Sign in

    Microchip Technology Inc (MCHP)

    Q3 2025 Earnings Summary

    Reported on Feb 7, 2025 (After Market Close)
    Pre-Earnings Price$53.11Last close (Feb 6, 2025)
    Post-Earnings Price$52.26Open (Feb 7, 2025)
    Price Change
    $-0.85(-1.60%)
    • Microchip is positioned for above-market growth due to a significant number of design wins in megatrend applications, which are about 2x the normal. The company notes that customers are re-engaging in new designs, and as these designs go into production, this will drive growth.
    • The company is proactively reducing costs and optimizing operations, including closing down Fab 2 and rightsizing manufacturing capacity, which should improve profitability. The team is far along in assessing steps to realign capacity, which will benefit future margins.
    • Once inventory corrections are over, Microchip expects improvements in gross margins and revenue, leading to stronger financial performance. The company is reducing inventory, which should reduce inventory reserve charges and improve gross margins as inventory balances come down. Additionally, they have confidence in their long-term business and operating margins.
    • Microchip Technology has a high level of inventory, with total inventory at 266 days, significantly above the target of 130 to 150 days. Internal fab inventory is even higher, around 288 days, which could lead to risks of inventory obsolescence or write-downs, negatively impacting gross margins.
    • The company is experiencing falling revenue and backlog, with low visibility into future demand, and has observed weakness in key end markets such as industrial and automotive, adding uncertainty to its growth prospects.
    • Microchip anticipates short-term price reductions in the low to mid-single digits, which, combined with decreased gross margin guidance due to inventory charges and lower revenue, could further pressure profitability.
    MetricYoY ChangeReason

    Total Revenue

    -42%

    Driven by a significant drop in demand across industrial and automotive end markets, coupled with an ongoing inventory correction that began in late 2024. The previous year’s higher revenue base amplified the year-over-year decline.

    Semiconductor Products

    -43%

    Impacted primarily by weak macroeconomic conditions and reduced orders from customers who were destocking their inventories. The segment also faced lower volumes in industrial and automotive segments, which had previously been strong contributors to revenue growth.

    Mixed-signal Microcontrollers

    -46%

    Experienced a pronounced drop due to customer pushouts, shorter lead times reducing ordering urgency, and corrections of excess inventory built up in the prior year. Demand in industrial and automotive applications, key markets for microcontrollers, softened significantly.

    Analog

    -37%

    Decline primarily attributed to broad-based weakness in key end markets, especially in Europe, and the resulting lower shipment volumes. Despite stable pricing, lower order bookings and elevated inventory levels at customers drove the year-over-year reduction.

    Other

    -35%

    Reflects reduced orders for miscellaneous products not categorized under the main product lines, exacerbated by higher inventory on customers’ balance sheets. This decline follows a comparatively stronger prior-year quarter, making the negative swing more pronounced.

    Technology Licensing

    +28%

    Benefited from the resolution of a legal matter and improved licensing agreements. The legal settlement released additional revenue that lifted licensing income above historical levels and offset some of the broader market headwinds.

    Americas Revenue

    -42%

    Weakened due to persistent inflation, elevated interest rates, and tighter corporate spending. Many customers in North America also opted to reduce inventories following the high-demand cycle of 2021–2022, lowering the region’s overall bookings.

    Europe Revenue

    -56%

    Significantly impacted by deteriorating industrial and automotive markets, which historically contributed a major share of European revenue. The region entered an economic slowdown 1–2 quarters behind the Americas, intensifying the year-over-year drop from a stronger base in the prior period.

    Asia Revenue

    -35%

    Although Asia did not weaken as severely as Europe, it still suffered from broad economic softening and customers’ elevated inventory levels. The prior year’s base had been buoyed by stronger demand in Greater China, making the year-over-year comparison more challenging.

    Operating Income (EBIT)

    -94%

    Significantly compressed by the steep revenue decline, higher underutilization costs, and increased operating expenses relative to sales. Despite efforts to reduce production, the overhead absorption was inadequate to maintain EBIT margins at prior-year levels.

    Net Income

    -113%

    Swung to a loss primarily due to the drastic drop in revenue and the resulting impact on margins. Additional charges—such as those related to capacity underutilization—further eroded profitability when compared to the robust net income in the previous year’s quarter.

    EPS (Diluted)

    -113%

    Mirroring the net income decline, EPS fell into negative territory. Lower revenue, coupled with one-time charges (e.g., cybersecurity-related costs) and reduced factory utilization, weighed heavily on diluted EPS relative to the strong results posted in the prior year.

    MetricPeriodGuidanceActualPerformance
    Net Sales
    Q3 2025
    $1.025B – $1.095B
    $1.026B
    Met
    TopicPrevious MentionsCurrent PeriodTrend

    High Inventory & Extended Correction

    Discussed persistently in Q2/Q1/Q4 FY2025 calls; elevated inventory and prolonged correction; target 130–150 days but running significantly higher.

    Still elevated; direct customers hold more inventory vs. distribution; aiming to reduce ~$250M by FY2026; no clear end date.

    Continues to be a major concern

    Demand Uncertainty & Visibility

    Q2/Q1 FY2025: Noted backlog erosion, low visibility due to weak bookings and short lead times.

    Q3 FY2025: Bookings slightly improved but still low; visibility remains limited; backlog started lower for March quarter.

    Still uncertain; small improvement in bookings

    Industrial & Auto Weakness

    In Q2/Q1/Q4 FY2025 calls, industrial and automotive markets were substantially weaker due to inventory corrections and macro challenges.

    Q3 FY2025: Confirmed broad weakness, with industrial and auto affected most; no significant recovery reported.

    Ongoing weakness in these end markets

    Pricing Dynamics

    Q2/Q1/Q4 FY2025: Mostly stable but with mounting pressure on new designs; low single-digit declines expected longer-term.

    Q3 FY2025: Some short-term price reductions (low-to-mid single digits) acknowledged, differing from competitor strategies.

    Increasing pressure but still disciplined

    Cost Measures & Fab Closures

    Q2/Q1/Q4 FY2025: Lower utilization rates, pay cuts, paused capacity expansion; planned two-week shutdowns in major fabs.

    Q3 FY2025: Closing Tempe Fab (Fab 2), rotating time-off at other fabs; targeting reduced inventory and quicker manufacturing realignment.

    More aggressive capacity realignment

    Design Wins & 64-bit MCUs

    Q2/Q1/Q4 FY2025: Touted strong design momentum in 32/64-bit MCUs for secure intelligent edge and radiation-hardened markets.

    Q3 FY2025: Introduced new 64-bit RISC-V with AI features; strong interest but revenue impact not immediate.

    Continued growth in high-end processing

    AI & Data Center Ops

    Q2 FY2025: Highlighted PCIe switches, SSD controllers, CXL solutions, and AI-driven data center growth.

    Q3 FY2025: No direct mention of PCIe/SSD/CXL, but 64-bit AI-capable MCUs were introduced; data center specifics not addressed.

    Little new data; main AI focus on 64-bit MCUs

    TSS Strategy

    Q2/Q1 FY2025: Emphasized total system solutions to boost content per application; tracked subsets and reference designs.

    Q3 FY2025: No specific update mentioned; scheduled review on March 3.

    No new details; broader update pending

    Geographic Variability

    Q2/Q1 FY2025: Significant declines in Americas and Europe, with Asia holding steadier.

    Q3 FY2025: Sequential decline in all regions (Americas, Europe, Asia), with inventory destocking ongoing.

    Sustained weakness across geographies

    PSP Exposure

    Q4 FY2024: PSP likely amplified downturn; late dismantling causing sharper correction.

    Q3 FY2025: Confirmed PSP ended two quarters later than peers, causing higher customer inventory of Microchip products.

    Significant factor elevating inventories

    Sharp Recovery Expectation

    Q2/Q1/Q4 FY2025: Hinted at strong snap-back when inventory aligns with consumption; uncertain timing.

    Q3 FY2025: Optimistic on eventual rebound but no firm timeline; bookings still low, leftover inventory persists.

    Recovery optimism remains but timing unclear

    Factory Shutdowns & CapEx

    Q2/Q1/Q4 FY2025: Used shutdowns and reduced capex to manage inventory; capital investments slowed sharply.

    Q3 FY2025: Continuing rotating time-off and global adjustments; FY2025 capex ~$135M; plan to grow into existing capacity.

    Ongoing tight control of expenditures

    Acquisition & AI Edge

    Q4 FY2024: Mentioned acquisitions (e.g., Neuronex) for AI edge expansion; multiple tuck-ins for faster design wins.

    Q3 FY2025: No mention of acquisitions; AI focus mainly on in-house 64-bit RISC-V introduction.

    No new acquisition updates

    Deeper Revenue Declines vs Competitors

    Q2/Q1/Q4 FY2025: Acknowledged sharper declines due to later correction cycle, PSP impact, and high industrial/auto exposure.

    Q3 FY2025: Direct customer inventory remains high, reinforcing revenue declines vs. peers; delayed PSP changes worsened the gap.

    Continues under deeper pressure

    1. Inventory Levels
      Q: What's causing elevated customer inventory?
      A: Management stated that inventory is high "pretty much across the board" and not specific to any end market. Distribution customers' inventories are getting closer to normal, but direct customers still hold high inventory because Microchip continued its Preferred Supply Program (PSP) for two more quarters than competitors. This led to customers having higher inventory of Microchip products.

    2. Gross Margin Outlook
      Q: How will gross margins trend?
      A: Management is guiding a gross margin of 53% for the current quarter, which they consider "extremely good". Operating expenses are high at 39.1%, driven by adding staff at the top of the cycle. They expect gross margins to return to historical levels as factory utilization improves and inventory corrections are made.

    3. Earnings Power Outlook
      Q: What's the earnings power over the next year or two?
      A: While not providing specific figures, management expressed confidence in achieving above-market growth once the inventory correction is complete. They are working through a 9-point plan and will share more details on March 3.

    4. Customer Relationships
      Q: How are customer relationships and lost trust being addressed?
      A: Management acknowledged some customer relationships had degraded due to high inventory from the PSP program and COVID-related price increases. They are actively working to rebuild trust, emphasizing strong products and multi-decade relationships, noting that "no customer is telling us to go away".

    5. Pricing Trends
      Q: How is pricing expected to trend?
      A: In the short term, some price reductions in the low to mid-single digits are appropriate. Management does not expect annual price drops in the long term, as costs do not decrease every year.

    6. Competitive Positioning
      Q: How is Microchip's competitive position versus a couple of years ago?
      A: Management believes they are "predominantly holding our own" in competitive positioning. Customer relationships remain strong, and they are addressing product gaps that require development.

    7. Inventory Risk
      Q: Is there a risk of inventory obsolescence or write-downs?
      A: The company has been taking significant inventory reserve charges, reflected in the gross margin. As inventory balances come down and the revenue environment improves, these charges should reduce.

    8. Manufacturing Capacity Alignment
      Q: How are you aligning manufacturing capacity?
      A: The team is "very far along" in identifying steps to rightsize factories beyond closing Fab 2 and will disclose details on March 3.

    9. Dividend Sustainability
      Q: Is the dividend sustainable given current free cash flow?
      A: Management is keeping the dividend flat, noting that not generating enough cash flow is a "short-term problem". They see no reason to decrease the dividend and expect cash flow issues to resolve in coming quarters.

    10. Debt Maturities
      Q: When is the next debt maturity after September?
      A: Following the $1.2 billion due in September 2025, the next maturity is $1 billion due in March 2028.

    11. China Strategy and 300mm Manufacturing
      Q: How competitive is your internal fab network without 300mm capacity, and what's your China strategy?
      A: Microchip utilizes substantial 300mm capacity through foundries and is satisfied with this approach. Building an internal 300mm fab is not cost-effective. They have a "China for China" strategy, which they will discuss further on March 3.

    12. Turn Level Expectations
      Q: How do current turn levels compare to historical norms?
      A: With short lead times today, the company can respond to a high level of turns. The turns required to meet current guidance are not outside normal levels in a short lead-time environment.

    13. RISC-V Processor Opportunity
      Q: What's the opportunity for your RISC-V processor?
      A: While no specific revenue impact was forecasted, management notes strong customer interest and high activity in building development environments and designing applications.

    14. Segment Performance
      Q: How are different segments performing?
      A: All end markets have been weak, including industrial and automotive. A detailed breakdown will be provided at fiscal year-end in March.

    15. Inventory Days Breakdown
      Q: How much of the 266 days of inventory is from internal fabs?
      A: Internal fabs hold approximately 288 days of inventory.