Microchip Technology Inc Q4 2025 Earnings Call Transcript

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

Question: Harsh Kumar - Piper Sandler - Analyst : Steve. First of all, let me add my congratulations to the recovery. I know it's been a long time coming, but we've seen you call bottoms in the past, and I'm excited that you see the bottom. But the question we get, Steve, though from a lot of our clients or investors is that maybe talk about the demand signals that you're seeing, which you kind of did, but there is also another aspect of maybe potential pull-ins from tariffs. If you could just help us understand why this may not be a head fake from that? And then also, if you could just -- I'll ask my second question here. If you could just talk about the recovery that you're seeing relative to your key end markets, if there's one that's acting better than the other or they're both acting the same?

Question: Harsh Kumar - Piper Sandler - Analyst : The second one was related to the key end markets.

Question: Christopher Caso - Wolfe Research - Analyst : I guess the first question, and we've been discussing this quite a bit with others during this earnings season. is what sort of macro impact that the tariff environment such will have as we go into the rest of the year? And Steve, I'm judging by your comments about improving bookings in that, that you're not seeing that? And -- but I guess the question is, what are your customers telling you right now? And from an investor standpoint, there's been a concern about pull-ins of demand from second half to now to get ahead of tariffs? What's your view on that?

Question: Christopher Caso - Wolfe Research - Analyst : That's a very helpful color. As my follow-up question, I wanted to dig in a little bit to the margin leverage that you referred to in your prepared remarks as well. And maybe two parts to that question. One is if you could discuss some of the charges that are acting as headwinds to gross margin now, some of the utilization charges and the reserve charges. And with the assumption that revenue starts to come back now, how does that play out over the next few quarters? And how is that leverage realized as the revenue comes back?

Question: Timothy Arcuri - UBS - Analyst : Eric, just on that point, so given all the actions you've taken, if we sort of get back to a point where, I mean, pick your revenue number, maybe like mid-1s back to 1.5 or something like that, with all the actions you've taken and you assume that the reserves come down and under utilization comes down, too, should we expect margins to be higher this time around than they were at the same revenue level last time? I mean, you've closed three fabs. So I would think that ultimately, margins would be higher at equivalent revenue than they were last cycle. Is that fair?

Question: Timothy Arcuri - UBS - Analyst : Okay. And then, Steve, do you have a way to determine what consumption is in June relative to your guidance? I know [ disti ] sell-through is finally growing in June. I would think that this sellers still going to be below sell-through in June. There's still some sort of slower moving MCU parts that seem to be moving a little slower. So where do you think consumption is for June relative to what you're guiding revenue?

Question: Blayne Curtis - Jefferies - Analyst : I had two questions. I wanted to ask about kind of big picture. Your cadence has been different than other companies. If you kind of look at MCU share, maybe you guys gained a little bit too much share during the pandemic and now your share looks quite low as you're correcting where others aren't correcting as much. I'm just kind of curious as you kind of look through here, and there's been a lot of talk about share gainers and MCUs. Kind of just curious when things normalize, do you expect to get back to where you were pre-pandemic?

Question: Blayne Curtis - Jefferies - Analyst : And I want to ask you, there's a lot of kind of debate about China's strategy and I guess who knows how all this trade war works out, and I'm not sure they're tariffing semis in China, but I think there are a handful of companies looking to do a China-for-China strategy. I'm just kind of curious to your perspective if you think that's the right move or the wrong move. I think you're starting to hear that ASPs are lower because the costs are lower. So it might be a headwind for the overall market, that's what everybody does. Just curious to your perspective.

Question: Vivek Arya - Bank of America Securities - Analyst : On the first one related to gross margins and pricing, so March quarter gross margins were, I think, kind of at the lower end of your outlook even though sales were slightly above. So just anything to call there? And then in general, Steve, what are you assuming for the pricing environment this year versus, say, three months ago?

Question: Vivek Arya - Bank of America Securities - Analyst : All right. And for my follow-up, Steve, you are calling June an inflection quarter how should this inform us about your visibility for one quarter out in September? Like if we had to think about September, should we be thinking given that June is an infection, that September should be seasonal, above seasonal? Should it kind of be in the same range as June because modeling your business when it is going through these periods of infection gets really tough, so I would appreciate any help that you could provide in how we should be thinking about quarter plus one for your business?

Question: Tore Svanberg - Stifel - Analyst : Yes. Thank you. So Steve, one of the organization changes was to combine the 8- and 32-bit market in core development tools under one group I was just wondering if you could clarify or talk a little bit more about what was behind that particular change and how that might impact your share in the overall microcontroller market.

Question: Tore Svanberg - Stifel - Analyst : That's great color. As my follow-up for Eric, Eric, the $90 million to $100 million in operating expenses that you're saving from the recent restructuring, could you just talk a little bit about the linearity of that? I mean, obviously, some of it has already played out that we can see better than numbers. But any more color you could offer us for those savings for -- as we move into fiscal '26.

Question: Harlan Sur - JPMorgan - Analyst : Steve, you already got the question on tariff-related pull-ins. And you mentioned indirect impact is above your pay grade. But it'd be fair just as a team, if you look back in the 2018, 2019 US China tariff and trade pump flick -- 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 caused by tariff impact at that time. Is that -- does the team has somewhat of a unique profile of having very large exposure to like small and medium-sized manufacturers and they tend to modulate their activity fairly quickly and in real time? So given the current trade and tariff dynamics, like are you starting to see any signs of a pullback or perturbations in order activity from your small, medium-sized China manufacturing and industrial base?

Question: Harlan Sur - JPMorgan - Analyst : I appreciate that. And then on the six megatrends focus from fiscal '21 to fiscal '24, megatrend revenues grew at a 20% -- 26% CAGR, right? That's about 2x the growth of the overall Microchip business represented about 47% of your revenues. Can you guys just drew us up, so what was the performance of the megatrend revenues versus your total sales in fiscal '25? And what was the percentage mix of the megatrend revenues in fiscal '25?

Question: Joshua Buchalter - TD Cowen - Analyst : You've been pretty transparent about your limited visibility as we kind of went through the tick of the inventory digested in the last few quarters. And clearly, there's been a lot of digestion and I realize we touched on it a bit, but I was wondering if you could maybe comment on what's improved from a visibility standpoint that's allowing you to conclusively say we hit the bottom here? I mean, is it simply that the bookings have gotten high enough where you're able to get a better pulse on true end demand and consumption versus inventory situation?

Question: William Stein - Truist Securities - Analyst : Great Steve, I appreciate all the clarifications you've provided. I wanted to dig into the question -- earlier question about China for China. And as I recall, the business update the March time frame. I thought that you talked about your -- some of the product in your portfolio little longer being meaningfully competitive in China, especially, I think what you characterized as standard products. And I thought that was the reason for this partnership. Now it sounds like that strategy has changed. So can you talk about your competitive positioning in China going forward? And how -- if some of your products are less competitive how that influences the total, I think it's called total solution selling strategy that you have? 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 08, 2025 / 9:00PM, MCHP.OQ - Q4 2025 Microchip Technology Inc Earnings Call

Question: Vijay Rakesh - Mizuho - Analyst : Just a quick question. On the Section 232, talking about bringing product back to the US, what are you contemplating? How are you looking at that? What's the time frame for that? And a follow-up.

Question: Vijay Rakesh - Mizuho - Analyst : Just wondering if you're expecting any Section 232 to rulings coming down in terms of trying to bring product back to the US. 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 08, 2025 / 9:00PM, MCHP.OQ - Q4 2025 Microchip Technology Inc Earnings Call

Question: Vijay Rakesh - Mizuho - Analyst : Got it. And then talk about visibility. Just wondering how you are looking at utilization, I guess, across the fabs as you go to the back half, if you have some visibility there in terms of demand or how we should see that going?

Question: Christopher Danely - Citibank - Analyst : Thanks, guys. Steve or Eric, just a question on the inventory write-downs, write-offs, et cetera, et cetera. How much of that has been written off written down? And then when will you start to sell that? And what's the impact going to be on the P&L for planning purposes.

Question: Christopher Danely - Citibank - Analyst : Okay. And then as a follow-up, so either Steve or Rich, Steve, now that you've been there for several months would you -- I guess, what would be your take on just Microchip's product positioning in the microcontroller market, maybe how it's gone over the last year or so. And -- do you think that anything needs to change? Do you guys think you need to add on anything to the product lines or do anything differently? Or is it sort of autopilot right now? I just appreciate your thoughts on the market share and the product positioning.

Question: William Stein - Truist Securities - Analyst : Yes. It's more of this conversion to even in development tools, we're going to make it much easier for customers to move between our product lines. A great deal of automation is being given to our customers to help them design in our products. So we are moving very aggressively on a number of fronts here. Very aggressively.

Question: Joseph Moore - Morgan Stanley - Analyst : I know the dividend has always been a big priority. Is there any scenario where you could see that coming down in different economic circumstance. I'm just asking I get the question a lot.

Question: Joseph Moore - Morgan Stanley - Analyst : Okay. I appreciate that. And then I've also gotten questions on the non-GAAP adjustments, the preferred dividend coming out of the non-GAAP numbers? Can you just describe the rationale for 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. MAY 08, 2025 / 9:00PM, MCHP.OQ - Q4 2025 Microchip Technology Inc Earnings Call

Question: Janet Ramkissoon - Quadra Capital - Analyst : Yes. Steve. Thanks. Great job and what you've been able to accomplish in such a short period of time. I wanted to drill down a little bit on the aerospace and defense I was a little bit surprised that it's up to 18%. And there are a lot of changes in the default area. Where we're seeing a lot of the traditional defense companies working more with some of the newer players in the market, SpaceX and [rural] industries and guys who are making drones and robots. Can you give me a sense of what your exposure is to some of these new markets? And I noticed you did say that one of the focus was to switch from 5G to AI. How does that tie into this defense business and some addressing some of the newer opportunities with some of these more innovative players in the space.

Question: Janet Ramkissoon - Quadra Capital - Analyst : Could you give me a sense of how you characterize the opportunity for you? How large is it? Is this just a small thing? Or could this be inversion to a good growth area for you.

Question: Christopher Rolland - Susquehanna International - Analyst : Thanks for the question. I'll try to be brief. Steve, how do you see market share dynamics in Microchip, the actual MCU market playing out do you see China taking share? Are there any more formidable competitors? And do you expect your share to increase?

Question: Christopher Rolland - Susquehanna International - Analyst : One other, and I apologize if this was asked, but AI as a percentage of revenue. And you had a bunch of new looks like AI product announcements, optical, power, PCI. Are you expecting any of these to be really needle-moving and of particular emphasis for you guys moving forward?

Question: Craig Ellis - B. Riley Securities - Analyst : Yes. I wanted to go back to the point that Rich made earlier about the significant changes that Microchip had made to improve product development and product development, deficiency for customers. What I was hoping you could do is just share an example or two of what those changes are 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 08, 2025 / 9:00PM, MCHP.OQ - Q4 2025 Microchip Technology Inc Earnings Call and and more importantly, help us understand when would investors see the benefit of the changes that you've made and how material could they be in, say, 2026 and years beyond?

Question: Craig Ellis - B. Riley Securities - Analyst : And is there anything about those tools, Rich, that would help them -- if they're going to use Microchip in one product on a system board more easily designing Microchip products for other parts of that system board so that the total system solution ambition that Microchip has had is something that's facilitated with the capability you've developed.