Microchip Technology Inc (MCHP)

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).

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 ( - ).