The paragraph is part of a financial results conference call for Microchip's Q4 and FY 2025. Steve Sanghi, the Executive Chair, CEO, and President, hosts the call alongside other executives and provides cautionary notes about forward-looking statements. Sanghi mentions his return as CEO in November 2024 and details an ongoing restructuring effort through a nine-point recovery plan to restore the company's performance. An update reveals the closure of the Tempe Fab 2 as part of resizing their manufacturing footprint. The call will include updates on financial performance, product lines, and future guidance, with a Q&A session at the end.

The company has completed several strategic actions across its facilities, aiming to optimize operations and reduce inventory. It successfully reduced inventory from 266 to 251 days and targets further reductions in the June quarter, with a fiscal year 2026 goal of a $350 million reduction to free up cash. It revised its megatrends focus, replacing 5G with artificial intelligence and integrating ADAS into Network and Connectivity. A detailed review led to organizational and channel strategy changes that haven't negatively affected distribution. Additionally, they strengthened customer relationships by engaging over 700 customers for direct feedback.

The paragraph details the company's progress in restoring customer relationships that were strained during the COVID cycle, successfully improving 78% of these relationships, leaving only 2.6% still stressed. The company also completed a global layoff of around 10% of its employees to reduce operating expenses and plans further improvements through revenue growth and cost control. Additionally, they resumed discussions with the CHIPS Office, which is under reorganization. Eric Bjornholt takes over, directing attention to GAAP and non-GAAP measures and providing a summary of the company's financial metrics, which are available on their website for investor review.

In the March quarter, the company reported net sales of $970.5 million, slightly above guidance, while experiencing a 5.4% sequential decline. On a non-GAAP basis, gross margins were 52%, operating expenses were 38% of sales, and non-GAAP net income was $61.4 million or $0.11 per diluted share. On a GAAP basis, gross margins were 51.6%, with total operating expenses of $601.4 million, leading to a net loss of $156.8 million or $0.29 per share. For fiscal year 2025, net sales totaled $4.402 billion, down 42.3% from the previous year. Non-GAAP results showed gross margins at 57% and a net income of $708.8 million, while GAAP results reported a slight net loss of $2.7 million. The non-GAAP cash tax rate was 13.6% in the March quarter and 14.2% for the fiscal year.

In fiscal year 2026, the expected non-GAAP tax rate is 12%, excluding transition taxes and prior tax audit settlements. As of March 31, 2025, the inventory balance decreased to $1.293 billion, with 251 days of inventory, down 15 days due to reduction actions. Notably, 18 days of inventory comprised high-margin products with discontinued manufacturing capacity. Distributor inventory decreased by four days due to higher distribution sell-through. Operating cash flow reached $205.9 million, while adjusted free cash flow was $182.6 million. The company's cash and investment position was $771.7 million. A $1.485 billion convertible preferred stock offering helped reduce debt and preserve the investment grade rating. Total debt decreased by $1.125 billion, and net debt dropped by $1.31 billion. Adjusted EBITDA stood at $200.4 million, or 20.6% of net sales, with a trailing twelve-month EBITDA of $1.337 billion, and a net debt to adjusted EBITDA ratio of 3.66.

In the March quarter, the company focused on strategic initiatives to enhance its product lines, delivering value across various markets. Investments were made in next-generation technologies like the Switchtec PCIe switches, which are adaptable for automotive and embedded computing applications, improving communication performance. The company strengthened its portfolio with ARM-based microprocessors, 32-bit microcontrollers, and high-performance analog peripherals for diverse sectors like industrial, consumer, medical, and AI/ML. These advancements reduce system complexity and cost. The MPLAB AI coding assistant, which boosts productivity, was updated with new features. The new PIC64 product line and 10BASE-T1S solutions are also gaining traction in markets such as Space, Industrial Automation, Automotive, and Edge Compute.

The company is demonstrating its commitment to growth and profitability through innovations and operational efficiency. Steve Sanghi discusses the business's financial performance, noting a revenue decline in the March quarter due to a large inventory correction after a post-COVID-19 boom. Microcontroller and analog units saw decreased sales, whereas technology licensing drove growth in other areas. Geographically, sales were down in the Americas and Asia but up in Europe. The company anticipates June quarter sales of $1.045 billion, indicating that the March quarter represented a revenue low. The book-to-bill ratio has improved to 1.07, suggesting increased customer purchases, and the company projects a non-GAAP gross margin of 52.2% to 54.2%.

The paragraph outlines the company's financial expectations and strategies for the upcoming fiscal year. They anticipate non-GAAP operating expenses to be 33.4%-34.8% of sales, with an operating profit of 17.4%-20.8% and diluted earnings per share between $0.18 and $0.26. The company highlights their business model's leverage, expecting to convert a significant portion of increased net sales into operating profit. They also discuss revenue growth driven by three main factors: correction of distributor and distributor customer inventories, an expected rise in distributor buy-in to meet sales demand, and improvements in direct customer shipments. These factors, coupled with sales growth, improving gross margins, and declining inventory, are expected to significantly enhance financial performance. The company plans to provide an update on shareholder capital return programs.

The company is currently paying dividends that exceed their adjusted free cash flow due to reduced net sales and periodic higher bond interest and tax payments. They plan to improve this situation by freeing up cash from inventory and maintaining low capital expenditures to increase adjusted free cash flow above the dividend. They aim to eventually reduce borrowings to previous levels once cash flow exceeds dividends. Despite the current situation, they are not considering cutting the dividend and recently strengthened their balance sheet through a $1.4 billion convertible preferred transaction, maintaining their investment-grade debt rating. During an investor call, a question was asked about demand signals and potential impacts from tariffs.

In the discussion, Steve Sanghi highlights the strong recovery in demand across key markets, beginning in January, with increased bookings observed through March. This upswing is attributed to depleted inventories and new product designs entering production, rather than any impact from tariffs, which have largely not affected semiconductor shipments to China or the U.S. He notes significant growth in the aerospace and defense sector, which has increased from 11% to 17-18% of their business in fiscal year 2025, driven by strong defense budgets, making it the second-largest market after industrial.

The paragraph discusses the increase in defense spending, with NATO and the U.S. notably allocating more resources due to ongoing wars. The U.S. Defense budget is expected to exceed a trillion dollars, benefiting European contractors tied to NATO as the U.S. encourages NATO to boost its defense expenditures. Meanwhile, other sectors like industrial, automotive, and consumer markets are seeing recovery driven by inventory reduction and new product developments. The discussion then shifts to a Q&A where Chris Caso inquires about the macroeconomic effects of tariffs, particularly concerning demand shifts. Steve Sanghi responds, suggesting that tariffs impact product shipments between China and the U.S. but doesn't specify immediate concerns about a shift in demand timing due to tariffs.

The paragraph discusses the impact of tariffs on the company's semiconductor production. During Donald Trump's presidency, 25% tariffs were imposed on Chinese-made semiconductors entering the U.S. In response, the company reduced its production in China from around 10-11% to less than 4%, shifting production to countries like the Philippines, Thailand, Vietnam, and Indonesia. The minimal amount of Chinese-made products entering the U.S. makes the tariff impact negligible, as costs are passed to customers. For U.S.-made products potentially facing tariffs in China, the company plans to use production facilities in Taiwan or Europe to avoid tariffs. Overall, the company is not significantly concerned about direct tariffs, although indirect economic impacts remain uncertain.

The paragraph discusses a hypothetical scenario where a significant reduction in revenue could impact manufacturing and inventory. The analysis revealed that despite this potential revenue loss, current manufacturing reductions ensure that inventory continues to decline, albeit at a slower rate, thus requiring no further action. The conversation shifts to addressing margin leverage, with Eric Bjornholt explaining current challenges, primarily underutilization and inventory reserve charges. These charges are expected to persist in the short term, as production remains low to reduce inventory, but potential revenue recovery should eventually improve margin leverage.

The paragraph discusses the company's expectation of a significant reduction in inventory reserves as revenue increases, predicting a dramatic drop due to rapid inventory reduction. They are targeting a $350 million reduction in inventory for the fiscal year, which should start affecting gross margins positively outside of the current quarter, though no specific numbers are provided. In response to a question by Timothy Arcuri of UBS, Eric Bjornholt clarifies that the company has closed one fab, not three, and emphasizes that future margins will depend on the recovery rate and factory ramp-up needs. Current inventory has higher per-unit costs, but the overall cost structure is solid.

The paragraph discusses the company's confidence in achieving a long-term model of 65% non-GAAP gross margins, emphasizing significant leverage but refraining from committing to specific margin levels at past revenue levels. Timothy Arcuri inquires about consumption in June relative to guidance, noting that distributor sell-through is growing but still expected to be below sell-in. Steve Sanghi responds that their models indicate the difference between distributor sell-in and sell-through will be less than the previous quarter's $103 million, with the gap expected to continue closing. He explains that this gap closure is not due to a decrease in sell-through but an increase in sell-in. Additionally, the company is consuming more inventory than it is producing, based on June quarter guidance.

In this paragraph, Blayne Curtis from Jefferies asks about the company's market share dynamics and strategy, particularly in the MCU sector. He notes that the company's share was high during the pandemic but has since decreased more than competitors. Curtis questions whether the company expects to return to pre-pandemic market share levels. Steve Sanghi responds, expressing confidence in regaining share as the company recovers. Curtis also raises questions about strategies related to the trade war with China, specifically the approach of manufacturing in China for the Chinese market and its potential impact on market dynamics, including pricing pressures.

In the paragraph, Steve Sanghi discusses a shift in strategy due to changes in rules regarding products labeled as "made in China." Originally, their strategy involved collaborating with a Chinese partner to sell products locally branded as Chinese, but this relied on components made in their US facilities. However, with new regulations, the definition of "made in" now focuses on where the product is manufactured rather than assembled. This change has prompted them to reconsider their strategy, possibly shifting production from the US to Taiwan to avoid tariffs and comply with the new rules. Sanghi also expresses concern that current US regulations incentivize moving production out of the country, which is contrary to the government's intentions.

In the paragraph, Steve Sanghi and Eric Bjornholt discuss financial aspects of their business, focusing on gross margins and pricing. The March quarter's gross margins were at the lower end of expectations due to low utilization and high inventory reserve charges, despite sales being slightly above the midpoint. They anticipate a mid-single-digit decrease in pricing for the year. Steve highlights the June quarter as an inflection point and expresses optimism for the September quarter, noting that the backlog for September is higher and the fill trend appears favorable. Vivek Arya seeks clarity on how to model the business during these inflection periods, to which Steve responds positively about future prospects.

In the paragraph, Tore Svanberg from Stifel asks Steve Sanghi about the organizational changes related to microcontroller development. Steve explains that the change involved merging the 8-bit and 32-bit business units, not their development tools, which were already combined. This decision was made because the separate 8-bit and 32-bit units were not coordinating well, leading to gaps in product offerings, particularly in low-end 32-bit products that former 8-bit customers needed. The shift from 8-bit to 32-bit gained momentum during COVID-19, as supply chain issues led customers to adapt to available 32-bit solutions. To address this, the company has adjusted its development priorities and plans to introduce new products in early January.

In the discussion, Eric Bjornholt explains that most of the $90 to $100 million in operating expenses savings from a recent restructuring have already been realized. He notes that operating expenses for the March quarter came in $7 to $8 million below forecasts due to early actions in March, and most savings will be reflected in their June quarter guidance. Tore Svanberg thanks Eric for the clarification. The next part of the conversation involves Harlan Sur from JP Morgan asking Steve about the impact of tariffs, referencing how in 2018-2019, the microchip team noticed order patterns dropping among China industrial and manufacturing customers due to tariff-related demand uncertainty.

In the paragraph, Steve Sanghi discusses the impact of tariffs on China, highlighting that current tariffs are broader than before, affecting the entire world rather than just China. However, he notes that people will continue to purchase goods such as cars and appliances, leading to a shift in production from China to other countries like Vietnam. This trend has been ongoing for several years due to political dynamics and is accelerating. Consequently, while China may face challenges, the global impact may be less severe. Harlan Sur then asks about the performance of megatrend revenues from fiscal 2021 to 2024, noting a growth rate double that of the overall microchip business. He seeks clarification on the revenues and percentage mix of these megatrends in fiscal 2025.

In the paragraph, Richard Simoncic discusses how the growth of megatrends has slowed in terms of percentage growth but still surpass the overall microchip rate in CAGR. However, megatrends have been affected by inventory corrections just like standard markets. Joshua Buchalter from TD Cowen asks about the improved visibility that suggests the company has reached the bottom of the inventory digestion phase. Steve Sanghi explains several indicators of improved visibility: increased sales to end customers via distribution channels, significantly higher bookings in the March quarter and April compared to previous months, and favorable daily billing and booking trends reflected in the crawl chart.

The paragraph discusses a comparison of backlog growth across different quarters, noting that the June quarter started with a higher backlog than the March quarter, and the backlog continued to grow substantially by May 8th. The September quarter backlog is even higher, indicating increased customer demand possibly due to inventory corrections or new product launches. Joshua Buchalter asks about more sustained production shutdowns in the June quarter, and Steve Sanghi explains that two factories are operating with rotating time off. The Oregon facility, in particular, is crucial because it produces advanced products, so it operates on a two-week rotating time off schedule to allow for rapid ramp-up if needed. This strategy is not applied in their Colorado or Philippines facilities.

The paragraph discusses a strategic decision regarding production levels and inventory management. Initially, the plan is to reduce production to decrease inventory levels, but not to the extent that it becomes unsustainable in the following quarters. The goal is to gradually increase production capacity in advance to avoid sudden surges in demand that can't be met due to hiring and training challenges. While this inflection point isn't expected in the current or next quarter, it may arise later in the fiscal year when production should be ramped up. The paragraph also touches on a question regarding the company's competitive positioning in China, with past concerns about certain products losing competitiveness, especially standard products. The discussion suggests a shift in strategy related to partnerships and overall solution selling in the Chinese market.

In the paragraph, Steve Sanghi explains that due to pressure from the Chinese government, many customers prefer Western products but need them to be branded locally to comply with government requirements. The company aimed to offer Western-designed products under local Chinese brands, providing a solution that met both quality expectations and local mandates. However, China redefined what constitutes a locally made product, excluding U.S.-made products from qualifying under the "China for China" strategy. This has led the company to consider shifting production from the U.S. to other countries like Taiwan, Germany, or Japan. They are already moving some processes to Taiwan but are hesitant to form new relationships for transferring U.S. products. Instead, they are providing feedback to the government about the potential negative impact of this strategy on U.S. production, though they may relocate production if the rules persist.

In the discussion, Eric Bjornholt addresses competition from Chinese companies in the semiconductor sector, noting that it is likely limited to lower-end products, with higher-end products remaining unaffected in the near term. Vijay Rakesh from Mizuho Securities inquires about the implications of Section 232 on bringing production back to the U.S. Steve Sanghi responds by explaining the current strategy of producing products outside of both China and the U.S. to avoid geopolitical tensions, emphasizing that this approach could change as regulations evolve. He highlights that their manufacturing strategy includes producing in multiple countries like Taiwan, Germany, and Japan to remain adaptable.

The discussion focuses on inventory management and production planning. Steve Sanghi mentions that their June quarter inventory is projected to be between 215 and 225 days, with expectations to drop below 200 days by September. Their long-term goal is 130 to 150 days. They plan to start increasing production before inventory reaches 150 days to avoid production challenges. Quinn Bolton asks if incremental margins could increase beyond 85% when production rises as inventory decreases. Steve replies that several factors affect this, including reduced write-offs from lower inventory levels.

In the provided paragraph from a conference call, Eric Bjornholt discusses the unpredictability of selling written-off inventory due to the variability in the order pattern. He notes that although predicting when this will occur is challenging, the sell-through of previously written-off inventory will eventually benefit gross margins as their products have a long life span. He anticipates this positive impact will become more apparent as they advance through fiscal year 2026. Christopher Danely then asks about Microchip's positioning in the microcontroller market. He inquires whether any changes are needed to the product lines or strategy, or if the current approach is effective and should continue as is.

In the paragraph, Steve Sanghi discusses the sense of urgency and recent organizational changes at their company, such as combining 8-bit and 32-bit product lines. He notes positive indicators like growth in revenue, margins, and customer counts, as well as product and inventory improvements. Sanghi mentions admitting to past missteps in transitioning from 8-bit to 32-bit products but asserts the overall quality of their products. Richard Simoncic adds that the company is enhancing customer tools to facilitate easier transitions between product lines, emphasizing aggressive strategic moves. Sanghi highlights the development platform changes for 32-bit microcontrollers, previously unique to Microchip, encouraging better customer adoption.

The paragraph discusses a strategic shift by Microchip from using proprietary and MIPS-based architectures to predominantly ARM-based architectures for their 32-bit products. This shift allows them to integrate with existing third-party development platforms like Keil and IAR, removing a barrier for large customers who previously had to change platforms to use their products. As a result, the company has successfully reduced obstacles to product adoption and is gaining new designs. Additionally, in response to a question about the dividend, Steve Sanghi emphasizes their commitment to maintaining it, having recently taken measures like raising $1.45 billion and reducing debt to uphold their investment-grade rating without reducing the dividend. With revenue increases, improved cash flow, and rising gross margins, they expect 85% of incremental revenue to contribute positively to their financials.

The conversation involves Joe Moore asking about the rationale for excluding a preferred dividend from non-GAAP results, to which Eric Bjornholt explains that it's an equity instrument and not debt. Janet Ramkissoon from Quadra Capital then asks about the company's involvement in the aerospace and defense sectors, specifically regarding the increase to 18% and collaboration with new market players like SpaceX. She inquires how the company's shift from 5G to AI strategies aligns with defense opportunities. Richard Simoncic responds that they have been collaborating with new defense and space customers by adapting their products to become RAD tolerant instead of RAD hard.

The paragraph discusses the growth opportunities for a company involved in producing microchips for defense and aerospace products, especially as the U.S. and NATO plan to rebuild and expand their defense arsenals. The U.S. intends to upgrade its aging military equipment, which includes missiles, tanks, and other hardware, all of which require the company's products. Additionally, NATO is expected to considerably increase its defense budget, presenting further opportunities. A major French defense customer expressed concern over the company's decision to close a fabrication facility, highlighting the anticipated expansion of their business.

The paragraph is from a financial discussion involving Microchip Technology. Steve Sanghi expects Microchip's market share in microcontrollers (MCU) to increase in the next few years, driven by customers increasing purchases after reducing inventory. Their June quarter guidance is strong, indicating market share gains. Christopher Rolland inquires about AI-related revenue and new product announcements in areas like optical, power, and PCIe. Eric Bjornholt mentions that AI as a percentage of sales has grown from about 4% last year to over 6% currently, showing significant growth in this area.

The paragraph discusses Microchip's efforts to improve product development efficiency for their customers. They created an AIML product group to coordinate the needs of various business units for models and accelerators. Richard Simoncic highlights a specific initiative where Microchip has been using an internally trained tool for code development, achieving a 40% productivity improvement. This tool, used by over 1000 engineers, is now being offered to customers for free to enhance their own embedded control design processes, thereby speeding up development time and improving time to market. The paragraph ends with an emphasis on sharing internal enhancements with customers.

The paragraph discusses Microchip Technology's efforts to enhance customer experience by integrating AI product recommenders and software development tools. These tools aim to facilitate easier design and integration of Microchip products into system boards, supporting their total system solution ambition. The company is also planning to offer board-related support for TSS solutions later in the year. The conversation concludes with closing remarks from Steve Sanghi, expressing optimism about financial improvements in the current fiscal year and mentioning upcoming conferences.

The paragraph is a closing statement, thanking participants for joining and instructing them to disconnect their lines.

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