Microchip Technology Inc Q3 2025 Earnings Call Transcript

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

Question: Vivek Arya - BofA Securities Inc - Analyst : Thanks for taking my question. Steve, I appreciate your comments, and I realize visibility is limited, but you mentioned inventory remains elevated at customers and channel partners. Could you share with us where the hot spots are by end-market or by the kind of product? Is it like worse than industrial or microcontrollers, et cetera? And do you think that this is the inventory issue specific to Microchip or do you think those customers and channel partners have kind of excess inventory from your competitors also because many of them seem to be indicating a lower level of concern than you are indicating? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 10:00PM, MCHP.OQ - Q3 2025 Microchip Technology Inc Earnings Call

Question: Vivek Arya - BofA Securities Inc - Analyst : Yes. And just as a follow-up, what would you say is the earnings power for Microchip over the next year? In fiscal -- in this last fiscal year, with the March guidance, it's about $1.30-ish or so. So, even if we start assuming some level of seasonal rebound over -- at some point over the next several quarters, should we be thinking $2, $3? What is the kind of earnings power, right, in the medium-term for the company? Because I imagine you are justifiably prioritizing cash flow, and you will probably keep fab utilization low. And then, the need to get OpEx back to a reasonable level, right, would also influence. So, just how do you think about earnings power for the company over the next year to two years or so? Thank you.

Question: Vivek Arya - BofA Securities Inc - Analyst : 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. FEBRUARY 06, 2025 / 10:00PM, MCHP.OQ - Q3 2025 Microchip Technology Inc Earnings Call

Question: Blayne Curtis - Jefferies - Analyst : Hey, good afternoon. Two questions. I just want to ask, I know you don't want to forecast the revenue slope back, but maybe can you walk us through the gross margin a bit because I think it stepped down more? Obviously, you said days and dollars would come down in inventory, but is there some level that you want to get to give us some reference as to how long this may be depressed before it comes back with revenue?

Question: Blayne Curtis - Jefferies - Analyst : Thanks. And then I wanted to ask you on the growth side, that's always been a debate for the company. I'm just kind of curious your renewed perspective here coming back, you mentioned some moves with the distribution channel to kind of incentivize demand creation. Do you think, when you said the company can outgrow the market, is that going to be a work in progress or you think that's what it is today, and these moves would kind of add to that?

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

Question: Harsh Kumar - Piper Sandler - Analyst : Hey, Steve, good to see you back. I had a quick question on OpEx. Sounds like from the answer you just gave to Blayne, I think you said that OpEx will come down from the current level in absolute dollars. Is that a fair assumption? That's my clarification question. And then, on the nine-point program that you have, are you assuming that things that the environment will stay the same, or are you baking in some level of recovery at some point in time this year or next year? It's got to come back at some point in time, but I'm curious if you're baking that into your assumption or just keeping the environment the same.

Question: Harsh Kumar - Piper Sandler - Analyst : Understood. I had another question, maybe not so easy, but could you take me through the process of how your organization would even try to gauge the correct level of channel inventory or direct inventory in this kind of an environment where things are dynamic, they're moving around, mostly going down, but still moving around a lot? I'm more curious about the process to understand how you would try to get to the right answer here.

Question: Harsh Kumar - Piper Sandler - Analyst : Understood. 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. FEBRUARY 06, 2025 / 10:00PM, MCHP.OQ - Q3 2025 Microchip Technology Inc Earnings Call

Question: Harsh Kumar - Piper Sandler - Analyst : Understood. Thank you.

Question: Toshiya Hari - Goldman Sachs - Analyst : Hi, thank you so much for taking the question. Steve, it sounds like you've been spending quite a bit of time with customers over the past two months since your return. I'm curious what the feedback has been to you and the company? Any common threads? And how do you plan on responding to some of the customer asks going forward? What do you need to do to regain any lost trust, if you will?

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

Question: Toshiya Hari - Goldman Sachs - Analyst : Great. Thank you. And then, as a quick follow-up, maybe on pricing, calendar '24, where did blended ASPs for you all land roughly? And how should we think about '25 and sort of the forward path? I think many of your peers have said something along the lines of they expect pricing to revert to pre-pandemic patterns, which is down low-single digits. Are you thinking about pricing the same way or could it be a little bit different for you guys? Thank you.

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

Question: Vijay Rakesh - Mizuho Securities - Analyst : Hi, thanks, Steve. And just a quick question. As you look at your different segments, autos, industrial, consumer, is there a way to tell us what the split is and how they have done year on year?

Question: Vijay Rakesh - Mizuho Securities - Analyst : Got it. And then, on the inventory side, is there any risk of inventory obsolescence or write-down given you are seeing some disintermediation with other solutions, I guess? Thanks.

Question: Vijay Rakesh - Mizuho Securities - Analyst : Right. Thank you.

Question: Christopher Danely - Citi - Analyst : Hey, thanks, guys. I guess a question for Steve/Rich. Steve, as you've been there for three months now, is there anything you see that's gone wrong that is not fixable? And then, if you/Rich could just spend some time on your assessment of Microchip's competitive positioning and how you feel that that is, let's say, versus a couple of years ago? Thanks.

Question: Christopher Danely - Citi - Analyst : Okay. And the competitive positioning question, and then I'll go away.

Question: Christopher Danely - Citi - Analyst : Got it.

Question: Joseph Moore - Morgan Stanley - Analyst : Great. Thank you. The 266 days of inventory, can you talk about how much of that is from the internal fabs? I think you had given a number that it's over 300 in the past. And then, I had a follow-up on that.

Question: Joseph Moore - Morgan Stanley - Analyst : Okay. And then, you talked about taking an inventory kind of reserve around the lower utilization. Like, are we -- that 53%, does that fully reflect the lower utilization, or is there kind of a lingering cost of inventory that's higher because of that lower utilization going forward?

Question: Joseph Moore - Morgan Stanley - Analyst : Great. Thank you so much. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 10:00PM, MCHP.OQ - Q3 2025 Microchip Technology Inc Earnings Call

Question: Craig Ellis - B.Riley - Analyst : Yes. Thanks for taking the question, and team, thanks for all the color so far. Steve, I wanted to go back to the plan's first point on production and ask a more qualitative question. Can you help us understand where the team is in assessing the right level of front-end and back-end capacity and where you are in terms of identifying the specific steps that are needed to realign that capacity and the things that allow you to be operating at the new correct capacity that you determine?

Question: Craig Ellis - B.Riley - Analyst : Got it. And then, Eric, I'll just follow up the point you made on the debt maturity in September. It sounds like you're well-positioned to deal with that. Is it correct that the next maturity beyond that would be in March of 2028? And if not, can you help me understand when that would be?

Question: Craig Ellis - B.Riley - Analyst : Got it. Thanks guys. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 10:00PM, MCHP.OQ - Q3 2025 Microchip Technology Inc Earnings Call

Question: Chris Caso - Wolfe Research - Analyst : Yes, thank you. I guess the first question with regard to the dividend, and I know at this point, you're not fully generating free cash flow to support the dividend. Could you talk about your level of commitment to that dividend and as we're going through sort of the recovery plan and such that we're still committed to this dividend in the foreseeable future as free cash flow starts to get better?

Question: Chris Caso - Wolfe Research - Analyst : Understood. For a second question, it's about kind of manufacturing capacity. And I know you're going to provide some more details in March. But I guess two parts to that. One would be, internally, you don't have access to 300-millimeter manufacturing, and it doesn't sound like that's something that you're going to pursue. Do you feel that the internal fab network is still competitive with the rest of the market as you see some others start to expand on 300-millimeter? How does Microchip respond to that? And then secondly, you've seen some other competitors move to China for China manufacturing strategy because of some of the geopolitical tensions, the feeling that Chinese customers want a manufacturing footprint inside of China. How is Microchip responding to that?

Question: Chris Caso - Wolfe Research - Analyst : Thanks.