Microchip Technology's CFO Discusses Inventory Replenishment and Financial Outlook at Bank of America Global Technology Conference 2025

Key Takeaways

TL;DR: Microchip updated its guidance upward as May bookings hit multi‐year highs. The CFO highlighted that improved inventory mgmt.—marked by a significant reduction in $145M in quarterly reserve and underutilization charges—and broad-based replenishment across both distributor and direct channels is driving a recovery across all end markets. Additionally, emphasis was placed on leveraging AI/ML to optimize capacity allocation, careful pricing adjustments, and a disciplined approach to OpEx and capital returns.

• Updated Guidance & Demand Recovery
  • Higher Bookings & Backlog: CFO Eric Bjornholt noted May bookings reached the highest levels in several years, prompting an upward revision of guidance by removing the low end of previous ranges. He also highlighted a growing backlog, esp. into the Sept. Q.
  • Broad-Based End-Market Replenishment: Demand recovery is driven by inventory rebuilds across all geographies and end markets—Industrial (30% of biz), Automotive, and A&D (18% of biz) all showing improvement.
• Inventory Mgmt. & Margin Impact
  • Significant Write-Off Charges: Microchip recorded over $90M in inventory reserve write-offs and about $54M in underutilization charges in the March Q—totaling nearly $145M in charges.
  • Inventory Reduction Strategy: As part of Steve Sanghi’s 9-point plan, efforts are underway to reduce inventory by $350M+ this fiscal year, which will help drive non-GAAP product GP margins closer to the 65% target.
  • Future Margin Tailwinds: As inventory reserve charges drop (potentially to $15–$20M quarterly) with improved production levels, underlying GP margins (previously near 67% before charges) are expected to improve.
• Distribution & Customer Dynamics
  • Improved Distributor Sell-Through: The call detailed a $103M gap between distribution sell-in and sell-out, which is narrowing as distributors begin to replenish inventories.
  • Direct Customer Reengagement: Despite a challenging PSP experience during the prior cycle, nearly all affected customers have reengaged, with a survey indicating +24% improvement in relationships and only 12% showing damage.
• Capacity Mgmt. & Pricing Strategy
  • Advanced Capacity Reservation via AI/ML: Microchip is deploying AI/ML to analyze customer data and reserve capacity for consistent buyers—aiming to avoid future issues like those seen with the PSP program.
  • Pricing Environment: The pricing is trending with a mid-SD decline this fiscal year, primarily on new design wins rather than established product lines, helping to maintain stable margins in the long run.
• OpEx & Capital Returns
  • OpEx Adjustments: A reduction in force has been completed, with current Q OpEx now at a projected low of $356M. Mgmt. emphasized a focus on returning OpEx to a long-term target of 25% of rev. as sales improve.
  • Dividend & Buyback Plans: The dividend remains at $0.455 per Q. Buybacks are deferred until the co. reduces its leverage (targeting 1.5x), given recent financing moves to secure an investment-grade rating.
• Tariff & Supply Chain Considerations
  • Limited Tariff Exposure: Approx. 14% of Microchip's rev. is subject to U.S.–China tariffs. Mgmt. noted flexibility in shifting manufacturing footprints (e.g., from Taiwan foundries) to mitigate potential tariff impacts, thus limiting direct competitive disadvantage.

Overall, mgmt.’s detailed discussion of enhanced inventory control, customer reengagement efforts, and proactive capacity planning indicates a well-strategized recovery path, offering multiple Qs of above-seasonal performance and improved margins as inventory-related charges decline. This info is crucial for investors assessing Microchip’s competitive position and future growth trajectory.

Call Q&A

• Vivek Arya: What led to the raise in guidance?
  • J. Bjornholt: We removed the low end of the range as things are trending well. Bookings for May were the highest in years, leading to updated guidance around the previous midpoint and high end. Inventory write-off charges impacted GP margin, but we aim for 65% non-GAAP GP margin targets.
• Vivek Arya: Is the industry rebound due to improving end demand or inventory replenishment?
  • J. Bjornholt: It's a matter of inventory replenishment after years of depletion. Distributors and customers are placing orders as their inventory gets too low, reflected in our bookings and backlog.
• Vivek Arya: Is the recovery driven by distribution or direct customers?
  • J. Bjornholt: It's a combination of both. Distribution sell-through is increasing, reflecting improved inventory at distributors' customers. We expect the gap between distribution sell-through and sell-in to converge this fiscal year.
• Vivek Arya: Are there specific applications or geographies driving the recovery?
  • J. Bjornholt: The recovery is broad-based across all end markets and geographies.
• Vivek Arya: Is there a better recovery in Industrial vs. Automotive?
  • J. Bjornholt: We see recovery across all end markets, including Industrial and Automotive. Industrial is our largest end market.
• Vivek Arya: How do you quantify undershipment relative to distribution sales?
  • J. Bjornholt: The $103M difference between distribution sell-in and sell-out is just a piece of the inventory levels. It's hard to know exactly where we stand relative to trend lines.