Microchip Technology Incorporated

Greetings and welcome to the Microchips Q3 fiscal 25 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 you require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Steve Sangeet, CEO. Thank you, Steve. You may begin.

Thank you, operator. And 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 or predictions and that actual events or results may differ materially. We refer you to our press release 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 Rich Simonsek, Microchip COO, Eric Bionhold, CFO, and Sajid Dowdy, Head of Investor Relations. I will comment on our restructuring and my observations since returning to Microchip as CEO. Eric will go over our third quarter fiscal year 2025 financial performance, and Rich will then review some product line updates. I will then provide an overview of the current business environment and our fourth quarter fiscal year 2025 guidance. We will then be available to respond to specific investor and analyst questions. Since I returned as Microchip CEO on November 18, 2024, I have spent a significant amount of time evaluating key aspects of Microchip's business. At the UBS conference on December 3rd, I described a nine-points plan to evaluate Microchip and make changes where needed to set the company on a course to achieve its previous premium status of performance. We're setting up an investor and analyst call on the morning of March 3rd to provide you with a comprehensive update on that nine-point plan. Today, I'll give you an interim report on several aspects of that plan. The first action was to resize our manufacturing footprint. After analysis, we have decided to close our Tempe FAB known as FAB2. Currently, we are in the process of building the material to provide the buffer required before we transfer the processes and products to our other two FABs. Seventy percent of this product is already qualified at these other FABs. Our other two FABs, namely FAB4 in Gresham, Oregon, and FAB5 in Colorado Springs, are working on rotating time off schedules. This reduces the capacity but leaves the fabs in a position to ramp capacity when needed on a very short notice. In our back-end facilities in Thailand and Philippines, we're managing capacity by taking shutdown days and reducing the number of employee hours and days of work. In the rest of our smaller plants worldwide, There is a plan for each plant based on the specific demand in each plant. Some of them are running at capacity, while others are working shortened weeks. The second action was to reduce our inventory. Our inventory at the end of December 2024 was 266 days, up from 247 days at the end of September 2024. Our target inventory is 130 to 150 days. On March 3rd, I will project out for you the inventory reduction plan as an example from December 2024 to the end of fiscal year 26, which is March 31, 2026. We are currently expected to be able to reduce our inventory balance by approximately $250 million. which will liberate cash from this inventory reduction. The third action was a review of our megatrends and TSS and recommend any changes. I will provide an update on this topic on March 3rd. The fourth action was business unit by business unit deep dive. This is still underway, but I already know that we will reorganize some of our business units for greater efficiency and synergy. In the process, we will combine a few groups together. The fifth action was a review of Microchip's channel strategy. I have reviewed our channel strategy, and we have made two changes. First, when we give a demand creation registration to a distributor on a design socket, We historically have kept that demand creation flag forever. Going forward, we will change that flag to demand fulfillment after a given number of years. This will incentivize the distributor to present our new products to customers instead of sitting on a higher margin and exposing the socket to competitors. The second change is We have been providing industry-high fulfillment margins for distributors. We have lowered the fulfillment margins, which will bring it to a level that is still on the higher end of what our competitors provide. The sixth point of evaluation was to strengthen our customer relationships. We have targeted the top 1,000 customers with an urgent focus on the 256 customers. Many of them have already been approached and visited, or the customers visited us. We are giving customers the chance to communicate candidly with us, showing empathy and care, and then engaging with them to support them on their new designs. Our goal is to put our customers first and win their hearts and design opportunities with our products, technologies, support, and care. Point seven and eight were our long-term business model and operating expenses. I will provide an update on these topics on March 3rd. The ninth and final area was the CHIPS Act activity. We are currently paused, waiting for the new administration to restaff the CHIPS office. We will then reengage when the time is right. With that, I will pass it to Eric Bjornholt. Eric?

Thanks, Steve, and good afternoon, everyone. We are including information in our press release and in 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've 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 reconciliations on our website. Net sales in the December quarter were $1.026 billion, which was down 11.8% sequentially. 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 55.4%, including capacity under utilization charges of $42.7 million, as we are aggressively managing production activities to adjust to challenging business conditions. Operating expenses were at 34.9% of net sales and operating margin was 20.5%. Non-GAAP net income was $107.3 million and non-GAAP earnings per diluted share was $0.20. Please note that our operating expenses increased in the December quarter and will further increase in the March quarter due to a predominant portion of our employees coming off the pay cut that we had been on for about nine months in the late November, early December 2024 timeframe. The full quarterly impact of this is reflected in our operating expense guidance for the March quarter. On a GAAP basis in the December quarter, gross margins were 54.7%. Total operating expenses were $530.5 million and included acquisition and tangible amortization of $122.6 million, special charges of $3.5 million, and share-based compensation of 42 million and 4.3 million of other expenses. The GAAP net loss was 53.6 million, resulting in a loss per share of 10 cents. Our non-GAAP cash tax rate was 19.9% in the December quarter. We currently expect our non-GAAP cash tax rate to be approximately 14.5% for the fourth quarter of fiscal year 2025, which is modestly higher than our previously forecasted 13% tax rate. This is a result of expected overpayments in two of our larger tax jurisdictions, which will have the impact of reducing our fiscal year 2026 tax rate as we are calculating this on a cash basis. Our non-GAAP cash tax rate is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years. Our inventory balance at December 31, 2024 was $1.356 billion, which was up $16.7 million from the end of the September 2024 quarter. We had 266 days of inventory at the end of the December quarter, which was up 19 days from the prior quarter's level. At the midpoint of our March 2025 quarterly guidance, we would expect both inventory dollars and inventory days to decrease from the December 31st, 2024 levels. 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 December. Inventory at our distributors in the December quarter was at 37 days and was down three days from the prior quarter's level. Distribution took down their inventory holdings in the December quarter as distribution sell-through was $118 million higher than distribution sell-in. Our cash flow from operating activities was $271.5 million in the December quarter. Our adjusted free cash flow was $244.6 million in the December quarter. As of December 31st, our consolidated cash and total investment position was $586 million. which is higher than normal due to the timing of the maturity dates of some of our commercial papers that did not occur until early January, which was used to pay down debt after the end of the December quarter. We retired $665.5 million in convertible bonds that matured in November 2024. In the December quarter, we also issued $1 billion in investment-grade bonds with a 4.9% coupon maturing in March of 2028. and $1 billion in investment grade bonds with a 5.05% coupon maturing in February 2030. We used the proceeds of these bond offerings to retire our $750 million term loan and pay down a portion of our commercial paper balance. Our next debt maturity is a $1.2 billion bond maturing in September 2025. The debt issuance this past quarter will give us ample room to retire our September 2025 bond with our line of credit or commercial paper programs. As a result, we have taken the refinancing risks off the table for the $1.2 billion maturity. Our net debt increased by $33.6 million in the December quarter. Our adjusted EBITDA in the December quarter was $274.9 million and 26.8% of net sales. Our trailing 12-month adjusted EBITDA was 1.64 billion. Our net debt to adjusted EBITDA was 3.78 at December 31st, 2024, up from 1.27 at December 31st, 2023. Capital expenditures were 18.1 million in the December quarter. Our expectation for capital expenditures for fiscal year 25 is about 135 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 up cycle that has not been placed in service yet. Depreciation expense in the December quarter was $40.4 million. I will now turn it over to Rich, who will provide some commentary on our product line innovations in the December quarter. Rich.