Microchip Technology Inc Q2 2025 Earnings Call Transcript

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

Question: Timothy Arcuri - UBS Equities - Analyst : Thanks a lot. Ganesh, I wanted your perspective on how long you think it could take the distribution channel to get back to normal. If I look at your drawdown in revenue, basically, it was all of distribution this quarter. So it seems like things are actually relatively okay beyond that channel. So if you look at inventory days, it's about 2x what it was before COVID. I mean do you think that 20 days of inventory is still what that channel wants to hold? And given your discussions with them, how long do you think it could take to clear that channel?

Question: Timothy Arcuri - UBS Equities - Analyst : Thanks a lot. And then, Eric, just a question on underutilization and how it could affect the shape of the gross margin recovery. The last quarter where you didn't take charges, I think, was the end of '23 when revenue was like [$1.8 billion] a quarter. And so if your capacity hasn't really changed since then, does revenue have to get all the way back to [$1.8 billion] before you're no longer burdened by underutilization. Can you talk through all that? Thanks.

Question: Timothy Arcuri - UBS Equities - Analyst : Thank you.

Question: Vivek Arya - BofA Global Research - Analyst : Thanks for taking my question. Ganesh, when we look across the space, there seems to be a wide range of corrections that we have seen across the diversified names, right? It seems like microcontrollers have been more impacted than analog, industrial more exposed than autos, but the combination of microcontrollers and industrial has corrected the most. What would you attribute that deal? Because it's just hard to imagine this 50%-plus peak, hopefully trough correction. And then what is giving you the confidence that this is an industry and a cycle issue and maybe is there something company-specific in terms of share shifts or China in-sourcing? But just give us the perspective of how is Microchip stacking up versus the industry that you're 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. NOVEMBER 05, 2024 / 10:00PM, MCHP.OQ - Q2 2025 Microchip Technology Inc Earnings Call

Question: Vivek Arya - BofA Global Research - Analyst : For my follow-up, just near-term clarification, what is the level of turns business that you are assuming for December versus normal? And then I know March is still a little bit further away, but if I go back in history, pre-COVID, usually, your March sales tended to be flat to up 1%, 2%. So any conceptual way you would help us think through what March might look like? Thank you.

Question: Vivek Arya - BofA Global Research - Analyst : Thank you.

Question: Toshiya Hari - Goldman Sachs Research - Analyst : Hi, good afternoon, and thank you so much for taking the question. I had two questions as well. My first one, I'm just curious how you're thinking about the gap today that exists between what you're selling in versus what is being sold through. And I know you don't have perfect visibility, but your December quarter revenue outlook. I think at the midpoint is 20% or 25% below where you were pre-pandemic? And if I recall correctly, late 2019, back then you were going through a cyclical correction. So you must be shipping well, well below what's being consumed. I'm curious if you have an estimation of how big that gap could be today

Question: Toshiya Hari - Goldman Sachs Research - Analyst : Got it. And then as my follow-up, I'm curious how you're thinking about blended pricing into calendar '25. And I know Ganesh historically, you've said that you operate a strategic business and it's less transactional than it used to be back in the day. But you've had a couple of peers point to low single-digit declines next year, mid-single-digit declines next year. I'm curious how at Microchip you're thinking about pricing as of today. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 10:00PM, MCHP.OQ - Q2 2025 Microchip Technology Inc Earnings Call

Question: Toshiya Hari - Goldman Sachs Research - Analyst : Thank you.

Question: Chris Caso - Wolfe Research - Analyst : Yes. Thank you. I guess first question is on what you've been seeing by geography and it looks like there's some sharp differences there with particularly what you're seeing in Europe and is that just simply end market dependent, I guess, saying with the exposure to industrial and auto there. In addition, we've seen some others in the space talk about some strength in China. Can you speak to that and if that's been a partial offset for you?

Question: Chris Caso - Wolfe Research - Analyst : Got it. As a follow-up, you mentioned in the prepared remarks about some borrowing that you were contemplating around the dividend. I wonder if you could give some of the details around that, some of the background of why you're choosing to do that? And maybe more broadly, given the downturn that's lasting longer than the most of us have thought, it's your general view towards the borrowing levels right now.

Question: Chris Caso - Wolfe Research - Analyst : Without a structural increase in debt levels?

Question: Chris Caso - Wolfe Research - Analyst : Okay. Got it. That's clear. Thank you.

Question: Blayne Curtis - Jefferies - Analyst : Good afternoon. Thanks for your question. I had two. Just curious on the message on the guidance. So it sounded like last quarter, you were hopeful of some green shoots. You said they're uneven. So I'm just curious, are you seeing any area, either product-wise or geography that you're feeling better about? And then, I guess, for the guidance, it sounds like you're just assuming less turns. Is that anything you're seeing? Or it's just as you explained seasonal and you're just being conservative on that.

Question: Blayne Curtis - Jefferies - Analyst : Got you. And then maybe just on OpEx over the next couple of quarters here. I thought that you had to pay cuts that would come back in, I'm assuming a lower forecast though, maybe the variable comp is down from -- I think you're guiding it up $12 million sequentially for December. But how do you think about the next few quarters beyond that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 10:00PM, MCHP.OQ - Q2 2025 Microchip Technology Inc Earnings Call

Question: Blayne Curtis - Jefferies - Analyst : Thank you.

Question: Chris Rolland - Susquehanna Financial Group LLLP - Analyst : Hi, guys. Thanks for the question. You had some comments about some data center products, which was nice to see PCIe switching some SSD, SXL, some other stuff as well. I guess a couple of questions here. Like is there a home run product amongst this group? Is this outgrowing, I would assume the rest of your other end markets, the last update that you guys had, I think, data center was 18% of revenue, but it hasn't necessarily grown over time. Would you expect, given this product line up for data center to expand as a percentage of your total over time? Thanks.

Question: Chris Rolland - Susquehanna Financial Group LLLP - Analyst : They're very good. Perhaps, secondly, CapEx, it seems like you guys paused your second silicon. I was wondering longer term, how should we be thinking about CapEx? And you mentioned also an update on the CHIPS Act. Remind us what you're playing for there and the timing of payments.

Question: Chris Rolland - Susquehanna Financial Group LLLP - Analyst : Excellent. Thanks, Ganesh. Thanks, Eric.

Question: Harlan Sur - JPMorgan - Analyst : Yes, good afternoon. Thanks for taking my question. Lots of questions on the near-term cyclical dynamics. Maybe just one for me on your products and technology. So you guys mentioned your customers are back to focusing on innovation, your TSS strategy continues to play out. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 10:00PM, MCHP.OQ - Q2 2025 Microchip Technology Inc Earnings Call The team has a very comprehensive system in place, right, to track the opportunity pipeline, also content growth for opportunity, I don't know, can you guys quantify how successful TSS has been? How has the Microchip dollar content per customer opportunity increased over the past several years. Any way to convey your success with TSS?

Question: Harlan Sur - JPMorgan - Analyst : Okay. Well, thank you. That's helpful. Thank you.

Question: Tore Svanberg - Stifel Nicolaus and Company, Incorporated - Analyst : Yes. Thank you. Ganesh, I had a question on your turns business. I mean, I assume the percentage each quarter now is very, very high. You obviously have short lead times, you have inventory, but so do your peers. So I'm just curious what's your view on how long we're going to be in this period. And I'm not suggesting maybe revenue is going down every quarter, but could we be in a very high turns environment for a while, just given all the inventory that all, the broad-based made companies have at this point? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 10:00PM, MCHP.OQ - Q2 2025 Microchip Technology Inc Earnings Call

Question: Tore Svanberg - Stifel Nicolaus and Company, Incorporated - Analyst : Well, that's great color. As my follow-up for Eric. Eric, on CapEx, obviously, it's going to be lower next fiscal year. But from a capacity perspective that Microchip has, and I do recognize that you obviously outsource to, right? But I mean, is it fair to say that the company can double its quarterly revenue with basically just maintenance had CapEx at this point?

Question: Tore Svanberg - Stifel Nicolaus and Company, Incorporated - Analyst : Well, again, thank you.

Question: William Stein - Truist Securities - Analyst : Great. Thank you for taking my question. I'd like to ask about the green shoots as you characterize them and the uneven way that they're playing out. This sounds to me as an outsider looking into the company that this is essentially just expedites, which are easy to confuse as like upside or urgent demands when in reality, the customers are just depending on you to have shorter lead times. How do you distinguish between those two demand triggers? And where do you think the mix -- like are there -- are there a lot of customers that are viewing demand in the way that they really need upside? Do they need it faster than before the real pull-ins? Or should I think of this mostly as just responding to your very short lead times?

Question: William Stein - Truist Securities - Analyst : I have one follow-up if I can. I appreciate that answer, Ganesh. I think at the last Analyst Day, the company highlighted a 6% to 8% long-term growth, but then there was a there was a conference call or an investor conference, perhaps where the company cited a 10% to 15% long-term sales growth view. I'm not expecting you to update this or to tune that outlook up. But I think there's a more basic question investors have, which is what's the -- what's the actual rate of end demand, even if it weren't really growing much, we're undershipping today. Clearly, you are over shipping at the peak. Do you have any -- even if it's a qualitative way to get at what you think normal normalized demand is on a, let's call it, a sellout basis or an end demand basis?

Question: William Stein - Truist Securities - Analyst : Great. Thank you.

Question: Chris Danely - Citi - Analyst : Hey, thanks, guys. So clearly, this downturn has gone on longer and deeper and farther than any of us expected. If we're still in this muck, let's call it another couple of quarters or whatever, is there any risk of an inventory write-down or restructuring? Or would you guys have to cut the dividend?

Question: Chris Danely - Citi - Analyst : That's fine. And then the last one is a little provocative. So some of your or most of your peers have already reported, and I'm sure you see that your sales are down substantially more than any of the competitors. Why is there not anything wrong with Microchip? Or what do you attribute your deeper sales decline versus all the competitors, too? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 10:00PM, MCHP.OQ - Q2 2025 Microchip Technology Inc Earnings Call

Question: Chris Danely - Citi - Analyst : That's fair. Thanks, guys.

Question: Joshua Buchalter - TD Cowen - Analyst : Thanks for taking my question. As we bridge to the December quarter gross margin, any help you can give us on expectations for directionally? I know you usually don't comment on utilization rates, but directionally, how you would expect underutilization charges to trend in the quarter? And maybe a similar question regarding expectations for potential inventory write-downs, I know that's been moving a little bit the last few quarters. Thank you.

Question: Joshua Buchalter - TD Cowen - Analyst : Okay. Thank you. And then maybe a bigger picture question. I mean the [distis] obviously issue right now and where you still have work to do on the inventory side. I mean, through this cycle, a lot of your peers have deemphasize the channel and distribution partners. I'm just wondering, I guess, coming out of this cycle, are you thinking about your relationship and the importance of the channel and how you expect it to treat it, I guess, long term strategically as you prioritize your inventory. I'd be curious your thoughts coming out of the cycle. Thank you.

Question: Joshua Buchalter - TD Cowen - Analyst : Thank you.

Question: Harsh Kumar - Piper Sandler Companies - Analyst : Yes. Hey. Can I have a question on pricing in the cycle? This is a period of high capacity, low product uptake. I was curious as you're negotiating prices with your customers, for your next contract for the next 12 months, are you starting to see any pressure at this point in time? Or is pricing still pretty firm?

Question: Harsh Kumar - Piper Sandler Companies - Analyst : Got it. And for my last question, Ganesh, you talked about green shoots. This is the second quarter, I think you're seeing those signs of cancellation. And this is probably very typical of being at the bottom. But I was curious if you could give us some color on these green shoots. Are these green shoots getting stronger for you? Are they just about the same? I mean I'm nitpicking here, but I want to see if there's something to be taken away from the demand signals that you are seeing.

Question: Harsh Kumar - Piper Sandler Companies - Analyst : Thanks, Ganesh.

Question: Janet Ramkissoon - Quadra Capital, Inc. - Analyst : Well. Yes, just a follow-up on the CHIPS act question that was asked before. I just want to make sure that I understand this correctly. You were awarded what talk -- of an award in brackets for $162 million and $90 million was for the expansion of Colorado Springs facility and only [$72 million] was for fab expense in Oregon. And from January to today, one would think that something would have happened -- is it the situation where the commerce department just made these awards and it's a situation where it's very difficult for you to meet your requirements to actually get these brands. Is there any color that you could provide that could help us understand why this was awarded and nothing has happened? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 10:00PM, MCHP.OQ - Q2 2025 Microchip Technology Inc Earnings Call

Question: Janet Ramkissoon - Quadra Capital, Inc. - Analyst : So did you -- you do have some equipment that you haven't deployed yet. At any time, did you feel that you were just trying to get one step ahead in terms of buying equipment to meet the obligations that you would have if you've got that $162 million with the breakdown to Colorado Springs and Oregon. It does require a little bit of lead time to be able to deliver on whatever you're promising wherever the commerce department thinks that be getting. So do you feel like you try to order equipment a little earlier because you think you felt like you were going to get this money? Thank you all joining us this morning.

Question: Janet Ramkissoon - Quadra Capital, Inc. - Analyst : All right, guys. That's fair. Thanks very much for the color. I appreciate it.