Microchip Technology Incorporated

Greetings and welcome to Microchip's Q2 fiscal year 2025 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd like to turn the conference over to our host, Mr. Eric Bjornholt, CFO. Thank you.

You may begin. Good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of today, as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Ganesh Murthy, Microchip's President and CEO, Rich Simonsek, Microchip's COO, and Sajid Dowdy, Microchip's Head of Investor Relations. I will comment on our second quarter fiscal year 2025 financial performance. Rich will then review some product line updates, and Ganesh will then provide commentary on our results and cash return strategy, as well as an overview of our current business environments. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the investor relations page of our website at www.microchip.com and included reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation, and certain other adjustments that's described in our earnings press release and in the reconciliation on our website. Net sales in the September quarter were $1.164 billion, which was down 6.2% sequentially. We recently settled an ongoing legal matter with one of our licensees. The impact of this settlement was the release of a $13.3 million accrual, which increased revenue and gross profit by $13.3 million in the September 2024 quarter. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were just above the midpoint of our guidance at 59.5%, including capacity underutilization charges of $25.9 million as we continued to manage production activities to adjust to challenging business conditions. Without the benefit of the legal settlement mentioned earlier, the non-GAAP gross margins would have been 59.1%. Operating expenses were at 30.3% of net sales and operating margin was 29.3%. Non-GAAP net income was $250.2 million and non-GAAP earnings prediluted share was $0.46, which was $0.03 ahead of the midpoint of our guidance and positively impacted by $0.02 from the aforementioned legal settlement. On a GAAP basis in the September quarter, gross margins were 57.4%. As you may recall, on August 20th, we announced that a cybersecurity incident had impacted our business operations, and on September 4th, we announced that this incident was unlikely to materially impact our financial condition or results of operations. During the closed process for the September quarter, we evaluated the financial impact of the breach, including unscheduled factory outages and Although the incident did not materially impact our financial condition or results of operations, we determined that the total cost impact of the incident was approximately $21.4 million. The majority of this cost is attributed to incremental factory underutilization charges resulting from a cybersecurity incident. Total operating expenses were $521.9 million and included acquisition and tangible amortization of $122.7 million, special charges of $1.5 million, share-based compensation of $42 million, and $3.6 million of other expenses. GAAP net income was $78.4 million, resulting in $0.14 in earnings per diluted share. Our non-GAAP cash tax rate was 13% in the September quarter, which was in line with our guidance. Our non-GAAP tax rate for fiscal year 2025 is expected to be about 13%. which is exclusive of the transition tax, and any tax audit settlements related to taxes accrued in prior fiscal years. We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. If this were to happen, we would anticipate about a 200 basis points favorable adjustment to Microchip's non-GAAP tax rate in future periods. Our inventory balance at September 30, 2024 was $1.34 billion, which was up $31.6 million from the end of the June 2024 quarter. We had 247 days of inventory at the end of the September quarter, which was up 10 days from the prior quarter's level. At the midpoint of our December 2024 quarter guidance, we would expect both inventory dollars and days to increase. We also continue to invest in building inventory for long lived high margin products whose manufacturing capacity is being end of life by our supply chain partners. And these last time buys represented 18 days of inventory at the end of the September quarter. Inventory at our distributors in the September quarter was at 40 days, which was down three days from the prior quarter's level. Distribution took their inventory holdings in the September quarter down. as distribution sell-through was about $95 million higher than distribution sell-in. Our cash flow from operating activities was $43.6 million in the September quarter and was negatively impacted by the timing of interest and tax payments, including the transition tax payment that is paid annually and was part of the 2017 Tax Cuts and Jobs Act. We have one more transition tax payment that is due in the September quarter of 2025. Hence, our adjusted free cash flow was $14 million in the September quarter. As of September 30th, our consolidated cash and total investment position was $286.1 million. Our total debt increased by $256 million in the September quarter and was negatively impacted by the higher tax and interest payments than the previous quarter. Our adjusted EBITDA in the September quarter was $405.7 million and 34.9% of net sales. Our trailing 12-month adjusted EBITDA was 2.161 billion. Our net debt to adjusted EBITDA was 2.85 at September 30th, 2024, up from 1.28 at September 30th, 2023. Capital expenditures were 20.8 million in the September quarter. Our expectation for capital expenditures for fiscal year 2025 is about 150 million. and we expect fiscal year 2026 capital expenditures to be lower than that, as we have a lot of capacity to grow back into, as well as capital that we purchased during the upcycle that has not yet been placed in service. Depreciation expense in the September quarter was $41.2 million. I will now turn it over to Rich, who will provide some commentary on our product line performance and innovations in the September quarter.

Rich? Thank you, Eric, and good afternoon, everyone. We are strategically investing in and launching innovative technologies across high-growth sectors. We believe these advancements are positioning us to capture emerging opportunities and drive long-term value creation. In the microcontroller space, our new DSPIC33A Digital Signal Controller Core, with its 32-bit architecture and double-precision floating-point unit, is driving innovation in critical sectors. In industrial automation, it's enabling more precise, energy-efficient motor control for smart factories and renewable energy systems, powering advanced grid inverters and solar installations, as well as power supplies for GPU and CPU-based data centers. We believe this positions us strongly in a growing clean energy market, as evidenced by our recently released electric vehicle charger reference designs. We have further expanded our MPU offerings with our PIC64GX multi-core 64-bit microprocessors, targeting secure intelligent edge systems that require multiple applications to run simultaneously on a single platform. Similarly, our new PIC64 high-performance space computer radiation-hardened MPU, complete with built-in AI accelerators and advanced Ethernet connectivity, represents a significant step forward for the compute needs of space exploration and satellite deployment. For high-performance space computers, we are sole sourced in aerospace and defense applications for this compute function, and working with numerous customers on early development of applications. In our data center and networking business, we are focused on evolving data center needs. Our family of PCIe switches and high performance PCIe SSD controllers are now in mass production and widely adopted by customers. These product families are designed and optimized to meet the high speed connectivity and high performance storage needs of standard and AI accelerated servers. We also see increased end customer qualification activity with our CXL controller solutions, which will enable larger server memory plat footprints and improve the efficiency of data center servers. We believe these solutions position us well to address the evolving needs of next generation data centers. In the automotive sector, We are expanding our single-pair Ethernet portfolio with our new 1000BASE T15s, supporting extended cable links. Additionally, we are excited about the launch of our VelocityDrive software platform and automotive-qualified multi-gigabit Ethernet switches, which are now available to support the next generation of software-defined vehicles and industrial applications. These innovations underscore our commitment to providing cutting-edge solutions across renewable energy, automotive, aerospace, defense, and data center sectors. We are making it easier for our customers to develop smarter, more efficient products, laying the groundwork for future growth in these dynamic marketplaces. With that, I will pass the call to Ganesh for comments about our business and guidance going forward. Ganesh.