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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 highlights strong financial performance with net sales and earnings per share exceeding guidance. Inventory reduction and factory utilization improved. The Q&A reveals positive sentiment, with growth above seasonal trends and minimal tariff impact. Despite a GAAP net loss, the optimistic outlook for future quarters and strategic recovery plan support a positive sentiment. However, the lack of specific guidance for the December quarter and some unanswered questions prevent a stronger rating.
Sequential Sales Growth 10.8% sequential sales growth. Net sales were up sequentially in all geographies. Sales from microcontroller and analog businesses were both up in double-digit percentages sequentially.
Non-GAAP Gross Margin 230 basis points sequentially and incremental non-GAAP gross margin was 76% sequentially. The product gross margin was 66.3% after accounting for inventory write-off and underutilization charges.
Non-GAAP Operating Margin Up 670 basis points sequentially and an incremental non-GAAP operating margin was 82% sequentially.
Inventory Reduction Inventory went down by $124 million sequentially. Inventory days reduced from 266 days to 214 days over two quarters. Inventory write-off in the June quarter was $77.1 million, down from $90.6 million in the March quarter.
Factory Underutilization Underutilization in factories in the June quarter was $51.5 million, down from $54.2 million in the March quarter.
Net Sales Net sales in the June quarter were $1.075 billion, up 10.8% sequentially and $5.5 million above the high end of updated guidance.
Non-GAAP Net Income Non-GAAP net income was $154.7 million, and non-GAAP earnings per diluted share was $0.27, $0.01 above the high end of updated guidance.
GAAP Net Loss GAAP net loss attributable to common shareholders was $46.4 million or $0.09 per share.
Cash Flow Cash flow from operating activities was $275.6 million in the June quarter. Adjusted free cash flow was $244.4 million.
Debt and Leverage Total debt decreased by $175 million in the June quarter. Net debt increased by $30.2 million. Adjusted EBITDA in the June quarter was $285.8 million, 26.6% of net sales. Trailing 12-month adjusted EBITDA was $1.167 billion, and net debt to adjusted EBITDA was 4.22.
Capital Expenditures Capital expenditures were $17.9 million in the June quarter, with fiscal year 2026 expected to be at or below $100 million.
AI coding assistant: Enabled customers to achieve up to a 40% productivity improvement in programming microcontroller devices. Further advancements with AI agents to be released in September 2025.
Radiation-tolerant FPGA solutions: Deliver up to 50% power savings while maintaining high security and reliability. Expanded portfolio with cost-optimized solutions offering up to 30% cost reduction.
Embedded controllers with post-quantum cryptography: Enhanced security for defense, industrial, and AI applications, complying with critical standards like CNSA 2.0 and the European Cyber Resiliency Act.
Aerospace and defense: Strengthened business amid increased global defense spending and NATO modernization. Expanded product portfolio for commercial aviation, defense systems, and space applications.
AI and data center infrastructure: Secured design wins in AI acceleration, storage, and network infrastructure with tier 1 cloud providers and enterprise leaders. Expanded offerings for AI and data center applications.
Inventory reduction: Reduced inventory by $124 million sequentially, targeting a $350 million reduction for the fiscal year. Inventory days decreased from 266 to 214 over two quarters.
Factory underutilization: Underutilization charges decreased from $54.2 million to $51.5 million sequentially, with further reductions expected in the December quarter.
Trifecta effect on revenue growth: Achieved 10.8% sequential sales growth due to distribution sales recovery, direct customer inventory correction, and structural demand recovery.
Capital return program: Adjusted free cash flow expected to exceed dividend payments after September quarter, with plans to reduce borrowings using excess cash flow.
Employee Morale and Retention: Employees have endured pay cuts, lack of bonuses or salary increases for 1.5 years, and a global layoff earlier this year. This could impact morale and retention in the long term.
Inventory Management: Inventory days have been reduced significantly, but challenges remain in achieving the target of 195-200 days by the end of the September quarter. Inventory write-offs and underutilization charges, though decreasing, still impact gross margins.
Factory Utilization: Underutilization charges in factories remain a concern, though they are expected to decrease. This impacts gross margins and operational efficiency.
Supply Chain Constraints: Emerging lead time pressures and challenges with lead frames, substrates, and subcontracting capacity could disrupt production and delay shipments.
Market Demand Recovery: While demand recovery is underway, it is still below normalized levels, and there is a risk of overestimating the pace of recovery.
Debt Levels: The company has a net debt to adjusted EBITDA ratio of 4.22, which could pose financial risks if not managed effectively.
Geopolitical Risks: Increased global defense spending and geopolitical tensions could impact the company's aerospace and defense business, both positively and negatively.
Revenue Expectations: Net sales for the September quarter are expected to be $1.13 billion, plus or minus $20 million.
Gross Margin Projections: Non-GAAP gross margin is expected to be between 55% and 57% of sales for the September quarter. Long-term non-GAAP gross margin target of 65% is considered achievable as inventory write-offs and underutilization charges decrease.
Operating Profit: Non-GAAP operating profit is expected to be between 22.2% and 24.6% of sales for the September quarter.
Earnings Per Share: Non-GAAP diluted earnings per share is expected to be between $0.30 and $0.36 per share for the September quarter.
Inventory Management: Inventory days are expected to decrease to between 195 and 200 days by the end of the September quarter. Inventory write-offs and underutilization charges are expected to decrease further, contributing to gross margin improvement.
Capital Expenditures: Capital expenditures for fiscal year 2026 are expected to be at or below $100 million.
Market Trends and Demand: Recovery is observed in key end markets such as automotive, industrial, communication, data center, aerospace, and defense. Demand normalization is expected as customer and distributor inventories have run low, leading to increased short-term shipment requests and pull-ins of prior orders.
Lead Times: Lead times are expected to increase from the current 4-8 weeks range to 6-10 weeks, and for certain products, to 8-12 weeks.
Free Cash Flow and Dividends: Adjusted free cash flow is expected to exceed dividend payments after the September quarter, driven by increasing revenue, profitability, low CapEx, and cash liberated from inventory. Excess cash flow will be used to reduce borrowings.
Capital Return Program: After the September quarter, the company expects its adjusted free cash flow to exceed its dividend payment. This is driven by increasing revenue and profitability, low CapEx, and cash liberation from inventory. The company does not expect to borrow money to pay its dividend after this quarter.
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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