In this conference call, Eric Bjornholt, Chief Financial Officer of Microchip, will discuss the company's first quarter fiscal year 2024 financial performance. He will be accompanied by Ganesh Moorthy, Microchip's President and CEO; Steve Sanghi, Microchip's Executive Chair; and Sajid Daudi, Microchip's Head of Investor Relations. Eric will comment on net sales, gross margin and operating expenses, while Ganesh will provide commentary on the results and Steve will provide an update on the cash return strategy. The call also includes information on various GAAP and non-GAAP measures, and a full GAAP to non-GAAP reconciliation is available on the company's website.

In the June quarter, net sales were $2.289 billion, and on a non-GAAP basis, gross margins were a record 68.4%, operating expenses were at 20.3%, and operating income was a record 48.1%. Non-GAAP net income was $905.3 million and Non-GAAP earnings per share on a diluted basis was a record $1.64. On a GAAP basis, gross margins were a record 68.1%. The non-GAAP cash tax rate was 14.2% in the June quarter and is expected to be 14% in fiscal year 2024. The cash tax rate is expected to be higher than the fiscal '23 rate due to lower availability of tax attributes, lower tax depreciation, and the impact of current tax rules requiring the capitalization of R&D expenses for tax purposes.

Microchips inventory balance at the end of June 2023 was $1.336 billion, down two days from the prior quarter. This was due to customer requests for delayed delivery, but the company also invested in inventory for products with long lives and high margins. Cash flow from operating activities was $993.2 million in the June quarter, which included $106.1 million of long-term supply assurance receipts from customers. After adjusting for these payments, the adjusted free cash flow was $776 million. As of June 30, the company's consolidated cash and total investment position was $271.2 million.

In the June quarter, Microchip paid down $413 million of total debt and reduced their net debt by $450.2 million. Over the past 24 quarters, they have paid down $6.76 billion of debt and used their line of credit to retire $1 billion in bonds. Additionally, they retired $38 million in convertible bonds for a total cash payment of $90.1 million. Microchip's adjusted EBITDA was a record at $1.172 billion and their trailing 12-month adjusted EBITDA was $4.473 billion. Their net debt to adjusted EBITDA was $1.29 at June 30th, 2023. Capital expenditures for the quarter were $111.1 million and they expect to invest between $300 million and $400 million in the next year.

Microchip's June quarter results were strong, with net sales reaching an all-time record of $2.29 billion, non-GAAP gross and operating margins at 68.4% and 48.1% respectively, and non-GAAP diluted earnings per share at $1.64 per share. Adjusted EBITDA was a record 51.2% of net sales, and adjusted free cash flow was 33.9% of net sales. The company returned $349.2 million to shareholders in dividends and share repurchases, and will continue to return 100% of adjusted free cash flow to shareholders by 2025. Ganesh Moorthy thanked all stakeholders for their efforts and the Microchip team for navigating through the business cycles.

In the June quarter, mixed signal microcontroller, analog, and FPGA net sales all set records. However, customers in China, the automotive and industrial segments, and Europe are feeling the effects of slowing economic activity and increasing business uncertainty, manifesting in weak sell-through activity and requests to push out or cancel backlog.

The paragraph discusses the current inventory situation and the effects of US export control actions in the June quarter. It was noted that inventory dropped by two days to 167 days, with channel inventory increasing by 5 days to 29 days. The company is taking actions to reduce inventory on their balance sheet, while maintaining absorption in their internal wafer fabrication factories. They are also working with their channel partners to find the right balance of inventory required. Expansion actions remain paused due to the current slowing macro environment and higher than target inventory level.

Microchip is expecting lower capital investments in fiscal years '24 and '25 due to macro weakness and business uncertainty. The company has been able to reduce its average lead time from 52 weeks to 26 weeks, but this has resulted in lower backlog. Despite this, Microchip is taking active steps to help customers with inventory positions and expects net sales for the September quarter to be between up 1% and down 3% sequentially. The non-GAAP gross margin is expected to be between 68.3% and 68.5%, non-GAAP operating expenses between 20.1% and 20.5%, and non-GAAP operating profit between 47.8% and 48.4%. The non-GAAP diluted earnings per share are expected to be between $1.60 and $1.64, with year-over-year growth of 11% despite a higher tax rate.

Microchip 3.0 strategy continues to be the foundation of their results, and they anticipate further business headwinds in the December quarter due to macro weakness and business uncertainty. However, they are confident that semiconductors remain the engine of innovation and that their non-GAAP operating margins would remain well above 40% if they experience a semiconductor inventory correction.

Microchip has achieved record financial results with record net sales, non-GAAP gross margin percentage, non-GAAP operating margin percentage, non-GAAP EPS, and adjusted EBITDA. The Board of Directors announced an increase in the dividend of 36.2% to $0.41 per share and purchased $140.3 million of stock in the open market. In the June 2023 quarter, Microchip returned $349.2 million in cash to shareholders, which was 67.5% of their adjusted free cash flow. Since November 2021, they have returned $2.686 billion through dividends and stock buybacks. In the current September quarter, they will use their adjusted free cash flow from the June quarter to target cash returned to shareholders.

Ganesh Moorthy and Eric Bjornholt discussed the company's orders, particularly in China, and how their backlog is still strong. They noted that bookings have been weak, but that is likely due to falling lead times, as customers are not viewing the need to put backlog in place. The company plans to return 72.5% of their adjusted free cash flow to shareholders with a dividend of $223 million and stock buyback of $339.6 million, and increase free cash flow return to shareholders by 500 basis points each quarter until they reach 100%.

Ganesh Moorthy is asked about pricing trends in the supply chain, and he responds that pricing tends to be stable in his business, and that outside of the last two years of inflation, pricing is usually relatively stable. He does not expect that to change in the future.

Microchip's Ganesh Moorthy and Vivek Arya discussed the outlook for the September and December quarters, and the effect of a potential year-on-year decline on gross margins. Moorthy stated that they have not modeled the December quarter yet, and have a range of scenarios they are working with. Arya then asked about the expectations for automotive and industrial, and Moorthy responded that they have not yet seen any significant contraction in lead times and that it is too early to tell how many quarters the weakness in these sectors will last.

Ganesh Moorthy explains that the NCNR program was created to provide mutual commitment of investment and benefit to customers. As lead times become longer, visibility gets less clear, however, the majority of customers have been very pleased with the results of the NCNR program in 2021 and 2022. Moorthy believes that the program has had more benefits than issues.

Ganesh Moorthy of the company is providing guidance for the September quarter that brackets between plus one and minus three, and is expecting the December quarter to be seasonally weaker than normal. He is unable to provide more insight into the future of the business, but is confident that the company's operating margin will reach 40%.

Ganesh Moorthy and Eric Bjornholt have expressed their confidence in their operating margins staying above 40%, with seasonal decreases of 3-4%. They have done scenario planning and are comfortable with their statement. Joshua Buchalter asked for a rough level of expected inventory in the quarter, and the company is going through a digestion period.

Ganesh Moorthy explains that the channel inventory is determined by the channel's demand, what they can supply, and what the channel wants to carry. Microchip is also taking extra measures to reduce inventory on their balance sheet in the September quarter. Additionally, their internal fabs are continuing to run and they are adjusting their purchasing from their foundry partners to bring the inventory in line with their long-term goals.

Ganesh Moorthy discussed the goal to reduce lead times to 26 weeks in the second half of the year, and potentially under 10 weeks by the end of the year. He also discussed the historical benchmark of 4-8 weeks for 90% of their line items. Regarding distribution inventory, Moorthy mentioned that it serves multiple functions.

Ganesh Moorthy discussed the need for turns in the December quarter and the normalization of lead times. He also mentioned that there may be small parts in the September quarter. Chris Caso then asked for more information about Europe, to which Moorthy responded that there has been some activity in industrial and auto, but nothing concrete.

Ganesh Moorthy and Chris Caso discuss the headwinds that European economies are facing, including a recession in Germany, high interest rates, high inflation, and a weak Chinese economy. Moorthy also explains that the company is not intentionally trying to reduce backlog, but is instead trying to help customers who have backlog placed on them but would prefer to receive it later than what was originally scheduled.

Ganesh Moorthy discussed the current backlog situation and the lack of displacement of their products by locally sourced products in China due to the current economic uncertainty. William Stein asked about the PSP and NCNRs and the flexibility of rescheduling and cancelling, which was met with less flexibility on cancelling.

Ganesh Moorthy and Steve Sanghi of Microchip discussed the success of their RISC-V and PolarFire SoC FPGA program, which is winning in aerospace and defense, industrial, and automotive markets. They are optimistic about its growth potential and believe it will be a huge driver for Microchip. Janet Ramkissoon asked a follow-up question regarding the program.

Microchip has experienced the current down cycle later than other companies due to their PSP and NCNR offerings, allowing customers to reschedule orders and not be strict on cancellations. However, if customers had been told they could not reschedule or cancel, then revenue and guidance would have been higher. The cause of the line drops is unknown.

Ganesh Moorthy thanked everyone for attending the call and for their questions. He mentioned that they would have follow-up meetings with some of the participants and look forward to speaking with them in the upcoming events during the quarter. The operator confirmed that there were no more questions in the queue, and Steve Sanghi suggested they close out the call.

This summary was generated with AI and may contain some inaccuracies.