The operator welcomes participants to the Microchip Q4 of Fiscal Year 2024 Financial Results Conference Call and introduces the host, Eric Bjornholt, Senior Vice President and CFO. He cautions that forward-looking statements may differ from actual results and refers to the press release and SEC filings for risk factors. Other attendees include Ganesh Moorthy, President and CEO; Steve Sanghi, Executive Chair; Rich Simoncic, COO; and Sajid Daudi, Head of Investor Relations. Eric will discuss the company's financial performance, Ganesh will discuss the current business environment and guidance, and Steve will provide an update on the cash return strategy. GAAP and non-GAAP measures will be discussed and a reconciliation can be found on the company's website.

The company has provided a summary of their debt and leverage metrics on their website. They reported their operating results, including net sales, gross margin, and operating expenses, on a non-GAAP basis. Net sales for the March quarter were $1.326 billion, down 24.9% sequentially. Gross margins were 60.3%, operating expenses were 27.4%, and operating income was 32.9%. Non-GAAP net income was $310.3 million and non-GAAP EPS was $0.57, in line with their guidance. On a GAAP basis, gross margins were 59.6%, operating expenses were $536.4 million, and GAAP net income was $154.7 million. For fiscal year 2024, net sales were $7.634 billion, down 9.5% from the previous year. Non-GAAP gross margins were 65.8%, operating expenses were 22%, and operating income was 43.9%. Non-GAAP net income was $2.698 billion and EPS was $4.92 per diluted share.

In the March quarter, Microchip reported a gross margin of 65.4% and operating expenses of 31.8% of sales. Net income was $1.907 billion and EPS was $3.48 per diluted share. The non-GAAP cash tax rate was 18.8% and is expected to be 13% for fiscal year 2025. The company's inventory balance was $1.316 billion with 224 days of inventory. Inventory at distributors was at 41 days, up 4 days from the previous quarter. The increase in inventory days is due to lower cost of sales in the March quarter.

In the March quarter, the company's cash flow from operating activities was $430 million, with an adjusted pre-cash flow of $389.9 million. The consolidated cash and total investment position was $319.7 million, with a total debt increase of $312 million and a net debt increase of $273.3 million. Adjusted EBITDA was $503 million and 37.9% of sales, with a trailing 12-month adjusted EBITDA of $3.623 billion and a net debt adjusted EBITDA of 1.57. Capital expenditures were $40.1 million in the quarter and are expected to be around $175 million for fiscal year 2025. Depreciation expense was $45.8 million. The company's performance in the March quarter was consistent with guidance, with net sales down 24.9% sequentially and 40.6% from the previous year. Non-GAAP gross margin was 60.3% and non-GAAP operating margin was 32.9%, but the tax rate was higher than expected, resulting in a non-GAAP diluted EPS of $0.57 per share. The company's net leverage ratio rose to 1.57x, but they remain committed to their capital return plan.

In the June quarter, the company plans to increase its capital return to shareholders to 87.5% of its adjusted free cash flow. Fiscal year 2024 was challenging due to a major inventory correction, leading to a 9.5% decline in revenue. However, the company's non-GAAP operating margin remained strong at 43.9%. Shareholders received $1.89 billion in capital return, representing a 15.4% growth from the previous year. The company's mixed-signal microcontroller and analog product lines saw declines in net sales, but the FPGA product line set a record with revenue exceeding $679 million and a growth of 22%. The company's FPGA solutions are well-positioned for the emerging opportunities in artificial intelligence at the edge. Overall, the company's FPGA design win momentum is strong in various end markets.

Microchip recently closed two acquisitions, one for a Korean company specializing in ADAS and digital cockpit connectivity, and another for a company that enhances AI capabilities for edge solutions. These acquisitions will help Microchip stay at the forefront of the automotive networking market and expand their capabilities for power-efficient AI-enabled solutions. Additionally, Microchip plans to enter the 64-bit embedded microprocessor market in July, further expanding their portfolio and capabilities.

Microchip is the only company that offers a wide range of embedded control and processing platforms, with a common development tool ecosystem. In the March quarter, there was weakness in all regions and most end-markets except for aerospace and defense and the artificial intelligence subset of data centers. This was due to lower product shipments and inventory destocking by customers. However, there are early signs of improvement, with a decrease in cancellations and push-outs, an increase in bookings, and shorter lead times. This suggests that a bottom may be forming. Average lead times remain at eight weeks or less.

The company believes that short lead times are the best way to help customers during business uncertainty, but this has also resulted in reduced visibility for the business. Due to the inventory correction, factories are running at lower utilization rates and capacity expansion actions are paused. The company expects low capital investments in fiscal year 2025. They are working towards an agreement with the CHIPS office for grants. The days of inventory metric may be deceptive at this stage of an inventory correction and the company is focused on where they believe consumption is running. They are working with distribution partners to find the right balance of inventory and are implementing cost reduction efforts, including salary sacrifices.

Microchip's culture of shared sacrifice has helped protect their employees, support customers, and maintain their momentum in design wins. While they have seen some positive signs in their business, they still need more orders within the quarter to meet their guidance. They expect their sales to be between $1.22 billion and $1.26 billion in the June quarter and believe that this marks the bottom of their cycle. They also expect their non-GAAP gross margin, operating expenses, operating profit, and diluted earnings per share to fall within certain ranges. Despite current challenges, they remain confident in their business's growth, profitability, and cash generation, fueled by their focus on total system solutions and key market trends.

Microchip remains committed to their strategic imperatives and appointed a new Chief Operating Officer. They have also increased their dividend by 18% and have purchased a record amount of their own stock in the open market. They have returned a total of $4.23 billion to shareholders and plan to continue returning cash in the current quarter.

The company's adjusted free cash flow excludes long-term supply assurance payments and their target return to shareholders is 87.5%. They completed two small acquisitions in the June quarter, reducing their share buyback amount. Going forward, they plan to increase their adjusted free cash flow and return it to shareholders through dividends and share buybacks. The operator then opened the call for questions and the first one was from Vivek Arya with Bank of America Securities. Ganesh mentioned that June is expected to be the bottom line and there are green shoots, but this was also suggested on the last call.

During the last earnings call, we did not mention any green shoots, but we did mention seeing them in the banking sector in March. The momentum has been picking up in March, April, and May, as seen through increased bookings, pull-ins, and expedites. This qualitative view, along with customer feedback, leads us to believe that the June quarter is the bottom and the September quarter will show growth. As for gross margin, it is expected to bottom out in June as well, but factors such as product mix and factory operations could affect this. A question was asked about any differences in end-markets, but the answer was not provided.

The company's CEO, Ganesh Moorthy, discussed the recent booking stabilization improvements, but was unable to pinpoint a specific end market that is doing better. He noted that the aerospace and defense and AI segments of the data center are performing well, while some industrial customers are still experiencing weakness. The company's CFO, Eric Bjornholt, stated that if things continue to go well, June could be the trough for gross margins. However, the trajectory of gross margins will depend on the revenue trajectory and the company's ability to bring their own inventories down to normal levels. The company remains confident in its long-term model and ability to reach its target gross margins, but the specific trajectory will depend on revenue and corresponding actions to increase output from their factories.

Harlan Sur asks a question about channel sell-through dynamics from global distributors. Ganesh Moorthy explains that the level of inventory with customers is not always visible, but they can see some indication through distribution placing additional orders. Moorthy does not have a definitive answer on sell-through and sell-in for the June quarter. Sur asks a follow-up question about the difference in direct customer shipments and distribution shipments, wondering if excess inventories are more pronounced at direct customers. Moorthy responds that lead times are sub-eight weeks and they only have visibility through the end of the quarter.

The Microchip team is confident that shipments to direct customers will increase in the coming months, as there is a rise in bookings and backlog for the September and December quarters. They have held operating expenses lower than expected and have implemented a shared sacrifice share reward program for employees, with no clawback provisions. This has worked well in the past to drive revenue growth and gain market share.

The company has seen great financial results from their actions during the pandemic and has been able to share the rewards with employees through higher bonuses and removing pay cuts. However, there is no guarantee that employees will receive this money back and there will be no retroactive claw-back. The company's culture and employee participation in voluntary salary reductions have played a significant role in navigating this difficult situation. The company hopes to restore normal salary levels as soon as possible. The analyst asks about design win metrics for the fiscal year.

The speaker discusses the company's approach to measuring the lifetime value of design wins and how they focus on the progress of their design pipeline. They also mention that customer priorities have shifted and there has been an increase in design activity in the last 12 months. The speaker then answers a question about book-to-bill ratio, stating that it was below 1 but not a reliable indicator for the business. They also mention that bookings are rising and cannot predict the outcome for May and June.

The speaker, Eric, states that book-to-bill is not a reliable indicator of growth. He also mentions that inventory was higher than expected in March but still within the range they had previously stated. The utilization in the current quarter may be slightly lower due to employee attrition. The next question is about 64-bit microcontrollers and AI at the edge, but the speaker, Ganesh, does not provide much insight on this topic.

The company's target markets for Edge AI are industrial, automotive, and medical, with designs in progress over the past six to 12 months. It will likely take another 24 to 30 months for Edge AI to become a more meaningful part of revenues. The company is currently shipping below consumption levels and it is difficult to determine the exact level of consumption. The company's peak a year ago was in the June quarter and current guidance is lower. Toshiya Hari from Goldman Sachs asked about inventory levels.

The speaker discusses the company's inventory management strategy and their goal of maintaining 130-150 days of inventory in the long term. They also mention the use of last time buys on high gross margin products. On the topic of pricing, they explain that it is primarily driven by competition at the point of design and is unlikely to change frequently due to the nature of their end markets.

The company has products that have been in design for a long time and they are competitive with new designs in terms of pricing. They have a lot of existing business at current prices and expect to have new business at higher prices in the future. New designs have always been highly competitive, but the competition has returned to normal levels after a couple of years of constraints.

The speaker explains that the company's CapEx guidance has decreased significantly over the past two years, but they are confident in their internal capacity and their partnerships with foundries and OSATs. A question is asked about the company's drop in revenue compared to their competitors, and the speaker suggests that it is difficult to determine the exact timing of the peak and trough of the market.

The speaker discusses the company's approach to responding to changes in the business, noting that they have a mix of end markets and a later start in the cycle which has affected their downturn. They also mention China as a competitor, with a focus on faster design cycles and products for consumer electronics. However, this is not a new competition for the company.

The company focuses on winning with new products and competitive solutions in order to provide customers with a better solution. They will continue to fight for new business in China and other markets. The company does not provide a specific utilization rate, but it may decrease slightly due to attrition and reduced hiring. The company made some tuck-in acquisitions this quarter and has a model for internal development that aims for a 68% gross margin, 23% operating expense, and 45% operating margin.

The company prioritizes its internal activities and uses tuck-in acquisitions to speed up its growth in certain areas. They have done about six to eight smaller acquisitions in the last few years and plan to do more. The revenue is expected to grow in September, but it is difficult to predict when inventory reductions will be mostly done due to the large number of customers.

The speaker is unable to provide a definite answer to a question about the duration of an inventory correction, but believes it will last beyond the current quarter. They also mention that some customers have made mistakes in their business decisions, while others continue to be strong players. The "green shoots" of growth are not limited to any specific geography or end market. The speaker then addresses a question about the Neuronix Labs acquisition.

The question is directed towards Ganesh Moorthy and Steve Sanghi, who are asked about the difference between the current state of Microchip's business and the bottom of a cycle. Ganesh responds by saying that the company's embedded customers are considering the potential of adding AI to their products, but there is no specific numerical data to provide. He also mentions that AI is the next step in the evolution of product innovation, similar to how intelligence, connectivity, and security were added in the past. The company sees this as a continuum of customers, with some not needing AI and others taking advantage of it in their next generation of products. The question is then directed to Steve, but there is no response from him in the paragraph.

The speaker notes the similarities between past and current demand shocks and inventory buildups in the semiconductor industry. These include customers and supply chain partners reacting by reducing orders and lowering utilization rates, followed by a later realization that they overcorrected and a scramble to obtain components. The speaker asks if there are any differences in this cycle and if the supply chain has learned anything, but the response is that the elements remain the same.

The speaker discusses their assumption that the recent constraints in the semiconductor industry would lead to a better understanding of the supply chain, but they have been surprised at how quickly people have forgotten and returned to old ways of thinking. They believe that these lessons will have to be relearned in the future. The industry is always cyclic and this cycle has been particularly pronounced. The current situation is seen as an "inventory correction on steroids" and lead times have drastically decreased.

During a conference call, Ganesh Moorthy, CEO of Microchip, answered a question from Joe Moore of Morgan Stanley about the company's FPGA business. Moorthy stated that the FPGA business has performed better than other businesses due to its strong presence in the aerospace and defense market. The company is also focusing on creating new design opportunities in industrial and automotive markets. They are also picking up designs from competitors who are shifting their focus away from mid-range products, which presents opportunities for their FPGA business. Moorthy expressed optimism about the future prospects of the FPGA business. Christopher Rolland of Susquehanna also asked a question during the call.

Ganesh Moorthy discusses inventory trends and surprises in the market, noting that different customers in the same industry may have varying inventory burn rates. He also mentions that June may have been the bottom and that it will take time for customers to return to seasonal trends.

The operator introduces Tore Svanberg from Stifel who asks about the churn requirement for the current quarter and how it compares to previous cycles. Eric Bjornholt responds that they are not disclosing the exact amount of turns required but they have enough to meet their guidance for a down quarter. Ganesh Moorthy adds that it is difficult to compare to previous cycles due to the current inventory situation, but they have factored in the risks and uncertainties into their guidance. The next question is from Vivek Arya from Bank of America.

The speaker clarifies that recent acquisitions will not contribute to revenue in the upcoming quarters. They also discuss the potential for a sharper recovery in the future, based on previous downturns and factors such as inventory levels and macroeconomic conditions. The speaker then thanks the participants for joining the call.

The speaker thanks the audience for their questions and looks forward to meeting and discussing with them in the future at upcoming conferences. The conference has now ended and participants can disconnect their lines.

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