Release Date: November 05, 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 $0.46, which was $0.03 ahead of the midpoint of their guidance.
- The company settled a legal matter, resulting in a $13.3 million accrual release, positively impacting revenue and gross profit.
- Microchip Technology Inc (MCHP) is strategically investing in high-growth sectors, launching innovative technologies in areas like industrial automation and renewable energy.
- The company is seeing strength in aerospace and defense, as well as the AI subset of data centers.
- Microchip Technology Inc (MCHP) is committed to returning 100% of its adjusted free cash flow to shareholders by March 2025, with a strong focus on dividends and share buybacks.
Negative Points
- Net sales for the September quarter were down 6.2% sequentially, reflecting ongoing inventory corrections and macroeconomic challenges.
- The company experienced a cybersecurity incident, resulting in a $21.4 million cost impact due to unscheduled factory outages.
- Microchip Technology Inc (MCHP) is facing significant underutilization charges, impacting gross margins and operating results.
- The business environment remains uncertain, with low visibility and continued macroeconomic weakness, particularly in the industrial and automotive markets.
- The company's inventory levels have increased, with 247 days of inventory at the end of the September quarter, up 10 days from the previous quarter.
Q & A Highlights
Q: Ganesh, how long do you think it could take the distribution channel to get back to normal, considering the current inventory levels?
A: Ganesh Moorthy, President and CEO: Historically, distribution inventory levels have been around 30 days. However, the current inventory situation is more complex due to destocking at various levels, including customers and their channels. While distribution is actively destocking, the visibility on when it will normalize is limited, though there are early signs of improvement.
Q: Eric, can you discuss the impact of underutilization on gross margins and what revenue levels are needed to alleviate these charges?
A: James Bjornholt, CFO: Underutilization charges are significantly impacting our gross margins. The exact revenue level needed to eliminate these charges depends on future revenue growth and forecasted ramp-up. Currently, we are significantly underutilized, and this will continue in the near term.
Q: Ganesh, what is your perspective on the correction in the microcontroller and industrial sectors, and how does Microchip compare to the industry?
A: Ganesh Moorthy, President and CEO: The correction is largely due to macroeconomic factors and inventory adjustments rather than company-specific issues. Microchip's exposure to industrial markets has led to a more pronounced impact, but we remain confident in our long-term growth prospects due to strong customer relationships and design wins.
Q: Can you provide insights into the current pricing environment and expectations for 2025?
A: Ganesh Moorthy, President and CEO: While there is pricing pressure, especially for new designs, our pricing remains stable overall. We focus on maintaining discipline and leveraging cost reductions to manage margins. The competitive environment is more intense, but we are committed to sustaining our pricing strategy.
Q: How is Microchip addressing the current high turns environment, and what are the expectations for inventory levels?
A: Ganesh Moorthy, President and CEO: The high turns environment is expected to persist until customers gain confidence in their demand forecasts. We are managing this by maintaining short lead times and prepositioning inventory to respond quickly to customer needs. As macro conditions stabilize, we anticipate a return to more typical inventory levels.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
