Microchip Technology(US:MCHP)2023-11-03 01:22Financial Data and Key Metrics - Net sales in the September quarter were $2.254 billion, down 1.5% sequentially [48] - Non-GAAP gross margins were 68.1%, operating expenses were at 20%, and operating income was a record 48.1% [49] - Non-GAAP net income was $889.3 million, and non-GAAP earnings per diluted share was $1.62 [49] - GAAP net income was a record $666.6 million, resulting in a record $1.21 in earnings per diluted share [49] - Inventory balance at September 30, 2023, was $1.331 billion, with 167 days of inventory, flat compared to the prior quarter [51] - Adjusted free cash flow was $454.3 million in the September quarter, with 77.5% or $352.1 million returned to shareholders [16][54] Business Line Data and Key Metrics - Mixed-signal microcontroller net sales were down 1.7% sequentially and up 8.5% year-over-year [60] - Analog product line net sales were down 1.7% sequentially and up 8.8% year-over-year [60] - Aerospace and defense end market showed reasonable resilience, while other end markets experienced broad-based weakness [89] Market Data and Key Metrics - Asia was down sequentially, Europe was flat, and the Americas were slightly up in terms of revenue [60] - China's market remained weak, with no significant improvement in distribution sell-through [15][127] - Short lead times were reduced from 52 weeks at the start of 2023 to 13 weeks by the end of the September quarter, with a target of less than 8 weeks by the end of 2023 [68] Company Strategy and Industry Competition - The company is focusing on total system solutions and key market megatrends to drive above-market long-term growth [72] - The PSP (Product Supply Program) was beneficial during periods of long lead times but has less value now due to reduced lead times [8][9] - The company is managing inventory levels carefully, with a target of 130 to 150 days, and is reducing capital investments in response to the challenging economic backdrop [77][102] Management Commentary on Operating Environment and Future Outlook - The company expects net sales for the December quarter to decline between 15% and 20% sequentially, with a year-over-year decline of 14.3% at the midpoint [71] - The March quarter is anticipated to see another sequential decline, although to a lesser extent than the December quarter [79] - The company remains confident in its long-term growth prospects, driven by strong design win momentum and focus on key market trends [72] Other Important Information - The company plans to increase free cash flow return to shareholders by 500 basis points every quarter until reaching 100% of adjusted free cash flow returned to shareholders, expected by the March quarter of 2025 [19] - The company reduced finished goods inventory last quarter and will continue to focus on inventory management [18] - The company expects non-GAAP gross margins to be between 64% and 65% for the December quarter, with non-GAAP operating expenses between 22.7% and 23.3% [78] Q&A Session Summary Question: How are bookings and pushouts affecting the business? - New bookings are in better shape due to more informed demand, while pushouts are mainly for backlog placed 9-12 months ago [4][5] - Customers are taking advantage of short lead times and readily available supply, leading to churn in backlog and pushout requests [6] Question: How is the PSP program evaluated in hindsight? - The PSP program was beneficial during periods of long lead times but has less value now due to reduced lead times [7][8] - The program helped manage backlog and make informed decisions on foundry orders and capital equipment [9] Question: What is the outlook for pricing and gross margins? - Pricing remains stable, with no significant erosion expected, as the company focuses on long design cycles and competitive pricing at the design stage [11] - Gross margins are expected to decline in the December quarter but remain strong, with potential adjustments based on the business environment [98][120] Question: How is inventory being managed? - The company is reducing finished goods inventory and working with distributors to balance inventory levels [18][22] - Inventory levels are above target but are being managed carefully, with adjustments based on the business environment [102][103] Question: What is the impact of short lead times on the business? - Short lead times are helping customers navigate the uncertain environment but are also resulting in lower bookings and reduced near-term visibility [69] - The company expects to continue reducing lead times to less than 8 weeks by the end of 2023 [68] Question: How is the company managing utilization rates? - Utilization rates have been reduced modestly, with no underutilization charges anticipated in the near term [82] - The company is balancing inventory build with the need to respond quickly to changes in the business environment [110][111]