Microchip Technology Inc at JPMorgan Global Technology, Media and Communications Conference Transcript

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

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Thanks. Thanks again, Eric. That was a great overview. I'm going to start off with near-term dynamics. We'll talk a little bit about strategy and then we'll talk about products. But from a near-term perspective, the Microchip team and some of your peers in the analog and embedded microcontroller space have talked about the current trends that point to the early innings of a cyclical recovery off of the downturn that started in 2022. In the March quarter from Microchip, significantly higher bookings overall book-to-bill was greater than one for the first time in almost three years. Order strength has continued thus far into this quarter, but many would argue that this uptick in orders and near-term demand activity is no different than a demand step-up due to pull-ins ahead of the expiration of the 90-day reciprocal tariff reprieve, right? We've actually heard from a few large OEMs that they are indeed pulling in component inventories near term, right? Some of the more -- maybe not apples-to-apples, but maybe some of the more compute semiconductor-focused names like Intel and some of the memory companies have

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : If I rewind back to the 2018, 2019 US, China tariff and trade conflict, the Microchip team was actually the first to call out seeing order patterns dropping within your China industrial and manufacturing customers due to the demand uncertainty, right, that was caused by tariff impact at that time. And the Microchip team has always had somewhat of a unique profile of having large exposure to small- and medium-sized manufacturers and they tend to modulate their activity fairly quickly and in real time, right? Given the current tariff and trade dynamics, we've seen a pretty steep drop off in China manufacturing activity. But are you starting to see any pullbacks or perturbations in order activity from your small- to medium-sized business customers in the China manufacturing and industrial space? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 14, 2025 / 7:00PM, MCHP.OQ - Microchip Technology Inc at JPMorgan Global Technology, Media and Communications Conference

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : I want to get a sense of the breadth of the recovery you're seeing. You talked a little bit about this, right? As of the December quarter, your direct business was about 43% of total sales. Distribution was 54% and you've got very good visibility into your distributors, you can monitor sell-through trends. You've talked about -- historically, you've talked about less visibility on inventory at your direct customers, but you can probably gauge the level of their inventories by looking at their order patterns. I mean you've clearly observed the increase in sell-through and order trends from your distributors. Have you seen a similar pickup in order trends at direct customers suggesting maybe inventories for them have bottomed as well? Or is that trend still lagging your disti set of customers?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : In addition to the strong rise in orders in the March quarter, typically, like in a cyclical recovery, you also start to see stronger turns business, right? Orders and shipments that are done fulfilled in the same quarter. So did you see a turn -- percentage turns business rise strongly in the March quarter? And is that still kind of sustaining here in the June quarter?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Let's talk a little bit about the pricing environment for this year. The team on earnings last week was asked about pricing. It looks like the team is forecasting a mid-single-digit percentage decline on average in pricing, which is a bit larger than the low single-digit percentage decline of some of your peers and what they're articulating. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 14, 2025 / 7:00PM, MCHP.OQ - Microchip Technology Inc at JPMorgan Global Technology, Media and Communications Conference Maybe if you could just elaborate on whether this is part of your pricing strategy, maybe to potentially increase market share? Or are you seeing increasing competitive dynamics? Or maybe it's just a mix impact, right? But more importantly, is the team driving its average fully packaged and tested chip costs at or greater than 5% per year as well?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : And how do we think about your overall -- when you think about your supply chain and manufacturing, cost infrastructure, any ways we can think about how you think about annualized cost declines?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Yeah. Okay. You mentioned the 9 point recovery plan that was laid out in March. There was a particular part of that that we evolved around your channel or distribution strategy. There, you aim to improve your channel strategy by lowering fulfillment margins, reducing incentives, aligning more closely with industry peers to enhance product and price competitiveness. You mentioned that you've just completed -- or Steve mentioned that you just completed this initiative without any negative impacts. What's the channel partner feedback been regarding these changes? Have you observed any notable differences in either sales velocity or product mix?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Let's talk about the product strategy, this particular part of the strategy has been around for a number of years, right? You're a total solution strategy or what we call TSS, right? And the idea is to drive higher attach rates of Microchip products to your anchor products, which are typically your microcontrollers, microprocessors or your FPGA products, right? More analog, power management, networking, chip attach per MCU or MPU design in, right? In the March business update that Steve gave to us. He presented a pretty insightful chart on anchor products showing an attach rate on average, about four to five additional Microchip products per anchor product, right? What programs has the team put in place, sales, marketing, channel partners to drive the increase in higher attach rates over the past number of years.

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : And is there -- are there incentives to like sales and marketing to drive higher attach rates to the anchor products?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : The team is well known for its leadership in microcontrollers, but over the years, you've doubled down on embedded microprocessors as well, right? And you introduced your 32-bit microprocessor a few years back, strong TSS attached of around five additional components per MPU design-in. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 14, 2025 / 7:00PM, MCHP.OQ - Microchip Technology Inc at JPMorgan Global Technology, Media and Communications Conference You just added our new 64-bit microprocessor family to your anchor product list. Your 32-bit MPU again, around for a few years is based on the ARM compute architecture, industry standard, compute architecture. But I noticed that your new PIC64 MPUs are based on a Risk 5 compute architecture. Risk 5 is gaining traction in the market, but ARM continues to be the dominant architecture. So what drove Microchip's decision to move to Risk 5 for a 64-bit architecture?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Is there any plans because ARM is well proliferated across your microcontroller product line, you have 32-bit MPUs. I assume that there's probably some road map at some point to have 64 bid-based MPUs based on our architecture. Is that fair?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Yeah, because predominant part of your MCU family is already ARM base, that makes sense. [Gartner] market share numbers are out for calendar '24. And as I mentioned before, Microchip fifth largest microcontroller semiconductor supplier globally, 60% of your portfolio, 32-bit and higher products. I know it's particularly noisy, right, given the undershipment trends, during this downturn. But in 8-bit market, right, you have a strong number 1 market share position. You're 2 times larger than your second -- the number 2 player in this space. But according to Gartner, I mean, you did slightly underperform the overall 8-bit market last year. And it seems that the Asian, especially China-based 8-bit MCU vendors are performing well in this area. So maybe you can discuss the competitive dynamics you're observing in the MCU market, especially in China?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : On the teams 6 megatrend focus in addition to TSS, you have a focus on 6 megatrends, right? Edge and IoT, compute, data center, AI, sustainability, electrification and networking outside of data center. From fiscal '21 to fiscal '24, megatrend revenues grew about 26% on an annualized basis. That's 2 times the growth of your overall business. represented 47% of your revenues in fiscal '24. If you could just maybe true us up what was the performance of the megatrend business like versus total sales in fiscal '25. And what was the percentage mix of the megatrend revenues?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Okay. That seems fair because, I mean, that's what you've been growing at over the past four years is at a 2 times growth rate. So that makes a lot of sense. Within the AI and machine learning area of focus, I think you guys have characterized it as a $1 billion TAM opportunity. Help us understand where the team is seeing strong traction with your microprocessor, microcontroller FPGA products in AI workloads?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Based on the fiscal '25 revenue by end market disclosure, you talked about, it appears that most of your end markets declined roughly in line with your overall business, except for your Aerospace and Defense segment, which actually held up relatively well. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 14, 2025 / 7:00PM, MCHP.OQ - Microchip Technology Inc at JPMorgan Global Technology, Media and Communications Conference And as a percent of sales, I think it grew by 400 basis points, 500 basis points. I assume a significant portion of your Aerospace and Defense revenues is driven by your radiation hard in, what we call rad hard in the industry, rad hard, FPGA products, a segment where Microchip has a very strong number 1 share position, right? But I do recall a few -- at the time that you guys did the Microsemi acquisition, I do recall that the team was trying to drive some synergies with the rad hard FPGA portfolio to develop a rad hard, Aerospace and Defense portfolio within your microcontroller products as well. Is that the case? And how successful or not has that initiative been?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Let's talk about the manufacturing footprint and consolidation as well as future expansion potential. You closed -- you mentioned you closed your Fab 2 manufacturing plant in Tempe recently. I know this data is probably a few years old, but last I saw the data in 2021 Fab 2 accounted for about 25% of your total 8-inch equivalent internal wafer capacity. Is that about right? Was that about the right mix quarter?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Yeah. We've talked to a few investors that are concerned that maybe when the demand environment does recover, the team may be caught short on internal wafer supply. You mentioned you have some room for capacity expansion for Fab 4 and Fab 5. But I also remember that your Fab 5 in Colorado Springs is still primarily 6-inch. So the good news that if and when the time comes, not only do you have footprint expansion capability, but you can also drive incremental output by converting a big part of to 8-inch. Is that correct?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : So what the closure of Fab 2 and you said about 37% of your internal wafer capacity -- 37% of your total wafer needs are internal. Is that the right mix? Is that how you guys are thinking about as kind of the right mix for the company as you think about the growth profile over the next, call it, three to five years?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Okay. Your, got that you -- so in December, this is talking more about the financials now. The team articulated total underutilization charges of $43 million inventory reserve charges of $82 million total of $125 million, right, coming out of COGS. That's 10% are added to cogs. That's 10 percentage points of gross margin impact, right? These charges sustained in the March quarter. They're sustaining here in the June quarter, implying that utilizations are staying roughly flattish through this quarter. But now that inventories are coming down aggressively. Bookings, backlog improving. Steve said that balance sheet inventories, like you said, should be below 200 days in the September quarter. You also said that the team will start to increase utilizations when inventories fall somewhere between 150, 200 days. So is it fair to assume that if the recovery trajectory evolves according to your base case scenario that we should see utilizations rising sometime in the September quarter or December quarter?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : That's kind of interesting because you said trailing 12 months, right? But if I look at it on a trailing 12 months, wouldn't your revenue still be kind of coming down?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : So the way to think about it is that the inventory reserves, $80 million plus per quarter now, you're saying that sometime between now and whenever you start to increase utilizations potentially in the December quarter, those are actually going to start to drop. So those are going to start to drop first. Is that kind of what you're saying potentially?

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : I see. And then how do we think about starting in -- let's assume that in the base case, you start to increase utilizations in the December quarter. Is there a formulaic way to think about as your utilizations increase, we should see x amount of underutilization charges coming down? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 14, 2025 / 7:00PM, MCHP.OQ - Microchip Technology Inc at JPMorgan Global Technology, Media and Communications Conference

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Gets you to the target margin.

Question: Harlan Sur - JPMorgan Chase & Co. - Analyst : Yeah, exactly. Okay. Well, I appreciate your participation in our conference today. Eric, Thank you very much. Look forward to monitoring the progress of the team this year.