Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Microchip Technology Inc (MCHP, Financial) reported non-GAAP earnings per diluted share of $0.53, which was $0.01 ahead of the midpoint of their guidance.
- The company continues to generate solid cash flow, with $377.1 million from operating activities and adjusted free cash flow of $301.3 million in the June quarter.
- Microchip Technology Inc (MCHP) announced an increase in their dividend by 10.7% from the year-ago quarter to a record $0.454 per share.
- The company has a strong design-in pipeline across all end markets, mega trends, and key customers, which is expected to drive above-market long-term growth.
- Microchip Technology Inc (MCHP) entered the 64-bit embedded microprocessor market, expanding their product portfolio and addressing high-performance embedded processing applications, including AI-enabled edge solutions.
Negative Points
- Net sales in the June quarter were $1.241 billion, down 6.4% sequentially, reflecting a major inventory correction.
- Non-GAAP gross margins were just below the midpoint of guidance at 59.9%, impacted by capacity underutilization charges of $36 million.
- The company's net debt increased by $183.6 million in the June quarter, with total debt rising by $179 million.
- Microchip Technology Inc (MCHP) expects net sales for the September quarter to be between $1.12 billion and $1.18 billion, indicating continued challenges in the business environment.
- The company is operating with very low backlog visibility and requires a significant amount of turns orders within the quarter to meet guidance, reflecting uncertainty in customer demand.
Q & A Highlights
Q: Ganesh, you talked about orders being up 50% sequentially, but you said that they're still weak. Can you talk about that a little more? Is that -- are you just saying that book-to-bill is still well below 1? Is that the point there?
A: Yes. I wouldn't say well below 1 book-to-bill is below 1. It has bookings have been growing. They've been growing unevenly between the months. So it's on the right track, just not as fast as we would like it to. And coming in they're aging faster. So that also helps.
Q: Can you talk a little bit more about -- you had talked about the green shoots, and it sounds like they kind of stalled out a little bit. Can you talk about maybe when that happened in the quarter? Was it like the last month of the quarter? And has it continued through the first month of this quarter, just -- and maybe the end markets where that's actually happened.
A: So at the end of May, I think we were at a public conference where we had said, hey, bookings are flattish for May versus April, June got a little bit better. I think it's just through the quarter week to week. I think these are short-term indicators. We have to look at it kind of on a longer-term basis, how is it evolving? So -- but yes, June did not have the same momentum that we would have expected. If this was continuing at a consistent pace. And so that's the difference between what we saw in April versus May versus June. It just didn't have a consistency throughout the quarter. And there's no particular end market thing. The two end markets I referred to, stability in aerospace and defense, strengthen the data center market. And of course, we're indicating that it's not only the AI subset, but going forward for September and December, we're seeing strength across the data center markets that we're in.
Q: Mine is around utilizations and where we go from here. So I think you guys had some shutdowns in June? Are you expecting to continue those into September? And then you also talked about external wafer supply agreements, would you expect those negotiations to go well and to push those out? Or might those effect as well?
A: So I'll start with internal utilization. So we are not planning on having another two-week shutdown for our wafer fabs in the September quarter. We do not expect production value out of the fabs to be much different quarter-on-quarter. We continue to have attrition and had to lower starts because of that. but we'll not be having another two-week shutdown. And in our assembly and test areas, we will continue to have days off for those activities to manage our finished goods assembly and test out appropriately. Ganesh, do you want to comment on foundry? Yes. We have continued to work with our foundry partners on how to match the wafers coming into the demand picture as it changes the degree of how we have worked that out has a different results at different semi -- foundry partners. But by and large, we are working through those with business arrangements to make sure that we are not receiving substantially more wafers than what we can use with the exception of the last time buy that Eric referred to, where factories are either closing down or processes are being end of life where we are buying because those products often have extremely high gross margins, and it behooves us to be able to take the inventory and over many years, I realize very high gross margin on those parts.
Q: And then you didn't call out China as a source of additional weakness. I was wondering if we could maybe get an update there, what you're seeing out of China and/or Asia.
A: Sure. So in the breakout that we provide that's on our website, Asia. We don't usually break out China, but Asia was flattish. The declines were largely in the Americas and to a larger extent, in Europe. And I think China and Asia on current basis is more constructive. The weakness is predominantly in the Americas and Europe. And I think that is, to some extent, consistent with if you look at some of the PMI reports and where the manufacturing economy is that just this morning, the US PMI came out last month, the European PMI came out. This is not the first month, there's been many, many months over which that weakness has been playing out. And I think China was there earlier on as were other parts of Asia. Some of that they have worked out. So more stability and strength on a relative basis than the Europe and Americas regions.
Q: Ganesh, one of your peers last week talked about customers sort of ordering hand to mouth and potentially even holding too low inventory due to working capital constraints and so on and so forth. Are you seeing that with some of your customers and maybe especially on the industrial side because that's certainly a concerning thing and it certainly may reflect the very low terms orders that you are getting or the very low backlog visibility that you are getting?
A: No, that is absolutely happening at many, many customers. And I think they have, in some cases, low visibility into their own business as well. So they're reflecting that. Given that there's plenty of capacity and short lead times, right? There's really no reason for them to try to get backlog ahead of time. At some point, that will change, and it will correct itself. But yes, the -- what is reflected in the green shoots we talked about when we said we're getting expedite orders where new orders are being placed with short cycle expectation and prior orders that were placed are being pulled in. Those are all reflective of people who are more conservative in how they place orders and then recognizing they need it parts sooner. At some point, that will catch up on itself. It's still early, but that's how these things usually correct is people tend to go too low and run out of inventory, any strengthening in the business starts to create some urgency for orders that becomes the whole expedite chase. We saw that back in other cycles as well. But that is something we're watching. We're still in the early innings of how that up cycle will play out.
Q: Can you comment on how much terms you need at this point and maybe compare that with previous cycle?
A: So we don't typically break that out. I think maybe you want to give some historical perspective on where they're at. So I mean, it is not unusual for us to enter a quarter needing 30%, 40% turns. And with short lead times, we've been able to do that historically now. We're coming off a period up to the last couple of quarters where we were fully booked entering a quarter. So it's definitely a large change for us from what we've seen over the last 2.5 years. But there's a significant amount of terms that we need to take, and we've kind of been signaling that to the marketplace that with short lead times that
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
