Q4 2024 Earnings Summary
- Anticipated Sharp Recovery Post-Inventory Correction: Microchip's management expects the June 2024 quarter to mark the bottom of the cycle, with sequential revenue growth returning in the September 2024 quarter. They anticipate a sharper recovery as customers burn through inventory and begin buying to consumption, potentially leading to stronger revenue growth over the next 12 months. ,
- Expansion into High-Growth Markets with 64-bit Microprocessors and AI Edge Solutions: Microchip is entering the 64-bit embedded microprocessor market, extending its product portfolio to higher performance applications, including AI-enabled edge solutions. The acquisition of Neuronix AI Labs enhances their neural network capabilities, positioning them to capitalize on high-growth opportunities in industrial, automotive, and medical markets over the next 24 to 30 months. ,
- Strong Competitive Position and Improving Demand Indicators: Despite competition, particularly from China, Microchip continues to win new designs through competitive solutions and providing better value to customers. Early signs of improving demand include bookings increasing month over month, with April bookings higher than March, and customers placing backlog into the September and December quarters, indicating a potential upswing in demand. , , ,
- Significant weakness across most regions and end markets, except aerospace and defense and AI data centers, with customers lowering inventories amidst a weak macro environment and uncertain outlook, leading to significant inventory destocking at multiple levels and reduced near-term visibility for the business.
- Factories running at lower utilization rates due to the severity of the inventory correction, with three major fabs scheduled for another two-week shutdown in the June quarter to control inventory growth. Internal capacity expansion actions are paused, and capital investments will be low in fiscal year 2025, indicating prolonged demand weakness.
- Sharper revenue decline compared to competitors, potentially due to higher exposure to markets like automotive and industrial that are correcting later and deeper, and possibly amplified by their Preferred Supply Program (PSP), suggesting Microchip may be more vulnerable to market downturns than peers.
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June Quarter Bottoming and Growth Outlook
Q: Is June the bottom? Will September see growth?
A: Management expects the June quarter to be the bottom , with growth resuming in September based on increasing bookings and customer demand across various end markets. -
Gross Margin Trajectory
Q: Will gross margins bottom in June and then improve?
A: They believe gross margins will bottom in the June quarter along with revenue , and expect improvement as revenue grows and factory utilization increases, though it depends on product mix and operational factors. -
Inventory Levels and Management
Q: How are internal and channel inventories being managed?
A: Internal inventories remain high at 224 days , but are being managed without significant factory cuts ; channel sell-through is exceeding sell-in, indicating customer inventories are reducing , supporting future demand. -
Pricing Trends and Sustainability
Q: Are pricing trends holding up, and what about future expectations?
A: Pricing remains stable with average selling prices holding up , and while new designs are competitive, management expects to maintain strong gross margins due to product differentiation and customer relationships. -
Operating Expenses and Salary Sacrifice Program
Q: How long can OpEx be held down through salary cuts?
A: The company has implemented a shared sacrifice program with voluntary salary reductions to manage OpEx ; employees won't receive retroactive pay but will share in future rewards as conditions improve. -
Acquisitions and AI at the Edge
Q: How will acquisitions, like Neuronex Labs, impact AI opportunities in MCUs?
A: Acquisitions like Neuronex Labs accelerate AI capabilities in the MCU portfolio, targeting industrial, automotive, and medical applications; meaningful contributions from AI are expected in 24 to 30 months. -
Competitive Landscape and China Supply
Q: Is increased competition from China affecting the business?
A: While acknowledging Chinese competitors, management focuses on differentiating products and winning new designs; competitive dynamics are consistent with historical trends. -
CapEx Guidance and Capacity Utilization
Q: Can you meet future demand with lower CapEx and current capacity?
A: Management is confident that existing internal and partner capacity will meet future demand ; CapEx has been significantly reduced, with previous investments deemed sufficient. -
FPGA Business Performance
Q: How is the FPGA business performing relative to peers?
A: The FPGA business is outperforming other segments due to strength in aerospace and defense ; management is optimistic about growth as competitors shift focus away from mid-tier markets. -
Design Win Pipeline
Q: Can you discuss design win metrics for the fiscal year?
A: The design win pipeline is strong, with increased activity as customers resume innovation after supply chain disruptions, positioning the company well for future growth. -
Book-to-Bill Ratios and Order Trends
Q: How are book-to-bill ratios and bookings trending?
A: Book-to-bill ratios are below one due to shorter lead times , but bookings are rising month by month, indicating improving demand; book-to-bill is not a key growth indicator. -
Inventory Correction Duration
Q: When will inventory corrections be completed?
A: Inventory corrections are expected to extend beyond the June quarter, varying by customer; some have completed corrections, others are still adjusting. -
Geographical Trends in Recovery
Q: Are green shoots concentrated in specific regions?
A: Improvements are seen across all geographies and end markets, with no specific region leading; customer recovery varies widely. -
Impact of Employee Attrition on Factory Utilization
Q: How is employee attrition affecting factory utilization?
A: Employee attrition has modestly reduced capacity utilization; fewer employees limit wafer starts, leading to slightly lower utilization in the June quarter. -
Expected Level of Turns
Q: What is the required level of turns for the June quarter?
A: The company needs to achieve certain turns to meet guidance, but exact figures aren't disclosed ; short lead times and customer uncertainties make turns unpredictable, but risks are accounted for in guidance. -
Returning to Seasonal Trends
Q: Will September return to seasonal trends post-inventory correction?
A: While growth is expected, not all customers will have completed inventory correction by September; returning to seasonal trends may take more time. -
Customers Relearning Inventory Lessons
Q: Have customers learned from past cycles to avoid overcorrection?
A: Management notes that customers quickly revert to old behaviors, treating semiconductors as readily available; similar cyclical patterns are expected to continue. -
Future Inventory Management Goals
Q: What are long-term inventory management targets?
A: The company aims to reduce inventory days to 130-103 days over time, maintaining short lead times and effective customer support.