Goldman Sachs Communacopia + Tech Conf. 2025: Microchip Tech (MCHP) Exec Discussion – Mkt Trends, AI Strat, Ops Outlook

Key Takeaways

TL;DR: MCHP signals rebounding demand, strategic AI/connectivity push, and aggressive inv. reduction. Key diffs: deep A&D/FPGA exposure w/ superior margin, sustained share gains in next-gen industrial/auto via connectivity, and disciplined OpEx to support margin. GenAI tools already boosting internal/customer productivity. Pricing headwinds manageable. US onshore prod. substantial, strategically relevant under new tariffs.

1. Demand, Backlog & Inv. Trends

• Bookings & Backlog:
  • July = highest bookings in ~2 yrs; Aug. "more reasonable" vs. historical weakness.
  • Backlog up Q/Q for June Q.
  • No Sept. commentary yet, but tone positive.
• Aggressive Inv. Reduction:
  • BS inv. down $120M+ seq. last Q; on track for Sept. Q inv. to reach 195–200 days vs. 261 days peak.
  • "Mfg at ~50% of demand to bring inv. down."
  • Target: 130–150 days inv. long-term.
  • Mgmt: Excess inv. limits demand visibility.

2. End Mkt & Product Segment Dynamics

• A&D:
  • 18% of FY rev. from A&D, driven by US/NATO spend.
  • MCHP supplies ~20% of semis for all A&D/space programs.
  • Design wins: Mars Rover (130 devices), James Webb Telescope, Actel RISC-V for next-gen space computers.
  • High share/"richer margin" vs. peers; long-lived, rad-hard, 60 yrs acquired know-how.
  • "Every product" at Paris Air Show had MCHP content; deep customer stickiness.
• FPGAs:
  • MCHP FPGAs use "50–60% less power than all others," winning in space/defense, now expanding to industrial/medical.
  • FPGA biz "more than doubled since Microsemi acq."; traction w/ PolarFire 2 (high-end) & lower-cost products.
• Connectivity, Networking & Industrial:
  • Leading growth in T1 Ethernet/connectivity: "all mkts... humanoids, Industry 4.0, auto... need higher speeds."
  • "Significant TSS/attach w/ connectivity/networking" drives forward rev.
  • Legacy standards obsolete—growth from new Ethernet/fast interface adoption.
• Auto:
  • Minimal China EV exposure; robust T1S connectivity/MCU growth (e.g., dashboard HMI).
  • 90% share of dashboard touch panels (e.g., Mercedes).
  • Focus: design wins in next-gen Ethernet for in-vehicle networks.
• China Rev. Exposure:
  • "About 18% of rev. is China," but half to trade zones (re-exported, tariff-insensitive).
  • True at-risk China consump. = 4–5% of rev.—mitigated via proprietary products.
  • "China corrected inv. early, continues to improve."

3. AI, GenAI & Internal Innovation

• AI/ML/GenAI Adoption:
  • AI/ML used since 2017 for ops automation: ~87% of orders "auto scheduled" w/ ML/product recs; "all AI generated... for ~5 yrs."
  • New internal GenAI code-gen asst. driving 20–40% productivity gain for 1,000+ engineers; customer release since Feb.
  • Tool: vectorized data sheets, YouTube training, RAG models, AI agents—auto code-gen, video recs, QA/testing, all-in-one.
  • "Latest release adds AI agents for workflow automation. First to market."
• Biz Model/Org Changes:
  • New AI/ML BU; reorg'd MCU & connectivity/DC BUs for efficient funding/R&D focus.
  • Pursuing unified HW accelerators/network procs deployable across BUs.