Microchip at Wells Fargo's TMT Summit: Strategic Growth Amid Challenges

On Tuesday, 18 November 2025, Microchip Technology Inc (NASDAQ:MCHP) participated in Wells Fargo's 9th Annual TMT Summit. The discussion, led by CFO Eric Bjornholt, highlighted Microchip's strategic focus on debt reduction and growth in high-potential markets, while addressing challenges such as inventory management and competitive pressures in China.

Key Takeaways

• Microchip is prioritizing debt reduction over dividend increases or share repurchases.
• The company is targeting a gross margin improvement to 60% by the March quarter.
• Growth areas include data centers and aerospace & defense, with new product offerings like the Gen 6 PCIe switch.
• Inventory levels and factory utilization are current challenges, but improvements are anticipated.
• Strategic investments are being made despite competitive pressures in China.

Financial Results

• Bookings have been strong over the past four months, although they are aging further out in time, affecting current quarter performance.
• Microchip aims to deleverage its balance sheet and prioritize debt reduction, with a focus on improving gross margins to 60%.

Operational Updates

• The company is actively working on reducing inventory and ramping up factory capacity to minimize underutilization charges.
• Operating expenses are being managed carefully, with an emphasis on strategic investments and employee engagement.

Future Outlook

• Microchip is guiding for an above-seasonal March quarter, driven by a robust backlog.
• The company is expanding beyond traditional markets, focusing on high-growth areas like data centers and FPGAs.
• Competitive pressures in China are being addressed with strategies to protect market share.

Q&A Highlights

• Wells Fargo analyst Joe Petrarchi inquired about bookings, lead times, and capital allocation.
• CFO Eric Bjornholt emphasized the company's commitment to debt reduction and improving gross margins.
• Sanjit elaborated on the advantages of Microchip's new Gen 6 PCIe switch for data centers, highlighting its power efficiency.

For a detailed account, readers are invited to refer to the full transcript below.

Full transcript - Wells Fargo's 9th Annual TMT Summit:

Joe Petrarchi, Analyst, Wells Fargo: Capture last name for me just so I don't—I don't want to set up.

Eric Bjornholt, CFO, Microchip: Bjornholt.

Joe Petrarchi, Analyst, Wells Fargo: Okay. That's where I thought it was, yeah.

Eric Bjornholt, CFO, Microchip: Norwegian.

Joe Petrarchi, Analyst, Wells Fargo: Yeah. I was, like, my name gets butchered all the time, so I'm always just, like, want to make sure that I ask.

Eric Bjornholt, CFO, Microchip: Yeah, your last name is kind of tough. You would not be the first one to butcher it, so it would be okay. It would not hold it against you.

Joe Petrarchi, Analyst, Wells Fargo: Perfect. Cool. We'll go ahead and get started. I'm Joe Petrarchi, the Sammy Sammy Cappy analyst here at Wells Fargo. Excited to have the microchip team here. Eric Bjornholt from the CFO, as well as Andre from IR. So, yeah, you guys just reported a couple of weeks ago. Maybe just, like, to level set the conversation a little bit, can you talk about just what you're seeing from a demand perspective looking into December quarter? When did you kind of realize December maybe is a little bit more seasonal than you previously kind of were thinking? Let's just start there.

Eric Bjornholt, CFO, Microchip: Okay. Let me start by doing the typical disclosure.

Joe Petrarchi, Analyst, Wells Fargo: Sure.

Eric Bjornholt, CFO, Microchip: During the course of this discussion, we'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. Okay. So the demand environment. So we have actually had pretty healthy bookings activity for the last several months. We go back to July, and we highlighted to the street that our July bookings were the highest that we've seen on a month for three years. August was seasonally soft, which is normal, and then September was higher than July. And then we follow that up with October, which was also higher than July, a little bit lighter than September, but we've had really good bookings through the last four months. What's changed a little bit is the aging of those bookings.

So the bookings are aging a little bit further out in time, and so the amount of those orders that are actually translating into turns orders, orders received in the quarter for delivery in the quarter, is lower than we originally expected. And so even though we are guiding the current quarter to be above seasonal at down 1% at the midpoint, it's a little bit lower than what our expectations were a couple of months earlier. But things are trending in the right direction. Our bookings in the September quarter grew 10% over what they were in the June quarter. We had a book-to-bill of 1.06, and our backlog today is building very nicely into the March quarter, and that is giving us very high confidence that the March quarter is going to be above seasonal.

Joe Petrarchi, Analyst, Wells Fargo: Okay. I think when you guys reported that you said, I think it was the first few days of November, the bookings were strong the first few days. I'm curious, is there any update there? They've remained strong now that we're kind of middle of the month or towards getting closer towards the end of the month?

Eric Bjornholt, CFO, Microchip: Yeah. So bookings in November have continued to be strong, so that trend has continued.

Joe Petrarchi, Analyst, Wells Fargo: Okay. And then I guess as we look into March, what gives you the confidence that you don't see a similar trend that you saw for December, that things just kind of the bookings age a bit and they get pushed out to June? I guess talk about that, just that confidence.

Eric Bjornholt, CFO, Microchip: Yeah. So let me clarify that we are not seeing push-outs of orders. Once they're placed, we're seeing very little push-outs. There's a lot more pull-in activity. A customer might schedule an order for February and now say, "Hey, I need it in December," or, "I need it in January." So there's not really push activity. Again, what was different is the new bookings were coming in, were aged a little bit further out in time. And we really attribute that to, in the December quarter, that we're in a little bit of a soft economic environment. It is not unusual for companies to have extended kind of shutdowns in December around the holidays and do a little bit of balance sheet dressing leading into the calendar year-end, which is the year-end for many of the companies. So I think really that's the phenomena that's happening.

Microchip continues to have extremely short lead times for our products, and so we see quite a bit of backlog that is placed in the month of January, and customers know that, hey, if they have some upside in this quarter and they actually need that product pulled into the month of December, that we can likely accommodate that.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Okay. I guess you talked about seeing the elevated amounts of expedient orders and things from customers. I guess what do you think maybe changes that dynamic as you get into '26? Is it just macro confidence, or you talked about also your lead times, right, are extending, or the lead times to deliver to customers? There's becoming a gap in that time, right? They don't match. So maybe help us, are you educating your customers in that dynamic, or just what's their response?

Eric Bjornholt, CFO, Microchip: So let me start by saying that lead times are still generally very short. We do have pockets of products that have lead times that have extended out a little bit. We highlighted this on our quarterly earnings call, not this last one but the one before, that some of our data center products, which run on higher process technology nodes, we outsource a lot of the assembly and test on those products, and that capacity was getting consumed by some things in AI or iPhone build for Christmas, and so the lead times were just longer than expected. That continues to happen for a small portion of the products, but the vast majority of products still have short lead times.

And I don't really expect customers to give us that much better visibility until they start to see those lead times stretch from us and the rest of the industry. And right now, everybody's still sitting on pretty healthy levels of inventory, so lead times are short, and in that environment, until the customer experiences something different. And it could be that, hey, a month ago I placed an order with Microchip, and I needed something in four weeks, and they could get it to me. Now I place an order, and I needed it in four weeks, and I can't get it for six or seven weeks, then they start thinking about it a little bit differently in terms of giving us a better backlog pipeline.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Okay. How does that, just kind of the more difficulty in visibility, how does that translate into thinking about factory loadings and gross margin dynamics, just given the underutilization right now?

Eric Bjornholt, CFO, Microchip: Yeah. So we took action and closed one of our wafer fabs earlier this year and ran the last production through what we called Fab Two, which was an Arizona-based facility in kind of early May timeframe. And by taking that action, today we are producing way less than what we're shipping, and that's why inventory is trending down each quarter. So we're in a really good position today that by adding some people into the factory, starting more wafers, we can ramp capacity pretty quickly. But we ended last quarter with still 199 days of inventory, which is still high. Our long-term target is 130 to 150 days.

But since we're producing at a level that's quite a bit lower than what we're shipping at, we can't wait to start ramping those factories until inventory is magically at 150 days, or inventory will go too low because these fabs are large operations. You need to add headcounts. You need to get people trained. You can't increase capacity in a wafer fab by 40% in a quarter. It's a gradual thing. So we're actually starting that this quarter. Our underutilization charges, which were about $50 million last quarter, aren't going to come down significantly this quarter because it takes some time to fill the line in the factory, but our expectation is that will have to continue as we move in and through 2026, and those underutilization charges will continue to come down.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Okay. Maybe from a demand perspective, I think one of the areas that's been more of a bright spot, right, has been aerospace and defense. Can you talk about, I guess, the demand that you're seeing there? Maybe you could split it out, like US versus rest of the world and just the opportunities.

Eric Bjornholt, CFO, Microchip: So aerospace and defense business has been really our steadiest business over the last couple of years, and obviously, the US defense budget is quite high this year. The NATO countries are being encouraged to spend more, and so we're seeing quite a bit of activity there. We are the largest supplier of semiconductors to the Department of Defense, and so we've got a really good view into what's happening there, and we're having lots of great customer conversations about things needing to be replenished and restocked because of some of the activity that's going on from a defense perspective around the world. So we're in a great position.

A lot of that business came to us through our MicroSemmi acquisition back in 2018, but that business has grown nicely, and now we're selling more of the broader microchip product line into that aerospace and defense market, and we see very nice growth opportunities over the coming years there because of the increase in spend.

Joe Petrarchi, Analyst, Wells Fargo: Okay. That's helpful. I think thinking about just the growth algorithm, we're thinking about the growth markets for you. I mean, data center is also another opportunity you guys have been talking a lot about. Maybe can you just kind of remind us where you participate in the data center, and then what do those opportunities look like out in front of us? And we can also talk about some of the product announcements you've recently made.

Eric Bjornholt, CFO, Microchip: Sure. I'll let Sanjit take that.

Sanjit, IR, Microchip: Yeah. On the data center side today, we're serving that space with a full-stack solution with our connectivity products, our power controllers, I'm sorry, our storage and memory controllers, our timing solutions, and our power management portfolio. And so it's really a full approach from a full-stack standpoint. And then on the connectivity side, we've been in that space for a very long time with our Gen 3, Gen 4, Gen 5 products, and then more recently, as you highlighted, we announced our Gen 6 product, which is the first of a kind, our first of a first one on a 3 nanometer, so the first in the industry for a 3 nanometer product. And essentially what that does is it really helps kind of solve for a very critical problem in the data center space today, which is power efficiency.

And so as you kind of move down to 3 nanometer, that product has, compared to what is currently in the market at about 144 lanes, our product has 160 lanes driving 15 to 20% efficiency per lane. And so we're presently sampling that today, and so we'll expect revenues from that later down the stretch, but pretty excited about that opportunity because it's a pretty significant ramp-up over there. And then we'll have a steady cadence of new product announcements too that kind of support that. So primarily those would be the kind of areas in the data center side.

Joe Petrarchi, Analyst, Wells Fargo: Okay. And I guess, I mean, I think data center has historically been like 15 to 20% of the business. We've got an update here in March, but where do you think that could go over time? Could it go to 30, 40% of the business? How do you think about just kind of the mixed drivers of the different end markets?

Eric Bjornholt, CFO, Microchip: So it's hard to say. We see the opportunity there quite large, as Sanjit said. We've got a very significant focus within the company. It is a little bit different type of business than what you historically think of Microchip, that you think of more kind of lagging-edge process technologies, but it's been a successful business for us in the past. We're not going to say doubling down on it, but we definitely are investing in it heavily today. We've got a new leader of that group that joined the team that actually spoke on our last earnings call, and he's really holding the team accountable on product deadlines. The market is quite different in terms of you've got to hit your market window, right?

If you're late by six months or nine months on a standard microcontroller or analog product that's going to sell for 20 years, it's not a big deal, right? But if you're late in this market, your opportunity to gain share or even keep your share is challenged. So we're excited about it. I don't want to put percentage terms around it of where it can be, but it definitely can grow from, I think it was 18, 19% of our business last fiscal year. It can grow over time quite nicely.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Yeah. On the PCIe, the Gen 6 switch that you briefly touched on, I mean, can you expand on just the competitive positioning of that product relative to peers and just kind of where your value proposition to customers that you think can drive some pretty meaningful opportunities there?

Eric Bjornholt, CFO, Microchip: So it's a big market, right? I think in talking to Brian McCarson, that the PCIe market that this product can address over time, it's about a $2 billion market, and there's some large players there, not to name names, but there's some large players there. And we think that by having the most advanced power-efficient product in the market, that that's really attractive. Again, we've been successful in this area before, but here we're hitting it with a product that is, it's got technical capabilities beyond what the competition has today, and we're super excited about it. And more product introductions to come over the coming year or so, which are going to add to that excitement. And the customer engagement is quite high at this point in time. The sampling efforts are going really well.

And as Sanjit said, it doesn't really hit anything from a materiality standpoint, from a revenue perspective, until the second half of our next fiscal year. So think of it as kind of September, December timeframe of next year. But we're excited, and we think the growth opportunity is nice. The margin profile on these products is also quite good. So it's going to absolutely help us as we continue on this path of improving our growth trajectory and our operating model.

Joe Petrarchi, Analyst, Wells Fargo: Okay. That's helpful. Maybe switch gears a little bit. Let's talk about gross margin. Maybe before we get to some of the more things that you're doing more idiosyncratically, how do you think about pricing into next year?

Eric Bjornholt, CFO, Microchip: I think pricing is going to be quite stable for us. It's stable on existing business. It is always price competitive at the point of design, and we're leading with our newest products with customers that are going to be cost-effective, and we'll continue to improve on their margin structure over time as they ramp. So it's not different than what we've seen in previous cycles at this point in the cycle when everybody has inventory and is scratching and clawing for market share. Pricing for new designs is always competitive, and we're going out there and trying to win business, being aggressive on price, but also cognizant that over time these products, as they ramp in volume, are going to have a better cost structure and lead to the margins that we need in the business.

Joe Petrarchi, Analyst, Wells Fargo: Okay. That's helpful. You're guiding, obviously, for gross margin improvement in the December quarter. But when do we think about this model getting back to 60%? Obviously, you talk about 65% maybe over time, but when do we just get back to 60?

Eric Bjornholt, CFO, Microchip: So we are guiding this quarter, which is slightly down. At the midpoint, it's down 1% in revenue, and gross margins are improving from 56.7% last quarter to 58.2% at the midpoint of guidance. So we've got a lot of positive things happening in the margin area. So there's two main charges that are dragging gross margin down today. We talked a little bit about underutilization in terms of our fab capacity in our earlier question. That was about a $50 million charge last quarter. The larger charge is we are taking an accounting charge for inventory reserves based on our accounting policies, which was about $72 million last quarter. Now, it's a relatively complicated calculation, but the basis of it looks at trailing 12 months of revenue, and that is finally at the point where it is inflecting and not falling any longer.

And as that happens, when inventory dollar balances on the balance sheet are decreasing, those charges are going to decrease significantly. So that was about a $72 million charge in the September quarter. Normalized, that might be, it varies quarter to quarter, but could be $15 to $25 million. So there's roughly $50 million of improvement in that line item alone. And we have our sights on, we haven't given any guidance, but we have our sights on getting to a 60% gross margin very soon, as early as the March quarter.

Joe Petrarchi, Analyst, Wells Fargo: Okay. And to get to that, if it happens in the March quarter, I mean, can you do that probably still with even if things were more seasonal in the March quarter, or do you still have to be kind of above seasonal?

Eric Bjornholt, CFO, Microchip: I think it's likely that we can get there in a normal quarter, and we are pretty confident that we're going to have an above seasonable March.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Okay. The path of inventory reserve charges, I think you talked about that you always have some, right? That path, getting back to the, I think it's like 15, 20 million is what you normally have. Is that linear, or how do we think about that? Or is it more, could it be choppy, I guess?

Eric Bjornholt, CFO, Microchip: It could be a little choppy, but my expectation as we make our way down towards that, I'll call it roughly 20 million. It's $15 to $25 million a quarter, is that it's going to steadily come down. It might not come down by $15 or $20 million every quarter, but the trajectory is going to be there, and I expect those charges to normalize absolutely in the next year.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Okay. We talked a little bit about fabulization a minute ago, but maybe just can you help us just kind of the logistics of turning on more capacity? What does that entail? Maybe just so we can kind of better understand. It's not just turning on a light switch, right?

Eric Bjornholt, CFO, Microchip: Yeah. I mean, so fabs are large, complex manufacturing engines. We have run way more capacity through our two remaining US wafer fabs in the past, and so the facilities are set up to do it, but you need people. You need people to do that, and you need a trained workforce. And so as inventory levels and revenue levels support it, we will start running more wafers in the factory, adding people, and probably the maximum we can increase output in a factory is probably 15, maybe maximum 20% in a quarter. And hypothetically, if you're starting at 60%, right, you can only take that 60% to 70% in a quarter and then 80% the next quarter, rough numbers. And so it takes time. So we will do it gradually, and we have a huge focus ever since Steve Sanghi came back on reducing inventory.

That was one of his nine points, and we're making really good progress on it. I think in the calendar year now, through September, we've reduced inventory by like $260 million, and inventory days have come down, but not where we want it to be yet, but coming down on a really nice trajectory. So we're in a good position, and even if there was a pause in demand coming back, inventory is still coming down each quarter because we're producing so much less than what we're shipping. So we're in a good spot.

Joe Petrarchi, Analyst, Wells Fargo: Right. I mean, on that, I think you talked about this past quarter of your sell-in versus sell-through in the distribution channel, that continues to kind of shrink. I mean, I guess that how do you think about the trajectory of that? Do you think you can be at shipping to in-demand pretty quickly here on that channel part?

Eric Bjornholt, CFO, Microchip: So there's yeah. I think on the channel part, I would expect over the next couple of quarters for that. It was a $53 million difference in the September quarter. I'd expect that to go to roughly zero over the next couple of quarters. Now, there's a lot that's going to drive that, right? I mean, we let our distribution partners determine the level of inventory that they want to hold. We don't manage that for them. But we have reduced distribution inventory to 27 days at this point in time, and it's been a wide range historically. At the peak of the upcycle, it was as low as 17 days because nobody could get enough inventory, but it's been as high as 47 historically. So we're closer to the low end of that range.

And again, when lead times are short, cost of capital is still relatively high from an interest rate perspective. Distributors are going to continue to work inventory down, but I think it's getting close to the point where they're going to have to start buying soon in line with end consumption. And then there's the other component of it is when do the distribution customers' inventory get to the level where they need to start buying again with their end consumption? So we have a bit of a multiplier effect there that can happen on revenue eventually.

Joe Petrarchi, Analyst, Wells Fargo: Okay. One of the things that I thought was interesting in your filing, you guys disclosed the difference of revenue from products from foundries versus, I guess, what would be implied of internal production. And it seems like maybe more of the revenue recovery has actually been kind of some of the foundry-produced products. Does that matter to gross margin?

Eric Bjornholt, CFO, Microchip: It really doesn't. And that number can move around and be a little lumpy quarter to quarter. So we know that our data center products had a good quarter last quarter. That's all advanced technology stuff that we don't do internally, right? So it varies, but essentially, we have good cost processes both internally and through our foundry partners and then price our products in the marketplace to drive the margins that we need for the business. So there's not a significant difference between the two. I mean, we can have an internal product that has a well-above corporate average margin, and then we could have an FPGA product as an example that is definitely outsourced from a wafer fab perspective that has super high gross margins. So it varies by product.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Okay. Maybe shift gears a little bit, talk about kind of cap allocation. How do we think about we've seen, obviously, stabilization of the P&L and revenue. We've gotten maybe a nice kind of trajectory over the next several quarters. How do we think about just the recovery in free cash flow?

Eric Bjornholt, CFO, Microchip: So we've been in a position for multiple quarters now where we have essentially been borrowing to pay the dividend. And we are fortunate that this quarter that changes. So this quarter, we fully expect that our free cash flow from the business covers the dividend. It was important to us to maintain the dividend at the level that it was at. So there was never really a discussion of cutting the dividend. And we had confidence in the long-term cash flow from this business. But as we generate cash flow from here above and beyond dividend, that is absolutely going to be used to pay down debt. We borrowed some money to pay the dividend for several quarters. We need to pay that down. And quite honestly, our leverage is still higher than we would like it to be.

If you look back to 2021, when we had our analyst day, we set a one and a half times leverage target. And during the upcycle, we got below that. I think we got down to about 1.27, but this last quarter was well above 4. And luckily, as we move forward on quarters, we have lower quarterly EBITDA looking back 12 months rolling off and higher months coming on. So leverage is going to start to come down this quarter, and both in dollar terms start to come down, and the actual net debt to EBITDA leverage numbers will come down also. So I think we're in a good spot, but I think investors should not expect us to be increasing the dividend in the short term. Definitely not doing surely purchase in the short term. We've got to get the balance sheet right and pay some debt down.

Joe Petrarchi, Analyst, Wells Fargo: Okay. I mean, how do you think about just you talked about a little bit, but getting leverage down from kind of math of EBITDA going up, right? That ratio getting smaller versus just the absolute debt reduction. How do we think about what's the right amount of cash that you think you need to have on the balance sheet?

Eric Bjornholt, CFO, Microchip: So I mean, we've got really low levels of cash today. I think we're quite efficient with how our treasury and tax team manage our money. I think last quarter, we only had about $250 million of cash on the balance sheet, and I don't think that number needs to change much from there. It can fluctuate a bit quarter to quarter. We have a large line of credit outstanding that we can tap into if we have short-term cash needs, or we can issue commercial paper to cover that. But we probably borrowed in the range of $300 to $350 million to fund the dividend over these multiple quarters. And absolutely, we got to pay that down first before we even think about doing anything differently on the dividend or share repurchase.

And the board has some time to make that decision, but absolutely, we are focused right now that we need to get that leverage target down, and my recommendation is going to continue to be to continue to delever.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Yeah, that makes sense. Maybe shift gears a little bit. An area that I get a lot of questions on from investors is China and their position in the semi-market and just kind of the various different China for China strategies. I mean, can you talk about just the competitive dynamics you see there as well as just kind of your strategy for China?

Eric Bjornholt, CFO, Microchip: Sure. So we sell about 18% of our revenue into China, and these are rough numbers, but we think about half of that is to multinationals that will manufacture in a foreign trade zone and ship it back to either the Americas or Europe for end consumption. But there's about half of it, or 9% of the overall revenue, that is for domestic consumption in China. There's probably half of that number, which is complex products that Chinese competition don't make today, that there really isn't that type of internal competition. But that leaves about 4.5% of the revenue that is kind of subject to that domestic competition over time, and that's what we would like to protect. And there's likely, no matter what we do, there's going to be some small bleed on that over time.

Clearly, these customers chose Microchip because we had the right product, the right service, and all those things that they needed. But there is pressure for domestically based Chinese companies to buy from a domestic local China supplier. So we've essentially mapped out our supply chain and all of our products and made that available to our customers. And in some cases, they can source a product that's wafer fabbed in the US or wafer fabbed at a foundry in Taiwan and pick and choose because some of those things are a bit flexible in the structure of where it's going to be manufactured, whether it's wafer fab assembly or test. But longer term, we will need to see where all these tariff rules settle out and how that potentially impacts our customers.

The impact of Microchip directly is going to be very small, but the impact that it has on our customers will help drive decisions in terms of what they want to do from a manufacturing perspective and what they might expect us to do. And we'll work that over time as the rules are hopefully eventually clarified.

Joe Petrarchi, Analyst, Wells Fargo: Okay. That makes sense. Back to kind of the, if I did that math right, the 4 to 5% that's kind of maybe more subject to Chinese competition. Can you help us understand, is that MCUs at lower-end MCUs, or where does that kind of?

Eric Bjornholt, CFO, Microchip: Yeah. I would describe it as kind of more standard microcontroller and analog products. Yeah.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Okay. I guess maybe shift gears a little bit more, but back to kind of the P&L. I mean, you guys have done a lot of just kind of trying to rationalize costs and things. So can you talk about just kind of where, as we see, right, revenue starting to inflect, how we think about adding costs back to OPEX, R&D, just how we think about just kind of the incremental margin of the business? Obviously, gross margin, big lever, but how do we think about OPEX as a piece of that?

Eric Bjornholt, CFO, Microchip: Yeah. So we went through a reduction force back in March, and we think we really right-sized the headcount for the company for where we're at today. When we have turnover today, it is not kind of an automatic you get a replacement. We are really emphasizing with our team finding ways to be more efficient, right? In some cases, that might be using AI. It can be other alternatives for us to be able to become more efficient. And the team's doing a good job of that, and our turnover has exceeded what our replacements have been recently. But we want to make sure that we are investing resources in the right areas to drive the long-term health of the business, whether that's with our new products, whether it's customer support, whatever it might be. So we're really focused on that.

We have a long-term operating model of 65% gross margin and 40% operating margin, so 25% OPEX. And we're quite a ways away from that today, right? We've talked about gross margin already, but on the OPEX side, we've got a lot of improvement to do. And there's going to need to be revenue growth for us to get to that number, and we're expecting that. But we will be prudent on how we make investments in the business. There are certain programs that we need to continue to bring back to employees, and bonuses are the big one of those to get back to paying bonuses at around 100% of target. That's kind of the expectations our employees have over time.

And we were paying 250% bonuses at the peak of the upcycle, and they went to zero, and they've been zero, and we've started to bring those programs back. But we'll need to continue to do that because we absolutely need our employees to be engaged and motivated to come to work. And that will put some pressure on the dollars of OPEX, but I fully expect that OPEX, as a percentage of revenue, will continue to come down towards the model.

Joe Petrarchi, Analyst, Wells Fargo: Okay. And those variable cost targets and things, those reset in March or into the next fiscal year, or?

Eric Bjornholt, CFO, Microchip: No. We run quarterly program on bonuses, right? And so there's quite a bit of flexibility in that. In a good quarter, you can take bonuses up. In a bad quarter, you take bonuses to zero or take them down. And that gives us the ability to manage OPEX dollars based on the environment that we're seeing in a given quarter.

Joe Petrarchi, Analyst, Wells Fargo: Okay. That's helpful. Maybe just we've got a couple of minutes left here and a couple more questions. One of the areas I think that maybe it gets a little bit hidden by reported other revenue, but your FPGA business, I think, has been a bright spot. Maybe can you talk about just what you're seeing there of what's been driving that business?

Eric Bjornholt, CFO, Microchip: So it's a really good business. This is another business that came to us through that MicroSemi acquisition that I think I mentioned earlier. And there's really four significant players in that market. I'll refer to them to their historical names: Zylenx and Alterra, which are part of larger companies today, Microchip, and Lattice. And Microchip's historical footprint when we acquired MicroSemi was in the A&D space and kind of in the mid-level market, not the high end, not the low end. And we're continuing to expand that over time with new product introductions so we can encroach on the higher end, encroach on the lower end, and get a larger share, and then expand from just being a player in A&D into industrial, automotive, and other markets. And it's been a really great business for us. The margins are quite high.

The growth opportunity in front of us is still really good. And we're excited about what we're doing in FPGA. It's not something that we break out for investors on a regular basis. We've shared some data on an annual basis a few times in the past, but it's grown quite nicely, and we are absolutely continuing to gain share there.

Joe Petrarchi, Analyst, Wells Fargo: Okay. That's helpful. Maybe just last question. You take a step back, and then we kind of round out the discussion. You look at the Microchip story, and what do you think investors maybe don't fully get or don't appreciate that we should or spend more time working on?

Eric Bjornholt, CFO, Microchip: So I think there's a couple of things. Probably the largest thing is just gaining confidence in can this team drive the operating margins to the level that we've committed to the street. That's a 40% target. I think the midpoint of our guidance this quarter is 25.7%. So there's a huge gap between those numbers, and I will tell you that our confidence is high that we can get there. We've been well above those numbers in the past, and we're coming out of a pretty steep down cycle here. But the earnings leverage that comes with that, the cash flow that it's going to generate are very significant. So I think it's a little bit underappreciated. It's really just math, but it's really the investor base gaining confidence that we can actually get there. And again, internally, we are highly confident that we can do that.

I think the other thing, it probably takes more time, and we've started to do this on our last earnings call, but really explaining to the street that we are not just a standard microcontroller and analog company anymore, right? We highlighted data center in the conference call, and Sajid spent a little bit of time answering one of your questions on that today as a really good opportunity. We had a quick question on FPGA and what we're doing there. Some of the things that we're doing in the communications market is just different, and it's not kind of old trailing edge technology. It's more advanced, and the growth opportunities are pretty high. So I think as we go through the coming quarters, we will continue to highlight some of these things.

Maybe our Ethernet 10BASE-T1S products would be another area where we could spend some time and just educating investors about Microchip because we haven't had an analyst day in a long time. So that falls on us to continue to educate the street on those things.

Joe Petrarchi, Analyst, Wells Fargo: Okay. Perfect. We'll end it there.

Eric Bjornholt, CFO, Microchip: All right. Thanks, everybody.

Joe Petrarchi, Analyst, Wells Fargo: Thanks. Thank you.

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