The paragraph is an introduction to Microchip's Q2 Fiscal Year 2025 Financial Results Conference Call. The operator welcomes participants and outlines the structure of the call, including a question-and-answer session after the formal presentation, and mentions that the call is recorded. Eric Bjornholt, the CFO, emphasizes that forward-looking statements made during the call are predictions and may differ from actual results, referencing risk factors disclosed in press releases and SEC filings. The call will feature comments from Eric on financial performance, Rich Simoncic on product updates, and Ganesh Moorthy on results, cash return strategy, and the business environment. Relevant GAAP and non-GAAP measures, along with financial details, are available on Microchip's website.

The paragraph details the company's operating results for the September quarter, highlighting net sales, which decreased by 6.2% to $1.164 billion. Non-GAAP gross margins were above guidance at 59.5%, bolstered by a $13.3 million legal settlement. Operating expenses constituted 30.3% of net sales, with an operating margin of 29.3%. Non-GAAP net income was $250.2 million, with earnings per share at $0.46, slightly above expectations. On a GAAP basis, gross margins were 57.4%. A previously disclosed cybersecurity incident did not significantly impact financial outcomes. Additional details, such as net sales by product line and geography, are available on the company's website.

In the September quarter, a cybersecurity incident led to approximately $21.4 million in costs primarily due to factory underutilization, but it did not materially affect the company's financial condition. Operating expenses were $521.9 million, with specific allocations for intangible amortization, special charges, and share-based compensation. GAAP net income was $78.4 million, translating to $0.14 per diluted share. The non-GAAP cash tax rate was 13%, aligned with expectations, and is projected to remain so for fiscal 2025 unless changes in R&D tax rules occur. Inventory at the end of September was $1.34 billion, covering 247 days, both metrics increasing from the previous quarter. Further inventory growth is anticipated, with ongoing investments in high-margin products affected by supply chain changes, representing 18 days of inventory at the end of September.

In the September quarter, inventory at distributors decreased to 40 days, with sell-through exceeding sell-in by $95 million. Operating cash flow was $43.6 million, affected by interest and tax payments, including an annual transition tax from the 2017 Tax Cuts and Jobs Act. One more transition tax payment is due in September 2025. The adjusted free cash flow was $14 million, and consolidated cash and investments totaled $286.1 million. Total debt increased by $256 million, impacting the net debt to adjusted EBITDA ratio, which rose to 2.85 from 1.28 the previous year. Adjusted EBITDA for the quarter was $405.7 million, 34.9% of net sales, with a trailing 12-month figure of $2.161 billion. Capital expenditures for the quarter were $20.8 million, with plans for $150 million in fiscal year 2025 and lower spending in 2026. Depreciation was $41.2 million. Future strategies focus on innovative technologies in high growth sectors.

The paragraph discusses the company's advancements in various technology sectors. In the microcontroller space, they have introduced the dsPIC33A Digital Signal Controller for industrial automation and clean energy markets, including smart factories and renewable energy systems. They have expanded their MPU offerings with the PIC64GX for secure intelligent edge systems and the PIC64 radiation-hardened MPU for space applications, where they are sole sourced for aerospace and defense. Their data center and networking business focuses on PCIe switches, SSD controllers, and CXL controller solutions to enhance server performance and memory efficiency, achieving mass adoption by customers.

The paragraph discusses the company's advancements in their technology solutions across various sectors, including data centers and the automotive industry, by introducing new products such as Single-Pair Ethernet and VelocityDRIVE software. These enhancements support innovations in software-defined vehicles and industrial applications, showcasing a commitment to cutting-edge solutions in renewable energy, automotive, aerospace, defense, and data centers. Ganesh Moorthy takes over to explain the financial performance, mentioning that despite a legal settlement benefiting the September quarter results, the company still faces a 6.2% sequential drop in net sales and navigates through an inventory correction amid macroeconomic challenges, particularly in the industrial market.

The paragraph discusses the financial performance and challenges faced by the company. Excluding a legal settlement, the non-GAAP gross margin and operating margin met or exceeded guidance, with earnings per share slightly ahead of expectations. However, the business environment is challenging, with global regions and most end markets showing weakness, except for aerospace, defense, and AI sectors. Particularly, Europe saw a significant revenue decline in industrial and automotive markets. Customers are tightly managing inventory and adjusting purchasing due to weak manufacturing conditions, high interest rates, and uncertain business outlook, leading to lower consumption, inventory destocking, and reduced target inventory levels across the supply chain.

The business is experiencing mixed progress with stable bookings, shorter lead times, and reduced cancellations, suggesting a potential bottoming out despite low customer confidence. Short lead times are helping customers navigate uncertainty, but reducing near-term visibility as they delay orders. The company has adjusted operations and inventory to accommodate demand for the December quarter, keeping factory utilization low to control inventory. Capacity expansion is paused, and capital investments for fiscal years '25 and '26 will be minimal, using existing inventory and underutilized capacity to support future demand.

The paragraph discusses the company's preparedness for long-term growth through partnerships and capital deployment, despite uncertainty in the semiconductor market's recovery. Progress is being made towards an agreement under the CHIPS Act, anticipated by December. Sales guidance for the December quarter ranges from $1.025 billion to $1.095 billion, amidst macroeconomic uncertainty, low visibility, and traditional seasonal challenges such as customer inventory reduction and extended shutdowns. They emphasize the difficulty of planning during these times but expect customer orders to meet their guidance.

The company anticipates a non-GAAP gross margin of 57% to 59%, operating expenses of 33.2% to 34.8%, and operating profit of 22.2% to 25.8% of sales, with diluted earnings per share expected between $0.25 and $0.35. Long-term growth is expected to be driven by new product innovation and a strong design-in pipeline, despite current challenges such as excess inventory. The company is confident in the growth potential, profitability, and cash generation of its business and anticipates a strong cycle reversal by 2025. An update on capital return to shareholders is also provided.

In the September quarter, the company returned $261 million to shareholders through dividends and stock purchases, which was 92.5% of their adjusted free cash flow from the June quarter. Since achieving an investment-grade rating in November 2021, they have returned $4.8 billion to shareholders up to the September 2024 quarter, with $2.4 billion from share buybacks, which is about 5% of their shares outstanding. They aim to return 100% of adjusted free cash flow to shareholders by the March 2025 quarter, using dividends as a fixed component and buybacks as a variable one. Occasionally, due to cash timing, they might temporarily borrow to cover dividends, repaid later through excess free cash flow. During a Q&A, Timothy Arcuri from UBS asked Ganesh about his perspective on normalizing distribution channel operations, noting that distribution heavily impacted revenue, while other areas seem stable, despite inventory days being twice the pre-COVID levels.

The paragraph discusses the inventory management challenges faced in the distribution channel during a period of market decline. Ganesh Moorthy notes that while 20 days of inventory was low during COVID, typically inventory levels are around 30 days. Current inventory calculations are based on backward-looking revenue, which may not accurately reflect the situation during a market downturn. Besides, inventory destocking is occurring not just at the distribution level but also further down the supply chain. While distribution channels are significantly reducing inventory over the past three quarters, visibility into downstream inventory levels remains limited. Signs of improvement are noted through increased requests for expedited orders, but overall market visibility is still challenging. Timothy Arcuri then asks about the impact of underutilization on gross margin recovery, referring to a past period when revenue was steady.

In the article paragraph, Eric Bjornholt discusses the impact of underutilization and inventory issues on their company's financial performance. He mentions that the company is significantly underutilized, which is affecting gross margins and operating results. Additionally, inventory reserve charges are high due to a lack of strong historical sales and backlog, but there is potential for improvement in gross margins as the market environment improves. The operator then introduces a question from Vivek Arya of Bank of America Securities, who asks Ganesh about the significant corrections seen across the sector, particularly affecting microcontrollers and industrial components compared to analog and automotive sectors. Arya seeks insight into whether these corrections are due to industry-wide cycles or company-specific issues such as share shifts or sourcing from China.

The paragraph discusses Microchip Technology's performance in the context of current industry cycles. Ganesh Moorthy explains that the semiconductor industry is experiencing an asynchronous up-and-down cycle, influenced by regional and market-specific factors. Companies, including Microchip, are dealing with an overhang from previous over-purchasing during a period of high demand optimism. This situation has been exacerbated by macroeconomic issues that led to slowed demand and excess inventory. Despite these challenges, Microchip remains confident due to its strong customer relationships and ongoing collaborations on future programs. The correction in the market is progressing, and they are moving towards recovery as the inventory imbalance is gradually resolved.

The paragraph highlights a discussion between Vivek Arya, Ganesh Moorthy, and Eric Bjornholt about the cyclical nature of their industry and the challenges of predicting future performance. Vivek asks for guidance on business expectations for December and March. Ganesh admits limited visibility into future quarters, noting factors such as the Chinese New Year and differing holiday schedules, which could impact production and sales. Eric acknowledges weak bookings for the September quarter but does not provide specific figures for December.

The paragraph discusses the disparity between Microchip's current sales and market consumption, noting that shipments are significantly below consumption levels. This gap is attributed to the bullwhip effect, where customers are managing their inventories and distribution channels, along with other macroeconomic factors. Despite visible challenges, Microchip is equipped with short lead times, available inventory, and manageable orders aligned with its lead times. Additionally, Microchip's performance expectations consider this situation, and they are positioned to execute within their historical standards. The conversation involves responses to an analyst from Goldman Sachs inquiring about the current revenue outlook and business conditions compared to pre-pandemic levels.

The paragraph features a discussion between Toshiya Hari and Ganesh Moorthy from Microchip about pricing strategies for 2025. Moorthy explains that Microchip's pricing approach remains relatively stable year-over-year, despite competitive pressures in the market, particularly for new designs. He emphasizes that while there may be pricing pressure in 2025, much of it will pertain to new designs entering production, whereas existing designs will maintain current pricing. Moorthy also notes that cost reductions, such as design shrinks, will help maintain margins. The conversation then shifts to Chris Caso from Wolfe Research, who is about to ask a question regarding geographical performance differences, particularly in Europe.

In the paragraph, Ganesh Moorthy discusses how Europe typically experiences economic cycles slightly later than the Americas, contributing to the large year-over-year and sequential declines in industrial and automotive markets in Europe. He also notes that while China and the Greater China region (Taiwan, China, Hong Kong) do not show great strength, they have not exhibited the same level of weakness as Europe and the Americas. In response to Chris Caso's follow-up question, Moorthy is asked to elaborate on borrowing considerations related to dividends and the company's perspective on borrowing levels amidst a downturn lasting longer than expected.

The paragraph explains the company's strategy for managing its adjusted free cash flow and dividend payments. In quarters where tax or interest payments lead to lower adjusted free cash flow than the dividend payment, the company may temporarily increase debt to cover the shortfall. However, in later quarters with higher free cash flow, the company plans to reduce debt and ensure a 100% capital return without increasing overall debt levels. The aim is to balance the cash flow over time without relying on external borrowing.

The paragraph discusses an exchange during an investor call, where Eric Bjornholt emphasizes a commitment to maintaining strong dividends and cash generation for shareholders. Blayne Curtis from Jefferies questions the company's guidance, particularly regarding uneven signs of recovery. Ganesh Moorthy responds by highlighting ongoing strength in aerospace, defense, and AI data centers, while noting seasonal factors, such as holiday shutdowns and year-end inventory management, that may influence production and guidance. The guidance reflects these varying influences and potential challenges for the quarter.

In the paragraph, Blayne Curtis asks about the company's operating expenses (OpEx) over the next few quarters, considering the reinstatement of salary cuts and the potential impact on variable compensation. Eric Bjornholt responds that there will be an $8 million increase in OpEx from December to September, primarily due to reinstating full salaries for employees below the director level. This change will be fully reflected in the March quarter, potentially increasing OpEx further. The company values employee engagement and compensation. Following this discussion, Christopher Rolland from Susquehanna International Group shifts the focus to data center products, inquiring if any particular product stands out and whether this segment is growing faster than other markets.

Ganesh Moorthy discusses the data center market's potential, highlighting its current challenges and future opportunities. While data center revenue is significant, growth is currently limited due to decreased spending on non-AI infrastructure, even as AI-related areas remain strong. He is optimistic about long-term prospects. Eric Bjornholt provides insight into capital expenditures (CapEx), which are expected to total $150 million for the fiscal year ending in March, with significant spending in the first half. He also mentions involvement with the CHIPS Act, although details and timelines remain unspecified.

The paragraph discusses the company's expectations for capital expenditures (CapEx) in fiscal year 2026, projecting it to be lower than in fiscal 2025 due to prior investments in capacity that have not yet been depreciated. While they will continue with maintenance and growth investments, the overall CapEx is expected to remain low. Regarding the CHIPS Act, Ganesh Moorthy explains that they are still negotiating agreements and don’t expect immediate benefits from it; however, over the next few years, as demand increases and they utilize their capital commitments, the Act’s provisions, including investment tax credits and grants, will be advantageous. Harlan Sur from JPMorgan then raises a question about the company's product and technology innovations.

In the paragraph, Ganesh Moorthy and Richard J. Simoncic discuss their approach to tracking the success of TSS (Total System Solutions) for Microchip. They explain that due to their large customer base of over 120,000, primarily through distribution channels, it's challenging to consistently quantify dollar content per customer. However, they do track subsets of large customers and specific megatrends internally, noting growth in those areas. Although they don't provide detailed financial breakdowns, they emphasize growth in content within their applications. They suggest that more insight might be shared in investor communications and recommend checking their website, which features a growing reference design section, for an understanding of target markets and associated devices.

In this paragraph, Ganesh Moorthy discusses the uncertainty in the market regarding inventory and lead times. He highlights that while there are currently high turn rates due to short lead times and available inventory, a shift could happen if customers start feeling the need to place backlogs due to either concerns about product availability or newfound confidence in their own business. Moorthy notes that customers are currently uncertain about their business outlook and inventory levels. However, he suggests that external factors, such as decreasing interest rates, could stimulate a turnaround in the market.

In the paragraph, Tore Svanberg and Eric Bjornholt discuss the company's situation with regard to inventory and revenue growth. Tore Svanberg asks Eric about the company's capital expenditures (CapEx) and its capacity to double quarterly revenue with just maintenance CapEx, considering the company's reliance on outsourcing. Eric affirms that theoretically, it could be possible if the current product mix remains the same, but acknowledges that future investments might be necessary for new products and changing market conditions. William Stein from Truist Securities then asks about the "green shoots" of demand and how they differentiate between genuine demand increases and expedited orders, which might be misinterpreted as higher demand due to decreasing lead times required by customers.

The paragraph discusses the dynamics of customer demand and order placements. Ganesh Moorthy explains that while some customers are taking advantage of short lead times to place orders, others are resuming orders after not doing so for several quarters. Some customers are also pulling in previously placed orders as their demand clears up. The company sees these actions as indicators of genuine demand, suggesting a closer alignment with actual consumption needs. William Stein then references past company growth projections, noting discrepancies in long-term sales growth expectations (6%-8% vs. 10%-15%) and asks about the current rate of end demand, acknowledging past periods of both low and excessive shipping.

In the paragraph, Ganesh Moorthy discusses the challenges of assessing normalized demand due to high market volatility and cyclic nature of growth, noting that recent growth and downturn cycles were largely influenced by unusual factors like COVID-19. He emphasizes that it's difficult to pinpoint what part of the cycle reflects secular growth versus temporary spikes. Despite the current down cycle, Eric Bjornholt expresses confidence in focusing on emerging megatrends and innovative areas where their products are relevant, suggesting these strategies will enable consistent market share gains. Moorthy highlights the significant role of semiconductors in driving innovation and its integration into everyday products and operations.

The paragraph discusses the challenges faced by a semiconductor company during an extended downturn. Chris Danely from Citi asks about the potential risks of an inventory write-down or dividend cut due to the prolonged downturn. Eric Bjornholt responds that they aren't concerned about these risks, as their products have long lifespans and they expect the market to rebound. The cash generation and dividend are stable. Danely also questions why Microchip's sales have declined more substantially compared to competitors. Ganesh Moorthy attributes this to a previous period of heightened sales growth for the company, suggesting they experienced a steeper increase earlier than others.

The paragraph discusses how companies in the industrial and automotive sectors have been managing higher inventory levels due to past policies, and as a result, they are now working through this excess. Despite a significant drop in revenue since pre-COVID levels in December 2019, there is potential for significant growth ahead. Microchip expects this growth to lead to a return to normal operating profits. Furthermore, Eric Bjornholt mentions continued suboptimal utilization of factories, leading to persistent underutilization charges. Joshua Buchalter inquires about expectations for gross margin and potential inventory write-downs in the December quarter, and Eric Bjornholt suggests that the current trends will continue.

The paragraph discusses a conversation between Joshua Buchalter and Ganesh Moorthy about inventory management and the role of channel partners in sales. Ganesh explains that while inventory reserves are high, they are confident that their long-term products will eventually sell. Joshua asks about the strategic importance of distribution channels in light of recent industry trends. Ganesh responds by emphasizing the continued significance of their approximately 100 global channel partners, who play a crucial role in reaching customers. He mentions that channel partners have consistently contributed to around 50% of their sales and highlights the need to adapt strategies for working with and rewarding these partners.

In the conversation, Harsh Kumar inquires about pricing pressures amid high capacity and low product uptake, asking Ganesh Moorthy how negotiations for the next year's contracts are unfolding. Ganesh acknowledges that while there's always pressure from purchasing managers, the emphasis is on creating win-win deals that benefit both parties, noting that long-term pricing remains stable. Harsh then asks about the "green shoots" or positive market signs, which Ganesh admits have dulled recently, despite being more promising two quarters ago, reflecting current market challenges.

In the paragraph, Ganesh Moorthy discusses the challenges and progress related to grants awarded under the CHIPS Act for facility expansions in Colorado Springs and Oregon. The grants, totaling $162 million, were initially outlined in a preliminary agreement in January, but have not yet led to concrete actions. Moorthy explains that extensive due diligence and mutual learning were required, involving ongoing negotiations with the Commerce Department. Efforts have been made to address issues relevant to Microchip, and significant progress has been achieved in navigating these challenges.

The paragraph discusses the complexities and challenges of a public-private partnership in the semiconductor industry, led by Microchip and involving government collaboration. Richard J. Simoncic highlights the intricate nature of semiconductor manufacturing, which requires global coordination and extensive investment. The process involved educating government stakeholders, unfamiliar with the complexity of semiconductor production, about the industry's needs and the CHIPS Act requirements. Janet Ramkissoon questions whether Microchip preemptively purchased equipment to fulfill obligations in anticipation of receiving funding, specifically mentioning a $162 million investment in Colorado Springs and Oregon.

In the paragraph, Ganesh Moorthy explains that their business activities were not specifically timed to align with potential CHIPS Act funding but were carried out according to the company's operational needs. Despite changes in the market, their actions were primarily focused on efficiently running the business. Janet Ramkissoon thanks Moorthy for his insights, and the operator concludes the teleconference, turning the floor back to Moorthy for final remarks. Moorthy expresses gratitude to the participants and looks forward to future engagements. The teleconference then ends.

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