Microchip at KeyBanc Forum: Optimism Amid Strategic Shifts

On Tuesday, 12 August 2025, Microchip Technology Inc (NASDAQ:MCHP) presented at the KeyBanc Capital Markets Technology Leadership Forum, highlighting its cyclical recovery and strategic initiatives. The company reported strong booking trends and revenue growth, yet acknowledged challenges in the automotive sector and global trade dynamics. CFO Eric Bjornholt expressed optimism about future growth, emphasizing strategic investments and market positioning.

Key Takeaways

• July bookings were the largest in three years, signaling strong recovery.
• Sequential revenue increased by 10.8% last quarter, with a 5.1% growth forecasted.
• The company aims to reduce inventory by $350 million this year.
• Gross margin target is set at 65%, with current guidance at 56%.
• Strong performance in aerospace and defense, while automotive remains sluggish.

Financial Results

• Revenue grew by 10.8% sequentially last quarter.
• Book-to-bill ratio was above 1 in June, with July bookings at a three-year high.
• Guidance for the current quarter anticipates a 5.1% increase, surpassing seasonal expectations.
• Distribution sell-through improved for the first time in eight quarters.

Operational Updates

• Inventory levels are normalizing, with distribution inventory decreasing for seven consecutive quarters.
• Lead times extended due to capacity constraints at OSAT suppliers.
• The Arizona fab closed in May, with production shifted to other U.S. facilities.
• Customer relationships are healthy, with previous issues largely resolved.

Future Outlook

• The company plans to increase wafer starts in December.
• A new AI business unit is focusing on product development and market strategy.
• The "China for China" plan addresses local competition, with 4% to 5% of revenue subject to domestic competition.

Q&A Highlights

• Customers are informed about lead time extensions and can adjust orders up to 45 days before delivery.
• Tariff impacts were minimal, with approximately 50% of wafer fabrication done domestically.
• China accounts for 18% of revenue, with half from multinational companies.

Microchip’s strategic focus on innovation and customer relationships positions it for potential long-term success. For more details, please refer to the full transcript.

Full transcript - KeyBanc Capital Markets Technology Leadership Forum:

John Vin, Analyst, KeyBanc Capital Markets: Okay. Good morning. I’m John Vin. I cover semis here at KeyBanc Capital Markets. We’re pleased to have Mike Cip with us this morning.

And we have Eric Bjornholt, CFO. Welcome, Eric.

Eric Bjornholt, CFO, Microchip: Yeah. Thanks for hosting me. Appreciate it.

John Vin, Analyst, KeyBanc Capital Markets: Obviously, just very topical right now is just kind of the cyclical recovery. I think you and your peers are seeing similar recovery trends. Maybe just take a minute, Eric, just to walk us through what you’re seeing from a recovery perspective, maybe talk about bookings trends and book to bill and lead times customer Sure.

Eric Bjornholt, CFO, Microchip: I’m going start with the disclaimer that during the course of this discussion, I’ll be making certain forward looking statements. I refer you to our filings with the SEC that identify important risk factors about the company. So with that out of the way, bookings have definitely improved. We broke out a book to bill ratio in the March, it was 1.07. It was above one in June and then we made the comment on our earnings call last week that our July bookings were the largest bookings that we’ve seen in three years.

So bookings have improved, obviously coming off a low base after the kind of the inventory correction. But definitely March marked the bottom for us and we have seen an improvement in bookings. And obviously, we had a really good quarter this last quarter, growing 10.8% sequentially and seeing improving metrics and gross margin, operating margin, etcetera.

John Vin, Analyst, KeyBanc Capital Markets: Great. Maybe just a couple of follow ups there. Given that July bookings were your largest in three years, your guidance into third quarter was kind of largely seasonal. So if the bookings were the largest in three years, why not a more optimistic outlook there?

Eric Bjornholt, CFO, Microchip: So I would say that our guidance for the quarter was above seasonal. We’re guiding 5.1% up. We don’t have any quarter that is seasonally up 5% plus. And bookings obviously age out in time. We have a high level of inventory today.

We have extremely short lead times for most of the product portfolio. And so there’s a lot of turns involved to get to the number that we guided to. And that the bookings dry up the further you go out in time, right? So visibility is pretty low and that’s just a function of where lead times and inventory are today.

John Vin, Analyst, KeyBanc Capital Markets: Okay. To that point, I’m wondering if you could just clarify this point that I think Steve had talked about on the call how you’re sending out letters to your customers and encouraging them to book further out that typically at this point in the cycle, you’re going to potentially see an extension of lead times. There’s maybe some concerns that there’s maybe some elements of that PSP program. Can you just clarify exactly what you’re trying to encourage and what you’re trying to do with that sort of notification to customers?

Eric Bjornholt, CFO, Microchip: Okay. So actually, the only notification that we’ve given to customers was through our earnings call. And in that call, Steve, our CEO said, hey, we’ve got pockets of lead times extension at this point in time. I think you’re referring to historically we used to post on our website, hey, customers get your orders in because lead times are extending. We haven’t done that as of yet.

But we are seeing we outsource roughly 30% of our assembly and test and we’re seeing that some of that capacity is pretty tight right now as some of the OSAT suppliers are working on iPhone builds and maybe data center AI activity that is pretty hot right now. And so that capacity is getting consumed and lead times have extended. And it’s actually at the point where some of our data center business could be stronger this quarter, but we’re not able to deliver what the customers want because those lead times have stretched. So it’s typically how these things work that it starts to get lead time extension on a portion of the product portfolio, lead time start to extend and then you start over time getting better backlog visibility. What we’re trying to prevent is customers getting surprised and you have 10 customers come in over the same product and the lead times go from six weeks to twelve weeks and they can’t get the product when they need it.

So it’s just general communication that we’re doing.

John Vin, Analyst, KeyBanc Capital Markets: Okay. You gotten any sort of feedback from your customers since you’ve made that sort of announcement on the earnings call?

Eric Bjornholt, CFO, Microchip: So it’s early, quite honestly. So I haven’t got any specifically. Obviously, traveling here this week, I haven’t got feedback from the sales team. But I think customers will take notice and we’ll highlight these things to customers, particularly those that are buying those products that are seeing the lead time extension and hopefully get some traction with better backlog coverage. And there’s really no penalty for the customer to do that.

They can cancel or reschedule that product anytime before forty five days before the delivery date. So if they gave us sixteen weeks of coverage, they still have flexibility to push things out or pull things in.

John Vin, Analyst, KeyBanc Capital Markets: Okay. Is forty five days the same cancel window that you had previous to COVID?

Eric Bjornholt, CFO, Microchip: So it has changed over time. I think at one point in time, for some of our products, it was as short as thirty days. It extended out to be like ninety days during COVID, and now it’s back to forty five. And I think that’s a good spot for us to be.

John Vin, Analyst, KeyBanc Capital Markets: Okay. Obviously, your June results were extremely strong. Can you just talk about how much of that strength that you saw in the quarter was due to tariff related pull ins versus just recovery?

Eric Bjornholt, CFO, Microchip: So we think it’s mostly recovery. We go out every quarter, our sales team and talk to customers and have our distributors talk to their customers that had any significant change in their quarter on quarter or year over year revenue and get that feedback and say, what’s happening, right? Most of that feedback is that, hey, our inventory is drying up and we’re needing to start purchasing more in line with what consumption is. We did get a few customers, particularly in China that did note tariff related and when we expand that out, we think it was probably a 5,000,000 to $9,000,000 impact on the quarter of pull in. But I think there’s equal amount of customers that are kind of frozen in their tracks waiting for all this whole tariff situation to get resolved and understood because once they buy our part, then they have to manufacture their good, whatever it could be, washing machine, automobile, etcetera.

And they want to know what that final landed cost is going to be and that’s difficult when things are in flux. So I think it’s on both sides. We think it was a pretty immaterial impact on the court.

John Vin, Analyst, KeyBanc Capital Markets: Great. It sounds like you feel very confident that kind of the inventory levels at your end customers are largely normalized. Obviously, if you look at distribution inventory, it’s easier to get your handle on that. Can you just walk us through what the process you use because you have so many customers out there to get kind of a sense of where the end customer inventories are and why you have confidence that things are normalized there?

Eric Bjornholt, CFO, Microchip: So it is challenging, right? We do 47% of our business through distribution. We get real time reports from our distributors every month that tell us what their inventory levels are. We obviously know what they’re shipping through to customers and we know what we’re selling to them. So we can measure that pretty easily.

And distribution inventory has been coming down dramatically over the last seven quarters. The difference between sell through and sell in, sell in being our GAAP revenue recognition was 103,000,000 in the March. That dropped to $49,000,000 in the June, so it is coming down. I think there’s still a bit more of distribution inventory to come down, but they’re definitely seeing that they’ve got plenty of products where inventory is kind of a rock bottom and they’re needing to order again. Now the direct customers, many of these customers signed up for the PSP program early and got preferential treatment.

And so I think there still is some level of inventory that our direct customers are working through. We can’t quantify that for you because we don’t know exactly what it is. But we see a lot of good signs in the business. One of the things we saw this last quarter is that distribution sell through increased for the first time in eight quarters. So that tells me that, hey, the distribution customers are working through inventory and eventually you’re going to start purchasing more in line with what consumption is.

When that happens, the distributors will need to buy to support that activity. And the same thing will happen at the direct customers, but we can’t quantify it exactly. But there’s pockets where customers are running out and there’s pockets where they still have some inventory.

John Vin, Analyst, KeyBanc Capital Markets: Great. When you look at this recovery and you look at the different segments and or end markets, where are the areas where you’re seeing the most amount of strength? And maybe what are some of the areas that are still lagging a bit?

Eric Bjornholt, CFO, Microchip: So we are obviously seeing really good traction in aerospace and defense today. That was 18% of our business in fiscal twenty twenty five, which completed in March and defense budgets are going up around the world. We are the largest supplier of semiconductors to the U. S. Department of Defense.

So that works in our favor. So that’s an area that’s quite strong. We’re seeing the data center business starting to come back, which is good to see. General industrial is obviously a large piece of our business and that’s a mix there where some customers are buying again and other customers are still working through inventory. Automotive has been a little bit sluggish, which I think is kind of familiar with what you’re hearing from other companies.

John Vin, Analyst, KeyBanc Capital Markets: Great. Aerospace defense obviously has been a pretty consistent area of strength for you obviously. Can you just talk about your portfolio there? What’s differentiating yourself within the market? And is that largely the Microsemi portfolio there?

Eric Bjornholt, CFO, Microchip: So a large piece of it is the Microsemi portfolio. Obviously, that’s a company that we acquired in 2018. So we’ve been working with customers and our product divisions to get more of our products qualified that we can sell those into customers. It’s FPGA has a heavy footprint in aerospace and defense, but we’re selling standard microcontroller and analog products today, some for our memory products, some of the timing products, some of our system level products going to aerospace and defense. So, it’s broad based.

It’s more than just Microsemi, but that’s the largest piece.

John Vin, Analyst, KeyBanc Capital Markets: Great. You had acknowledged that there was maybe 6% of your customer base where you had some work to do to kind of improve your relationships there. Some of this obviously had to do with the fallout from the PSP program. Can you just talk about what you are doing specifically to improve on those customer relationships? And maybe just give us an update in terms of what kind of progress you’re making there?

Eric Bjornholt, CFO, Microchip: So we’ve made really good progress. And I think at this point, we don’t have a customer issue any longer, right? It’s going to be the small percentage that have hurt feelings or whatever. But we’ve met with them, fallen on our sword. We’ve explained to them how we got to the point we were at.

They understand it, right? Everybody had extended lead times and some form of NCNR program, non cancelable, non reschedule program during the up cycle. We clearly stuck with our program a couple of quarters longer And we talk through that with customers and then we find ways that we can partner with them to provide value. And that’s why they’ve obviously selected Microchip to work with historically.

And ultimately, the engineers like working with us. We deal with the purchasing managers and help mend fences there and with the C suites. And I think we’re in a good spot today. We Steve announced this as part of his nine point program. And when we went through that work between kind of when he came back in November and really our early March earnings call, we had made a lot of progress in that timeframe.

It’s continued over the last four months and I think we’re in good shape. So I think customer relationships are healthy.

John Vin, Analyst, KeyBanc Capital Markets: Right. I think you were also very transparent in acknowledging that maybe the PSP program wasn’t kind of the best program to implement during this last pandemic cycle. What have you really learned about it? What safeguards have you implemented in this next recovery? And what are you planning to do differently going forward?

Eric Bjornholt, CFO, Microchip: Yes. So PSP was definitely not all bad. There are many customers that were PSP participants that would sit here and tell you we had a great experience, we got supply when we needed it, we didn’t have lines down situations because of microchips. So there was good that came out of it. But it extended too long.

We didn’t have appropriate safeguards across what we were doing where you could have a situation where a customer has been a steady customer for the last five years and by 10,000 units a month, right, and fluctuating modestly. And the PSP program could have consumed capacity to them where that steady long term customer couldn’t get product for fifty two weeks because lead time stretched so long. So we’re putting certain things in place where we can look at customer behavior and past history, not just direct customers but through distribution to make sure that we reserve capacity in the future for those customers and don’t let it get consumed when lead times stretch again and backlog goes up because it will in the future. And so we’re using AI and machine learning to help us with that to identify those things and I think we’re going be in a much better spot in the future. And I don’t think we’ll ever do a program like PSP again that goes out twelve months for NCNR.

But NCNR is important in some instances. I won’t say that we’ll never use it, but PSP, a program like it, will not come back in that exact form again.

John Vin, Analyst, KeyBanc Capital Markets: Great. As part of your nine point program, our turnaround plan, there is some fab rationalization in there. What are you doing in terms of just optimizing your fab footprint to take into consideration the concerns around Section two thirty two tariffs some of the geopolitical related tariff risk there?

Eric Bjornholt, CFO, Microchip: Right. Okay. So we do a little less than 40% of our wafer fab in our U. S. Factories.

It used to be three factories, now it’s two factories. We closed the Arizona fab. The last production came out of there in May. But none of that production that was produced in Fab two is moving outside of The U. S.

It’s moving to our other two U. S.-based fabs, one in Colorado and one in Arizona. So the production in The U. S. For us is not changing because of that.

We expanded clean room capacity and equipment capacity significantly during the up cycle and we think that we can support peak revenue plus again from those other two factories because they’ve got the largest footprint. Fab two, which we closed, was our smallest of our three domestic fabs. So from a February perspective, I think we’re actually in a really good spot, right? We have domestic manufacturing today. We continue to invest in that.

I mentioned before that we are the largest supplier to the U. S. Department of Defense, which is pretty and we’re continuing to invest. And then when you look at some of our foundry partners, we use foundry partners that actually have U. S.

Footprints also. So if you look at the dollars that we source fabrication through our own fabs and then our partners that have facilities here. So TSMC has a fab in Washington, GlobalFoundries has a fab in New York, XFab has a fab in Texas. You combine those together and we do about 50% of our wafer fab domestically, which I think should qualify us to be exempt, but we’ll see how the final rules play out.

John Vin, Analyst, KeyBanc Capital Markets: Great. One follow-up I had on that is, are you supporting any sort of fungibility between some of your overseas capacity with your U. S. Capacity? Is that something that you’re working on at all?

Eric Bjornholt, CFO, Microchip: So there’s some of that, right? We have certain products that can run-in our internal factories and they can run-in an external factory because we have process technologies that are qualified both in our internal fabs and an external partner. And essentially what we’ve done is we have mapped out for our customers where they can see this is the point of fab, this is the point of assembly, this is the point of test and done that in a way where depending on where all this tariff stuff falls out, they can pick and choose where material is sourced from that gives them the best answer for them depending on where we’re shipping that product. So it’s not perfect. I mean there’s lots of product that is produced on advanced nodes where we don’t have the ability to do those by ourselves internally.

But our foundry partners might have multiple locations where they can do that and we’ll maximize that to the extent that we can.

John Vin, Analyst, KeyBanc Capital Markets: Great. Are there any questions there?

Eric Bjornholt, CFO, Microchip: So that is definitely a new thing for us. We’re making investments there and supporting what customers need and obviously want to be compliant with everything that we need to be on a global basis. So it’s just continued investment that we need to make over time. I don’t think it’s a material needle mover for us, but something that’s important to a portion of the customer base.

John Vin, Analyst, KeyBanc Capital Markets: Does it go across the entire MCU portfolio?

Eric Bjornholt, CFO, Microchip: I do not know the answer to that. We can follow-up separately. If you want to follow-up, can get the business unit person to chime in. No problem. Thank you.

John Vin, Analyst, KeyBanc Capital Markets: Any other questions? Great. Eric, maybe you can talk about kind of the China market right now, maybe just walk us through your China for China program. Are you also just giving given the geopolitical tensions out there, are you seeing more pressure on your Chinese customers to kind of move to local sources? I know there’s always been competition in that domestic market, but maybe just talk about that.

Eric Bjornholt, CFO, Microchip: Right. So we talked about a China for China plan back in March. And I think with all the tariff that have changed between then and now and still waiting for some of that to get finalized, that is not a completely finalized plan as of yet. Again, we’ve mapped out our sourcing of each product so our customers can see that and we can work with them to find the optimal manufacturing flow that works for them depending on the country of location. China competition is definitely an issue for a portion of our product over time.

We do about 18% of our revenue in China. We think about half of that is done through multinationals that we ship product into a foreign trade zone over there, it’s manufactured and then it ships back to The U. S. Or Europe. So that really isn’t at risk.

But the 9% that is kind of domestic consumption is something we obviously look at. We think about half of that is products that Chinese competitors don’t have. And so there really isn’t competition for us domestically there and the customers need to use our So an FPGA could be an example of that, a data center product could be an example of that, couple of examples there. But that leaves probably 4% to 5% of the revenue that is subject to domestic competition, I’ll call that kind of standard microcontroller and analog product.

And clearly those customers have chosen Microchip because they want to work from us with us. But there is pressure from local government for them to source domestically if they can and that’s where our China for China program will come into play in finding a way to make as much of that product be sourced from an area, could be sourced from Taiwan, is that considered China or not, right? China would probably think so, Taiwan would not. But there’s a lot of permutations and combinations and we will work with our customers to best service their needs. But there’s going to be more and more competition on that 4.5% of revenue and we’ll continue to invest and support our customers and invest elsewhere where we think we can get the biggest bang for our buck.

John Vin, Analyst, KeyBanc Capital Markets: Great. Can you talk about the pricing environment right now? And maybe also just comment on how does that compare to the pricing environment you’re seeing in the China market?

Eric Bjornholt, CFO, Microchip: So I would say pricing for microchip is pretty stable. We are being aggressive at the point of design, which is normal for this point in the cycle. All of our competitors have excess capacity and are fighting for sockets just like us. So we’re aggressive with pricing there. We talked about likely a mid single digit pricing decline this fiscal year and then it probably gets more stable after that.

But that’s really just being aggressive at the point of design. But once we’re designed in, those prices tend to hold through the life of the application. All the work is done upfront. The pricing is set there and then the customer is designed in with a proprietary product that is not pin for pin compatible with any of our competitors. So pricing is stable.

John Vin, Analyst, KeyBanc Capital Markets: Great. As part of the turnaround plan, I think you talked about adding an AI business unit. What’s your AI exposure today and what are the opportunities that you see to grow that franchise?

Eric Bjornholt, CFO, Microchip: Yeah, so this is new, the AI business unit. So we created an edge AI business unit that is really looking today at maximizing the benefits of the portfolio that we have today and building a go to market strategy around that. And then getting all the business units that support the AI ecosystem to work together for common sets of IP, common go to market strategy, feeding our sales force with the proper collateral material to make ourselves successful. So there’s definitely IP investment that’s going to be made. There’s helping to shape new product development for some of these business units that have the opportunity to really do well there.

It could be MCU, MPU, some of our wireless products or data center products, etcetera. And with that, it’s a relatively small portion of our business today, but it’s got a growing footprint and we are very well positioned with some of the products that we have today just in kind of enhancing the software working with the customer to do that to do really well.

John Vin, Analyst, KeyBanc Capital Markets: All right. Can you talk about just the puts and takes of how we think about kind of the gross margin expansion as we continue through this recovery?

Eric Bjornholt, CFO, Microchip: Sure. So our long term target model on gross margin is 65% on a non GAAP basis. The last quarter was just over 54%. We’re guiding the current quarter to 56. And there’s two significant charges that are impacting gross margin today.

We have underutilization charges from our factory, which were just over $50,000,000 last quarter. And then we have accounting charges for inventory reserves, which fell last quarter to about $77,000,000 it was $90,000,000 a quarter before, but those are going to come down very rapidly as we move ahead. The basis for those calculations, you take a snapshot of inventory and look at twelve months of trailing revenue demand. And we’ve been in a falling revenue environment and inventory has been up until the last couple of quarters pretty stably quite high. And so inventory is coming down rapidly.

We ’ve got a goal this year to reduce inventory on the balance sheet by $350,000,000 So that alone will take those charges down. And then with the revenue inflecting upwards, that’s also going to take those charges down. So those charges never go to zero. There’s always some inventory that is subject to those charges, but that $77,000,000 could come down to $20,000,000 and that’s $57,000,000 of gross margin improvement or five percentage points that will come back to gross margin pretty rapidly here over the coming quarters. And then the capacity underutilization charges will be more gradual.

I think that will spread over a couple of years. We are we that charge is going to come down just just modestly in the current quarter and that is really from our back end factories ramping assembly and test activities. We drained finished goods last quarter. We don’t want to do that again this quarter. And then we indicated publicly that we plan to increase wafer starts in our factories starting in December, and we’ll gradually do that over time as revenue and inventory supports it.

John Vin, Analyst, KeyBanc Capital Markets: Great. Looks like we’re out of time. Thank you, Eric.

Eric Bjornholt, CFO, Microchip: Right. Thanks, everybody. Thanks, John.

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