Christopher Danely

Christopher Danely asked for an outlook on end market performance for the year and whether business conditions had changed recently. He also inquired about the path to improving the Embedded business's low margins.

Answer

Executive Haviv Ilan stated that due to short lead times, they 'call it when they see it,' but noted personal electronics, enterprise, and communications appear to be in a cyclical upturn, while industrial and automotive have not yet bottomed. Regarding Embedded margins, he described the business as being in a strategic transition. Executive Rafael Lizardi reiterated that low revenue and the disproportionate impact from LFAB underutilization are the primary causes, which will reverse as the factory ramps.

Christopher Danely asked for clarification on DRAM revenue mix, specifically the contribution of DDR4 and DDR5, and the relative impact on incremental gross margin between DDR5 and HBM. He also followed up on previous discussions about achieving 50%+ gross margins, asking what factors changed to enable this and what limiting factors remain.

Answer

Sumit Sadana, EVP and Chief Business Officer, noted that DDR4 (excluding LP4) has been a low single-digit percentage of the business, with margins improving due to extreme shortages. He explained that HBM and non-HBM DRAM operate under different business models, making direct margin comparisons difficult. He anticipates improving pricing and margins for non-HBM DRAM as the industry tightens. Mark Murphy, EVP & CFO, attributed the improved gross margins to continued market condition improvements, particularly tight DRAM and improving NAND. He highlighted structural factors like low inventory, extended DDR4/LP4 life constraining tech transitions, silicon intensity of HBM, and long fab construction times as enabling factors for margin expansion, along with cost improvements and focus on higher-value products.

Christopher Danely questioned why current gross margins are roughly 10 points lower than the last time revenue was at a similar level, asking if this precludes a return to the 50% range. He also pointed out a perceived contradiction between the strategy of shifting to a high-value mix and citing increased consumer exposure as a drag on margins.

Answer

CEO Sanjay Mehrotra clarified that the margin disparity compared to the past is primarily due to the NAND business, which has been weighed down by poor industry fundamentals, while DRAM margins remain healthy. He explained there was no contradiction, as the 'consumer exposure' refers to a strong demand rebound in markets like smartphones after a period of inventory correction. This rebound, along with HBM, is tightening supply and enabling price increases across the portfolio.

Christopher Danely asked for more details on the cause of the lower factory utilization rates in the quarter, their current status, and future trajectory, as well as other gross margin drivers.

Answer

CEO & Chair Vincent Roche attributed the issue to a one-time event at a European fab, which created an absorption problem but is not expected to repeat. EVP & CFO Richard Puccio confirmed utilization is now increasing. Roche also noted that they are absorbing costs from recent CapEx to expand internal fabs, which will benefit from rising industrial demand.

Christopher Danely questioned the company's operating leverage, pointing out that OpEx growth appears to be tracking revenue growth with minimal gross margin expansion in the Q3 guide. He asked for the reasons and the outlook for future leverage.

Answer

Executive Michael Lucarelli explained that while base OpEx was flat, leverage in Q2 and Q3 is being muted by rising variable compensation tied to year-over-year operating margin growth, which is rebounding in fiscal '25. He anticipates more leverage in fiscal '26. Executive Richard Puccio added that gross margin is expected to return to around 70% in Q3, aided by strong growth in the more profitable industrial segment.

Christopher Danely from Citi requested more detail on the drivers of industrial segment strength, asking if it was due to inventory replenishment or improved demand, and inquired about booking trends during the quarter.

Answer

CFO Rich Puccio attributed the industrial strength to three consecutive quarters of sequential growth, with Q1 seeing continued momentum in ADAS and ATE, plus stabilization in automation and healthcare. He noted a pickup in the broad market drove upside. Executive Michael Lucarelli added that industrial bookings improved in Q1 versus Q4, supporting the forecast for it to be the fastest-growing market in Q2.

Christopher Danely asked for details on the strength in the Automotive segment, specifically the size of the China market and the mix between EV and ICE vehicles.

Answer

CFO Rich Puccio explained that Q4 automotive demand was better than expected due to improving demand from China, reflecting EV volume, share gains, and content growth. He noted broad weakness in other geographies but upside in the U.S. driven by BMS. CEO Vince Roche added that ADI focuses on high-performance solutions with major players in China. Executive Michael Lucarelli clarified that China's business mix is about 80% Industrial and Automotive.

Christopher Danely questioned the gross margin impact of exiting 5% of the business and asked about the margin profile of the silicon carbide business relative to the corporate average and its path to the company's target.

Answer

CFO Thad Trent stated that silicon carbide gross margin is currently below the corporate average due to underutilization, which will improve with volume. He explained that the exiting business is currently near the corporate average margin, making the short-term impact neutral, but its removal is accretive to the long-term 50%+ margin goal. President and CEO Hassane El-Khoury declined to break out China's specific percentage of auto revenue but emphasized that wins there are based on performance and technology leadership.

Christopher Danely asked for an update on the plan to exit non-core business in the current pricing environment and inquired about the momentum and gross margin potential for the silicon carbide business.

Answer

CEO Hassane El-Khoury confirmed the plan to exit non-core business remains, with timing being market-dependent. CFO Thad Trent added that about $50 million was exited in Q1, with a full-year goal of around $300 million. Regarding silicon carbide, El-Khoury expressed continued confidence in growth and market leadership, stating that current margins are impacted by underutilization but the company's cost structure remains the industry's best.

Christopher Danely from Citi inquired about the expected growth trends for automotive versus industrial for the remainder of the year and asked if the recent decline in silicon carbide is causing a reassessment of long-term growth or margin targets for that business.

Answer

CEO Hassane El-Khoury stated it was too early to forecast the rest of the year, as performance is now purely dependent on end-market demand. CFO Thad Trent added that the company believes it is under-shipping natural demand. Regarding silicon carbide, El-Khoury confirmed that long-term targets for market leadership and high profitability remain unchanged, as the current issue is short-term demand lumpiness, not a structural change in strategy.

Christopher Danely asked for the outlook on depreciation for 2025 and beyond, given that CapEx is peaking. He also inquired about the risk to the silicon carbide bridge inventory due to slowing market growth.

Answer

CFO Thad Trent projected that 2025 depreciation would be roughly in line with current levels at around 7% of revenue, with a decline expected to begin in 2026. CEO Hassane El-Khoury assured there is no risk to the bridge inventory, as it is held as raw substrates, providing maximum flexibility to build to demand without obsolescence or pricing risks.

Christopher Danely asked for more color on visibility trends and shortages through year-end and sought a comparison of the growth outlook for the automotive versus industrial segments over the next year.

Answer

CEO Kurt Sievers expressed optimism for both segments, stating they are on track to meet long-term 8-12% growth targets. He highlighted strong design-win traction in automotive for software-defined vehicles (SDV). President Rafael Sotomayor added that the industrial recovery is now broad-based across geographies and includes core industrial applications, not just consumer IoT, with growing engagement on AI at the edge.

Christopher Danely of Citigroup asked for more color on visibility trends, including quantitative metrics on shortages and escalations, and questioned whether automotive or industrial would see higher relative growth over the next year.

Answer

CEO Kurt Sievers declined to give a Q4 segment guide but reiterated confidence in the 8-12% long-term growth model for both Auto and Industrial & IoT, suggesting a catch-up is possible next year. President Rafael Sotomayor added that the Industrial recovery is now broad-based across geographies and core industrial markets, not just consumer IoT. He also highlighted growing customer engagement for next-gen high-performance AI products.

Christopher Danely asked about the size of NXP's China auto business, the impact of Chinese EV share gains, and the long-term goal for inventory days.

Answer

CEO Kurt Sievers did not provide a specific breakdown but implied the auto business's China exposure is similar to the corporate average of around 35-37%. He views the rise of Chinese OEMs as a positive for NXP, as they innovate faster, creating quicker opportunities for NXP's new products. CFO Bill Betz stated that internal inventory days will remain elevated for a couple of quarters and that a new long-term target will be provided at the upcoming Analyst Day.

Christopher Danely asked for details on inventory write-downs, including when the written-off inventory might be sold and its P&L impact. He also asked for CEO Steve Sanghi's assessment of Microchip's MCU product positioning.

Answer

CFO J. Bjornholt explained that predicting the sale of written-off inventory is difficult, but the large amount written off will become a tailwind to gross margin as they progress through fiscal 2026. CEO Steve Sanghi stated that they are correcting a product gap in the low-end 32-bit space and have changed strategy to fully support third-party development platforms like IAR and Keil, lowering adoption barriers for customers.

Christopher Danely asked CEO Steve Sanghi if he has found any unfixable problems since his return. He also requested an assessment of Microchip's current competitive positioning compared to a few years ago.

Answer

CEO Steve Sanghi asserted that he has not found any unfixable problems, stating that rightsizing factories, reducing inventory, and optimizing business units are all achievable, though some fixes take time. COO Rich Simoncic addressed competitive positioning, stating that feedback indicates Microchip is 'predominantly holding our own' and that customer relationships remain strong despite inventory challenges.

Christopher Danely asked about the risk of an inventory write-down or a dividend cut if the downturn persists. He also provocatively asked why Microchip's sales decline appears deeper than its competitors' and if something is 'wrong' with the company.

Answer

Executive J. Bjornholt stated they don't 'lose sleep' over those risks, citing the long life of their products and the business's strong cash generation, affirming the dividend is 'there to stay.' CEO Ganesh Moorthy attributed the steeper decline to a correspondingly steeper increase during the upcycle, suggesting the 'total area under the curve' is similar to peers and that the sharp downturn positions them for a strong recovery.