EXTRA: Microchip CEO Sanghi eyes turnaround after third quarter loss

(Alliance News) - Microchip Technology Inc Chief Executive Officer Steve Sanghi on Thursday reiterated his plan to return the firm to its "previous premium status of performance".

CEO Sanghi was speaking on an investor call following the Chandler, Arizona-based semiconductor firm's third quarter earnings release. Also present on the call were Chief Operating Officer Rich Simoncic, Chief Financial Officer Eric Bjornholt and head of investor relations Sajid Daudi.

In its third quarter ended December 31, Microchip reported a net loss of USD53.6 million, swung from net income USD419.2 million a year prior. Revenue sunk to USD1.03 billion from USD1.77 billion.

Third quarter diluted loss per share was USD0.10 compared to earnings per share of USD0.78 a year ago.

The quarter was the company's first after Sanghi returned to the helm following a three-year absence. In November, Microchip announced that Sanghi, who had served as President from 1990 to 2016 and as CEO from 1991 to 2021, would replace Ganesh Moorthy as CEO.

Third quarter revenue results were in line with guidance offered by Sanghi in December. The CEO had commented: "We indicated in our November earnings call that significant turns orders were required to achieve the midpoint of our December 2024 quarter revenue guidance. Those turns orders have been slower than anticipated and we now expect our December 2024 revenue to be close to the low end of our original guidance which is USD1.03 billion."

On the earnings call, CEO Sanghi reiterated the firm's nine-point plan to return to growth. This includes resizing the manufacturing footprint, reducing inventory, reviewing megatrends and Total System Solution, taking a unit by unit deep dive and reviewing the channel strategy. The firm also hopes to strengthen customer relationships, examine long-term models and operating expenses, and re-engage with the CHIPS Act under the new Trump administration.

Though down on-year, third quarter operating expenses increased to EUR530.5 million from EUR521.9 million in the quarter prior. CFO Eric Bjornholt expects a further increase in March as a "predominant portion" of employees exit the pay cut that began in November 2024.

GAAP gross profit margin in the quarter was 54.7%, compared to 63.4% a year prior, and 57.4% in the quarter prior.

Adjusted free cash flow in the period was USD244.6 million, compared to USD793.8 million the year prior, and USD22.8 million in the September quarter.

In the third quarter, the CFO noted a USD33.6 million increase in net debt, adjusted Ebitda of USD274.9 million at 26.8% of net sales, and a net debt to adjusted EBITDA ratio of 3.78%. This was compared to 1.27% at December 31, 2023.

Third quarter capital expenditure was USD18.1 million in the quarter. The firm projects full-year 2025 capex of USD135 million and 2026 capex to decline as "we have a lot of capacity to grow back into as well as capital that we purchased during the upcycle that has not been placed in service yet," CFO Bjornholt said.

Regarding its manufacturing footprint, Microchip reiterated its November announcement to shut down the Tempe Fab plant, known as Fab 2. "Currently, we are in the process of building the material to provide the buffer required before we transfer the processes and products to our other two fabs. 70% of this product is already qualified at these other fabs," CEO Sanghi said.

The firms other two fabs, Fab 4 in Gresham, Oregon, and Fab 5 in Colorado Springs are working on rotating time-off schedules. This reduces capacity but leaves them able to ramp up on short notice if needed. Back-end facilities in Thailand and Philippines are taking shutdown days and reducing employee hours and workdays. Other smaller plants worldwide have changed operations accordingly.

Microchip's inventory was 266 days at end-December, up from 247 days at end-September. The firm has a target of 130 to 150 days. The company will provide a more detailed plan on March 3.

The company's inventory balance at end-December was USD1.356 billion, up from USD16.7 million at end September. It eyes an inventory balance reduction of approximately USD250 million.

The firm expects both inventory dollars and days to decline at the end of March from current levels. Microchip says it continues to invest in building inventory for long-lived high-margin products.

Regarding its channel strategy, CEO Sanghi said Microchip will make changes to demand creation registration.

"First, when we give a demand creation registration to a distributor on a design socket, we historically have kept that demand creation flag forever. Going forward, we will change that flag to demand fulfillment after a given number of years. This will incentivize the distributor to present our new products to customers instead of sitting on a higher margin and exposing the socket to competitors."

Further the company will lower fulfilment margins, though they'll remain at a higher level than competitors, Sanghi said.

CEO Sanghi said he would provide updates on the company's review of its megatrends and Total System Solution, as well as the business unit by business unit deep dive

Microchip will "re-engage when the time is right" with the CHIPS and Science Act, following Trump administration restaffing the CHIPS office.

Chief Operating Officer Rich Simoncic noted the firm's new generation of AI-backed 64-bit RISC-V processors and expanded Wi-Fi portfolio as stand out product developments in the quarter.

In the FPGA portfolio, its radiation hardened received space certification and the firm released a new sensor connectivity solution for NVIDIA's Holoscan platform, "enabling AI applications in medical imaging and industrial automation".

For the fourth quarter, Microchip expects net sales of USD920.0 million to USD1.00 billion, with a net loss of USD128.5 million to USD79.4 million.

It sees diluted loss per share of USD0.24 to USD0.14.

The company expects fourth quarter capital expenditure of USD23 million.

Microchip projects a non-GAAP cash tax rate of 14.5% in the fourth quarter, higher than the 13% previously forecast. "This is a result of expected overpayments in two of our larger tax jurisdictions, which will have the impact of reducing our fiscal year 2026 tax rate as we are calculating this on a cash basis," its CFO said.

The company will hold its next earnings call on March 3, in which it will discuss further updates to its nine-point turnaround plan.

Microchip Technology shares traded down 3.1% at USD51.45 in New York on Friday afternoon.

By Aidan Lane, Alliance News reporter

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