Microchip Technology Inc at UBS Global Technology and AI Conference Summary

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

Question: Timothy Arcuri - UBS - Analyst : <_ALACRA_META_ABSTRACT>So just to start with, I wanted to open with Microchip's recent leadership change, which has seen you return as the interim CEO, and announcements you made yesterday that revenues are at the low end of guidance and that Fab 2 will be closed. So I just wanted to open it up and see if you wanted to say anything about that. Steve Sanghi - Microchip Technology Inc - Chair of the Board, Chief Executive Officer and President Sure. So let me sort of start with the leadership change. I want to start by thanking Ganesh Moorthy, who worked for Microchip for 23 years. And he was a very hard worker, had a number of positions at Microchip for five years, from 2016 to 2021. He was the President when I was CEO, and he was too in the box with me. I couldn't have had a better wingman. He was just a great executor when I pointed him in the right direction. And then in 2021, I stepped down from the CEO role, and he became the CEO. And the results, especially in this cycle and the last couple of years, Microchip has substantially underperformed. So he stepped down from his role and retired. I had retired completely. I actually had moved out of the Valley. I still had a house here, but I was living in Prescott, in the mountains, having fun, hiking peaks, navigating lakes and playing with the grandkids and family. And then Board asked me if I would step back REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 03, 2024 / 10:35PM, MCHP.OQ - Microchip Technology Inc at UBS Global Technology and AI Conference in. And I, with my team, built this company for 31 years. And when the duty called, I couldn't say no. So here I am. I moved back in the house in the last week. So one of the questions people have, two questions people have is, what does interim mean? My title is Interim CEO and President. And number two, what am I going to do different? So the definition of interim is I'll be in this role for as long as it is necessary. It is not weeks. It's much longer. Microchip, if you look at our performance today, we're down 55% in revenue from the peak, 1,000 bps down in gross margin; 2,000 bps down in operating profit; severe cash crunch, we're not producing even enough cash to pay our dividend, we're borrowing money to pay dividend. So I kind of look at it as a turnaround story almost. And we need to get all these things fixed before there is even a thought of another CEO transition. So there's no search out today. We're not looking for another CEO. I'm it for a while, whether you like me or not. So I keep going, I just didn't want to have you get cut off from your question. So what am I going to do? I'm on a massive, with a sense of urgency, program to review the entire Microchip from top to bottom in the next 90 days. And I'm going to give you a nine point plan that we're going to look at. The first one is resizing the manufacturing footprint. So Microchip's manufacturing footprint today is too large. We had a peak revenue, which was more than 2x our current revenue, and we were adding capacity to grow beyond that. And some of that capacity is installed and much of that capacity is not even installed. It's an equipment sitting in our fabs that we can install and go substantially above our prior peak. So at the current revenue level and with any kind of expected growth, even significant growth, we got inventory, just incredible amount of capacity. And in trying to keep those fabs with some reasonable utilization, we have continued to build inventory, and we just can't do that anymore. We're drowning. So yesterday, we decided to close down one Fab, Fab 2, which is our smallest fab. And a lot of people have been asking the question that by closing that fab, are we cutting off our upside. I'm really not worried about the upside. We have so much capacity and so much inventory. It was the smallest fab. The other fabs are capable of doing 3x of what they're doing today. So the upside is not an issue. So that's number one. And so this is resizing just the fab, but we have other factories. We have 4 factories, large factories, in the back end, two in Thailand, two in Philippines. And we have other smaller fabs around the world, 2 in Germany. We have a plant in Ireland. We've got three in Massachusetts. So all that structure, I'm going to look at it and review what needs to be combined, what needs to be done what. So the second issue is the inventory, which is tied to the capacity. For 31 years I ran Microchip as a CEO, I never had inventory go higher than 135 days on our balance sheet. Last quarter, the inventory in our balance sheet was 246 days. And this quarter was going to go to 276 days. And that was before we lowered the guidance yesterday. So it's going to go higher than that. And the outside inventory, what we buy from foundries, is about 234 days. So the inside inventory is even higher than the number I gave you. It's probably closer to 300 or higher. That's over 2x the inventory. I mean it's just like way too much. Enough is enough. So we're going to aggressively bring the inventory down. Our inventory is too high even on the foundry. So we're dramatically cutting starts from the foundry to bring that inventory down. The system inventory is closer to 300 days. Systems is 10% of our business, where we build the boards and systems and development tools and others. And why does it have 300 days of inventory, it should be 100 days lower, so I'm going to mount a program to bring that 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. DECEMBER 03, 2024 / 10:35PM, MCHP.OQ - Microchip Technology Inc at UBS Global Technology and AI Conference The third one is there are a lot of growth initiatives in the company. There is mega trends, there is TSS, there is AI. And I need to review each one of those programs and see what is working, what is not working, maybe take one away, maybe add one, add more resources to this because there's higher potential, take resources from this because it's not working as well. And so I'm going to do that entire review in the next 90 days. And then the fourth one is a review of the business unit. We have 25 business units in the company. We actually, every quarter, see 25 P&Ls. And some of the business units are quite small. They were started for a reason maybe 5 years ago, 10 years ago. Is that reason still valid? Is that promise still there? In some cases, maybe it's not. So they should be combined or closed or sold, or I'm just going to review everything and see what needs to be changed. So that's the fourth. The fifth one is the channel strategy. So you're aware of significant changes in the distribution strategy in our industry where many other companies have done. Microchip channel strategy hasn't changed in several years. We do business with about 100 distributors around the world. Some are global, some are regional, some are catalog. And I'm going to do a comprehensive review of that channel strategy to see what are we paying everybody. Is that too much? Or is that too little? Should something be terminated? Should something be added? And I think the whole channel strategy need to be looked at again. Number six is strengthening our customer relationships. I think in the times of extreme shortage and after that, when the industry came down and there were a large number of non-cancellable, non-reschedulable orders on our books and, in certain cases, customers didn't want the product but since we helped them in good times, in bad times, we wanted them to help us and keep taking that product, I think we stressed certain relationships. And call it an apology tour, call it forgiveness tour, I think we are on it, and we've got 125,000 customers, we cannot visit them all, but we need to take top 5,000 customers and ensure that we love them, but do they still love us. And some of them have six months of inventory. They're not buying as much from us today because they have inventory. But when the inventory runs out, are they still our customers? Are they going to still buy from us when we have the next design, I think we do. I think it's okay. But we just need a falling on the sword and apologize and give them some TLC and ensure that our customer relationships are strengthened. Number seven is the business model. Now our business model that we have still has a remnant of elements from peak performance. When growth was very high, gross margin was very high. There were expedited charges. There were price increases. Customer is willing to do anything to get the parts. And the operating expense percentage was very low because the revenue was so high and you couldn't add operating expenses fast enough. So the business model that is still in our presentation, which has been taken out, really had remnants of peak performance in a super cycle, which is not representative of the real world. So I'm going to recast that in 90 days. I don't know what changes will happen in there. When I look at it on the gross margin side, actually some of our businesses that are higher than corporate gross margin are doing better than our businesses that are lower than corporate gross margin. So gross margin could actually be accretive for all I know. But there is also pricing pressure, things happening in China. So there are things on both sides of the ledger, and I need to put it all, process it all together and see what the new growth number is, what the new gross margin is, operating expenses, and give that business model to you and then aggressively execute to get there. So that was number seven. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. DECEMBER 03, 2024 / 10:35PM, MCHP.OQ - Microchip Technology Inc at UBS Global Technology and AI Conference Number eight is on the OpEx side of the equation. Our OpEx today is 35% of our revenue, and that was before we lowered the revenue yesterday, so it's even higher. Plus, all year, we have been on a pay cut. That pay cut was reversed two Fridays ago just before I joined. It was the decision made before. So when I look at the next quarter, the full pay will be for the entire quarter. And when that happens, so when we have a full quarter of full pay, the OpEx in dollars will rise some. Plus, in the first quarter, all the FICA comes back for the higher-paid people because usually, in the third and fourth quarter, the company matching part of FICA is not there. So I think I'm concerned that the operating expense goes higher and gets farther away from a model that I like to see at. So what needs to be done? What portion of it will actually self-correct when the revenue comes back? And what portion doesn't come back and we need to do something in terms of weeding and feeding, and business units or whatever? So that's just a question right now. I don't have the answer to that. And the final one, number nine is review the CHIPS grant. The grant was applied to maybe almost a year ago when everybody thought that the factory capacity was never enough and the world is going to build silicon fabs forever. And today, we have too much capacity. And government gives you $0.15 of every dollar you spend. Do I want to spend $100 million to get $15 million back from the government? If I don't need it, then I don't want to spend the other $85 million myself. So I don't know what the answer would be. With 10 days back at the job, I just need to reopen that. I have put the negotiations with CHIPS office on hold for now until I get my arms around it. And probably by the time I get my arms around it, we're into the new administration. I don't know what their take is, which people they put, is the money still available. But whatever happens, then we will deal with it. So that's kind of what I'm going to do. And the plan is to get this accomplished in 90 days, which is a Herculean task. I don't know how much of it gets done, but that's what the attempt would be. And we'll bring some of the output back to you probably at one of the conferences in March and give you some update. So that's kind of where I am. Sorry for the long answer.

Question: Timothy Arcuri - UBS - Analyst : Sure. Got it. And Steve, we do all these scrapes of [disti] websites. And microcontrollers, in particular, are sort of an outlier in terms of the inventory sitting at these [distis]. And it's not just Microchip. Is there something unique about MCU? I mean, part of it probably was PSP and all the things that you talked about. Yes, there is that lag effect where you were putting product to customers. But how much of sort of what's going on in microcontroller is industry related? And how would you tie that back to the environment for demand across the different end markets?

Question: Timothy Arcuri - UBS - Analyst : Okay. And then can you talk to China? I know this is more of a structural question. China is sort of seen as this melting ice cube, and it's seen as just only a matter of time until everyone in the industry begins to feel the indigenization of what China is trying to do. From your seat, how much do you see the indigenization efforts as a threat to your business in China?

Question: Timothy Arcuri - UBS - Analyst : As you go through this evaluation, who knows what the new administration will do? But the talk about tariffs and all this kind of stuff, I mean, how does that play into your thinking about what you want to do?