The operator introduces the Microchip First Quarter Fiscal Year 2025 Financial Results Conference Call and the host, Eric Bjornholt, CFO. Bjornholt cautions that forward-looking statements may differ from actual results and introduces the other attendees: Ganesh Moorthy, President and CEO; Steve Sanghi, Executive Chair; Rich Simoncic, COO; and Sajid Daudi, Head of Investor Relations. Bjornholt provides a summary of the company's financial performance and mentions the inclusion of GAAP to non-GAAP reconciliation information on their website. He also mentions a summary of outstanding debt and leverage metrics.

In the June quarter, net sales for the company were $1.241 billion, a decrease of 6.4% compared to the previous quarter. Gross margins were just below the midpoint of guidance at 59.9%, and operating expenses were at 28.4% of net sales. Non-GAAP net income was $289.9 million and non-GAAP earnings per diluted share were $0.53. On a GAAP basis, gross margins were 59.4% and total operating expenses were $517.8 million. The non-GAAP cash tax rate was 13% and is expected to remain at that level for fiscal year '25. The company hopes for a favorable adjustment to their non-GAAP tax rate if the tax rules for R&D expenses are changed. Inventory balance at the end of the quarter was $1.308 billion, a decrease of $8 million from the previous quarter.

The company's inventory and cash flow increased in the June quarter, with a focus on investing in high-margin products. The company's debt also increased due to refinancing activities. Adjusted EBITDA and net debt-to-adjusted EBITDA ratios were also provided, along with capital expenditures for the quarter.

In the June quarter, the company's net sales decreased by 6.4% due to an inventory correction. Non-GAAP gross margin and operating margin were in line with guidance, and non-GAAP diluted earnings per share exceeded expectations. Net leverage increased to 2.02x, but the company remains committed to its capital return plan. Cash generation remains strong and the company's team is working hard to navigate the current environment and position the company for long-term success.

Microchip has recently entered the 64-bit embedded microprocessor market and is expanding its capabilities to address high-performance applications. They have a strong portfolio of 8 to 64-bit processors and FPGAs, making it easy for customers to innovate and reuse their work. The June quarter showed weakness in all regions and most end markets, except for Aerospace and Defense and artificial intelligence in data centers. The weak macro environment is causing customers to manage inventory tightly and adjust their business plans, leading to inventory destocking and reductions in target inventory levels. This is seen across direct customers, contract manufacturers, distributors, and indirect customers.

Bookings in the June quarter increased by close to 50% compared to the previous quarter, but were still below desired levels. Customers are requesting expedited orders and shipment date changes, while cancellations and pushouts are decreasing. Lead times are around 8 weeks or less, resulting in reduced visibility. The company has adjusted its operations to adapt to the uncertain environment and has prepositioned inventory to accept and ship orders. Factories are running at lower utilization rates to control inventory levels. Capital investments are expected to be low in the next two fiscal years. The company is also preparing for long-term growth through partnerships with foundries and outsourced partners.

The company is prepared for the market recovery and is working through challenges with government departments regarding grants. They are collaborating with the chip's office and remain committed to their business values. The company has a strong design-in pipeline due to customers returning to prioritizing innovation projects.

The growing design pipeline is currently muted due to excess inventory and a slow gestation period. However, design win momentum is expected to drive long-term growth. In the September quarter, the company is forecasting growth in their data center business and expects net sales to be between $1.12 billion and $1.18 billion. The non-GAAP gross margin is expected to be between 58.5% and 59.5% of sales, while non-GAAP operating expenses are expected to be between 30% and 31% of sales. The company also expects non-GAAP operating profit to be between 27.5% and 29.5% of sales, and non-GAAP diluted earnings per share to be between $0.40 and $0.46. The current semiconductor cycle has been unique, starting with supply and demand disruptions in March 2020, followed by product shortages and supply chain challenges, and ending with a substantial inventory correction in recent quarters.

The company acknowledges that their revenue decline has been steeper than their competitors, but attributes this to various factors such as market exposure and business size. They believe that looking at the cumulative revenue over the entire cycle shows similar performance between them and their competitors. They suggest that this may indicate potential for stronger growth in the future and emphasize the overall strength of their business.

The company remains confident in its solutions and is committed to delivering results and shareholder value. They are focused on creating long-term value and have increased their dividend and purchased a significant amount of stock. They have also returned a total of $4.6 billion to shareholders and will continue to target a similar amount in the current quarter. Their adjusted free cash flow for the June quarter was $301.3 million.

The company's target return to shareholders is 92.5% of the total amount, with a cash return of $261 million, mostly through dividends and stock buybacks. The company plans to increase its adjusted free cash flow return to shareholders by 500 basis points each quarter until it reaches 100%. The current Non-Executive Chair will transition to a new role after 34 years of service, and the CEO thanks him for his contributions. The company has seen a 50% increase in orders, but they are still weak and the book-to-bill ratio is below 1.

The company has experienced uneven growth between months, but overall it is on the right track. However, the growth is not as fast as desired and there is also an aging factor to consider. The green shoots mentioned earlier have stalled out in the last month of the quarter and there was no consistent momentum throughout the quarter. This is not specific to any particular end market. The company had previously mentioned stability in aerospace and defense and strength in the data center market, particularly in the AI subset. Going forward, they are expecting strength across all data center markets for the upcoming quarters. There have been some shutdowns in June, but it is unclear if they will continue into September. Negotiations for external wafer supply agreements are expected to go well and may push out any potential effects.

The company does not expect to have another 2-week shutdown for their wafer fabs in the September quarter, and production value is expected to remain consistent. There may be some attrition and lowered starts, but no major shutdowns are planned. In terms of assembly and test areas, there will continue to be days off to manage finished goods. The company is working with foundry partners to match wafer supply with demand, and they are also buying high-margin products from factories that are closing down. Asia was relatively stable, but declines were seen in the Americas and Europe, possibly reflecting the current state of the manufacturing economy in those regions.

The speaker discusses the recent PMI data and notes that while there has been weakness in Europe and the Americas, there is more stability and strength in Asia. They also mention that many customers are ordering hand to mouth and holding low inventory due to working capital constraints, which is reflected in the green shoots they are seeing. However, they believe this will eventually correct itself as orders catch up with demand.

The company is still in the early stages of an up cycle and they are not able to disclose how much terms they need. They typically enter a quarter needing 30-40% turns, but in the last 2.5 years, they have been fully booked. They expect to take a significant amount of terms and have been signaling this to the marketplace. The next question is about the assumptions for the September quarter guidance and if they will be under-shipping demand. The company is not able to provide much granularity on this topic.

The distribution inventory has been decreasing for the third consecutive quarter, but it is uncertain where true consumption is at. The company's business is down more than their customers' business, but this gap is expected to close as inventory drains and the company's business recovers. It is difficult to determine the inventory levels of all 100,000 customers, but the industrial and automotive markets are showing the most weakness. There is no pricing pressure on the company's current products, but there may be some on the fringes.

The company's new designs are being aggressively marketed by participants in order to win the design. However, pricing is a strategic exercise and value is the main factor in customer decisions. The company has seen improvements in sell-through in China and Asia, and they expect China to be the first to recover from the current market conditions.

The speaker discusses the current state of the market and how it is difficult to judge due to the Chinese New Year and differences in shipping days. They mention that China is the least weak market and that America and Europe are hurting more. Another speaker adds that the economic conditions have changed and inventory levels are affecting destocking. They also mention that cancellations and pushouts are decreasing, which is a positive sign. The next question is from a representative of Citibank.

Chris Danely asks Ganesh Moorthy about the revenue decline and the factors contributing to it, specifically in the industrial and automotive end markets. Moorthy explains that lack of confidence in the industry and macro trends are leading to shorter order cycles and lower backlog. He also mentions that the PMI has been weak for an extended period of time. Danely thanks Steve for his honesty and asks for a comparison between the automotive and industrial markets, to which Moorthy responds that both are affected by the lack of confidence in the industry.

The speaker, Ganesh Moorthy, responds to a question about the potential end markets for Microchip's 64-bit microcontroller and its compatibility with other products. He clarifies that while the software is not common, the development tools and ecosystem are, making it easy to port between processors. He also mentions the expansion in higher performance areas such as factory automation, machine vision, and AI at the edge.

The company is expanding into higher end microprocessors and 64-bit technology, which will open up new markets and potentially double their total available market. There has been stable demand in aerospace and defense, but no other notable end markets. In the September quarter, data center growth is broadening, possibly due to growth in general purpose and power connectivity.

The data center infrastructure has shifted towards accelerated computing and has resulted in increased CapEx investments. However, other parts of the data center are also performing well. Microchip has seen a significant reengagement from customers and design in activity as the supply chain crisis has eased. Design cycles for the company typically range from 12 to 24 months.

The company expects to see a surge in activity over the next 1-3 years due to ongoing design-in activities and customers using older inventory before shifting to newer generation products. The slowdown in the macro may also cause delays in product launches. The surge will benefit from Microchip's approach to maximizing total system solutions. CapEx will remain low over the next 2-4 quarters, potentially due to low foundry utilization and attractive pricing.

During a conference call, Microchip executives discussed the current foundry environment and their plans for utilizing internal and external production. They stated that their current mix of 40% internal and 60% external production is likely to stay the same for the coming years. They also mentioned that they have been working on technologies that can run both internally and externally, and that it is more favorable to load an underloaded internal factory than to rely solely on the foundry. A long-time shareholder thanked CEO Steve Sanghi for his leadership and asked about the 64-bit marketplace.

The company's early design win activity is looking positive, with June being stronger than May and July expected to be flat. The company has many early adopters for their 64-bit products, but it is still too early to have design wins. Once production of the 64-bit chips begins, margins are expected to increase faster than the 32-bit chips, but it is too early to make assumptions about specific margins. The company will also consider the entire portfolio when looking at margins for the 64-bit products.

The speaker discusses the value of their company's total system solutions for customers, rather than just the individual chip. The floor is then turned over to Ganesh for closing remarks, where he thanks everyone for attending and mentions upcoming conferences and meetings. The call is then concluded by the operator.

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