Microchip Technology Inc at Citi TMT Conference Summary

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

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : <_ALACRA_META_ABSTRACT>And let's jump right into the 9-point plan. Maybe just run through it again and talk about where we are on those 9 points, how things are going, and then we'll go ahead and run from there. Steve Sanghi - Microchip Technology Inc - Chairman of the Board, Interim President and Chief Executive Officer Great. Thank you, Chris. And I just want to say that during this presentation, we might be making some projections and other forward-looking statements. And these involve a lot of estimates and predictions, and actual results may vary materially. So I refer to you to our filings with the SEC that identify some important risk factors. Now, Chris, answering your question about the 9-point plan. The first part of the 9-point plan was resizing our manufacturing footprint. During the go-go days post-COVID, our manufacturing footprint became too large. And we were building a large amounts of inventory producing well, well above what we were shipping. And the inventory got as high as 266 days. So first thing I needed to do was the downsize of manufacturing footprint. We closed down one of our older smallest Fabs and downsize the other two Fabs and also downsized somewhat assembly and test. And today, we're producing significantly less every quarter than what we are shipping. So therefore, inventory is dropping rapidly. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2025 / 11:30AM, MCHP.OQ - Microchip Technology Inc at Citi TMT Conference And second point of the 9-point plan was the inventory reduction from 266 days in -- at the end of December, we were 251 days at the end of March, 214 days at the end of June, and are expected to be below 200 at the end of September and will continue to go down from there. And at this point in time, we are producing well below what we are shipping. And we have said that we will start growing our capacity, again, starting the December quarter, utilization will start increasing. And capacity increase will be about 15% to 20% per quarter starting the December quarter. The third and fourth point of the 9-point plan was to do a deep dive on all of our business units, as well as look at all of our mega trends, key corporate growth initiatives and essentially go through every one of them in a deep dive fashion to either reconfirm what we're doing or to change what we need to change. And we made some changes. We made some changes to the megatrends, and we made some changes to our business units. So those things are all completed. The fifth part of the plan was to look at our channel strategies with distributions around the world. As you know, we have a very, very broad distribution around the world. We use global distributors, which are Arrow, Avnet and The Future. And we also use a large number of regional distributors in China, in Taiwan, in Korea, in Japan, and in Europe. So unlike some of our competitors, we have a very broad distribution network, and we want to take a look at that. We want to look at the margins we're giving it to them and made some changes, which were made and have been implemented. We also terminated a couple of small distributors that were not performing. The sixth point of the plan was really reconnect in a meaningful way with all of our customer base worldwide. With some of them during the go-go days became very transactional, parts were hard to get and everybody was just looking for where I can get parts. So we put a major effort to improving our relationship with our customers worldwide, which is still an ongoing process. But as a big project, it was completed, and I would say our customer relationships today are very healthy. We're reengaged. Our funnel is growing, design funnel is growing, and we're doing extremely well. The seventh part of our 9-point plan was to unveil a new long-term business model. The business model that was on the street prior to me coming back to do this job, really had a remnants of peak performance during peak performance, we were charging customers a lot of expedite charges. There were a lot of capacity reservation charges, there were just all sorts of stuff and prices had gone up some beyond reasonable, and we didn't believe that, that business model in a steady-state fashion was doable. So we unveiled a new business model to the street, which I think we did it in March. And that was a long-term gross margin of 65%, operating expense of 25% and operating margin of 40%. And we're making a very good progress towards that, and I'll cover one of that gross margin. And the number eighth was -- I'll come back to gross margin. Number eighth was operating expenses. So our operating expense at that time was 39% of our business, and our long-term model was 25% of our business. And I didn't think we can get from 39% to 25% without doing something meaningful. During the peak performance days when so much of the revenue was driven by inventory shipments to customers and distributors and a lot of the inventory is still there, still high, a growth in operating expenses driven by that revenue really wasn't the right thing to do. And therefore, we must correct it. So we made that correction in the March quarter by a worldwide layoff, which was our first in 25 years, but that needed to be done. And so with the help of that and with the revenue improving on operating expenses, we are halfway there. 39% has come down to about 32%, and the rest taking it from 32% to 25% will happen through -- mainly through revenue improvement, revenue coming back to the entitlement when the inventory goes away, but there is some attrition built in there also. So that was the number eight, and number nine was the CHIPS Act. We haven't taken any money from the CHIPS Act. We were still negotiating when my predecessor left I put that negotiation on hold, pending review of the entire business review of our capacity REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2025 / 11:30AM, MCHP.OQ - Microchip Technology Inc at Citi TMT Conference and then the administration change and CHIPS office really didn't have any directions regarding what to do. So they never really reengaged with us. And so we never got any CHIPS Act money. And now it looks like to get any CHIPS Act when you have to give equity. So not interested in that.

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Great. All right. I have a series of questions on all of those comments you just said. I did have some of your larger shareholders demand that I ask a couple of different questions. Number one, on the Aerospace and Defense. With all of this sort of NATO spending going on, how do you feel like your exposure is to Europe on the Aerospace and Defense and the ability to take advantage of that?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Great. And then just to run through the numbers. So Aerospace and Defense was around 18% of business last year. I think Industrial is 41%?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : 30% -- sorry.

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Got it. So Industrial 30% and then Aerospace and Defense is another 18%.

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Great. One other question was given the issues that happened with PSP, whenever the next upturn happens, contrary to popular belief, I do believe there's going to be another upturn in analog and semis. Is it fair to say probably not going to be another PSP program in the next upturn?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Great. And then you've been on point as to when this recovery first started about saying, hey, our bookings this month were better than last month and this quarter. It was better than last quarter, and this week is the best in 36 months or something like that. Can you give us sort of a rundown of those statistics?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : And then given this strength in bookings, I know you came out and said on the previous conference call that you expect above seasonal growth in the December and the March quarters. Maybe give us some of the reasons why you have confidence in that? Does it tie back to your comment earlier where you said every month, we've got, I think you said thousands of customers starting to order again? Are those tied in?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Great. Another sort of area you've been a leader in is the lead times. I think you made some comments on the last conference call that you've seen some, I guess, times of certain products start to extend. I don't know if anybody else is seeing that yet, although we'll see what happens in October. Can you maybe talk about the circumstances that surround that? And do you expect be able to get that under -- to get that under control? Or will we see more lead times extend as business continues to improve?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : I don't think it's just you, Steve, I think exactly the same thing.

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : All those (inaudible) customers. I had two questions for the stage of the Southwest. Yesterday, we had a whole bunch of analog companies talking about two areas where we got differing opinions, and I just wanted your take. First was on the Automotive end market. As you said, it's like mid-high teens percent of your revenue. Some companies are saying it's good. Some companies are saying it's not good. What's the Microchip take on the state of the Automotive end market?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Okay. And then another one was on demand in China. So there's this constant drumbeat or fear of this China for China strategy, apparently, some people think this is brand new. I've been seeing it going on for about 25 years, but some companies are saying that their China business is good. Some companies are saying their China business is hurting. Maybe talk a little bit about your China demand trends and then the China for China impact or not impact on Microchip? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 04, 2025 / 11:30AM, MCHP.OQ - Microchip Technology Inc at Citi TMT Conference

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : Yes. I think on the conference call, you guys -- did you say you expected the China business to be up this quarter?

Question: Christopher Danely - Citi Infrastructure Investments LLC - Analyst : All right. Thanks, Steve. That's all we have time for. Thanks, everyone. Appreciate it.