Microchip Technology Inc at Stifel Cross Sector Insight Conference Transcript

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

Question: Toshiya Hari - Goldman Sachs - Analyst : April 2. Congratulations. But I know you've been with the company for, I think, 35 years. Can you reflect on your career, what key responsibilities you've held, some of the turning points of your career, if you will? And Microchip as a company has done so well during that timeframe, if you can kind of walk us through the journey of the overall company.

Question: Toshiya Hari - Goldman Sachs - Analyst : Thank you for sharing that. You've been working closely with Steve and Ganesh for a long time. So I doubt you differ too much in views and how you think about strategy. But now that you are the COO role and perhaps you have a more holistic view of the company, any new projects or initiatives that you're focused on? Or in general, how are you spending your time now that you're the COO?

Question: Toshiya Hari - Goldman Sachs - Analyst : So if I'm a salesman at Microchip and I put in my system I'm going to customer ABC, do I get some sort of guidance through whatever device he should be [selling]? Is the customer a discrete component or a TSS or what have you? Is that how it works?

Question: Toshiya Hari - Goldman Sachs - Analyst : Interesting. And you've been working on this for the past five years?

Question: Toshiya Hari - Goldman Sachs - Analyst : Thank you. Going back to higher-level topics, this cycle versus past cycles. You've been in the industry for a long time. You've experienced firsthand lots of upturns and downturns. As you compare and contrast this current cycle you guys are working through with the past cycles, what are some of the fundamental similarities and what are some of the fundamental differences?

Question: Toshiya Hari - Goldman Sachs - Analyst : In a nutshell, is it fair to say COVID essentially created this really odd upturn, and, to your point, drove lead times beyond 52 weeks? And again, your customers, with the interest rate environment and the evolution there, overshooting or undershooting?

Question: Toshiya Hari - Goldman Sachs - Analyst : Right, right. Okay. Got it. A question on PSP. I think you get this question all the time. But you introduced a program earlier on in COVID. It worked really well initially. The very late part, perhaps not so much. Internally, what did you guys learn to the extent you're faced with, hopefully never a global pandemic, but something similar? Would you go about introducing something similar next time? And how would you tweak it should you decide?

Question: Toshiya Hari - Goldman Sachs - Analyst : Interesting. And how many customers were signing up for the PSP?

Question: Toshiya Hari - Goldman Sachs - Analyst : But to your point, next time, should it happen, you'd be a lot more selective.

Question: Toshiya Hari - Goldman Sachs - Analyst : Got it. Okay. All right. That makes sense. Shifting gears, near-term demand outlook. On your recent earnings call, you did guide June quarter revenue to decline 7% sequentially at the midpoint, but you did talk about bookings. I think the month of Feb was the highest in eight months, March was the highest the fiscal year, and April was up as well. Cancellation rates coming down or normalizing a little bit, and expedites coming in a little bit. All very good signs. I guess it's been a month or so since you reported any new developments. How has progress been inter-quarter?

Question: Toshiya Hari - Goldman Sachs - Analyst : Okay. Interesting. Got it. So you've been cutting loadings in your FAB. I believe you've been reducing your foundry orders as well, and that's to be expected given the weaker demand backdrop. Looking ahead, what would you need to see to start taking up wafer starts? I know. It's not a zero-one, right? But what are you guys monitoring as a team as you make that decision?

Question: Toshiya Hari - Goldman Sachs - Analyst : Got it. Okay. Got it. I was going to ask about inventory next. I think as of today, inventory on your balance sheet is nearly 2X of what you had before the pandemic. And, Rich, you just talked about some of the strategic moves that you guys are making. But how should we think about inventory management going forward? Is this sort of the new normal or do we start to come down over 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 / 1:45PM, MCHP.OQ - Microchip Technology Inc at Stifel Cross Sector Insight Conference

Question: Toshiya Hari - Goldman Sachs - Analyst : Interesting. Shifting gears a little bit, long-term demand drivers. I know Microchip, in a very positive sense, you guys are diversified, right? Not one end market and application accounts for 20%, 30% of revenue. And I know you guys have talked about secular growth drivers over the past couple of years, particularly on your Analyst Day. But as you sit here today, what are you most excited about? You talked a little bit about AI not only leveraging it internally, but also as a potential growth driver or growth driver.

Question: Toshiya Hari - Goldman Sachs - Analyst : Great. All right. I just wanted to double-click on GPU-based accelerated servers. What exactly is Microchip supplying into that ecosystem, if you will?

Question: Toshiya Hari - Goldman Sachs - Analyst : Great. Great. Thanks for that. The TSS strategy, as you spoke to earlier, has been in place for a while. I guess my main question on this one is, there are other companies that also have analog technology, microcontroller technology, maybe less so FPGAs. How does your TSS approach differentiate

Question: Toshiya Hari - Goldman Sachs - Analyst : And your peers, it's more of that.

Question: Toshiya Hari - Goldman Sachs - Analyst : Appreciate that. I am going to pause here and see if we have any questions from the audience. I'll keep going. So I wanted to pivot back to markets and demand and pricing. From a pricing perspective, clearly over the past couple of years it's been inflationary given all the dynamics that we talked about. I think on the most recent call, Ganesh reminded us that you're not in a commodity business and pricing doesn't go up and down in a week or a quarter or month. But he did say, from a design-in perspective, I forget the exact language he used, but perhaps being a little bit more aggressive or the market being a little bit more aggressive, how do you guys think about pricing, not in the near term but medium to long term? Do we go back to pricing being flat to down low singles or do we stay flat? How do you plan around that?

Question: Toshiya Hari - Goldman Sachs - Analyst : I guess the most extreme scenario, the question that we get is, well, if pricing increased double digits per year over a two-year, three-year timeframe, why wouldn't it come down all the way? Which is, again, very extreme, but based on what you just said, you don't really see that happening. 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 / 1:45PM, MCHP.OQ - Microchip Technology Inc at Stifel Cross Sector Insight Conference

Question: Toshiya Hari - Goldman Sachs - Analyst : Makes sense. The other question I get, and I'm sure Sajid gets all the time, is competition in China. It's come up on a couple of conference calls. What do you see from a competitive standpoint in China? Is it the usual suspects, the incumbents, primarily in the West and some in the East? Or are you starting to see local competitors show up and you start running into them?

Question: Toshiya Hari - Goldman Sachs - Analyst : I guess is there an acceleration or more intense competition, I guess?

Question: Toshiya Hari - Goldman Sachs - Analyst : Got it. That makes sense. From a gross margin standpoint, you're just above 60% at the moment. I think long-term, and obviously that's on depressed revenue, depressed factory loadings, longer term, 67.5% to 68.5% is your long-term target. You were kind of there, I think, a couple of quarters ago. But the bridge from where you are today to those levels, is that purely just revenue utilization rates driven, or is there more going on there?

Question: Toshiya Hari - Goldman Sachs - Analyst : Okay. Got it. Just wanted to come back to FPGAs real quick, since you made that comment. You talked earlier about taking sort of the A&D heavy exposure at Microsemi to something broader. Are you still in that process? As in, could that process alone drive continued outperformance in that market? Because I think based on what you reported vis-a-vis your competition, whether it be the classic Xilinx business or the classic Altera business, you're outperforming. So are you in the early innings of that process? Are you in the middle innings?

Question: Toshiya Hari - Goldman Sachs - Analyst : Got it. Thank you. I guess in the last couple of minutes, I wanted to hit on two topics. One is, OpEx and the other is capital allocation. From an OpEx perspective, you guys have this culture where you share the upside and when times are tough, like today, you kind of share the pain, if you will. The OpEx reductions that we're seeing today, is any of that permanent or structural? Or as you come out of this downturn and you start to recover, as analysts, should we model OpEx to snap back?

Question: Toshiya Hari - Goldman Sachs - Analyst : Okay. And then, again, lastly, in terms of capital allocation, historically, you guys had been quite acquisitive, and it's worked really well. Rich, you talked a little bit about tuck-ins. Steve has been super transparent about capital return. So I feel like we have all the information. But how do you think about priorities internally? Let's start with the [debate].

Question: Toshiya Hari - Goldman Sachs - Analyst : Okay, great. In the last 90 seconds, anything that we didn't ask or we didn't discuss that you'd love to highlight before we close?