Login
Microchip Technology (MCHP) Q1 2026 Earnings Call Transcript
Image source: The Motley Fool.
DATE
Thursday, Aug. 7, 2025 at 5 p.m. ET
CALL PARTICIPANTS
- Executive Chair — Steve Sanghi
- Chief Executive Officer — Richard J. Simoncic
- Chief Financial Officer — Eric Bjornholt
- Head of Investor Relations — Sajid Dowdy
Need a quote from a Motley Fool analyst? Email [email protected]
TAKEAWAYS
- Net sales-- Net sales in June were $1.075 billion, representing 10.8% sequential growth for the fiscal first quarter ended June 30, 2025, and exceeding the high end of updated June guidance by $5.5 million.
- Geographic and segment growth-- All geographies and major product lines, including microcontroller and analog, achieved double-digit sequential growth.
- Non-GAAP gross margin-- 54.3% non-GAAP gross margin, including $51.5 million in underutilization charges (non-GAAP) and $77.1 million in inventory write-offs (non-GAAP); incremental non-GAAP gross margin was 76% sequentially.
- Non-GAAP operating margin-- 20.7% of sales (non-GAAP), representing a 670 basis-point sequential increase in non-GAAP operating margin; incremental non-GAAP operating margin was 82% sequentially.
- Non-GAAP earnings per share-- $0.27 non-GAAP earnings per diluted share, $0.01 above the high end of updated non-GAAP guidance.
- GAAP net loss-- $(46.4) million GAAP net loss attributable to common shareholders, or $(0.09) per share (GAAP), including special charges of $22.2 million for foundry exit costs and Fab 2 closure on a GAAP basis.
- Inventory reduction-- Inventory balance declined by $124.4 million sequentially to $1.169 billion; days of inventory fell to 214 from 251 in the prior quarter, and 266 two quarters prior.
- Distribution sell-through versus sell-in-- Distribution sell-through exceeded sell-in by $49.3 million, narrowing the distribution sell-in versus sell-through gap from $103 million in the March 2025 quarter.
- Cash flow and capital position-- $275.6 million in operating cash flow, $244.4 million in adjusted free cash flow for June, $566.5 million consolidated cash and investments as of June 30, 2025, and $175 million reduction in total debt, with net debt increasing by $30.2 million.
- Adjusted EBITDA-- Adjusted EBITDA was $285.8 million, or 26.6% of net sales, with a trailing twelve-month adjusted EBITDA total of $1.167 billion, and a net debt to adjusted EBITDA ratio of 4.22 as of June 30, 2025.
- Capital expenditures and guidance-- Capital expenditures were $17.9 million; capital expenditures for fiscal 2026 forecasted at or below $100 million.
- September guidance-- Net sales expected at $1.13 billion ± $20 million for the fiscal second quarter ending Sept. 30, 2025; non-GAAP gross margin between 55%-57%; non-GAAP operating profit between 22.2%-24.6% of sales; non-GAAP EPS between $0.30 and $0.36.
- Lead times-- Current lead times are mostly four to eight weeks as of the June 2025 quarter, with some products extending to six to twelve weeks due to bottlenecks in substrates, lead frames, and packaging capacity.
- Bookings and backlog-- July bookings were the highest for any month in the last three years; September starting backlog exceeded that of June at the same point in time for the fiscal second quarter.
- AI and product portfolio-- The company introduced new FPGA solutions offering up to 50% power savings or 30% cost reductions; its AI coding assistant increased customer programming productivity by up to 40% as reported by customers in 2025.
- Inventory strategy-- Factory output significantly below shipment rate, with wafer starts planned to increase in December 2025, ahead of full inventory normalization.
- Capital return outlook-- Adjusted free cash flow is expected to exceed dividend payments after the fiscal second quarter, with subsequent excess cash flow targeted at debt reduction rather than share buybacks.
SUMMARY
Microchip Technology (NASDAQ:MCHP) management attributed sequential revenue acceleration in the fiscal first quarter to broad-based end-market improvement, channel and customer inventory reduction, and a recovering demand environment. Executive Chair Steve Sanghi stated that guidance for the fiscal second quarter implies a sequential increase of 5.1%, well above normal seasonality of approximately 3%, in contrast to peers' caution. Automotive remains the weakest end market, while data center and industrial demand are reviving, with lead times starting to lengthen in select regions and product types. The leadership team confirmed continued inventory normalization, progressive margin recovery, and incremental operating leverage as key strategic drivers. Outlook for the December and March quarters is for results "above seasonal," according to management commentary following the fiscal first quarter, with no return to non-cancelable order practices and increasing customer visibility requested to manage supply chain constraints.
- CEO Richard J. Simoncic noted that new defense, aerospace, and AI design wins—including adoption of radiation-tolerant FPGAs and embedded post-quantum cryptography—are broadening Microchip Technology's product reach.
- Management identified U.S.-based manufacturing scale as a potential tariff exemption advantage, subject to further rule clarification.
- Deleveraging will precede any share repurchase program, in line with target leverage metrics (net debt to adjusted EBITDA of 1.5 or lower, as discussed in the June fiscal first quarter earnings call).
- Steve Sanghi stressed that extended customer backlog and flexible cancellation terms differentiate current engagement from prior non-cancelable booking programs.
- No material impact was reported from recent currency shifts, as 99% of revenue and assets are U.S. dollar-based.
INDUSTRY GLOSSARY
- Sell-in: Shipments from the company to distribution partners or direct customers, not yet reflected in end-user consumption.
- Sell-through: Actual products sold by distribution partners to end customers, representing true demand signals.
- PSP program: Non-cancelable, non-returnable pricing and supply program used by Microchip Technology during COVID-era supply disruptions.
- CNSA 2.0: Commercial National Security Algorithm Suite 2.0, a U.S. government cryptographic standard for defense and secure applications.
Full Conference Call Transcript
Steve Sanghi: Thank you, operator, 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 or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip Technology Incorporated's business and results of operations. In attendance with me today are Richard J. Simoncic, Microchip Technology Incorporated CEO, Eric Bjornholt, Microchip Technology Incorporated CFO, and Sajid Dowdy, Microchip Technology Incorporated's head of investor relations.
I will provide a reflection on our fiscal first quarter 2026 financial results. Eric will go over our financial performance, and Richard J. Simoncic will then review some product line updates. I will then provide an overview of the current business environment and our guidance for 2026. We will then be available to respond to specific investor and analyst questions. Microchip Technology Incorporated employees are often referred to as chippers. I will begin with a question for all of you, and then I will provide the answer. How many chippers does it take to deliver a good quarter? The answer is that it takes quite a few.
But they all showed up to deliver an outstanding quarter like we produced in June 2025. And that is the point I want to make. 18,000 employees of Microchip Technology Incorporated worked all last year on a pay cut, have not received a bonus or a salary increase in a year and a half, and suffered through a gut-wrenching global layoff earlier this year in March. These employees, working with high morale, came together to deliver an outstanding quarter. I tip my hat to all 18,000 employees of Microchip Technology Incorporated worldwide. I will highlight a few salient points of our financial results. 10.8% sequential sales growth. Net sales were up sequentially in all geographies.
Sales from our microcontroller and analog businesses were both up in double-digit percentages sequentially. Non-GAAP gross margin was 230 basis points sequentially, and incremental non-GAAP gross margin was 76% sequentially. Non-GAAP operating margin was up 670 basis points sequentially, and incremental non-GAAP operating margin was 82% sequentially. Inventory went down by $124 million sequentially. Our target for the whole fiscal year is a $350 million reduction, so we are off to a very good start. Inventory days were 214 days. Our inventory over two quarters has gone down from 266 days to 251 days to 214 days. We expect inventory at the September quarter to be between 195 and 200 days.
The inventory write-off in the June quarter was $77.1 million, down from $90.6 million in the March quarter, was $51.5 million, down from $54.2 million in the March quarter. Adding $77.1 million inventory write-off and $51.5 million of underutilization charge makes a total of $128.6 million of charges. Divide that by the net sales of $1.075 billion, and you get a non-GAAP gross margin impact of 12 percentage points. Adding it to the reported non-GAAP gross margin of 54.3% indicates that the product gross margin was 66.3%. The point is, as inventory write-off and under charges decrease, we believe our long-term non-GAAP gross margin target of 65% is achievable.
We have accrued about $5.5 million from the upside profit to provide a small bonus to our 18,000 employees who deserve it very much. The net impact from this approval is less than a penny per share. And with that, I will pass it on to Eric Bjornholt, who will take you through our more detailed financial performance last quarter. I will come back later to discuss the business environment and provide guidance for the second quarter. Eric?
Eric Bjornholt: Thanks, Steve, and good afternoon, everyone. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP 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 June were $1.075 billion, which was up 10.8% sequentially, $5.5 million above the high end of our updated June guidance provided on May 29. 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 54.3%, including capacity underutilization charges of $51.5 million and new inventory reserve charges of $77.1 million.
Operating expenses were at 33.7% of sales, and operating income was 20.7% of sales. Non-GAAP net income was $154.7 million, and non-GAAP earnings per diluted share was $0.27, which was $0.01 above the high end of our updated guidance. On a GAAP basis in June, gross margins were 53.6%. Total operating expenses were $544.6 million and included acquisition intangible amortization of $107.6 million, special charges of $22.2 million, which was primarily driven by foundry contract exit costs and our activities associated with the closure of Fab 2, share-based compensation of $45.2 million, and $7.5 million of other expenses. The GAAP net loss attributable to common shareholders was $46.4 million or $0.09 per share.
Our non-GAAP cash tax rate was 11.25% in June, and we expect to record a non-GAAP tax rate of about 9.5% in September. Our non-GAAP tax rate for fiscal year 2026 is expected to be about 10.25%, which is exclusive of a transition tax and any tax audit settlements related to taxes accrued in prior fiscal years, and was positively impacted by the impacts of the recently passed One Big Beautiful Bill. Our inventory balance at June 30, 2025, was $1.169 billion and down $124.4 million from the balance at March 31, 2025. We had 214 days of inventory at the end of June, which was down 37 days from the prior quarter's levels.
Our inventory reduction actions are what drove this. Included in our June ending inventory was 616 days of long life cycle, high margin products whose manufacturing capacity has been end of life by our supply chain partners. Inventory at our distributors in June was at 29 days, which was down four days from the prior quarter's level. Distribution sell-through was about $49.3 million higher than distribution sell-in. Our cash flow from operating activities was $275.6 million in June. Our adjusted free cash flow was $244.4 million in June. And as of June 30, our consolidated cash and total investment position was $566.5 million. Our total debt decreased by $175 million in June, and our net debt increased by $30.2 million.
Our adjusted EBITDA in June was $285.8 million and 26.6% of net sales. Our trailing twelve-month adjusted EBITDA was $1.167 billion, and our net debt to adjusted EBITDA was 4.22 at June 30, 2025. Capital expenditures were $17.9 million in June, and we expect capital expenditures for fiscal year 2026 to be at or below $100 million. Depreciation expense in June was $39.5 million. I will now turn it over to Richard J. Simoncic, who will provide some commentary on our product line innovations in June. Richard?
Richard J. Simoncic: Thank you, Eric, and good afternoon, everyone. I am pleased to share our operational progress this quarter, highlighting strong momentum across aerospace, defense, AI applications, and network connectivity. As a leading semiconductor supplier to the Department of Defense and our NATO allies, our aerospace and defense business continues to strengthen amid increased global defense spending driven by geopolitical tensions and NATO modernization. With over sixty years of aerospace and defense heritage, including from our acquisitions, we have recently achieved significant defense industry device qualifications and continue to expand our product portfolio to support commercial aviation, defense systems, and space applications. Microchip Technology Incorporated plays a key role in supporting products to many modern defense platforms.
Also, our radiation-tolerant FPGA solutions can deliver up to 50% power savings while maintaining the highest levels of security and reliability. We have recently expanded our FPGA portfolio by introducing cost-optimized solutions that deliver up to 30% cost reduction while maintaining industry-leading performance and security. This positions us firmly across both high-reliability defense applications and broader industrial markets. Microchip Technology Incorporated continues to be a leader in the microcontroller industry and enabling customers with our AI coding assistant, aiding customers to achieve up to a 40% productivity improvement programming our microcontroller devices.
At Masters, our major technical conference this week, we previewed further advancements for the attendees with the inclusion of AI agents into the AI coding assistant, that will be released into the market in September, further improving productivity and reducing time to market for our customers. The AI build-out continues to create substantial opportunities across our portfolio. We have secured design wins in data center infrastructure spanning AI acceleration, storage, and network infrastructure with tier-one cloud providers and enterprise leaders. We have strategically expanded our connectivity, storage, and compute offerings for AI and data center applications as well as intelligent power modules for AI at the edge. Security remains paramount as defense and AI deployments proliferate.
We have made significant advances with embedded controllers that feature immutable post-quantum cryptography support, which was recently mandated by the NSA. This support enhances the security of platforms using our digital signing for secure boot and secure firmware over-the-air updates. These capabilities are essential enablers to protect our defense, industrial, and AI applications well into the future in compliance with critical standards such as CNSA 2.0 and the European Cyber Resiliency Act. With that, I will pass the call to Steve for comments about our business and guidance going forward. Steve?
Steve Sanghi: Thank you, Richard. During the last quarter's earnings conference call, I talked about a trifecta effect on our revenue growth. We saw that effect in action last quarter. First, our distributors' customers' inventory is getting corrected, and we saw the first sequential increase after two years in distribution sales out last quarter. Second, the distributors sell-in versus sell-through gap shrunk from $103 million in March to only $49.3 million in June. So distribution sell-in is rising to meet the sell-through, and we believe there is more to go. And third, our direct customers' inventory is getting corrected, and we saw the first sequential increase in direct sales in two years.
This trifecta effect led to a 10.8% sequential growth in our net sales in June. We believe that this dynamic is still in effect. Importantly, we believe that what we are seeing represents structural demand recovery as we remain below normalized end-market demand levels. After two years of correction, we believe we are feeling a supply chain deficit rather than experiencing any significant pull-forward activity. The second effect I have spoken about is the impact on gross margins. As the inventory comes down, our inventory write-off will decrease, thus growing our gross margin percentage. As the inventory comes down and we start to grow the factories again, our underutilization charge will decrease and will further grow the gross margin.
We saw these two effects in action last quarter. Our inventory write-off decreased from $90.6 million in March to $77.1 million in June. A factory underutilization charge dropped from $54.2 million in March to $51.5 million in June. This combined effect is adding to our gross margin. We expect the increase in gross margin percentage will continue as the inventory write-off decreases and we ramp the factories, which will lower the underutilization charge. We currently plan to start increasing wafer starts in December. Now, the market environment. We are seeing some recovery in our key end markets: automotive, industrial, communication, data center, aerospace and defense, markets, and consumer are all looking somewhat better.
While we have not seen any material tariff-related pull-ins in April and May, we saw some selective acceleration of orders from Asia, which appear to be tariff-related. We believe that such pull-ins amounted to only mid to high single-digit millions. However, it is important to provide context on pull-ins more broadly. We are still shipping below normalized end-market demand across most of our markets after two years of inventory correction. This deficit to normal demand level means that any pull-in we are seeing represents underlying demand where the inventory has run out at the customers rather than borrowing from future quarters. Now let's go into our guidance for September.
We believe substantial inventory destocking has occurred at our customers, channel partners, and downstream customers, and the trifecta effect is in play. Our backlog for September started higher than the starting backlog for June, and as of this time, the backlog for September is comfortably higher than the backlog for June at the same point in time. The bookings for July were higher than bookings for any month in the last three years. I will make a comment about lead times. While lead times for products have been four to eight weeks for some time, we are experiencing a lead time bounce off the bottom and increases on some of our products.
While we have sufficient inventory, it is mostly held in the die form. We still have to package and test the products. We're running into challenges on certain kinds of lead frames, substrates, and subcontracting capacity. While these challenges are isolated to specific areas, we expect them to broaden and lead times go from the four to eight weeks range to more like six to ten weeks range out in time, and on certain products, they're likely to go to eight to twelve weeks range. The customer and distributor inventories have begun to run low on many products. We are increasingly getting short-term shipment requests and pull-ins of the prior orders.
Our customers will be well advised to manage their backlog and have twelve to sixteen weeks of their needs on backlog so they are not caught short. The emerging lead time pressures and increasing customer requests for expedited shipments reflect the reality that inventories have run too low on certain products. This dynamic supports our view that we are seeing demand normalization from a severely corrected starting point rather than speculative buying or any significant pull-forward activity. Taking all of these factors into account, we expect our net sales for September to be $1.13 billion plus or minus $20 million. We expect our non-GAAP gross margin to be between 55-57% of sales.
We expect our non-GAAP operating expenses to be between 32.4-32.8% of sales. We expect our non-GAAP operating profit to be between 22.2-24.6% of sales. We expect our non-GAAP diluted earnings per share to be between $0.30 and $0.36 per share. I want to again highlight the leverage in our business model. With a $54.5 million sequential increase in net sales at the midpoint, we would expect to see approximately 77% of such amount go to the bottom line as non-GAAP operating profit. As the inventory drains further and inventory write-offs decrease, we expect our gross margin recovery will accelerate, and with the incremental profits going to the bottom line, we will have tremendous leverage.
Finally, a comment on our capital return program for shareholders. After this September, we expect our adjusted free cash flow to exceed our dividend payment, driven by increasing revenue and profitability, low CapEx, and liberating cash from the inventory. Therefore, we do not expect to have to borrow money to pay our dividend after this quarter. In future quarters, we intend to use this excess adjusted cash flow to bring down our borrowings. With that, operator, will you please poll for questions?
Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a three-tone prompt acknowledging your request. Should you wish to cancel your request, please press star followed by the two. I would like to advise everyone to have a limit of one question and a brief follow-up. If anyone has an additional question, you can put yourself back in the queue by pressing star one again. One moment for your first question. Thank you. And your first question comes from the line of Vivek Arya. Thank you. Please go ahead.
Vivek Arya: Thank you for taking my question. Steve, many of us equate better than seasonal sequential trends as a sign of recovery. When you look at your September outlook, sales up 5% or so sequentially, would you call that seasonal, above seasonal? Basically, what we are all trying to get our hands on is yes, there is a recovery, but are we done with that stronger recovery as in a lot more above seasonal quarters? So just how would you describe September seasonal, above seasonal? And then what does that kind of inform us as to how December could shape up in similar terms?
Steve Sanghi: So thanks, Vivek. Quarter guidance of 5.1% up sequentially would be considered well above seasonal. Our seasonal increase usually per quarter is really in the 3% range in the September quarter. And December quarter usually is the weakest quarter of the year. In ordinary times, totally normal inventory times, December quarter will be sequentially slightly down. March quarter will be up again. So we were strongly above seasonal in the June quarter, we're strongly above seasonal in the September quarter, and I would expect that we'll continue to be above seasonal in December and March.
Vivek Arya: Alright. Thank you, Steve. And you know, when we look at several of your peers, they had a strong June. They kind of guided September line as but they expressed some caution as they looked at December onwards. Mainly because there seems to be kind of this renewed threat about the delayed impact of tariffs and whatnot. What's your read, Steve, of the macro environment? Do you think that as you look out beyond September that the recovery is as strong as you thought three months ago? Just how would you contrast the recovery you are seeing versus the slightly more conservative tone that some of your analog peers have indicated on their earnings calls? Thank you.
Steve Sanghi: So, Vivek, our sales went down much more significantly than others because of really excessive inventory at the direct customers as well as channels, driven by our PSP program, which was launched during the COVID years and continued well afterwards. Many of our competitors and peers got off the non-cancelable, non-returnable treadmill, I think a year earlier than Microchip Technology Incorporated did, and therefore, we continued to ship large amounts of products to our customers and distributors in accordance with the PSP rules. Therefore, when we eventually corrected, our sales went down much, much harder than others. So what we are seeing right now is the trifecta effect we talked about.
Inventory is going down at our distributors' customers, they're going down at distributors. Our sales in are catching up to sales out from distributors. Our direct customer inventory is going down. So we believe the dynamics that are taking place at Microchip Technology Incorporated are more driven by those kinds of factors and not any kind of tariff-related pull-in. We have done substantial analysis on the tariff question. Part of our normal process each quarter is to ask our distributors to explain any significant fluctuations in their customers' quarterly sales. This is done at a very forensic level, covering a large percentage of our customer base.
We did this, and we identified a small number of customers that identified tariffs as the reason for the sequential change in their revenue. When we extrapolated this data, we believe the impact came out to be only mid to high single-digit, $7-9 million range. We have no direct customers that indicated that tariffs were the reason for their increase in revenue. I also want to remind investors that a very high percentage of our direct customer exposure in China actually is manufactured in free trade zones that are not impacted by tariffs. Therefore, the phenomena we're seeing at Microchip Technology Incorporated is really related to inventory digestion than any kind of tariff plan activity. Thank you.
Operator: Thank you. And your next question comes from the line of Harsh Kumar. Thank you. Please go ahead.
Harsh Kumar: Yeah. Hey, Steve. I've got two as well. Steve, I was hoping that in September, you could help us understand the growth between the two key end markets, auto and what I would call as pure industrial. And why I'm saying pure is because you're in defense, and defense is very strong for obvious reasons, and it's skewing things for the industrial category. So I was hoping that just outside of defense, if you could just talk about in September, which ones, you know, how do you see auto versus pure industrial playing out?
Steve Sanghi: So, with such a strong growth of 10.8% sequentially, which you annualize it, it's a phenomenal, enormous rate of growth. With a very, very strong June quarter, we actually saw growth across all of our product lines, end markets, microcontrollers, analog. So it was very, very broad-based and all geographies. Therefore, I think my simple answer would be we saw recovery pretty in all end markets.
Harsh Kumar: Okay. Fair enough. Can I ask you, Steve, if at this point, you feel like sell-through is equal or higher than sell-in at your distributors? And if there's a gap, what kind of gap there is, you know, to the best of your knowledge? I know a difficult one to answer, what kind of gap exists? And your inventory dollars came down, I think, by $124 million, which is a big number. How far do you think you are from where you want to be in terms of optimal inventory level?
Steve Sanghi: I think we gave you the number in our prepared remarks. Let me pull it out again. Sell-through and distribution. Yeah. So maybe I missed this, Steve. Was $49.3 million higher than what sell-in was. And, you know, that's just the distribution piece of our business, which is a little less than 50%. We absolutely believe that our direct customers are draining too and consuming more than we're shipping to them, but we just don't have real-time data to show you. But that $49.3 million compares to a $103 million the quarter before. So the gap is shrinking, but there's still a gap. There's still a $49.3 million gap. So sell-in is rising to meet sell-through.
Now we closed half the gap last quarter. And, you know, we don't know. It could take a couple of more quarters to close the rest of the gap.
Eric Bjornholt: They can't be. Yeah. Progress we're making towards inventory. Right? The inventory target overall. And, Steve, do you want to address or do you want me?
Steve Sanghi: No. So I'll address it. So we are bringing inventory down in days of sales in pretty heavy chunks. It was 266 days of inventory at the December, that came down to 251 days at the March. Came down to 214 days, very large drop, at the June. And we are forecasting that we'll break the 200 and be between 195 and 200 at the September. In dollars of inventory reduction, we reduced inventory last quarter by $124.4 million. So we're making massive progress by shutting down one of our fabs, the Tempe Fab 2, and a substantial scaling down of our other fabs, we are producing products in our factories which is well, well below the rate of consumption.
That's why the inventories are dropping by a very large amount. And you know, that essentially will continue. We will start growing wafer starts in December, as I said in my remarks. And not that, you know, our inventory has fully come down. But if we wait till our inventory is totally normal to then start growing the fabs, we're going to have to grow the fabs by 30, 40% in a single quarter. And that's not possible. So therefore, we have to start early and asymptotically reach the number where the fabs need to run.
Harsh Kumar: Understood, Steve and Eric. Thank you so much.
Operator: Thank you. And your next question comes from the line of Chris Caso from Wolfe Research. Please go ahead.
Chris Caso: Yes. Thanks. Good evening. I guess the first question, maybe following on some of your prior comments, is just getting a sense of how far below end demand you think you're really shipping now. And, you know, recognize you have your best data with distributors, and you talked about how low point of sale is. And I guess the quick math it would seem like I guess you're about maybe 10% below point of sale and distribution. The distributor inventory is also not at bad levels. Do you have a sense of how much by how much you might be undershipping, you know, real end demand at your direct customers?
Steve Sanghi: We have a sense, but sense is not audit-proof and really can't be discussed outside. You know, the number that we could share and we have shared is the gap between sell-in and sell-out because those are two actual numbers. Other than that, how much inventory our distributor customers have is very anecdotal. By asking our distributors, by asking some of the customers that we jointly visit, and since the customer base is so broad, having 110,000 plus customers, you know, even if you do the analysis based on larger customers, it's really, you know, it's not audit-proof. And then when you get to your direct customers, the analysis is even more difficult.
Many of our large industrial customers buy, you know, 900 different line items and produce the product in 26 different factories around the world. You know, and some products have inventory and some products are assured and they're expediting those products. So to get a total feel for it is very difficult. But anecdotally, as we do the analysis, we know many, many line items that have a run rate and they're not buying because they still have inventory. And on other line items, they were not buying two months ago or three months ago, and they're buying now, which means the inventory is running low.
So I think when I put it all together, I believe inventory correction will continue for some time. And our sales will continue to grow towards the more normalized levels. Exactly how far are we and when will that end, I don't think I can put a number with very high confidence.
Chris Caso: Right. I mean, it sounds like and maybe I could ask a different way, which would be easier to answer. Do you think that you're undershipping the direct customers by more or less than the distribution customers? Based on the rough analysis you've been able to do?
Steve Sanghi: Again, just directionally, during the go-go days, we prioritized shipping to direct customers more than to distributors. So direct customers got a more than fair share of the product. And therefore, direct customers in most cases build a higher amount of inventory than the distributors were able to do. So, I think just by that statement, I would say the inventory at the direct customers is probably higher than the inventory at distributors.
Chris Caso: Right. Alright. That's helpful color. Thanks, Steve.
Operator: Thank you. And your next question comes from the line of Blayne Curtis from Jefferies. Please go ahead.
Blayne Curtis: Wanted to maybe I misheard it. I just wanted to know the timing you talked about lead times extending from four to eight, six to ten, eight to twelve. Is that now, or is that where you expect it to go?
Steve Sanghi: So lead times, broadly on most of our products, lead times are four to eight weeks. But on certain products, like I said, in certain pockets, the lead times have gone longer. And some of them are six to ten weeks, and some are even headed towards eight to twelve weeks. And those are cases where we are short of lead frames or short of substrates or in a given pocket, given package type, our subcontractors are overbooked. We're trying to find and negotiate a place. So, you know, this always starts partly like this. And we have a substantial recovery to go through in our sales still. Because we're shipping so much below the end consumption.
This is just a warning shot to our customers. You know, to really bring their backlog healthy because lead time being short, you get very short-term booking, you get very short-term visibility. So it's a message to our investors, but more than that, it's a message to our customers to make sure that they look at their demand for, you know, twelve to sixteen weeks. And give us that backlog so we can buy lead frames and substrates and start wafers and do everything in the right mix to be able to meet their needs.
Blayne Curtis: Gotcha. So I think you kinda answered it, but you said that you had more bookings at this time versus last time, the same time frame last quarter. I guess, lead times, you know, kind of the duration's the part we don't know. When you look at how you set the guide, is the level of turns you're looking for in the quarter the same, or is it different?
Steve Sanghi: Yes. So July bookings were the largest bookings for any month in the last three years. Any month of June quarter, but any month of the prior three years, we had a very, very strong month of July. Now, you know, bookings every quarter are different based on how much backlog you begin with and what the lead times are. If the lead times are short, you get higher turns. If the lead times are longer, you get less. And our backlog started in September quarter stronger than June quarter. And, you know, the turns requirement is about the same. And with the same kind of turns requirement, roughly, I think we'll have a good quarter.
Blayne Curtis: Thank you.
Operator: And your next question comes from the line of James Schneider from Goldman Sachs. Please go ahead.
James Schneider: Good evening. Thanks for taking my question. I was wondering if you could maybe comment on any end markets that you think are materially lagging in terms of end demand? Steve, I know you talked about a number that are doing well as most of them, I believe. Any that are lagging? And, you know, do you see any in the ones that are lagging? The reason I asked the question is because I believe your other products didn't really grow much sequentially and think they were down slightly sequentially? Just trying to understand what happened there.
Richard J. Simoncic: I would say automotive is still lagging more than any of our other markets today. If you wanted to be specific about that. AI data centers or data centers are doing very well and recovering. Industrial, you know, some of the smaller and medium-sized customers are starting to recover. It seems that the one that's probably lagging the most is automotive at this point in time.
Eric Bjornholt: Yeah. And that other category of revenue that you're referring to is, you know, everything other than the microcontrollers and analog and includes licensing and some other things that tend to be a little bit more lumpy. So that can drive some of that fluctuation quarter to quarter, Jim.
James Schneider: Okay. That's helpful. Thank you. Then maybe just as a follow-up, relative to President Trump's press conference yesterday, he talked about tariff exemptions for companies with U.S.-based investment or increased U.S.-based manufacturing investment. Just wanted to confirm, is it your understanding that your existing U.S. manufacturing investments qualify you for that exemption, or do you have to do more or do you not know yet?
Steve Sanghi: Yeah. So I think, you know, anything President Trump says is never clear and often changes a week or two weeks later. But the way we understand what he said is it's not by products that are made in the U.S. and the products that are made overseas. So we make some products here, and we make some products overseas in TSMC and other places. So it's not that you have to pay a tariff on the products that are made overseas. But you qualify as a company. Now as a company, we make a large amount of manufacturing in the U.S. And then we also buy wafers from foundries outside.
So because we make so many investments in the U.S., and a large amount of our manufacturing in the U.S., our interpretation is that we will qualify to be exempt from tariffs. And if that is the case and if that holds, then I think we are okay. And maybe in better shape than some of our competitors, like the Japanese competitors and others.
James Schneider: Thank you very much.
Operator: And your next question comes from the line of Timothy Arcuri from UBS. Please go ahead.
Timothy Arcuri: Thanks a lot. Steve, you said bookings are the highest since July 2022, but in reference to another question, you're guiding up 5%. Yes, it is better than seasonal, but it's not that much better. And then you just said the turns are about the same in Q3, unless I miss what you said. So to me, that kind of implies that a lot of these bookings are filling in Q4, as in the December, you know, rather than, you know, calendar Q3. So is it fair that you can say at this point that December should be another really good quarter?
Steve Sanghi: Yeah. I think I'm not willing to get that far. I think I said in my commentary that I expect us to continue to be above seasonal in September, December, and even in March. You know, a good quarter is anybody's definition. I don't know. Without numbers, what that means. But what happened on July 1, our backlog for the September quarter was meaningfully higher than our backlog for the June quarter on April 1. And if you get about the same amount of turns this quarter as we got last quarter, then we'll have a good September quarter.
Having said that, you know, there are strong bookings this quarter, some are turns, and some are going into the calendar fourth quarter.
Timothy Arcuri: Okay. Thanks. And then you did say that lead times are lengthening, and you actually said you're encouraging customers to expedite orders. I think a lot of us see what happened to, you know, last cycle and worry that when we hear that, that it could scare customers off a little bit. Because of the potential to get back into a PSP sort of a dynamic. So if lead times are already sort of doubling for some products and you barely even come off the bottom, how are you managing this messaging to customers to avoid what kind of, you know, happened last cycle? Thanks.
Steve Sanghi: Well, first of all, you know, we're not asking any customers to expedite orders. We're simply asking them to place the order with a scheduled backlog. You know? So today, a lot of the orders are very short-term orders because lead times are very short. And what they need in Q4, they think they can place the order in late September and still get the product. And we're simply saying look a little bit farther ahead and lay it in the backlog for every month going out four months. Which is not the same as expediting orders. We're not asking them to take the product early. We're not trying to ship above demand.
We're simply asking them to place the orders. Secondly, we're not changing the rules of cancellation. So if they give us a higher visibility, and their demand changes, higher or lower, or they want to change the product, the product is cancelable. It's not a non-cancelable order. So they have complete flexibility. Therefore, there is no comparison to a PSP environment here.
Eric Bjornholt: Right. Yeah. The other thing that we are seeing from customers, and Steve kind of alluded to this earlier, is we are seeing them, they'll have an order already on the books, and then they ask to pull that in. And sometimes that can be challenging without visibility to be able to meet their new requested date. So, you know, having better backlog visibility helps us better service the customer. So that's really all we're saying here.
Richard J. Simoncic: Yeah. And at least having extended backlog, even if they do wind up pulling that in, that is still better for us because it allows us to plan capacity and purchase materials that we may need to build that product.
Timothy Arcuri: Okay. Thank you all.
Operator: Thank you. And your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.
Harlan Sur: Hi, good afternoon. Thanks for taking my question. Steve, on the accelerated demand signals from Asia, Asia was up about 14% sequentially versus Europe and North America at about eight. Even if I exclude the mid to high single digits millions of dollars, which may be pulled forward, Asia was still up strongly at about 12 or 13% sequentially. And then on a year-over-year basis, Asia in the first half was down only about half of what the US and Europe was through the first half of the year. So what's driving the relative strength in Asia both sequentially and through the first half of this year?
Steve Sanghi: I think a lot of the Asia strength is a proxy on what's happening in the US and Europe. Because, you know, we build our customers, you know, European and US customers build a lot of their product in Asia. So we report sales by, you know, where we sell, where we ship the product. Not where it is designed or where the origin of the customer is. So a lot of our US customers, you know, asking us to ship the product in China or Taiwan or Vietnam or Asia or wherever.
So I don't think you can quite look at it, you know, by numbers you could say, you know, Asia is stronger, but a lot of that strength is coming from US and European customers.
Eric Bjornholt: Yeah. And I think another impact that we see and saw in June is you're comparing it to March, which has the Chinese New Year. Right? So there's some of that effect that's reflected in the June results.
Steve Sanghi: That's true. More shipping days.
Harlan Sur: Yeah. That makes a lot of sense. Okay. And I apologize if I missed this. I think you did mention something about turns business, but, you know, in addition to the strong rising orders that you saw in March, June, and a cyclical recovery, we typically do see stronger turns business, right, orders placed and fulfilled in the same quarter. I know your turns business rose as a percentage of sales in March. Did that turns percentage grow in the June quarter? And what are you guys seeing thus far here in the September quarter?
Eric Bjornholt: Yeah. So I would say that, you know, turns were strong in the June quarter, and, you know, that's not surprising because we obviously beat on revenue. So turns were higher, and lead times are really short for the vast majority of products. And we would expect turns to continue to be a pretty high number for us, given where lead times are today. And, obviously, if lead times stretch, that'll change over time.
Harlan Sur: Great. Thank you.
Operator: Thank you. And your next question comes from the line of Quinn Bolton from Needham and Co. Please go ahead.
Quinn Bolton: Hi, guys. I just wanted to ask on the gross margin guidance. Can you give us some sense, what total charges for underutilization and write-offs you're assuming in that 55 to 57% range?
Eric Bjornholt: So we don't break that out. You know, we did say that we'd expect the underutilization charges to be modestly lower, and I would say that is mainly driven by activities increasing in our back-end factories. The wafer starts, as Steve indicated, are really planned to go up in December. And we expect the inventory write-offs to be lower. It's a hard number to forecast, quite honestly, but we do expect it to be lower as, you know, the comparison because we start this by looking at twelve months of trailing demand for the calculations. And that is getting to be a better metric for us with the revenue increases that we're seeing.
And then, obviously, our overall inventory dollars are coming down, which helps with that. So it will be lower, but giving you an exact number is difficult to do.
Steve Sanghi: We ship, you know, hundreds of thousands of SKUs in the quarter. So and this inventory write-off is SKU by SKU, looking at every SKU, what its inventory is, and comparing it to the last twelve months of shipments. So it's a complicated calculation, and you can't make an accurate forecast of it.
Quinn Bolton: Understood. Okay. And then the second question I have is just on those products where you're seeing lead time stretch out to the size six to twelve weeks, how much of that is sort of substrate or packaging related versus wafer related? And if it's wafer related, is it mostly outsourced wafers or internal wafers? Because obviously, wafers take probably the longest in the manufacturing cycle. So I'm kind of wondering on at least on those products where you're seeing lead times extend, why you wouldn't be increasing the wafer starts now rather than waiting to December?
Richard J. Simoncic: The majority of that is in substrate or packages, and that's typically how that all starts as business starts to turn around. We still have quite a bit of die stores or die inventory on many of our devices. So it tends to be a matter of just pulling that product out of die stores and ensuring that the substrates and the rest of the assembly materials are in place to bring that out. That's what shifts it a few weeks at a time.
Steve Sanghi: Yeah. We're not seeing shortages on our internally produced product yet. It's mostly back-end like Richard said, and, you know, there could be one or two places where, you know, we have our products coming from a large number of fabs at foundries because this company is built up of acquisitions with Microsemi and Atmel and SMSC, and everybody bought product from different fabs. So we buy product from a large number of fabs, and I think there are a handful of fabs where certain nodes are constrained. So just very, very spotty. There are a few places where, you know, external die is constrained, we're trying to beef that up.
But all the rest of it in Foundry and all of the internally we are printing a capacity, and we're printing a die.
Quinn Bolton: Yeah. But it sounds like it's more back-end than front-end at the current point in time.
Eric Bjornholt: You're correct. Yeah.
Quinn Bolton: Okay. Thank you.
Operator: Thank you. And your next question comes from the line of Joshua Buchalter from TD. Please go ahead.
Joshua Buchalter: Hey, guys. Thank you for taking my questions. Maybe a follow-up on Quinn's. Can you maybe speak to us about what it, you know, what you're looking for that's gonna give you signal that it's all clear to raise utilization rates? Is there a certain inventory target? Is there sell-through demand that you're looking for? I guess I'm curious to hear why there's so much conviction that December will be the right time given you are seeing some cyclical signals improving and, you know, while at the same time, levels are elevated, just curious to how you're thinking about that holistically? Thank you.
Steve Sanghi: So I think the fact is that our current production output from our two fabs with the third fab closed is so far below our shipment rate that if we do not start increasing utilization in the fabs, then there'll be a point where we'll have to double the capacity just to get to the shipment rate. And fabs take a long time to ramp. You can, you know, grow a certain percentage every quarter. So therefore, we have a forecast over the next two years and how much die will be needed for that. Bounce off the die inventory, how long will it take for that to deplete?
And then what is the rate of growth by which we can grow our both Oregon and the other fabs? And then that is solving a math problem on when we need to begin.
Joshua Buchalter: Okay. Thank you. And oh, go ahead.
Steve Sanghi: Oh, you just have to begin well before, you know, well before your die inventory goes too low. Because once the die inventory goes too low, you know, then you get in trouble very rapidly because we're producing only half the product that we need every quarter.
Joshua Buchalter: Okay. Thank you. And I guess on, you know, on that note, understand you don't want to break out the auto utilization and write-down charges, you know, by quarter. But any rules of thumb that we should think about as to how those charges should unwind? Is there a certain revenue level? Or any other factors that we could think of, again, as we think about modeling those charges coming out of the model? Thank you.
Steve Sanghi: I think we gave you incremental gross margin. Didn't we give you incremental gross and operating?
Eric Bjornholt: We did. But maybe it'd be helpful to say that, you know, we expect those underutilization charges to take longer to come out of the system than the inventory write-offs. Like, the inventory write-downs happen quicker, and the ramping of our factories will be gradual over time. So, hopefully, that helps a little bit.
Joshua Buchalter: Yeah.
Steve Sanghi: Okay. Thank you both.
Operator: Thank you. And your next question comes from the line of William Stein from Truist. Please go ahead.
William Stein: Great. Product gross margin, as you highlighted, was 66.3%. And your long-term target is lower than that at 65%. And I wonder, does that imply that you're somehow exceeding your long-term target because of mix or pricing or maybe help us reconcile why product gross margin once these unusual charges go away would decline from where it is now.
Steve Sanghi: But, you know, number one, charges don't ever go to zero. Now there's always some mix issues where certain product is built and the demand went away. You know, number two, when you're 12 percentage points away, you know, I wouldn't quibble about a percent here and there. You know, what I'm simply trying to say is many investors ask us, how are you confident that you'll get to 65 gross margin? And we're saying that, you know, that is achievable based on the math.
William Stein: But is mix or something else going to change such that, you know, perhaps it's the defense end market exposure that's quite high now and as that mix normalizes, does that have an effect of dragging gross margins?
Steve Sanghi: You know, we ship hundreds of thousands of SKUs every quarter. We, you know, have 20 business units, some exchanges every quarter. You know? Some of our, you know, so if I think you're making too much of that, you know, 65 versus 66, I don't differentiate those two numbers.
Eric Bjornholt: Yeah. I would agree with that. And, you know, you shouldn't look at this, but long-term, we think that our product gross margins are going to go down. You know, we're introducing lots of really high-margin products. You know, we talk about 10-based T1S, you know, our Ethernet products. Those are going to be higher than corporate average. You know, we have a lot of confidence in how our FPGA business is going to grow over time. That's higher than corporate. So there's a lot of moving parts there, William. I understand your question. But, as Steve said, we're really just trying to frame this that we have confidence in getting to our long-term model.
And, you know, the mix will have some effect over time, but we've got high confidence that we can get there, and it's just going to take us some time.
William Stein: That helps a lot. If I could squeeze one more in. If sell-in and sell-through sort of continue in September as they did in June, you should be pretty well aligned by the end of the quarter. Is that the right way for us to think about this such that maybe by the time we get to December, we're looking at sell-in being aligned or maybe even higher than sell-through?
Steve Sanghi: I would not think that. I think there is a lot of slow-moving product in distribution. We call it sludge. And it's just not a perfect mix. You know, the product it was bought two years ago in a certain mix, the demand always comes out in a different mix. So I think this will take, you know, more than just the September to close. We're not telling you that September will be sell-in and sell-through will be equal.
Eric Bjornholt: Yeah. There'll be a difference still. And, you know, I've kind of been saying, you know, I think maybe by the end of the fiscal year, we're pretty much aligned, but that's a guess.
Steve Sanghi: Yeah.
William Stein: Thank you.
Operator: And your next question comes from the line of Christopher Danely from Citi. Please go ahead.
Christopher Danely: Just real quick on the incremental gross margins. Eric, I think you said 76% for the September or excuse me, for the June quarter? The December quarter, since you guys are turning the fabs back on or at least increasing utilization rates, would that incremental gross margin go up? And if so, roughly how much?
Eric Bjornholt: No. I think it will be roughly in that same ballpark. If you look at our guidance, you'd look at the revenue change and where we've guided gross margin to. I think it'll be about the same. And I think our fall through to operating profit too would be in a similar range to what we saw in June.
Christopher Danely: Great. Thanks. That's super helpful. And then a question for Steve. So, Steve, now that you've been back in the front seat of the Microchip Technology Incorporated minivan here for, you know, a good nine months, how would you describe Microchip Technology Incorporated's competitive positioning, especially on microcontrollers? Are you, you know, have you seen any improvement? Has it been better than you thought, worse than you thought? How do you see your share going forward? Maybe talk about a, you know, path to gaining back market share. Anything there?
Steve Sanghi: So I think, you know, market shares are kind of hard to decipher when you're dealing with such a large inventory change. When you, you know, simply measure by revenue divided by the total revenue of the industry, it would seem that the market share is much lower. But if some of that revenue comes back when our customer's inventory goes away, and if you grow higher than, you know, the overall industry, which seems to be the case, I have compared, you know, our numbers against semiconductor industry's June ending report for microcontrollers. And we grew substantially more in microcontroller. Can we grow double digits roughly?
Eric Bjornholt: We did. Yes. Yeah.
Steve Sanghi: And the industry was up only about six, six and a half percent sequentially. So that means, you know, we gained share in the June quarter. So some of that share gain is coming back. I think it's going to take a little longer for us to go down this journey before we can really tell what happened. But one of the things which we have corrected is we were weaker at the very low end of 32-bit microcontrollers because we were serving those functionalities with 8-bit microcontrollers. And as customers wanting to be in 32-bit microcontrollers, we had a good portfolio of midrange parts and high-end parts, but we didn't have entry-level parts.
You know, we were competing with 8-bit on that. And I think that's one thing I corrected after I returned. And there are, you know, a couple of very, very good low-end 32-bit parts that we're developing at a very, very good price point. So for one of them gets introduced to the market nearly the start of the next calendar year. So those will strengthen our position further. But I think, you know, more than that, there are a few things we have done. One other thing was, you know, for 8-bit and 16-bit, we had our own proprietary architecture. You know, thick architecture. We didn't use ARM or anybody, any industry standard architecture. All the tools were ours.
We developed our own tools. So when we went to 32-bit microcontrollers and adopted ARM as well as MIPS to build it, our internal strategy remained that we brought those parts on our own tools, which were proprietary tools. And ARM has a substantial market share at a 32-bit level. All of the competitors build ARM-based products, and many of those companies don't even build the tools because they just simply send the customers more industry standard tools from like IAR and Seger and others. Kyle and a number of other companies. So, basically, when we compete with a customer, you know, we're trying to jam our proprietary tool where they already have an industry standard tool.
And if our products will simply work on that industry standard tool, we'll have a lower resistance level. So I think that's one thing we have changed, you know, in the last nine months where we have enabled all of our 32-bit products to be able to run on industry standard tools. And we're even working with one company at least who will even support our 16-bit DS tech on industry standard tools. So there are, you know, things we are doing to make our lines more competitive, make it easier for our customers to do business with and adopt products.
The other thing that Richard talked about was this coding assistant that we have developed, is a first in the industry, and we're giving it to our customers. It saves almost 40% time for development. It basically writes a code for you. And nobody else has come up with a tool like that. So, you know, everybody would, but we're the first. So, you know, I would say, you know, I think our position is still good, still very competitive. But we did lose share with our PSP strategy. And we hope that some of it is not permanent. And as our sales are growing, we will come back.
Christopher Danely: Alright. Thanks a lot, Steve.
Operator: Thank you. And your next question comes from the line of Tore Svanberg. Thank you. Please go ahead.
Tore Svanberg: Yes. Thank you. I had a question on the pace of the decline of the underutilization charges. So I appreciate you're going to start increasing utilization in December. And I think right now, obviously, those charges are coming down by a few million dollars, obviously, because you still have inventory. But when do we see more step function, you know, in the utilization charge? Is that going to be when you get to that 130, 150 inventory day target, or could we potentially already see it before you get to that level?
Steve Sanghi: It would happen well before that. As I said, if we wait till the inventory comes down to between 130 to 150 days, then we're going to require a very large step function increase in our fabrication output in the following quarter, which is impossible. So therefore, you have to grow over five, six quarters, and we have to start much earlier. So utilization will start improving, you know, well before our inventory gets to those kinds of levels. I think you should see a substantial improvement in utilization probably in December and then continue every quarter after that.
Tore Svanberg: Yeah. That's great color. And then on your cash flow, so great to see the cash flows are now going to be big enough to cover the dividend. You did say that any excess cash flow is going to be used to pay down debt. What's sort of the new target level for debt? That we can try and understand when the buybacks are going to start to pick up again?
Steve Sanghi: So I think what we have said is, and I have this only number as approximate, you know, as may have one number. I think we borrowed about through this quarter, we would have borrowed about $300 million. It's about $350 million to cover the dividend in the last x number of quarters since cash flow became less than the dividend. So the next $350 million of excess cash flow over the dividend will go to bring that debt back to where it really was. So that's factor number one. And factor number two is, you know, our leverage is still very high. We just finished the quarter with a leverage of 4.2.
And if you recall, when we started to increase the dividend and started to buy back, you know, stock and all that, we had said we want the leverage to one and a half or lower. So it's quite a way to go before we, you know, get back to that kind of leverage and a very strong investment-grade rating. So I wouldn't look for a, you know, stock buyback in the near term.
Tore Svanberg: Great color. Thank you, Steve.
Operator: And your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.
Vijay Rakesh: Yes. Hi, Eric and Steve. Just a question on the underutilization charges. I think your inventory write-downs and underutilization charges are running fifty-fifty. Do you guys think most of the inventory write-downs get done by September?
Eric Bjornholt: I don't. I don't. I think it takes longer than that, Vijay. But what we expect is that the amount of the inventory write-downs will continue to decline as we move through the fiscal year. So, you know, it's going to take some time, but the charge dropped from $90 million to $77 million last quarter. We expect it to be lower than the $77 million this quarter, and that cadence to continue now for multiple quarters as we see into the future. And underutilization, I think we've talked about a little bit more in response to some of the other analyst questions. It's going to go down modestly this quarter.
And when we increase wafer starts in the factories in December, it will take another step function down. But that one's going to take a little bit longer because we are significantly underutilizing our factories today. And we'll grow it back over time as inventory declines and revenue improves.
Vijay Rakesh: Got it. And, Steve, in response to your section 232 on some of the exceptions that could get with investing in the US, is your understanding that, you know, I'd put you at a much better version versus, this STMicro and Infineon and some of your peers there? Thanks.
Steve Sanghi: Well, I would hope so. I don't really know fully, you know, what the rules are. But I think we produce a higher percentage of our product in the US, you know, than some of the companies you mentioned do. But I don't know whether it makes a difference what percentage it is. I think it's going to be more black and white. If you do some manufacturing in the US, then you know, you qualify for no tariff. I don't know what the rules will be. You know, I think some of those companies have fabs in the US. Some others don't. And I don't know the rules clear enough to be able to interpret that.
I hope we have an advantage. But I'm not sure.
Vijay Rakesh: Got it. Thank you.
Operator: Thank you. And your next question comes from the line of Christopher Rolland from Susquehanna. Please go ahead.
Christopher Rolland: Hey, thanks for the question. Just maybe a clarification or just understanding tone here. I guess, first of all, typical seasonality for December and March, I know it changed since the addition of Atmel. I think the last up down 5% in December and negligible for March, but down a little bit. Maybe if you could update us on that. And then, Steve, you said, you know, you thought you'd be better than the seasonal, but you know, I think the street was at plus 5% or something like that for the December quarter. So like, is that tone as much as 1,000 basis points better than seasonal? If you could update us there, that'd be great.
Eric Bjornholt: Let me maybe start by saying, you know, I don't think seasonal in December is down 5% for us. I think maybe it's down a couple percent. And then maybe seasonal, you know, it's been a long time since we've been seasonal, but maybe seasonal in March would be up a couple percent. So maybe start with that. And, you know, we are not at a point where we want to provide any guidance or able to provide any guidance yet for December. We think our business is trending in the right direction. But, we're not ready to provide. So I'll start with that and see if Steve wants to add anything to it.
Steve Sanghi: I think exactly I wanted to say that, you know, your numbers have a larger bracket on it. I think December is usually down a couple and March is up, you know, two or three maybe. I'm sorry. Up by, you know, two or three. And my expectation is that the business would be better than seasonal in those both quarters without being able to put numbers on it.
Christopher Rolland: Okay. Thank you for that. And then secondly, maybe on AI, I know there was some stuff in the prepared remarks, but you guys had any updates on the percentage or the dollars contributed from AI and if there were any products that are just going gangbusters just above your expectations, whether they're, like, PCIe switches or retimers or FPGAs, or timing products, just anything that's significantly outperforming your expectations. Around AI, that would be great.
Eric Bjornholt: But we haven't broken that out.
Richard J. Simoncic: So we are seeing more and more uptick from our customers using the tools. You know, it's still relatively new. We just launched this in the February time frame in terms of AI code support. It's been used behind our firewall for over a year by our internal engineers and our support engineers supporting customers. And it's improved productivity within our own engineering force quite a bit. On the FPGA front, where we're seeing most of the uptick are used of AI is in vision detection or vision systems. For detecting people or visual inspection in factories are probably the fastest growing areas that we're seeing AI and acceleration used in our products.
Christopher Rolland: Yeah. Any data center products not the AI coding tool. I apologize.
Richard J. Simoncic: No. We have not put out data in terms of pertaining to the AI coding tool. In terms of what it benefits. Right now, the only number that we've given is that typically, customers and engineers that are using it are reporting about a 40% productivity improvement. Which in the end translates to time to revenue improvements.
Christopher Rolland: Thanks, guys.
Operator: Thank you. And your next question comes from the line of Janet Ramkissoon from Quadra Capital. Please go ahead.
Janet Ramkissoon: Congratulations and a nice turnaround, guys. Most of my questions have been asked, but just a couple of little things. Given the recent decline in the US dollar, how does that affect you? And if we see higher budget deficits and higher need to sell more debt and which may lead to a further decline in the dollar, how is that likely to affect you in the next couple of quarters?
Eric Bjornholt: Yeah. So, you know, the foreign currency fluctuations don't have as large an impact on us as some of our competitors that are not as US-based as us. You know, we really sell 99% plus of our revenue is in US dollars. A lot of our assets are going to be US dollar-based. So I think that the impact to us is smaller than what you would see with some of our European competitors as an example.
Janet Ramkissoon: Okay. And secondly, if I may, any comment about your Chinese business or trends? Any insights into what's going on in that market? Thank you.
Steve Sanghi: Chinese business? I think our business in China was very strong. It bounced back very strong from March, which is the Chinese New Year quarter to June, up, I think, 14% or something. So our business is doing very, very well. You know, everybody is talking and concerned about what's gonna happen with tariffs. And I think that's dominating the agenda. But on a business level, it's not really having an impact today.
Janet Ramkissoon: Okay. Thanks very much. Congrats again.
Operator: Thank you. There are no further questions at this time. I will now hand the call back to Steve Sanghi for any closing remarks.
Steve Sanghi: Well, I want to thank all the investors and analysts for hanging in with us. I think we're on our way to making a very, very strong recovery from the, you know, lows in the business environment. And we'll see many of you at a number of conferences we'll go to starting early September, I think.
Eric Bjornholt: Yeah. We actually have a conference as early as next week. So we'll be at a lot of conferences this quarter, and we look forward to further discussions with everybody.
Steve Sanghi: Thank you.
Operator: This concludes today's call. Thank you for participating. You may all disconnect.
Where to invest $1,000 right now
When our analyst team has a stock tip, it can pay to listen. After all, Stock Advisor’s total average return is 1,047%* — a market-crushing outperformance compared to 181% for the S&P 500.
They just revealed what they believe are the 10 best stocks for investors to buy right now, available when you join Stock Advisor.
*Stock Advisor returns as of August 4, 2025
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.