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    Microchip Technology Inc (MCHP)

    CEO Change
    Board Change
    New Share Buyback Program

    Microchip Technology Inc. (MCHP) develops, manufactures, and sells smart, connected, and secure embedded control solutions used in a wide variety of applications . The company's strategic focus includes general-purpose and specialized 8-bit, 16-bit, and 32-bit mixed-signal microcontrollers, microprocessors, analog, FPGA, and memory products . These products are part of their Total System Solution (TSS), which combines hardware, software, and services to help customers increase revenue, reduce costs, and manage risks .

    1. Mixed-Signal Microcontrollers - Develops and sells 8-bit, 16-bit, and 32-bit microcontrollers, forming the largest component of the company's semiconductor products segment.
    2. Analog Products - Offers a range of analog solutions that are integral to the company's semiconductor offerings.
    3. Other Products and Services - Includes FPGA products, memory products, and manufacturing services, contributing to the semiconductor products segment.
    4. Technology Licensing - Provides technology licensing services as a separate business segment.
    Initial Price$91.50June 29, 2024
    Final Price$80.59September 29, 2024
    Price Change$-10.91
    % Change-11.92%

    What went well

    • Microchip believes they are in the later stages of an industry-wide inventory correction and anticipate a market recovery, positioning them to benefit from the turnaround.
    • Their Total System Solution (TSS) strategy is increasing content per customer application, creating multiplier effects and driving future growth opportunities.
    • Microchip is well-positioned in the data center and AI markets, with strong product offerings like PCIe switches, SSD controllers, and CXL solutions, expecting growth in these areas.

    What went wrong

    • Microchip is experiencing continued uncertainty and low visibility due to customers delaying orders and relying on short lead times, leading to higher reliance on turns orders (short-term orders) and making it difficult to predict demand.
    • The company is facing pricing pressure as customers negotiate for better deals, and underutilization is impacting gross margins, indicating challenges in maintaining profitability.
    • Significant corrections in the microcontroller and industrial markets have led to revenue declines for Microchip, with customers over-ordering in the past and now adjusting inventories, resulting in decreased demand.

    Q&A Summary

    1. Underutilization Impact on Margins
      Q: How does underutilization affect gross margin recovery?
      A: Underutilization is significantly impacting our gross margins and operating results, and this will continue as we remain significantly underutilized ( ). We cannot specify a revenue level to eliminate underutilization charges; it depends on the revenue curve's slope and our forecast ( ). Additionally, high inventory reserve charges are affecting margins, but these will provide a tailwind as the environment improves ( ).

    2. Inventory Destocking and Recovery
      Q: What's the outlook on inventory destocking and demand recovery?
      A: We are in the later innings of the correction and expect a turnaround as inventory levels normalize ( ). Customers overbuilt inventory due to optimism and are now destocking, but our confidence comes from our strong customer connections and long product cycles ( ). We are shipping considerably below consumption levels, indicating that as customers correct inventories, they will return to consumption levels significantly higher than our current shipping levels ( ).

    3. Sell-In vs. Sell-Through Gap
      Q: How big is the gap between what you're selling and actual consumption?
      A: We are shipping well below consumption levels, and our customers' businesses are not down to the degree that our revenues suggest ( ). This reverse bullwhip effect means that as customers adjust inventories, they will need to increase orders, leading to higher shipping volumes in the future ( ).

    4. Pricing Environment
      Q: What's your outlook on pricing into 2025?
      A: Our pricing remains consistent year-over-year, although the environment for new designs is more competitive, and some competitors are more aggressive ( ). We will match competitors where necessary but maintain discipline in our processes. Pricing pressure will be primarily on new designs, while existing designs will continue with current pricing and terms ( ).

    5. Capital Allocation and Debt
      Q: Why are you borrowing to pay dividends?
      A: In quarters where adjusted free cash flow is less than the dividend, we may increase debt temporarily to maintain the dividend payment ( ). In subsequent quarters, we plan to generate excess free cash flow to reduce debt, ensuring we maintain 100% capital return without raising aggregate debt levels ( ).

    6. CapEx and CHIPS Act Benefits
      Q: How will CapEx and CHIPS Act impact you?
      A: For the current fiscal year ending in March, CapEx is expected to be about $150 million, and we expect even lower CapEx in fiscal 2026 due to existing capacity ( ). We are working on agreements related to the CHIPS Act, but don't anticipate short-term benefits in the next 1–2 quarters. Over the next 3–5 years, as demand returns, the CHIPS Act will be beneficial as we expand and deploy capital ( ).

    7. Demand Outlook and Green Shoots
      Q: Are you seeing signs of demand recovery?
      A: We continue to see strength in aerospace and defense and the AI subset of data centers ( ). We are observing increasing expedites and pull-ins, which indicates some early signs of recovery, but customers remain cautious and lack sufficient confidence to place more backlog orders ( ). The green shoots are there but less prominent than two quarters ago ( ).

    8. Comparison with Competitors
      Q: Why are your sales declining more than competitors?
      A: Our larger decline reflects our steeper increase in previous years; we grew 25% annually for two consecutive years during the upcycle ( ). Different companies navigated the cycle differently, and our customers, especially in industrial and automotive, built higher inventories that they're now reducing ( ). Over time, we expect to capitalize on the opportunity to grow significantly as the market recovers ( ).

    9. Data Center Segment Growth
      Q: What's the outlook for your data center business?
      A: Long-term, we are confident that data centers are a huge opportunity with multiple growth areas, including the AI subset, which represents about 30% of our data center revenue and is continuing to grow ( ). In the short run, overall data center budgets are constrained on the non-AI portion, but as investments return, we expect increased growth ( ).

    10. Geographical Performance
      Q: How is Europe affecting your results, and what about China?
      A: Europe is experiencing larger declines due to its high exposure to industrial and automotive markets, and it typically lags cycles by 1–2 quarters ( ). In contrast, Greater China shows less weakness; while not experiencing great strength, it doesn't have the same level of decline as Europe and the Americas ( ).

    11. Turns Business and Lead Times
      Q: Could high turns business persist due to inventory levels?
      A: It's hard to predict, but as customers gain confidence and their inventories drain, they will need to place backlog orders, reducing the proportion of turns business ( ). Current short lead times mean customers can defer ordering, but external factors like improving interest rates and inventory depletion will eventually encourage backlog placement ( ).

    12. Operating Expenses
      Q: How will OpEx trend in the coming quarters?
      A: We are reinstating salary cuts, returning most employees to 100% salary this quarter, resulting in an OpEx increase of over $8 million quarter-over-quarter ( ). OpEx is expected to rise again in the March quarter as the full effect of reinstating salaries takes place ( ).

    13. Channel Strategy
      Q: Are you changing your approach to channel partners post-cycle?
      A: Our channel partners remain an important part of our sales strategy, representing around 50% of our business ( ). We have no plans to deemphasize them and will continue to evolve how we work together, incentivizing and compensating based on performance ( ).

    14. Long-Term Growth Rates
      Q: What's your expectation for long-term growth?
      A: The recent cycle has been unusual, and it's challenging to provide a precise long-term growth rate. While we previously grew at 25% annually, we know cycles fluctuate. Our focus remains on innovation and participating in faster-growing areas through our products and Total System Solutions strategy, aiming to consistently gain market share over time ( ).

    15. Pricing Pressure
      Q: Are you seeing pricing pressure in negotiations?
      A: There's always pricing pressure as purchasing managers push for better terms, but we focus on creating win-win outcomes that make the pie bigger for both us and our customers ( ). Our products have long design-in cycles, and we maintain stable and disciplined pricing in the long term. Current gross margin movements are more impacted by underutilization and other operational issues rather than pricing ( ).

    16. CHIPS Act Progress
      Q: What's the status of your CHIPS Act funding?
      A: We are still negotiating agreements related to the CHIPS Act and have worked through many details with the Commerce Department ( ). The process has involved significant learning on both sides due to the complexity of semiconductor manufacturing. We anticipate reaching an agreement and benefiting over the next 3–5 years, but it's not affecting our short-term business operations or capital deployment plans ( ).

    NamePositionStart DateShort Bio
    Ganesh MoorthyPresident, Chief Executive Officer, and DirectorMarch 2021Ganesh Moorthy has been serving as the President and CEO of Microchip Technology Inc. since March 2021 and has been a member of the Board of Directors since January 2021. He joined Microchip in 2001 .
    Steve SanghiExecutive ChairMarch 2021Steve Sanghi has been with Microchip since August 1990, serving in various leadership roles. He was CEO from October 1991 to March 2021 and has been Chair of the Board since October 1993 .
    Richard J. SimoncicChief Operating OfficerApril 1, 2024Richard J. Simoncic is the COO at Microchip Technology Incorporated. He was promoted to this position on April 1, 2024. He has been with Microchip since 1990 .
    J. Eric BjornholtSenior Vice President and Chief Financial OfficerJanuary 2009J. Eric Bjornholt has been serving as the Senior Vice President and CFO of Microchip since January 2009. He joined Microchip in 1995 and has served in various financial management capacities .
    Stephen V. DrehoblSenior Vice President, MCU8 and MCU16 Business UnitsAugust 1989Stephen V. Drehobl has been employed by Microchip since August 1989. He was promoted to Senior Vice President in 2019. He retired from his executive officer role on June 7, 2024 .
    Steve SanghiInterim Chief Executive Officer and President, Chair of the BoardNovember 18, 2024Steve Sanghi is currently serving as the Interim CEO and President and continues as Chair of the Board. He was reappointed as interim CEO and President on November 18, 2024 .
    1. Given the prolonged reliance on high turns business due to customer uncertainty and short lead times, what specific actions is Microchip taking to encourage customers to place longer-term orders to improve visibility into future demand?
    2. With the downturn being deeper and longer than anticipated, how is Microchip managing the risks of significant inventory write-downs or the need for restructuring, and can you assure investors that the dividend will be maintained without impacting the company's long-term financial health?
    3. As competitors report low to mid-single-digit pricing declines for 2025, how does Microchip plan to adjust its pricing strategy to stay competitive without eroding profit margins, particularly amidst aggressive pricing in new design wins?
    4. Underutilization charges and elevated inventory reserves are significantly impacting gross margins; what are your plans to mitigate these pressures, and at what revenue levels do you anticipate gross margins returning to historical norms?
    5. You mentioned challenges in quantifying the success of your Total System Solutions strategy across your extensive customer base; how can investors evaluate the tangible impact of TSS on revenue growth and increased customer content going forward?
    Program DetailsProgram 1
    Approval DateNovember 2021
    End Date/DurationNo expiration date
    Total additional amount$4.00 billion
    Remaining authorization$1.56 billion
    DetailsUsed to fund share issuance requirements under the Company's equity incentive plans

    Q2 2025 Earnings Call

    • Issued Period: Q2 2025
    • Guided Period: Q3 2025
    • Guidance:
      • Net Sales: $1.025 billion to $1.095 billion .
      • Non-GAAP Gross Margin: 57% to 59% of sales .
      • Non-GAAP Operating Expenses: 33.2% to 34.8% of sales .
      • Non-GAAP Operating Profit: 22.2% to 25.8% of sales .
      • Non-GAAP Diluted Earnings Per Share: $0.25 to $0.35 .

    Q1 2025 Earnings Call

    • Issued Period: Q1 2025
    • Guided Period: Q2 2025
    • Guidance:
      • Net Sales: $1.12 billion to $1.18 billion .
      • Non-GAAP Gross Margin: 58.5% to 59.5% of sales .
      • Non-GAAP Operating Expenses: 30% to 31% of sales .
      • Non-GAAP Operating Profit: 27.5% to 29.5% of sales .
      • Non-GAAP Diluted Earnings Per Share: $0.40 to $0.46 .

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: June 2024 quarter
    • Guidance:
      • Net Sales: $1.22 billion to $1.26 billion .
      • Non-GAAP Gross Margin: 59% to 61% of sales .
      • Non-GAAP Operating Expenses: 28.25% to 28.75% of sales .
      • Non-GAAP Operating Profit: 30.25% to 32.75% of sales .
      • Non-GAAP Diluted Earnings Per Share: $0.48 to $0.56 .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024
    • Guidance:
      • Net Sales: $1.225 billion to $1.425 billion .
      • Non-GAAP Gross Margin: 59% to 61.6% of sales .
      • Non-GAAP Operating Expenses: 26.9% to 30.7% of sales .
      • Non-GAAP Operating Profit: 28.3% to 34.7% of sales .
      • Non-GAAP Diluted Earnings Per Share: $0.46 to $0.68 .
      • Non-GAAP Operating Margin for Full Fiscal Year '24: 43.6% at the midpoint of the March quarter guidance .
      • Inventory Days: 225 to 230 days .
      • Capital Return to Shareholders: 82.5% of the December quarter adjusted free cash flow .

    Recent developments and announcements about MCHP.

    Financial Actions

      New Share Buyback Program

      ·
      Dec 16, 2024, 10:02 PM

      Microchip Technology Incorporated has announced a new buyback program involving the issuance and sale of $1,000,000,000 aggregate principal amount of 4.900% Senior Notes due 2028 and $1,000,000,000 aggregate principal amount of 5.050% Senior Notes due 2030. These notes are part of a strategic financial maneuver to manage the company's capital structure effectively .

    Legal & Compliance

      Legal Proceedings

      ·
      Dec 16, 2024, 10:02 PM

      Summary of the Legal Matter Involving Microchip Technology Incorporated (MCHP):

      Key Parties Involved:

      • Microchip Technology Incorporated: The primary company involved in the legal proceedings.
      • Guarantors: Includes Atmel Corporation, Microchip Holding Corporation, Microchip Technology LLC, Silicon Storage Technology, Inc., Microsemi Corporation, and Microchip Storage Solutions LLC.
      • Trustee: Computershare Trust Company, National Association.
      • Underwriters: J.P. Morgan Securities LLC, BofA Securities, Inc., and Wells Fargo Securities, LLC .

      Nature of the Proceedings:

      • Microchip Technology Incorporated has issued $1,000,000,000 in 4.900% Senior Notes due 2028 and $1,000,000,000 in 5.050% Senior Notes due 2030. These notes are part of a debt securities offering registered with the Securities and Exchange Commission under the Securities Act of 1933 .
      • The notes are guaranteed by the aforementioned guarantors and are issued under an Indenture dated February 29, 2024, and supplemented on December 16, 2024 .

      Potential Financial or Operational Consequences:

      • The issuance of these notes is a significant financial undertaking, involving a total of $2 billion in debt. This could impact the company's financial leverage and interest obligations over the coming years .
      • The notes are subject to certain covenants, including limitations on liens and sale-leaseback transactions, which could affect the company's operational flexibility .
      • A change of control repurchase event could require the company to repurchase the notes at 101% of their principal amount, which could have financial implications if such an event occurs .

      This summary provides an overview of the current legal and financial proceedings involving Microchip Technology Incorporated as of December 16, 2024.

    Corporate Leadership

      Board Change

      ·
      Nov 20, 2024, 9:30 PM

      Ganesh Moorthy has retired as a member of the Board of Directors of Microchip Technology Incorporated, effective November 18, 2024. The Board has elected Steve Sanghi as interim Chief Executive Officer and President, and he will continue to serve as Chair of the Board. The Board size has been decreased from 7 directors to 6 directors following Mr. Moorthy's retirement .

      Leadership Change

      ·
      Nov 20, 2024, 9:30 PM

      Ganesh Moorthy is retiring as CEO and President of Microchip Technology Incorporated. Steve Sanghi is stepping up as the interim CEO and President, effective November 18, 2024. Mr. Sanghi will also continue to serve as Chair of the Board. The Board has decreased in size from 7 to 6 directors following Mr. Moorthy's retirement .

      CEO Change

      ·
      Nov 20, 2024, 9:30 PM

      Ganesh Moorthy has retired as the CEO and President of Microchip Technology Incorporated as of November 18, 2024. Steve Sanghi, the former CEO and President, has been appointed as the interim CEO and President .