Q1 2025 Earnings Summary
- New bookings are growing and cancellations are decreasing, signaling improving demand trends.
- Strong early interest in new 64-bit microprocessor products from customers, potentially driving future growth.
- Stable pricing environment with no significant pricing pressure, helping maintain gross margins.
- Book-to-bill ratio is below 1, indicating continued weak demand and potential revenue decline. Despite bookings being up nearly 50% sequentially, they are still not at desired levels.
- Industrial sector "feels worse" compared to automotive, and besides aerospace and defense, no other end market is acting better, suggesting widespread market weakness.
- Significant declines in the Americas and Europe, which are major markets for Microchip, indicate geographic weaknesses impacting overall performance.
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Demand Trends and Orders
Q: Why is revenue declining despite signs of recovery?
A: Despite some positive signs, revenue is declining due to weak demand in the industrial and automotive sectors, where more inventory cleanup is needed. Prolonged weak PMI reports in the U.S. (21 months) and Europe (24 months) reflect a lack of confidence, leading customers to place orders cautiously and with shorter lead times. -
China and Asia Sales
Q: How did China and Asia perform this quarter?
A: Asia sales were flat, with China showing relative stability. The declines were mainly in the Americas and Europe. China and Asia are currently more constructive, possibly due to earlier downturns allowing for earlier recovery. , -
Customer Ordering Patterns
Q: Are customers holding too little inventory?
A: Yes, many customers are ordering hand-to-mouth due to working capital constraints and low visibility into their own businesses. With ample capacity and short lead times, they see little reason to build backlog. This cautious approach might lead to urgent orders later as inventories run low. -
Utilization and Production
Q: Will there be further production shutdowns?
A: No further two-week shutdowns are planned for wafer fabs in the September quarter. Production output is expected to be similar quarter-on-quarter. The company continues to manage assembly and test activities to align with demand. -
Data Center Market Strength
Q: What is the outlook for the data center market?
A: There is strength in the data center market, not only in the AI subset but across broader data center applications. Expectations are positive for the September and December quarters, with increased investments in data center infrastructure. , -
Inventory Levels
Q: Can you provide insight on inventory levels?
A: Distribution inventory has been decreasing for three consecutive quarters. Customers' businesses are down 5–15% year-over-year, while Microchip's business is down mid-40% due to inventory adjustments. The discrepancy is expected to close as inventory drains, even if the macro environment remains weak. -
Pricing Environment
Q: Are you seeing any pricing pressure?
A: There's no significant pricing pressure on current products shipped. While competition is natural in new design wins, the company focuses on providing overall value beyond just price. -
Launch of 64-bit Microcontrollers
Q: What can you tell us about the new 64-bit microcontroller?
A: The 64-bit microcontroller expands opportunities into higher-performance applications like factory automation, machine vision, and AI at the edge. It effectively doubles the total available market from around $3–4 billion to about $6 billion. Early customer engagement is positive, with interest in evaluating samples and tools. , -
End Market Performance
Q: Which end markets are performing better or worse?
A: Aerospace and defense show stability, with strength in defense due to global issues. Industrial feels weaker compared to automotive, though both sectors are experiencing challenges. , -
Foundry Partnerships
Q: How are you managing external wafer supply agreements?
A: The company is working with foundry partners to align wafer supply with changing demand. Business arrangements are in place to avoid excess wafer inventory, except for last-time buys from factories closing down or processes ending, which involve high-margin products worth maintaining.