bjornhardt, CFO, Microchip: Well, you know, I can’t see us implementing a program like PSP again, and that doesn’t mean that we could have non cancelable orders, but, you know, the challenge with it was it was really on a first come first serve basis. And so what could happen is you could have customers that jumped on it really quickly and over ordered and consume the capacity on a given part and took it away from a customer that hypothetically was buying 50,000 units a month for the last four years. Right? And then they got stuck with the lead time that went from eight weeks to sixty weeks. Right?

And so, you know, what we are doing is we are using AI and ML to analyze all of our customer data with direct customers, with distributors to look at it. And then we will reserve capacity for those customers that are buying on a consistent basis and not allow that capacity to be consumed by others that are speculating and spot buying on things that aren’t true end demand. And, you know, it’s, you know, we are not in that situation today. We have a massive amount of inventory. Inventory, you know, we’re projecting it’s gonna come down by $350,000,000 plus this year as we get inventory days more in line with our model.

But, you know, we’re building systems so we can better react to the situation again. Now I’ve been at Microchip for almost thirty years and I had never seen lead time stretch out they did in the last cycle. And I hope in my career, I never see it again, but we need to be prepared to deal with it better than we did in the last up cycle.

Vivek Arya, Analyst, BFA: I see. Makes sense. On the pricing issue, Eric, we have heard a range of views, right, from you and your peers, which is some saying, pricing this year is down low single, some are saying mid single. I think you guys have said mid single digit or so. Would you call this kind of return back to normalcy or is this you know, customers trying to take advantage of all the excess inventory in the system and extracting bigger?

Like, is this being again, is this kind of a return to normal or do you think this is being done in a very defensive way? And at what point does, there is no kind of elasticity right in the system, even if you cut prices, the demand is not there. It’s just not. So how would you describe the pricing environment?

Eric Bjornhardt, CFO, Microchip: Yeah. So, we’ve been saying for the better part of a year now that we have been being quite aggressive at the point of design, right? So pricing on product that is designed in shipping today, you know, that is very stable for us, but, you know, we want to make sure that we are leading with customers with our newest, most cost effective products and doing that in a way as the cost structure for those products improve over time, you know, we’re still driving reasonable margins for the company. Now, you know, you saw that back in March, updated our long term business model. We took our gross margin target down from 68% down to 65%.

And there’s a number of things that factor into that. One is I think Steve saying he wanted to set a model that we are very confident in achieving, that we can bounce around and do better than when things are great in the industry, when the utilization is really high and then fall below it, but not by much during a down cycle. And we have to do a better job of managing inventory levels to do that. So we don’t have to cut capacity as much as we did at the bottom of this cycle. So that’s one thing, you know, pricing does factor into it to some degree, but, you know, we think that probably we’re mid single digit decline in this fiscal year, and then it kind of returns to more normal, very small declines because these are proprietary products you get designed in and you can hold that price for the life of the product line.

But, you know, there’s certain cases where we’re leading for a new design and to win that design, it might be with an existing customer that you need to give a little bit of a concession on your existing business. And we’re willing to do that if the economics of the overall deal makes sense.

Vivek Arya, Analyst, BFA: I guess that’s where I want to draw the distinction that is this pricing concession being given to products that are already buying or is this pricing concession being given as a way to attract them to the next generation of the product? Yeah.

Eric Bjornhardt, CFO, Microchip: It’s typically the latter, but as I say, you can have a situation in winning a design that you have to give a little bit on something that’s already shipping, but that’s the exception to the process. I see.

Vivek Arya, Analyst, BFA: And how would you contrast this to, let’s say, whichever was a normal period pre COVID? Is is this very different? Is it is it similar?

Eric Bjornhardt, CFO, Microchip: So, you know, I I think it is a little bit different than it was pre COVID. You know, we weren’t in a significant inventory and excess capacity position then. And, you know, obviously, our competition has excess capacity too. And so they are being aggressive. So we need to match our competition in terms of how they’re coming to the market because we wanna come out of this as a share gainer.

But in normal conditions, I would expect pricing to be very stable for our products.

Vivek Arya, Analyst, BFA: I see. And this is not being done because, you know, your end customers might be getting pressured by tariffs or other situations, right? It’s not because of that. It’s not normal industry competition.

Eric Bjornhardt, CFO, Microchip: It’s normal for kind of where we’re at in terms of the inventory and where lead times are, where capacity is in

Vivek Arya, Analyst, BFA: the industry today. Got it. Makes sense. Now, during the downturn, Microchip had to go through a lot of headcount reductions and so forth. Where are you in that process?

Because now OpEx is starting to grow. And do you think that OpEx reduction also impacted customer relationships in some way?

Eric Bjornhardt, CFO, Microchip: Okay. So, you know, we had a reduction in force last quarter. We announced that in early March and all that is implemented in this at this point in time and as reflected in our OpEx guidance for the current quarter. So, you know, OpEx this quarter is down from where it was in the previous quarter. But I think investors should really look at the about 356,000,000 that we’re guiding to in OpEx to be kind of the low point.

That that has no variable compensation in it. You know, we do have employees back to full salary that was effective for everybody. So that’s reflected in the current quarter numbers. But, you know, we need to bring back the bonus programs over time as the P and L can afford it. We’ll be cautious with that.

We are very focused on getting to our long term model on OpEx, which is 25% of revenue and we’re we’re a long ways away from that today. So we know that as revenue grows, OpEx as a percentage of sales needs to come down pretty dramatically. I see.

Vivek Arya, Analyst, BFA: So this 3 50 6 is what almost like a hundred ish million, right, off the peak. So is it possible that you’ll get to that prior peak OpEx level even if sales are not at the prior peak?

Eric Bjornhardt, CFO, Microchip: It is not. It is not. So, you know, we we will we will be very cautious on how we add back OpEx. At the peak of the cycle that had a hundred million dollars more of OpEx, we were paying bonuses at 200, two hundred and 50 percent, I think 300% of target in a given quarter. And, you know, that doesn’t need to come back.

And that was a result of, you know, the extreme upcycle that we went through. And obviously the financial results that we were posting at that time of 48% operating margins, right, which is well above our target. Got it. And then on

Vivek Arya, Analyst, BFA: the gross margin, you know, the drivers that you mentioned, is there a way to, you know, simplify the analysis and say that, you know, if sales are, I don’t know, 1.3, one point four ish billion, then gross margins can be 60%. Is there a way to do a simple methodology like that? Because it’s hard for us to track, you know, what is coming in and out of inventory and then try to correlate that, right to gross margins.

Eric Bjornhardt, CFO, Microchip: Yeah. So I talked about this a little bit and kind of the introductory that I did, but, you know, the two biggest things that are impacting gross margin today are our inventory reserve charges, which is an accounting charge for write offs. And then we’ve got these underutilization charges. Last quarter, over $90,000,000 was written off in terms of these inventory obsolescence That is the first thing that’s going to go away. So, you know, we look at that, we take a snapshot of inventory at the end of a quarter.

We look at twelve months of trailing demand on a revenue basis and then turn that and multiply it by one and a half. And if inventory is over that in any point in the chain, it’s a it’s a write off candidate. And so those write offs have been extremely high. So what’s gonna happen here is obviously inventory is coming down, right? We said $350,000,000 plus this fiscal year.

So there’s going to be a lower amount of inventory that is subject to a potential write off. And we’re gonna turn the quarter corner where trailing twelve month revenue starts to increase. And as that happens, and we’re way way under producing what we’re shipping today, as as those things all come together, that $90,000,000 quarterly charge drops dramatically. And, you know, it never goes to zero, but it it will get much lower. Could it be $15,000,000 20 million dollars in a quarter?

It’s it that that’s significant. Right? And that will happen. Our prediction is that will happen during this fiscal year. And so, you know, that that’s gonna start being a very positive tailwind to gross margin.

Now we also will start to need to increase activities in our factories, and that could happen as early as the month of September that we start to have to increase output in the factories. Now that would have a very modest impact on September results, but could have more materially impact the December and the March as we have to start adding people running more wafers and activities through our factories. You know, the other thing that is a tailwind to gross margin is we’ve written off huge amounts of inventory over the last five or six quarters. And again, this product will likely eventually sell. And when it does, it will sell at a much higher gross margin.

In many cases, that inventory has been written off when it’s gone through the wafer fab. So it’s sitting in die bank. And we get an order in, we’d have to add the assembly and test cost to get it to a finished good, but it’s still selling at a much higher than corporate average margin. Makes sense. Please, Jamie.

Vivek Arya, Analyst, BFA: May not be further, but as you just walk through that, is your unit inventory significantly different than the dollar inventory? And does that matter?

Eric Bjornhardt, CFO, Microchip: So, you know, I I think your question might be getting at the point that, you know, the the the cost per unit of inventory that we’re producing today is higher. Right? You know? So so we do have higher cost inventory that’s sitting in inventory that will need to sell through before we get the benefits of increasing activities in the factory. But the period charges for underutilization charges will come down as we start increasing activities and then these inventory reserve charges.

And then with taking out Fab two, you know, through a restructuring, our overall costs are coming down, our fixed costs associated with manufacturing. And so I think we can grow back into our capacity very cost effectively. But you’re right. There is a time delay delay in your cost of inventory that’s being sold to customers representing itself in in the p and l. It’s a

Vivek Arya, Analyst, BFA: good question. Okay. Thank you, Jafy. Is there a simple way, Eric, to think about what are the implication of this whole section two thirty two that many investors are concerned about as in if you are getting semiconductor imports from outside, right, they will be exposed to more tariff. Does that give a competitive advantage to some of your peers who are manufacturing more than The US?

Eric Bjornhardt, CFO, Microchip: Yeah, so we’ve looked at it. So we’ve gone through every product that we produce and have made this information available to our customers in terms of where it’s fabbed, where it’s assembled, where it’s tested. And there’s about 8% of our products that is manufactured in The US that ends up shipping to China. There’s another 5% or so that are manufactured not in The US or China, and then come back to The US. And then there’s a very small percentage.

I think it’s like 0.3% that is manufactured in China and comes to The US. So, you know, you add all that together and it’s, you know, roughly, you know, 14% of the revenue that is subject to kinda US China tariffs and, you know, where all that falls out, I don’t know. Now that doesn’t consider is there going to be tariffs on US product going to the EU or EU coming to US and we’re gonna have to see where all these things flush out. But we have some flexibility. Right?

There’s some of our products that are manufactured in our fabs that we could move to a foundry in Taiwan and those could be shipped into China as an example. And, you know, today there’s no there’s no tariff on Taiwan into China. Right. We have certain of our foundry partners that have facilities in The US where the product is manufactured today, and they could move that. And so, yeah, we’ve got some flexibility in our supply chain.

I think you could look at, you know, just depending on where tariffs fall, where your manufacturing footprint is going to be impacted, and then you’ll have to make decisions on on doesn’t have an impact or not. I think the impact of tariffs directly on a company like Microchip is going to be quite small, but it ends up being what is going to be the indirect impact on our end customers and the products that they are selling and how that impacts them. That’s the kind of the larger thing that is not understood at this point in time.

Vivek Arya, Analyst, BFA: Got it. One or two quick ones, Eric. One is, as we are going through this cyclical rebound, does seasonality mean anything like or can you continue to have multiple, right,

Eric Bjornhardt, CFO, Microchip: strong quarter? Yeah. Don’t think at this point in time, seasonality has any impact. Right? I mean, December is typically our weakest quarter of the year and the holidays are still going to happen.

But if the inventory replenishment is happening, that could override that. Again, we’re not giving guidance at this point that that far out in time. But I think this this inventory replenishment cycle has, you know, multiple quarters of legs behind it. Got it.

Vivek Arya, Analyst, BFA: And then the final one is if let’s say, you know, you know, you expressed some confidence in kind of exiting this fiscal year at a, you know, six plus handle and gross margins. Do you think that can somehow correlate to the ability to, you know, generate enough cash flow that you kind of get back to stock buybacks?

Eric Bjornhardt, CFO, Microchip: So on capital returns, obviously we are very committed to the dividend at the level that it’s at, which is 45 and a half cents per quarter. We did a financing transaction last quarter where we issued a mandatory convertible preferred, which is essentially an equity instrument. You know, common stock will be issued for that in three years when it matures. We did that to secure our investment grade rating and make sure that our dividend is absolutely secure. Now from a buyback perspective, you know, we had set a net leverage target way back at our analyst day in November of twenty one of one and a half times.

And, you know, we’re not gonna be at one and a half times for a, you know, extended period of time. So we’ve had a few quarters where we have had to borrow to pay the dividend. You know, we get a couple more quarters out in time that that’s not gonna be an issue for us, but the board will have a decision to make once we get back to kind of paying our debt down for the borrowing that we’ve done to pay the dividend, which is about $300,000,000 once we get to that point, and then what’s the strategy from there? Obviously, the dividend is sacred and won’t be cut. But at that point, would they say, hey, you should take that down further or you should get try to get back to that one and a half times levered or some other number?

Do they set kind of a total debt level that that they’re comfortable And then when do you start buyback again? And, yeah, I think I think buyback is further out in time in my impression. It’s out in time. Right? I mean, we’re fully committed to the dividend at the levels that it’s at.

We know we think we need to reduce leverage. That’s the focus, but it’s not a decision that we need to make in the short term. Right.

Vivek Arya, Analyst, BFA: Makes sense.

Eric Bjornhardt, CFO, Microchip: And at that time, we’ll take feedback from our shareholders and see what they would prefer.

Vivek Arya, Analyst, BFA: Makes sense. Perfect. Thank you so much, Eric. Really appreciate your insights. Thanks everyone for joining.

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