Microchip Technology Inc at Bank of America Global Technology Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Vivek Arya - BofA Global Research - Analyst : And we'll go through the business, but I just wanted to kind of touch on the most recent right thing with Microchip. You recently issued a convert, and I was hoping you could describe that, what is the rationale behind that? And I think you had a covered call as part of that,, versus the standard bond. So maybe just give us some more color around that.

Question: Vivek Arya - BofA Global Research - Analyst : Got it. At a high level, Eric, what does it mean to kind of the P&L math for this year?

Question: Vivek Arya - BofA Global Research - Analyst : Makes sense. Let's go to the business. Maybe you could just start with the state of the union, right? Every company is going through its own timeline of inventory adjustments. Where does Microchip sit today? And if you could maybe walk us through whether it's by product type, whether it's by end market type or geography, whichever way you think is the right way to segment your business, where you are in that inventory adjustment process.

Question: Vivek Arya - BofA Global Research - Analyst : All right. Given -- Eric, you have been through a few of these cycles before. Obviously, cycles are different every time. But do you think the recovery, the shape of the recovery this time around is -- is it a V-shaped recovery? Is it something that you need to have a couple of flat quarters before you start to see the recovery on the other side? Like, when will you know that now you can trust that the recovery is happening?

Question: Vivek Arya - BofA Global Research - Analyst : On the industrial side, I think what I remember from the last call was that certain customers are getting better, certain customers are worse. Help us understand what are the big moving pieces of your industrial business, right? Is it more exposed to aerospace or defense or factory automation or test and measurement? Like, what are those big moving pieces? And are you seeing a distinction between what is getting better versus what is not improved yet?

Question: Vivek Arya - BofA Global Research - Analyst : And outside of aerospace and defense, you think that we should be prepared for more downside in the next couple of quarters? Do you think that

Question: Vivek Arya - BofA Global Research - Analyst : Okay. On the automotive side, what is Microchip's positioning on the automotive side? And I'm asking these questions because Microchip has never described itself as a play on one thing or another, right? There is a broadly diversified company. Many of your peers describe themselves as a play on one thing or another. So what are Microchip's kind of key focus areas in a car? And how is -- what's happening in the automotive market, right? Flat production this year, EVs may be growing. How does that inform us about how you can do in automotive?

Question: Vivek Arya - BofA Global Research - Analyst : What's your average content in an EV versus a traditional car?

Question: Vivek Arya - BofA Global Research - Analyst : All right. In line with how EVs are as a percentage of the automotive market.

Question: Vivek Arya - BofA Global Research - Analyst : In the automotive market, is that a market you still think that there is a sense that maybe it's still the last shoe to drop in terms of whether it's excess inventory at Tier 1s or at OEMs? Do you sense that also? Do you think you have a much better handle on the automotive business?

Question: Vivek Arya - BofA Global Research - Analyst : Based on this bookings improvement, I know you said it's not the normal level, right? May better than April, better than March and Feb and so forth. Is automotive recovering faster or is industrial recovering faster in your bookings?

Question: Vivek Arya - BofA Global Research - Analyst : I see. And you mentioned last quarter direct sales went down more than distribution sales. Conceptually, why wouldn't Microchip have better visibility into your direct customers versus distribution or you think that direct customers just don't provide you with that level of feedback? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 05, 2024 / 9:40PM, MCHP.OQ - Microchip Technology Inc at Bank of America Global Technology Conference

Question: Vivek Arya - BofA Global Research - Analyst : I see.

Question: Vivek Arya - BofA Global Research - Analyst : Over time, do you think that Microchip will have, so how much is distribution right now, is it what, about 60%?

Question: Vivek Arya - BofA Global Research - Analyst : 47%. So you think over time, does it get to be a bigger part of your sales or do you think direct distribution remains, does distribution become a smaller part of your sales or do you think it stays at this level?

Question: Vivek Arya - BofA Global Research - Analyst : Got it. On the data center side, Eric, it's -- we don't think of Microchip as a data center company, but it's almost as big as your automotive business. So maybe help us unpack what is in your data center. What do you see as the big growth drivers for that?

Question: Vivek Arya - BofA Global Research - Analyst : So that is correlated to what we are seeing in the accelerator.

Question: Vivek Arya - BofA Global Research - Analyst : Okay. On the CapEx side, your large competitor is building out a really large fab footprint in the US. How do you think that changes the competitive dynamics over time?

Question: Vivek Arya - BofA Global Research - Analyst : So you don't think having a lot of US-based capacity can give you a competitive edge?

Question: Vivek Arya - BofA Global Research - Analyst : On pricing, is the thinking that pricing is relatively stable this year? So does it mean that there are products where pricing is still going up and products where pricing is still going down? What are the kind of the puts and takes? Because stable sounds like such a clean and efficient assumption. And I'm sure there is more to it.

Question: Vivek Arya - BofA Global Research - Analyst : But Eric, historically, we have had that same situation. Still, industry pricing came down before. So why can't the same thing happen again? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 05, 2024 / 9:40PM, MCHP.OQ - Microchip Technology Inc at Bank of America Global Technology Conference

Question: Vivek Arya - BofA Global Research - Analyst : Got it. Makes sense. On gross margins, so about 60% or so in June, there are eight-plus points away from the high. Can we assume 60 is kind of the line in the sand that Microchip should hold this level of gross margins? Or if not, what are the kind of the puts and takes around whether it's mixed, whether it's further factory utilization actions that you might take?

Question: Vivek Arya - BofA Global Research - Analyst : How much is underutilization as part of the eight-point delta from the peak that you were --?

Question: Vivek Arya - BofA Global Research - Analyst : Got it. And then on the OpEx side, you've taken some pretty drastic actions to control spending. So, as the market normalizes, should we be prepared for some sudden jump in OpEx as a catch-up? Because I think your quarterly OpEx is almost $100 million off over the last several quarters. So, should we be expecting a quarter where as soon as you get to, let's say, seasonal sequential growth whenever that is, that we suddenly see $100 million jump in OpEx also on that same time?

Question: Vivek Arya - BofA Global Research - Analyst : All right. On free cash flow margins, so they have stayed pretty strong, right? 30%, which is remarkable given how much the business has fallen off. What are your thoughts about free cash flow returns as the business starts to get to normal? I know there is a very specific formula that you are following. So, when do we get to the point at which dividends start to grow at a more kind of normalized pace and you are able to devote a lot more to whether it is buybacks or M&A?

Question: Vivek Arya - BofA Global Research - Analyst : That's terrific. Thank you so much, Eric. Really appreciate your time. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JUNE 05, 2024 / 9:40PM, MCHP.OQ - Microchip Technology Inc at Bank of America Global Technology Conference