Release Date: May 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Microchip Technology Inc (MCHP, Financial) maintained a strong non-GAAP gross margin of 60.3% despite a significant sequential drop in net sales.
- The company's non-GAAP operating margin exceeded expectations, reaching 32.9% due to effective expense control measures.
- Microchip Technology Inc (MCHP) reported a robust capital return to shareholders, with dividends and share buybacks in fiscal 2024 amounting to $1.89 billion, marking a 15.4% increase from the previous fiscal year.
- The company successfully completed strategic acquisitions, such as the purchase of Neuronix AI Labs, enhancing its capabilities in AI-enabled edge solutions.
- Microchip Technology Inc (MCHP) is entering the 64-bit embedded microprocessor market, which could open up new revenue streams and strengthen its product portfolio.
Negative Points
- Net sales for the March quarter dropped significantly by 24.9% sequentially and 40.6% from the previous year, indicating a major inventory correction phase.
- The company's net leverage ratio increased to 1.57x, up from 1.45x the previous year, due to lower EBITDA and increased debt.
- Inventory levels remained high with 224 days of inventory at the end of the March quarter, reflecting challenges in aligning inventory with reduced demand.
- Microchip Technology Inc (MCHP) experienced a higher than expected non-GAAP cash tax rate of 18.8% in the March quarter, impacting net income.
- The company anticipates continued inventory adjustments and a modest rise in net leverage in the coming quarters, suggesting ongoing financial pressure.
Q & A Highlights
Q: Ganesh, you were suggesting June to be the bottom and for September to grow sequentially because of green shoots. But to be fair, green shoots as suggested on the last call also. So what's the difference between the last 60% also the trough for gross margin, if June is the bottom, does it also mean 60% is the trough for gross margins?
A: Ganesh Moorthy, CEO, President & Director of Microchip Technology, clarified that green shoots were not mentioned in the last earnings call but were discussed in a banking session in March. The momentum from bookings and customer interactions in recent months supports the belief that June will mark the bottom of the cycle, with growth expected in September. James Eric Bjornholt, CFO, added that if June is the trough in revenue, gross margins are likely also at their lowest point, although specific guidance on this will depend on various factors including product mix and factory operations.
Q: Is there any difference that you're seeing from any of the different end markets? How would you characterize the booking stabilization improvement among the different end markets?
A: Ganesh Moorthy noted that while aerospace and defense, along with the AI segment of data centers, are performing well, other sectors like industrial show mixed results. There is no clear trend across different end markets regarding inventory stabilization or recovery.
Q: Can you talk about channel sell-through dynamics from your global distributors?
A: Ganesh Moorthy explained that while it's challenging to track inventory levels past distributors, there are signs that distributors are managing their inventories and placing additional orders. This activity suggests a positive adjustment in their inventory levels, although definitive sell-through versus sell-in data for the June quarter isn't available yet.
Q: How long can you hold OpEx down, and is there any clawback provision for the lost wages during this temporary salary cut?
A: James Eric Bjornholt and Ganesh Moorthy addressed that there is no clawback for salary sacrifices, which are part of the company's culture of shared sacrifice during downturns. The duration of reduced OpEx will depend on revenue performance, and there is no promise of retroactive compensation for employees.
Q: Can you give us a sense of book-to-bill? It sounds like it was below 1 for March, but I just wanted to confirm that.
A: Ganesh Moorthy confirmed that the book-to-bill ratio was below 1 and emphasized that book-to-bill is not a primary indicator for business direction at Microchip, especially with current short lead times. Instead, the focus is on the rising bookings and customer engagements.
Q: Inventory was a little higher coming out of March than some expected. Can you talk about loadings in the factory and how you're thinking about loadings into June?
A: James Eric Bjornholt responded that inventory levels were within the expected range and factory utilization in the current quarter would be similar to the previous quarter, possibly slightly lower due to workforce attrition affecting production capacity.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
