Microchip Technology Incorporated (NASDAQ:MCHP) Q4 2024 Earnings Call Transcript

Microchip Technology Incorporated (NASDAQ:MCHP) Q4 2024 Earnings Call Transcript May 6, 2024

Microchip Technology Incorporated misses on earnings expectations. Reported EPS is $0.57 EPS, expectations were $0.574. Microchip Technology Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Microchip Q4 of Fiscal Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Bjornholt, Senior Vice President and CFO. Thank you, Eric. You may begin.

Eric Bjornholt: Thank you 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 are predictions and that actual events and results may differ materially. We refer you to our press release as 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 Ganesh Moorthy, Microchip’s President and CEO; Steve Sanghi, Microchip’s Executive Chair; Rich Simoncic, Microchip’s COO, and Sajid Daudi, Microchip’s Head of Investor Relations.

I will comment on our fourth quarter and full fiscal year 2024 financial performance. Ganesh will then provide commentary on our results and discuss the current business environment as well as our guidance and Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions. We are including information in our press release 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 have 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 as described in our earnings press release and in the reconciliations on our website. Net sales in the March quarter were $1.326 billion, which was down 24.9% 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 60.3%, including capacity under utilization charges of $32 million. Operating expenses were at 27.4%, and operating income was 32.9%.

Although our operating income was better than the midpoint of our guidance, our cash taxes came in higher than forecasted. Non-GAAP net income was $310.3 million and non-GAAP earnings per diluted share was $0.57 and at the midpoint of our guidance. On a GAAP basis in the March quarter, gross margins were 59.6%. Total operating expenses were $536.4 million and included acquisition and tangible amortization of $151.2 million, special income of $16.9 million, which was primarily driven by the settlement of an unclaimed property audit at a value that was less than what we had accrued for. Share-based compensation of $37.4 million and $1.1 million of other expenses. GAAP net income was $154.7 million resulting in $0.28 in diluted earnings per share.

For fiscal year 2024, net sales were $7.634 billion and were down 9.5% from net sales in fiscal year 2023. On a non-GAAP basis, gross margins were 65.8%, operating expenses were 22% of sales, and operating income was 43.9% of sales. Non-GAAP net income was $2.698 billion, and EPS was $4.92 per diluted share. On a GAAP basis, gross margins were 65.4%, operating expenses were 31.8% of sales, and operating income was 33.7% of sales. Net income was $1.907 billion and EPS was $3.48 per diluted share. Our non-GAAP cash tax rate was 18.8% in the March quarter and 14.5% for fiscal year 2024. Our non-GAAP tax rate for fiscal year 2025 is expected to be about 13%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. If this were to happen, we would anticipate about a 200 basis point favorable adjustment to Microchip’s non-GAAP tax rate in future periods. Our inventory balance at March 31st, 2024 was $1.316 billion. We had 224 days of inventory at the end of the March quarter, which was up 39 days from the prior quarter’s level and in-line with our expectation, giving the difficult revenue quarter we experienced. At the midpoint of our June 2024 quarter guidance, we would expect inventory dollars to be up modestly and days of inventory to increase based on the lower cost of goods sold, driven by the depressed revenue levels at which we believe is the low point of the current cycle for Microchip.

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 14 days of inventory at the end of March. Inventory at our distributors — in the March quarter were at 41 days, which was up 4 days from the prior quarter’s level. Distribution took down their inventory in the March quarter as distribution sell-through was about $125 million higher than distribution sell-in. The inventory days increased as this is reflective of the much lower cost of sales for Microchip in the March quarter that is used in this calculation. Our cash flow from operating activities was $430 million in the March quarter. Our adjusted pre-cash flow was $389.9 million in the March quarter.

As of March 31, our consolidated cash and total investment position was $319.7 million. Our total debt increased by $312 million in the March quarter, and our net debt increased by $273.3 million. Our adjusted EBITDA in the March quarter was $503 million and 37.9% of sales. Our trailing 12-month adjusted EBITDA was $3.623 billion, and our net debt adjusted EBITDA was 1.57 at March 31, 2024, up from 1.45 at March 31, 2023. Capital expenditures were $40.1 million in the March quarter and $285.1 million for fiscal year 2024. Our expectation for capital expenditures for fiscal year 2025 is about $175 million. Depreciation expense in the March quarter was $45.8 million. I will now turn it over to Ganesh to give his comments on the performance of the business in the March quarter, as well as our guidance for the June quarter.

Ganesh?

Ganesh Moorthy : Thank you, Eric, and good afternoon, everyone. Our March quarter results were consistent with our guidance with net sales down 24.9% sequentially and down 40.6% from the year ago quarter. As we endured through a major inventory correction. Non-GAAP gross margin came in as expected at 60.3% and non-GAAP operating margin was better than expected at 32.9% due to the strong expense control programs we had in place. However, as Eric mentioned, our tax rate was higher than expected and as a result our consolidated non-GAAP diluted EPS only met expectations at $0.57 per share. Our revenue decline resulted in March quarter EBITDA dropping and as a result our net leverage ratio rose to 1.57x. We expect our net leverage to rise modestly for a few quarters, as trailing 12-month adjusted EBITDA drops when replacing stronger prior year quarters, with weaker current year quarters.

However, our cash generation capability remains strong and we are committed to our capital return plan. Our capital return to shareholders in the June quarter will increase to 87.5% of our March quarter adjusted free cash flow as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025. Reflecting on our fiscal year 2024 results, it was a roller coaster year with a positive start that was followed by a major inventory correction. As compared to fiscal year 2023, revenue declined 9.5% to $7.6 billion. Non-GAAP operating margin was resilient at 43.9% as we took the actions required to respond to the major inventory correction. Capital return to shareholders through a combination of dividends and share buybacks in fiscal 2024 was $1.89 billion, representing a 15.4% growth as compared to fiscal year 2023.

My thanks to our worldwide team for their support, hard work, and diligence as we navigate a difficult environment and focus on actions that we believe position us well to thrive in the long-term. Taking a look at our fiscal year 2024 net sales from a product line perspective, our mixed-signal microcontroller net sales were down 10.2% and represented 56% of Microchip’s overall revenue. Our analog net sales were down 15.2% and represented 26.4% of Microchip’s overall revenue. While we don’t normally break out our FPGA product line results, it is noteworthy that our fiscal year 2024 FPGA revenue exceeded $679 million and set another record. FPGA revenue grew over 22% as compared to fiscal 2023 and delivered operating margins of a north of corporate average.

We deliver market-leading mid-range FPGA solutions with best-in-class low power, reliability, and security, and are especially well-suited for the fast emerging opportunities around artificial intelligence at the edge. Our overall FPGA design win momentum is strong across multiple end markets. A few other product line notes of significance. Early in April, we closed our acquisition of Seoul Korea-based VSI, an ADAS and Digital Cockpit Connectivity Pioneer, to extend our Automotive Networking Market leadership. This acquisition adds Automotive SerDes Alliance Motion Link technology, otherwise known as ASA-ML, to Microchip’s broad Ethernet and PCIe automotive networking portfolio to enable next generation software defined vehicles. With the anticipated increase in the adoption of advanced camera-based driver assistance systems, in-cabin monitoring, safety and convenience features, and multi-screen digital cockpits for next-generation software-defined vehicles, there is a growing requirement for more highly asymmetric raw data and video links and higher bandwidths, which the ASA Motion Link Open Standard supports.

Also last month, we closed our acquisition of Neuronix AI Labs, whose innovative software technology enhances AI-enabled intelligent edge solutions and increases neural networking capabilities. This technology expands our capabilities for power-efficient AI-enabled edge solutions deployed on FPGAs. Neuronix AI Labs provides neural network sparsity optimization technology that enables the reduction in power, size, and calculation for tasks such as image classification, object detection, and semantic segmentation while maintaining high accuracy. Finally, in July, we expect to announce our entry into the 64-bit embedded microprocessor market with a suite of products, development tools, and other support requirements to address high-performance embedded processing applications, including AI-enabled edge solutions.

This will extend our strong 32-bit embedded microprocessor portfolio to higher performance and increased capabilities, while preserving Microchip’s historically strong ecosystem of leading development tools to make adoption easy for embedded system design engineers. Microchip is the only company to offer the widest embedded control and processing platform from 8-bit to 64-bit, as well as FPGAs, with a common development tool ecosystem that’s empowering customers to innovate and reuse their work across a wide spectrum of markets and applications. Now for some color on the March quarter and the general business environment. All regions of the world and most of our end-markets, with the exception of aerospace and defense and the artificial intelligence subset of data centers were weak.

We believe that our product shipments were significantly lower than the end-market consumption of our products as our distribution channels drained inventory during the quarter. Our broad base of customers continued to lower their inventory and adjust their business plans in the midst of a weak macro environment and an uncertain outlook. With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe that as inventory destocking, as well as reduction in target inventory levels that is underway at multiple levels, that our direct customers and distributors buy from us, our indirect customers who buy through our distributors, and in some cases our customers’ customers. We are however, also seeing early signs of green shoots in our business.

First, the level of requests to cancellations and push-outs has started to subside. Second, our bookings have started to pick up, albeit from low levels. February bookings were the highest in eight months. March bookings were the highest in all of fiscal 2024, and April bookings were higher than March. Third, the new bookings are aging over a shorter period of time. And fourth, the number of expedites and shipment pull-in requests are growing. Collectively, these green shoots, we believe, are pointing to the formation of a bottom. Our average lead times continue to be eight weeks or less. During a period of business uncertainty, we believe short lead times are the best way to help customers navigate the environment successfully and improve the quality of backlog placed with us.

However, the significant reduction in lead time is also resulting in reduced near-term visibility for our business. Given the severity of the inventory correction, our factories around the world are running at lower utilization rates. And our pre-major fabs will take another two-week shutdown in the June quarter in order to help control the growth of inventory. Our internal capacity expansion actions remain paused. We expect our capital investments in fiscal year 2025 will be low, even as we prepare for the long-term growth of our business. On the CHIPS Act front, we have nothing new to report. The CHIPS office has completed their diligence for the grants we are seeking, and we are working towards an agreement. At this stage of a major inventory correction, we believe that the days of inventory metric, whether for Microchip or for our distributors, can be deceptive, as this is a backward-looking indicator measuring off of the baseline that is well below where we believe end-market consumption is at.

For inventory planning, we are, therefore focused on where we believe consumption is running and will likely run in the coming quarters. We continue to work with our distribution partners to attempt to find the right balance of inventory required to serve their customers, manage through their cash flow requirements and be positioned for the eventual strengthening of business conditions. The operating expense reduction efforts we implemented last quarter, including broad-based salary sacrifices are continuous this quarter. The shutdown for manufacturing team members and pay cuts for non-manufacturing team members are consistent with our long-standing culture of shared sacrifices and down cycles and shared rewards and up cycles. Our culture of shared sacrifice protects our valuable employees from layoffs, helps enable us to support customers and maintain our design win momentum, helps ensure that manufacturing capacity can be turned on quickly as business conditions strengthen and helps enable our product development teams to maintain their pace of new solution introductions.

Now let’s get into the guidance for the June quarter. While we see a number of green shoots in our business indicators, we still need turns orders within the quarter to meet our guidance. Operating in a high turns environment has historically been normal for Microchip. It is just not a position we have found ourselves in over the last few years due to supply-constrained high backlog environment, we and the industry experience. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the June quarter to be between $1.22 billion and $1.26 billion. We believe that the June 2024 quarter marks the bottom of the cycle for Microchip and that our business will return to sequential revenue growth in the September 2024 quarter.

We expect our non-GAAP gross margin to be between 59% and 61% of sales. We expect non-GAAP operating expenses to be between 28.25% and 28.75% of sales. We expect non-GAAP operating profit to be between 30.25% and 32.75% of sales, and we expect our non-GAAP diluted earnings per share to be between $0.48 and $0.56. We believe that the fundamental characteristics of growth, profitability and cash generation of our business remain intact. We are confident that our solutions remain the engine of innovation for the applications and end markets we serve. Our focus on total system solutions and key market megatrends continue to fuel strong design win momentum, which we expect will drive above-market long-term growth. We remain committed to executing our Microchip 3.0 strategic imperatives, which we believe will deliver sustained results and substantial shareholder value.

Last but not least a month ago, we appointed Rich Simoncic as Chief Operating Officer. Rich is a Microchip Lifer who has been with us for 35 years in many different capacities, which has been expanding his role over the last few years, and he and I will jointly lead the Microchip global enterprise so that we can apply our combined leadership capacity to engage the opportunities and challenges that are ahead of us. With that, let me pass it back on to Steve to talk more about our cash return to shareholders. Steve?

Steve Sanghi: Thank you, Ganesh, and good afternoon, everyone. I would like to provide you with a further update on our cash return strategy. The Board of Directors approved an increase in the dividend of 18% from the year ago quarter to a record [$0.452] (ph) per share. During the last quarter, we purchased a record $387.4 million of our stock in the open-market. We also paid out a record $242.5 million in dividends. Thus, the total cash return was a record $629.9 million. This amount was 82.5% of our actual adjusted free cash flow of $763.4 million during the December 2023 quarter. Our net leverage at the end of March 2024 was 1.57 times. Ever since we achieved an investment-grade rating for our debt in November 2021 and pivoted to increasing our capital return to shareholders, we have returned a total of $4.23 billion to shareholders through March 31, 2024, by a combination of dividends and share buybacks.

During this period, our share buyback in the open market was approximately 30.4 million shares, representing approximately 5.7% of our shares outstanding. In the current June quarter, we will use the adjusted free cash flow level from the March quarter to target the amount of cash returned to shareholders. The adjusted free cash flow excludes amounts we collected from our customers for long-term supply assurance payments, these payments are refundable when purchase commitments are fulfilled. Our adjusted free cash flow for the March quarter was $389.9 million, so our target return to shareholders would be 87.5% or $341.2 million of that amount. However, as Ganesh mentioned, we did complete two small acquisitions in this June quarter. So we are reducing our share buyback amount to reflect the cash outlay for those deals.

Thus, in the June quarter, our cash return to shareholders is expected to be $315.3 million, out of which dividends are expected to be approximately $243 million and our expected stock buyback will be approximately $72.3 million. Going forward, we plan to continue to increase our adjusted free cash flow to return to shareholders by 500 basis points every quarter until we reach 100% of adjusted free cash flow returned to shareholders through dividends and share buybacks. They will take three more quarters, and we expect that dividends over time will represent approximately 50% of our cash returns. With that, operator will you please poll for questions.

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Q&A Session

Operator: Thank you. Now we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Vivek Arya with Bank of America Securities. Please proceed with your question.

Vivek Arya: Thanks for taking my question. Ganesh, you were suggesting June to be the bottom-line for September to grow sequentially because of green shoots. But to be fair, green shoots are suggested on the last call also. So what’s the difference between the last call and this call and if you could help us maybe quantify what has been maybe the base of bookings increase year-on-year or quarter-on-quarter so far, so we can get sense for a base of recovery into September, and then maybe if I could also ask Eric on a related note is, 60% also the trough for gross margin, if June is the bottom, does it also mean 60% is the trough for gross margins? Thank you.

Ganesh Moorthy: Great. Thank you, Vivek. I don’t think we mentioned green shoots at the last earnings call, but we did say that one of our banking sessions that we were at. And that was the first time we began to see it was in the March time frame. And the momentum is picking up, right as we go through March and April and May. I mentioned what the bookings we are doing on a relative basis over that time. We can see how many more people are asking for pull-ins and expedites and all of that. So it’s a qualitative view looking at how we integrate the last two or three months of where momentum is coming in, where the customer feedback is coming in that reflects our view that the June quarter is the bottom and September quarter is growth.

Eric Bjornholt: And then the follow-up question for me on that was on gross margin. And would I expect if June is the trough in revenue if gross margin would bottom-out. And I believe that to be the case. I mean, obviously, we haven’t given guidance yet, and there’s factors that apply to that, that we don’t know yet in terms of product mix and where we’ll be running our factories. But I think that we are bouncing along the bottom on gross margin.

Vivek Arya: Great. Thank you.

Ganesh Moorthy: Thank you.

Operator: Our next question is from Chris Caso with Wolfe Research. Please proceed with your question.

Chris Caso: Yes, thank you. Good afternoon. I guess the question is if there’s any difference that you are seeing from any of the different end-markets? I mean, you talked about some of the booking stabilization improvement that you’ve seen. How would you characterize that among the different end markets?

Ganesh Moorthy: I don’t — on the stabilization, I can’t really point to a particular end market or doing better or not. I said in the aggregate, aerospace and defense and the AI segment of data center are both doing well. And so that part is pulling it up. On the others, there can be some industrial customers, who are still seeing weakness, others who are beginning to see the bottom and trying to come back in with rush orders that goes into the other end markets as well. So no particular end market trend that is distinguishable on the bottoming out of where their inventories are.

Chris Caso: Thanks. As a follow-up, Eric you talked about perhaps if still things go well, June the trough and then June is likely the bottom for gross margins as well. As you go forward, as we pull our way out of this, what do you think would be the trajectory of gross margins? And I guess I asked that taking consideration the fact that your internal inventory is still high. So how would we think about gross margins in the context of recovery as you have to bring your own inventories down to normal?

Eric Bjornholt: So it does depend on the revenue trajectory and then how we would run our factories to respond to that. And so it’s not a question that I can 100% answer today. But our cost structures are still in good shape. Average selling prices are absolutely hanging in there. So with that, we have confidence in our long-term model and our ability to get back there, but the trajectory and how we get there is going to very much be revenue dependent, which will drive certain actions to increase output from our factories. So I know that’s not specifically answering your question, but I think that’s the best we can do right now.

Chris Caso: Okay, fair enough. Thank you.

Operator: Our next question is from Harlan Sur with JPMorgan. Please proceed with your question.

Harlan Sur: Good afternoon. Thanks for taking my question. Can you just talk about channel sell-through dynamics from your global distributors? In March, you mentioned sell-through $125 million higher versus sell-in. Is that a similar delta here in the June quarter? And if excess inventories at end customer of distributors are coming down, I would assume that distribution sell-through is starting to grow. Are you seeing that this quarter? And is this maybe what’s also giving you confidence that June is the bottom?

Ganesh Moorthy: So Harlan, thanks for the question. The level of inventory that is past what our distributors had that has been with our customers is not always visible to us. I think we can get some sense of that from what the distribution sell-through is. But there is also a second factor, which is some of those customers are also reducing the months of inventory they want to carry. So it’s a multipronged answer to it. But what we can see is that distribution is part of the placing of additional orders on us. So they are seeing how they are managing their end customers, their inventory and placing incremental orders on us. So that must have some relevance to how they’re viewing things, but I don’t have a definitive answer on where sell-through is going to end up versus sell-in here in the June quarter, at least not at this time.

Harlan Sur: Thank you for that. And then just a quick follow-up. So direct customer shipments were almost 30% — were down almost 30% sequentially, while [these shipments were] (ph) only down 20% sequentially in March. Does that suggest that excess inventories are maybe a bit more pronounced at your direct customers? And if your lead times are sub-eight weeks, you guys only have visibility through the end of this quarter. So what gives the Microchip team confidence that shipments to direct customers post June will be growing sequentially as you aren’t looking beyond that and you don’t really have visibility into their sell-through dynamics?

Ganesh Moorthy: So we know and customers are placing backlog into the September quarter, into the December quarter. So there’s not a single answer that everybody is following. And we can see that as the bookings are rising, they are placing them into the next three months to six months on a more predominant basis. So that level of where the momentum is coming in or how backlog is coming in is what gives us a sense of where the bottom is and how things are going to be as we into the September and December quarters.

Harlan Sur: Thanks Ganesh.

Ganesh Moorthy: Thank you.

Operator: Thank you. Our next question is from Gary Mobley with Wells Fargo. Please proceed with your question.

Gary Mobley: Hi guys. Thanks very much for taking my question. I know you guys communicated that you held the OpEx lower than expected. And I think it’s today, what — $355 million on a non-GAAP basis. My question is, how long can you hold that down? And is there any claw-back provisions for the lost wages during this temporary salary cut? And I’m just trying to get a sense of how we should think about the OpEx increasing as revenue increase?

Eric Bjornholt: I’ll start with the response and Ganesh can add to it if he wants to. So there is not a clawback in terms of what we’re doing from a salary sacrifice for our employees. We have the shared sacrifice share reward program. And in the past, when we have implemented something like this that has worked out well for our employees that we keep everybody working on the things that are important to drive the revenue growth as the cycle turns upward and we’ve gained market share through that. And so we’ve had great financial results coming out of it and then been able to share those rewards with employees through higher bonuses and taking away the pay cuts at the appropriate time. So we are going to have to see how this plays out from a top-line revenue perspective.

It would be my perspective that we will achieve the same types of results this go around with the actions that we’ve taken, but there’s no promise to employees that they’re going to get this money back. There’s no retroactive claw-back that would be implemented.

Ganesh Moorthy: This is a part of our culture that is not always as easily appreciable from an investor community. We have 98% of employees around the world that are participating in this voluntary. We have another 700 employees who have volunteered for a higher salary reduction than what we have requested from them. It’s very difficult to quantify how powerful culture plays a role in these type of difficult situations and how much that the employees that are part of the solution. And of course, they are part of the shared rewards that come up as we get into better times as well. So this is very much of a program that has worked many times in the past and is another time we’re applying it, and we expect it to be successful.

Eric Bjornholt: I think the other thing that I’d add is we know this is difficult for employees. The inflation still exists, and this is a challenge for employees. So it is not that we want to keep these in place. But at the time, with where we’re guiding revenue for the current quarter of revenue and earnings it’s appropriate. And we hope that we can restore these things back to normal salary levels as soon as possible.

Gary Mobley: Thank you for that color. This is my follow-up, I wanted to perhaps strike a more positive chord and ask about design win metrics for the fiscal year. I don’t know if you have those stats on handy with you, but maybe if you can just give us some qualitative or quantitative measure of the lifetime value of the design wins.

Ganesh Moorthy: So we don’t usually break that out and we have slightly different ways in which we look at this. What we do constantly look at is how is the design pipeline progressing. And in the course of 2023 in addition to all the work that we did, we also saw customers shifting their priorities from doing triage for some of the shortages that they were running into bringing back the innovation program that they had put on hold. And so if you put all of that together, the design win pipeline is strong. There’s a lot more design in activity in the last 12 months than there was in the prior 12 months, just simply because customer bandwidth was there to be able to run the development program that they were progressing with.

Gary Mobley : Thanks Ganesh.

Ganesh Moorthy : Thank you.

Operator: Our next question is from Carlos Coronado with UBS. Please proceed with your question.

Timothy Arcuri: Hi, it’s Tim on. So Ganesh, can you give us a sense of book-to-bill. It sounds like it was below one for March, but I just wanted to confirm that. And I know that you did say that orders are getting better month by month. But is the message that you think book-to-bill could be above one for the June quarter. So I’m just wondering if you can talk to book-to-bill? Thanks.

Ganesh Moorthy: So book-to-bill was below 1. However, book-to-bill has never been an indicator for us of where the business is going as much as an indicator of where our lead times are. During the 2021, 2022 shortages, we had book-to-bill in many, many multiples of where they were at, reflecting the long lead times. Right now with short lead times that we have, we expect book-to-bill will be lower. But the bookings are rising, and I can’t quite tell what May and June are going to complete. So I don’t have a thing – but I — we don’t really look at book-to-bill as necessarily an indicator of where the growth is going to be. It’s more a reflection of as lead times get short, people replace the booking consistent with the shorter lead times.

Timothy Arcuri: Got it. Okay. And then, Eric, one for you. So inventory was a little higher coming out of March then — and I think some of us thought it would be. Can you talk about loadings in the factory and sort of how you’re thinking about loadings into June? Are you just kind of drawing the line understand where you plan to bring down inventory on the balance sheet in June? And yes, just kind of talk about that and its impact on gross margin. Thanks.

Eric Bjornholt: Yes. So I’m honestly not quite sure where The Street had us modeled. We had talked about in our last conference call that inventory days are expected to be between about 225 to 230 days at the midpoint. We came in at 224. So I think we kind of deliver on what we told The Street we were going to do. In terms of utilization in the current quarter, we have been having some attrition in our factories. And because of that, we can start less wafers on a monthly basis than we can because we have a fewer number of employees. But it’s — in the big picture of things relatively modest. I don’t think utilization will be significantly different than it was in the March quarter, maybe just modestly lower.

Timothy Arcuri: Well, thank you Eric. Thank you.

Eric Bjornholt : Thank you.

Operator: Our next question is from Tore Svanberg with Stifel. Please proceed with your question.

Tore Svanberg: Yes, thank you. Let me move on from cyclical questions. And I have a question on 64-bit microcontrollers. You also had an AI acquisition in the quarter. Just trying to understand, Ganesh, your conversations with customers, we hear AI at the edge a lot, but it’s hard for us to get true visibility on that. So — when will Edge AI become a much more meaningful part of your revenues, what you think?

Ganesh Moorthy: Our target markets for Edge AI predominantly in industrial, smaller extent, automotive, some in medical. The medical segment of industrial factory automation, all that. So they are designs in progress and they’ve been taking place over the last six months to 12 months. They probably will just state over 24 to 30 months of time. So it’s in that time. There’s some of it small amounts that are already taking place, but I think it becomes a more and more meaningful part as time goes on. And each of these either product line announcement or some of the acquisitions, which give us specific technologies, just accelerate where those designs can go and how our solutions can be differentiated from others providing similar solutions.

Tore Svanberg: Great. And as my follow-up, you said that you’re basically shipping below consumption. You’re about $1 billion from your trough. Obviously, you’re running inventory at a certain level. So you must have some idea where the consumption is. Is that a number you could share with us?

Ganesh Moorthy: Not with any level of precision. I think any form of a take a four quarter revenue divided by 4 starts to get you into the ballpark. But even that is unclear, right? So I think that number will get clearer as people begin to book and buy at a level that they need to, excluding any quote just to get back to consumption. But there’s not an easy way to make that number determinable. It’s clearly between where our peak a year ago was in the June quarter to where you’re seeing the guidance for this quarter.

Tore Svanberg: That’s helpful. Thank you.

Ganesh Moorthy: Thank you.

Operator: Thank you. Our next question is from Toshiya Hari with Goldman Sachs. Please proceed with your question.

Toshiya Hari: Hi good afternoon. Thank you so much for taking the questions. I had two quick ones. First, on inventory, maybe for Eric. So how should we think about inventory management through cycle or longer term? I know you’ve got strategic inventory. I know you want to better service your customers on the way up. But when you think 12 months out, 18 months out, whether be in dollars or days, what are you managing the business to? And then quick follow-up on pricing. I think you mentioned that in the near term, pricing is holding up. But as you think about calendar ’25, I think some of your peers have talked about pricing trends potentially reverting to pre-pandemic patterns down, call it, low singles. Is that a view that you would agree with or share? Or do you feel or think differently on pricing? Thank you.

Eric Bjornholt: Okay. All right. So on inventory days, longer term, our model is — and this really hasn’t changed from what we shared back in our Analyst and Investor Day that we’re targeting 130 to 150 days. Now we’re a long ways from that today, and I’m not going to put a time horizon on when we will get there, but that’s still the goal, right? We think with that level in a more normalized environment, we can have short lead times and support our customers appropriately with that level. So I’ll turn the pricing question over to Ganesh.

Ganesh Moorthy: And I would add one more thing, which is we also have these last time buys that we put into place on very high gross margin product lines, and those will be additive and they are situational depending on when we’re faced with that kind of situation. On the pricing itself, our pricing is predominantly a function of what we have to compete with at the point of design. And so in the near term, pricing is really driven by where designs were historically what we won them at. And a lot of these are products going into applications. that have long life cycles and they don’t really change, unlikely consumer electronics or other end markets, they don’t really every 9, 12 months change things out. We have products that have been in designs for five, seven, nine, 10 years in many cases as well.

We are being competitive on new designs with pricing where we need to be, but we also have new products that we compete with. And so the most competitive new products are what we use to go fight in the most price-sensitive new design applications. And that’s been historically how spend is not something new. And if we go back and look at 20 years of Microchip, that’s how we’ve done it. And we have a lot of business that continues, that will be existing business at existing prices for a long, long time to come. And then we’ll have new business at new pricing. And that new pricing, we expect will have good gross margins as time goes on.

Toshiya Hari: Great. Thank you.

Operator: Thank you. Our next question is from Joshua Buchalter with TD Cowen. Please proceed with your question.

Joshua Buchalter: Hi guys. Thank you for taking my questions. I guess to start, maybe I can follow up on the previous one. You mentioned pricing hanging in overall, but competing more on new design wins. Have those — are you observing those new design wins becoming any more price sensitive or more price competitive as the shortages have eased and we’ve entered this correction mode? Or sort of still normal operating and competitive conditions? Thank you.

Ganesh Moorthy: New designs have always been highly competitive. It’s where people are trying to work on winning platforms with multiyear implications. So it is in the couple of years of constraints, there were fewer new platforms, new designs that customers are doing. But in the sense of having to be competitive and the competitive intensity for new designs, yes, it is different from the last two years or three years, but it is consistent with what it has been over 20 years before that.

Joshua Buchalter: That’s clear. Thank you. I appreciate the color there. And then for my follow-up, the CapEx guidance is obviously down meaningfully off of what was likely a peak two years ago. Could you maybe just speak to your confidence in having enough capacity both internally and perhaps more importantly, investment from your foundry partners at the process geometries that you ship your products on? Thank you.

Ganesh Moorthy: Yes. So when we say — it’s a plan that we look at consistently, both short, medium and long term. We feel very confident with the internal capacity, both what is installed and underutilized, what is available and ready to go and then eventually what we might add to it. And then we work with our partners, both the foundries as well as the OSATs on their capacity planning across the horizon that they have. We’re obviously a small piece of a much bigger pie there that they’re running. But we don’t have any particular capacity constraints that we’re concerned about. It may change as demand begins to come back, and if in fact, there is a much sharper rise as some people are predicting. But for the moment, we’re quite confident both in our internal, as well as our partner capacity for the business we’re running.

Joshua Buchalter: Thank you.

Operator: [Operator Instructions] Our next question is from Chris Danely with Citibank. Please proceed with your question.

Chris Danely: Hi, thanks guys. So now that we’re yet another quarter into the correction and hopefully coming out of it, if we look at your total drop in terms of revenue, it is probably going to be like 45%, something like that. And that’s worse than most of your competitors. So I guess, why do you think that is? Do you think that the PSP program encouraged a little double ordering? Is there some geographic or something else going on? Just looking for some for your take on why that’s happened?