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01/11 03:22
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call presents mixed signals. Financial performance shows a decline in net sales and gross margins, but management provides optimistic guidance with recovery signs in key markets. The Q&A reveals some uncertainties, particularly regarding tariffs and future margins, but also highlights growth in aerospace and defense. Shareholder returns are supported by a convertible preferred stock transaction. Overall, the sentiment is neutral as positive elements are offset by financial declines and some management uncertainty.
Net Sales (Q4 2025) $970.5 million, down 5.4% sequentially and down 26.8% year-over-year due to a large inventory correction following a post-COVID super cycle.
Gross Margin (Non-GAAP) (Q4 2025) 52%, including capacity underutilization charges of $54.2 million.
Operating Expenses (Non-GAAP) (Q4 2025) 38% of sales.
Operating Income (Non-GAAP) (Q4 2025) 14% of sales.
Net Income (Non-GAAP) (Q4 2025) $61.4 million, with earnings per diluted share at $0.11, which was $0.01 above the midpoint of guidance.
Net Sales (FY 2025) $4.402 billion, down 42.3% from FY 2024.
Gross Margin (Non-GAAP) (FY 2025) 57%.
Operating Expenses (Non-GAAP) (FY 2025) 32.5% of sales.
Operating Income (Non-GAAP) (FY 2025) 24.5% of sales.
Net Income (Non-GAAP) (FY 2025) $708.8 million, with EPS at $1.31 per diluted share.
Cash Flow from Operating Activities (Q4 2025) $205.9 million.
Adjusted Free Cash Flow (Q4 2025) $182.6 million.
Consolidated Cash and Total Investment Position (Q4 2025) $771.7 million.
Total Debt (Q4 2025) Decreased by $1.125 billion.
Net Debt (Q4 2025) Decreased by $1.31 billion.
Adjusted EBITDA (Q4 2025) $200.4 million, or 20.6% of net sales.
Capital Expenditures (Q4 2025) $14.2 million.
Depreciation Expense (Q4 2025) $41.2 million.
Inventory Balance (Q4 2025) $1.293 billion, down $62.8 million from December 31, 2024.
Days of Inventory (Q4 2025) 251 days, down 15 days from the prior quarter.
Distributor Inventory Days (Q4 2025) 33 days, down four days from the prior quarter.
New Product Innovations: Investments in next generation technologies like Switchtec PCIe switches for automotive and embedded computing applications, enhancing ARM-based microprocessors and 32-bit microcontrollers for various markets.
MPLAB AI Coding Assistant: Accelerates design cycles, reducing embedded software development time by up to 40%.
New PIC64 Product Line: Gaining momentum in design opportunities across Space, Industrial Automation, Automotive, and Edge Compute.
10BASE-T1S Solutions: Recently launched solutions seeing market adoption with a growing design funnel.
Market Positioning: Revenue from microcontroller and analog business units down sequentially, but FPGA flat and other businesses up, mainly driven by technology licensing.
Geographic Performance: Seasonally down in Americas and Asia, but seasonally up in Europe.
Bookings and Backlog: Bookings up significantly in March quarter, with a healthy book-to-bill ratio of 1.07.
Inventory Reduction: Target to reduce inventory by over $350 million in fiscal year 2026, with current inventory at 251 days down from 266 days.
Manufacturing Footprint Resizing: Closure of Tempe Fab 2 and completion of actions in other fabs to allow rapid capacity ramp-up.
Employee Layoffs: Global layoff of approximately 10% of employees to reduce operating expenses.
Nine-Point Recovery Plan: Update on restructuring efforts and strategic shifts including changes in megatrends and channel strategy.
CHIPS Act Activity: Reinitiated discussions with the CHIPS Office.
Inventory Management Risks: The company is undergoing a significant inventory correction, with inventory days at 251, which is still above the target of 130-150 days. This poses a risk to cash flow and operational efficiency.
Regulatory Risks: The company is reinitiating discussions with the CHIPS Office, which is still reorganizing under the new administration. This uncertainty may impact future funding and support.
Operational Risks: The closure of Tempe Fab 2 and resizing of manufacturing footprint may lead to capacity constraints, although it allows for rapid ramp-up when needed.
Economic Factors: The company is navigating through a post-COVID super cycle, which has resulted in a significant decline in net sales by 42.3% year-over-year, indicating vulnerability to economic fluctuations.
Competitive Pressures: The shift in megatrends from 5G to artificial intelligence and changes in customer relationships may indicate a need to adapt to competitive pressures in the technology landscape.
Debt Management Risks: Despite a decrease in total debt by $1.125 billion, the company still faces challenges in managing its debt levels while maintaining its dividend policy.
Nine-Point Recovery Plan: Update on the nine-point recovery plan to restore premium performance status, including resizing manufacturing footprint, reducing inventory, and strengthening customer relationships.
Inventory Reduction: Target to reduce inventory by over $350 million during fiscal year 2026, with an expected inventory level of 215-225 days by the end of June 2025.
Megatrends Review: Replaced 5G with artificial intelligence and ADAS with Network and Connectivity in the company's strategic focus.
Customer Relationship Strengthening: Restored 78% of previously deteriorated customer relationships, with only 2.6% remaining stressed.
Capital Return Program: Returning 100% of adjusted free cash flow to investors in the form of dividends, with plans to improve cash flow and reduce borrowings.
Q1 FY 2026 Revenue Guidance: Expected net sales for the June quarter to be $1.045 billion +/- $25 million.
Gross Margin Guidance: Expected non-GAAP gross margin to be between 52.2% and 54.2% of sales.
Operating Expenses Guidance: Expected non-GAAP operating expenses to be between 33.4% and 34.8% of sales.
Operating Profit Guidance: Expected non-GAAP operating profit to be between 17.4% and 20.8% of sales.
Earnings Per Share Guidance: Expected non-GAAP diluted earnings per share to be between $0.18 and $0.26.
Capital Expenditures Guidance: Expected capital expenditures for fiscal year 2026 to be at or below $100 million.
Dividend Program: Microchip is currently returning 100% of its adjusted free cash flow to investors in the form of dividends. However, due to depressed net sales, the adjusted free cash flow is currently less than the dividend.
Future Dividend Plans: As cash is liberated from inventory and capital expenditures remain low, Microchip expects adjusted free cash flow to exceed the dividend in future quarters. The company does not plan to cut the dividend.
Shareholder Return Plan: Microchip raised $1.4 billion in a mandatory convertible preferred stock transaction to improve its balance sheet and reaffirm its investment grade debt rating.
The earnings call presents a mixed picture. Strong financial metrics and optimistic guidance are offset by concerns over inventory write-offs, underutilization charges, and lack of visibility due to dismantled LTSAs. The strategic focus on data center products and expected cost savings from the Fab 2 closure are positives, but substrate capacity constraints and unclear management responses create uncertainties. Overall, the sentiment is neutral, with no strong catalysts for a significant stock price movement in either direction.
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