Citi Global TMT Conf. 2025: Microchip CEO on 9-Point Turnaround, Mkt Trends & Semi Growth Outlook

Key Takeaways

TL;DR: Microchip’s multi-pronged restructuring is rapidly boosting profitability—GP, OM, and OPX targets tracking ahead. Key tailwinds: strong defense/NATO demand, industrial automation, DC growth, and resilient China biz. Inventory correction is mid-cycle, driving above-seasonal seq. growth into Dec/Mar Qs. Disty and LT signals point to normalizing S/D, w/ selective tightness in high-end. Risks: CHIPS Act (no cap. accepted), auto (healthy end-mkt but inv. overhang), and global cycles—actively managed.

1. 9-Point Plan Execution & Strategic Updates

• Mfg. Footprint Resizing:
  • Actions: Closed 1 old fab, downsized 2 more, cut capacity after inv. ballooned to 266 days post-COVID.
  • Quote: “Inventory got as high as 266 days... at the end of June [now] 214 days, expect <200 at end of Sept.”
  • Forward Look: Util/capacity to increase +15–20%/Q starting Dec; currently producing below shipments to burn down inv.
• BU/Megatrend Review & Channel Strategy:
  • Completion: Deep-dive/realignment of BUs & megatrends done; channel/partner margins and underperforming distys pruned.
  • Quote: “Terminated a couple of small distributors that were not performing.”
• Customer Re-engagement:
  • Global outreach led to notable increase in design funnel and customer “reengagement”—rebuilding demand drivers.
• Fin. Op Model Reset:
  • New Model (Mar ’25):
    • LT GM: 65%
    • OPX: 25%
    • OM: 40%
  • Progress:
    • OPX down from 39% to ~32% (first layoff in 25 yrs); path to 25% as inv. corrects and rev. recovers.
  • GP: On track for LT target, improved pricing discipline (post-peak anomaly w/ charges/excess).
• CHIPS Act:
  • No funds accepted; paused talks. Equity req. is a dealbreaker: “Not interested in that.”

2. Growth Drivers & Segment Breakdown

• Above-Peer Growth Through Downturn:
  • Inv. correction and broad customer base (~110K customers) enable Microchip to sustain growth as more customers finish destocking.
  • Key Growth Sectors:
    • Aero & Defense:
      • % of Sales: Up from 9% to 18% YoY.
      • Catalyst: US defense budget ($1T+) replenishing ammo post-conflicts.
      • Europe/NATO: Major upside as NATO spend “doubling/tripling”; designed into “drones, missiles, tanks... radars.”
      • Unique Position: “Largest defense supplier to US Defense... Nobody is even close.”
      • Space: “India landed a vehicle on the moon... loaded w/ our chips.”
    • Industrial (incl. Medical):
      • % of Sales: 30%
      • Themes: Robotics, AI/automation, US re-shoring, factory capex.
    • DC:
      • % of Sales: 19%
      • Role: Power mgmt, PCIe, Ethernet—“co-traveler” content in servers/centers.
      • Trend: “Huge growth in DCs... can’t ever make enough.”
    • Network & Connectivity:
      • Segments: Home, auto, factory, DC—USB hubs, CAN, LIN, Ethernet, etc.
      • Status: “Doing very, very well vs. others.”
    • Auto:
      • % of Sales: ~18%
      • Status: Unit prod. healthy (“SAAR in $16M range”); inv. overhang slows chip shipments vs. demand.

3. Bookings, Inventory, & Mkt Outlook

• Bookings Momentum:
  • Quote: “July was the best month in 36 months.”
  • Trend: Jan–Jun saw MoM improvements; Aug “ended better than expected” despite seasonality; Sept tracking strong.
• Seq. Growth Outlook:
  • Dec/Mar Qs:
    • Guide: Expect “better-than-seasonal” growth, driven by inv. normalization and new design wins.
    • “Inv. correction in three places: direct, disty customers, and channel inv.”
    • Disty shipped out $103M more than shipped in (Mar Q), $49M (Jun Q)—disty inv. to normalize in coming Qs, supporting GAAP rev.
• LT Dynamics:
  • General LTs “in good shape,” but select specialty/high-end DC/back-end products tight due to cell phone/AI DC build-outs (“challenges w/ back-end... should go away after cell phone build is completed”).