Financial Summary for Fiscal Q4 and Full Year 2024
Net sales for Q4 were $1.326 billion, a 24.9% decrease sequentially.
Non-GAAP gross margins stood at 60.3%, with operating income at 32.9%.
GAAP net income for Q4 was significantly lower, resulting in $0.28 diluted earnings per share.
Fiscal year 2024 saw net sales of $7.634 billion, a 9.5% decrease from the previous year.
Non-GAAP net income for the year was $2.698 billion, with an EPS of $4.92.
The non-GAAP cash tax rate was 18.8% for Q4 and 14.5% for the full year.
Inventory and Cash Flow
Inventory balance at the end of March 2024 was $1.316 billion.
Cash flow from operating activities in Q4 was $430 million, with adjusted free cash flow at $389.9 million.
Total debt increased by $312 million in Q4, with net debt increasing by $273.3 million.
Business Performance and Outlook
Q4 results were in line with guidance despite a major inventory correction.
Non-GAAP operating margin for FY2024 was 43.9%, showing resilience amidst inventory correction.
Capital return to shareholders through dividends and share buybacks in FY2024 was $1.89 billion.
Mixed signal microcontroller net sales were down 10.2%, representing 56% of overall revenue.
FPGA revenue grew over 22% compared to FY2023, exceeding $670 million.
Microchip expects the June 2024 quarter to mark the bottom of the cycle, projecting a return to sequential revenue growth in the September 2024 quarter.
Cash Return Strategy
The dividend was increased by 18% to $0.452 per share.
A record $387.4 million of stock was purchased in the open market last quarter.
Total cash return last quarter was $629.9 million, 82.5% of the adjusted free cash flow.
Microchip plans to increase the cash return to shareholders to 100% of adjusted free cash flow by March 2025.
Question and Answer
Green Shoots and Revenue Growth
Question
What is the difference between the “green shoots” mentioned in the current call and those referenced in the previous call, and how do they support the expectation of June as the revenue bottom and September as a growth quarter?
Answer
The green shoots were first observed in March, and their momentum has been increasing through March, April, and May, as evidenced by bookings and customer feedback.
The qualitative view of these green shoots, along with the booking trends, supports the belief that the June quarter will be the bottom and that growth will resume in September.
Gross Margin Trough and Recovery
Question
If June is the trough in revenue, does it also imply that June is the trough for gross margins?
Answer
While no definitive guidance has been provided, it is believed that gross margins will bottom out along with revenue, with average selling prices remaining stable and cost structures intact.
End Market Stabilization and Trends
Question
Are there any differences or trends observed in the stabilization and improvement across different end markets?
Answer
The stabilization is not specific to any particular end market, but rather a combination of factors.
Aerospace and defense, as well as the AI segment of the data center, are performing well and contributing to the overall improvement.
Some industrial customers are still experiencing weakness, while others are showing signs of bottoming out and placing rush orders.
Gross Margin Trajectory and Inventory Levels
Question
Considering the potential for June to be the trough in both revenue and gross margins, what is the expected trajectory of gross margins as the company recovers and reduces its high internal inventory levels?
Answer
The gross margin trajectory will be heavily influenced by the revenue trajectory and the corresponding factory utilization levels.
While the specific timeline and actions are not yet determined, the company is confident in its long-term model and ability to achieve its target gross margins.
Channel Sell-Through and Inventory Dynamics
Question
Are there any observable trends in channel sell-through dynamics from global distributors, and is there evidence of excess inventories at end customer distributors coming down?
Answer
The exact level of inventory at end customer distributors is not always visible, but distributors are placing additional orders, indicating a level of confidence in their end customer inventory management.
While there is no definitive answer on the sell-through trend, the increased distributor orders suggest a positive outlook.
Inventory Levels at Direct Customers
Question
The sequential decline in direct customer shipments was more pronounced than the decline in distributor shipments in March. Does this suggest that excess inventories are more pronounced at direct customers, and what gives the company confidence in sequential shipment growth to direct customers beyond the current quarter?
Answer
Direct customers are placing backlog orders into the September and December quarters, indicating their confidence and a positive outlook beyond the current quarter.
The increasing bookings and momentum in backlog orders provide visibility and confidence in sequential shipment growth to direct customers.
Operating Expense Management and Clawback Provisions
Question
How long can the company maintain its lower-than-expected operating expenses, and are there any clawback provisions for the temporary salary cuts implemented during the current period?
Answer
There are no clawback provisions for the temporary salary cuts, as the company operates on a “shared sacrifice, shared reward” program.
The company has a history of successfully implementing such programs and sharing the rewards with employees through higher bonuses and restoring pay cuts when appropriate.
Design Win Metrics and Pipeline Strength
Question
Can you provide any insights into the design win metrics for the fiscal year, and what is the lifetime value of these design wins?
Answer
While specific metrics are not typically disclosed, the company focuses on the progression of the design win pipeline, which has shown strength and increased activity over the past 12 months.
Book-to-Bill and Business Outlook
Question
Can you provide insights into the book-to-bill ratio and its significance, as well as the potential for book-to-bill to exceed 1 in the June quarter?
Answer
While the book-to-bill ratio was below 1, it is not considered a significant indicator of future business growth, as it primarily reflects lead times.
Inventory Loadings and Gross Margin Impact
Question
How do inventory loadings in the factory look, and what is the expected impact on gross margins as the company reduces inventory on the balance sheet?
Answer
Inventory days are in line with previous guidance, and factory utilization is expected to be relatively stable, with some modest attrition due to lower employee headcount.
The company is managing inventory levels in line with its previous guidance and does not anticipate a significant impact on gross margins.
Edge AI Market and Revenue Contribution
Question
When will Edge AI become a more meaningful part of the company’s revenues, and what are the target markets for Edge AI solutions?
Answer
The target markets for Edge AI solutions are primarily industrial, with some presence in automotive and medical.
Design activities are currently in progress and are expected to continue over the next 24 to 30 months, with incremental revenue contribution expected as these designs reach production.
Consumption and Inventory Levels
Question
Can you provide any insights into the level of shipments relative to consumption and the expected timeline for reaching a balance between supply and demand?
Answer
While a precise number is not available, a rough estimate can be obtained by averaging the past four quarters of revenue.
The company expects a gradual shift towards a balance between shipments and consumption, with a potentially sharper recovery as demand picks up.
Inventory Management and Pricing Trends
Question
How is inventory management expected to evolve through the cycle or long term, and what are the expectations for pricing trends in 2025?
Answer
The company’s long-term target for inventory days remains at 130 to 150, with a focus on maintaining short lead times and supporting customer requirements.
The company utilizes strategic inventory and last-time buys on high-margin product lines as needed.
Pricing is primarily driven by competition at the point of design and is expected to remain stable in the near term, with new product pricing reflecting historical design wins and competition in specific applications.
New Design Win Competition and Dynamics
Question
Are new design wins becoming more price sensitive or competitive as semiconductor shortages ease and the market correction continues?
Answer
New design wins have always been highly competitive, as they involve long-term platform decisions and multi-year implications.
While the competitive landscape has shifted compared to the past two to three years, the current dynamics are consistent with the historical norms of the industry.
Capacity Planning and Foundry Partners
Question
Can you discuss the company’s confidence in having enough capacity, both internally and through foundry partners, at the process geometries where your products are manufactured?
Answer
The company is very confident in its internal capacity, including installed, underutilized, and potential additional capacity.
The company works closely with foundry and OSAT partners to ensure capacity alignment and has no immediate concerns about capacity constraints.
Revenue Decline and Competitive Landscape
Question
Why has Microchip experienced a larger revenue decline compared to some of its competitors, and are there any specific factors contributing to this difference?
Answer
The larger revenue decline is attributed to the timing of the peak and trough in the cycle, with Microchip responding to changes in the business at a later stage compared to some competitors.
The company’s mix of end markets, including a higher exposure to automotive and industrial, which experienced a deeper downturn, also contributed to the difference.
Competitive Landscape and China Supply
Question
Is there any concern about aggressive competition from Chinese suppliers, particularly in the microcontroller market, and what are the observed trends in this area?
Answer
China has always been a competitor in the semiconductor market, and while their priorities may have shifted towards faster time-to-market products, competition remains consistent.
Microchip competes by offering superior solutions, winning with new products, and providing differentiated value to customers.
Utilization and CapEx
Question
How do you expect utilization rates to evolve throughout the year, and what is the rationale behind the significant reduction in CapEx guidance?
Answer
Utilization rates vary by factory and are expected to remain relatively stable in the near term, with some modest declines due to attrition in employee headcount.
The reduction in CapEx guidance reflects the company’s confidence in its internal capacity and the capacity planning with its foundry and OSAT partners.
Inventory Correction and Industry Cycles
Question
What are the differences between the current inventory correction cycle and the typical cycle bottom, and have there been any learnings or changes in the supply chain over the past three years?
Answer
The current cycle exhibits similarities to past cycles, with a demand shock leading to inventory build-up, customer corrections, and subsequent component shortages.
However, there is a lack of evidence suggesting that the supply chain has learned from previous cycles, and the industry continues to exhibit cyclicality.
Inventory Correction and Recovery Timeline
Question
When is it expected that customers will have completed their inventory corrections, and is a return to seasonal trends anticipated in September or beyond?
Answer
The timeline for completing inventory corrections varies by customer, and it is expected that some customers will still be in the correction phase in September.
While a return to seasonal trends may not be immediate, a gradual shift towards normalcy is anticipated over the coming months.
Green Shoots and Geographic Distribution
Question
Can you provide insights into the geographic distribution of the observed green shoots, and are there any specific regions leading the recovery?
Answer
The green shoots are not limited to any specific geography but are observed across all regions and end markets.
Acquisition Rationale and Capital Deployment
Question
Can you discuss the rationale behind the recent tuck-in acquisitions and their relative focus compared to internal product development?
Answer
Tuck-in acquisitions are used to accelerate the company’s design-in and design-win efforts, leveraging external opportunities to complement the internal development pipeline.
These acquisitions are targeted and aligned with the company’s long-term growth strategy, providing a quicker path to solutions in specific areas of interest.
Inventory Turns and Balance with Consumption
Question
What is the expected level of inventory turns in the current quarter, and when is it anticipated that a balance will be achieved between shipments and consumption?
Answer
While specific numbers are not disclosed, the company has factored in the potential headwinds from inventory corrections in its guidance.
A gradual shift towards a balance between shipments and consumption is expected as demand picks up, with a potentially sharper recovery in the future.
Acquisition Impact and September Quarter Recovery
Question
What is the expected contribution of the recent acquisitions to the June and September quarters, and should a sharper recovery be anticipated in line with historical patterns following such a significant decline?
Answer
The acquisitions are small and not expected to contribute to the June or September quarters.
A sharper recovery is anticipated, with the exact timing dependent on the pace of inventory corrections and the broader macroeconomic environment.
