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01/11 03:17
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
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.
Sequential Sales Growth 6% sequential sales growth, with net sales up sequentially in Americas and Asia, and flat in Europe. Reasons include strong contributions from the microcontroller (MCU) business, which grew 9.7% sequentially, and the analog business, which increased 1.7% sequentially.
Non-GAAP Gross Margin Up 236 basis points sequentially, with an incremental non-GAAP gross margin of 95% sequentially. Reasons include a rich product mix driven by data center products.
Non-GAAP Operating Margin Up 364 basis points sequentially, with an incremental non-GAAP operating margin of 84.6% sequentially. Reasons include operational improvements and a strong product mix.
Inventory Reduction Inventory went down by $73.8 million sequentially, with a calendar year-to-date reduction of $261 million. Inventory days decreased from 266 days to 199 days over three quarters. Reasons include inventory reduction actions and improved sales.
Product Gross Margin 67.4% in the September quarter, driven by a rich product mix from data center products. However, inventory write-offs and underutilization charges reduced the non-GAAP gross margin to 56.7%.
Net Sales $1.14 billion in the September quarter, up 6% sequentially and $10.4 million above the midpoint of guidance. Reasons include strong sales performance in data center markets and other key end markets.
Non-GAAP Net Income $199.1 million, with non-GAAP earnings per diluted share of $0.35, which was $0.02 above the midpoint of guidance. Reasons include operational improvements and strong sales.
Cash Flow from Operating Activities $88.1 million in the September quarter. Adjusted free cash flow was $38.3 million. Reasons include operational improvements and inventory reduction actions.
Debt Reduction Total debt decreased by $82 million in the September quarter. Reasons include operational cash flow and disciplined financial management.
Adjusted EBITDA $341.8 million in the September quarter, representing 30% of net sales. Trailing 12-month adjusted EBITDA was $1.103 billion. Reasons include strong sales and operational improvements.
3-nanometer-based PCIe Gen 6 switch: Announced as the industry's first, designed to power modern AI infrastructure. Offers 4 competitive advantages: doubles bandwidth, 15%-20% power efficiency, advanced telemetry, and secure boot-based hardware root of trust. Sampling to customers with production starting in June 2026.
Data center market: Strong sales performance, albeit from previously depressed levels. Large increase in bookings and shipments of Gen 4 and Gen 5 products.
Inventory reduction: Inventory decreased by $73.8 million sequentially, with days of inventory reduced to 199 days. Calendar year-to-date reduction is $261 million.
Operational margins: Non-GAAP gross margin increased by 236 basis points sequentially to 56.7%. Non-GAAP operating margin increased by 364 basis points sequentially.
Factory underutilization: Underutilization charges were $51 million, contributing to a total of $122.8 million in charges including inventory write-offs.
Restructuring of wafer fabrication operations: Sale of Fab 2 wafer fabrication facility in Tempe, Arizona, as part of restructuring plan. Process technologies transferred to Fab 4 in Oregon and Fab 5 in Colorado.
Inventory Write-offs and Underutilization Charges: The company reported $71.8 million in new inventory write-offs and $51 million in underutilization charges, totaling $122.8 million. These charges significantly impacted the non-GAAP gross margin, reducing it by 10.8 percentage points. The company acknowledges the need to bring down these charges to improve financial performance.
Factory Underutilization: Underutilization in factories led to a $51 million charge in the September quarter. This indicates inefficiencies in production capacity utilization, which could adversely impact profitability if not addressed.
Restructuring of Wafer Fabrication Operations: The company is in the process of restructuring its wafer fabrication operations, including the sale of Fab 2 and transferring processes to other facilities. While this is aimed at long-term efficiency, the transition poses risks such as potential delays, increased costs, and operational disruptions.
Supply Chain Constraints: The company is facing challenges with substrates, subcontracting capacity, and foundry constraints on advanced nodes. These supply chain issues could lead to delays in meeting customer demand and impact revenue.
Seasonal Weakness in December Quarter: The December quarter is seasonally weak due to holidays and customer factory shutdowns, which is expected to result in a 1% sequential decline in net sales. This seasonal trend could impact short-term financial performance.
Customer and Distributor Inventory Levels: Customers and distributors are continuing to lower their inventories, taking advantage of short lead times. While this indicates efficient inventory management, it also suggests potential short-term revenue constraints as sell-in lags behind sell-through.
Advanced Node Foundry Constraints: The company is experiencing constraints in foundry capacity for very advanced nodes, which could limit its ability to meet demand for cutting-edge products.
AI Data Center Build-Out: Hyperscalers are committing to gigawatt-scale deployments, with projects in the 5 to 10 gigawatt range targeting completion between 2026 and 2027. Microchip's Gen 6 Switchtec devices are positioned to capture a meaningful share of this growth, with production starting in June 2026 and volume ramping towards the end of 2026.
December Quarter Guidance: Net sales are expected to be $1.129 billion, plus or minus $20 million, representing a 1% sequential decline at the midpoint. Non-GAAP gross margin is projected to be between 57.2% and 59.2%, and non-GAAP diluted earnings per share are expected to range from $0.34 to $0.40.
March Quarter and Beyond: March quarter sales are expected to be stronger than seasonal trends, with sequential growth anticipated. The company expects three strong quarters in March, June, and September 2026.
Operational Discipline: Despite a seasonally weak December quarter, operational improvements are expected to deliver a sequential increase in non-GAAP operating profit by over $13 million at the midpoint of guidance.
Lead Times and Inventory: Lead times for some products are increasing due to challenges in substrates, subcontracting capacity, and advanced node foundry constraints. Customer requests for expedited shipments have risen, indicating low inventory levels.
Capital Return Program: Starting this quarter, we expect our adjusted free cash flow to be roughly even with our dividend payment driven by increasing profitability, low CapEx and liberating cash inventory. In future quarters, as we have excess free cash flow above dividends, we intend to use this to bring down our borrowings.
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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