Detailed Narrative
9-Point Recovery Plan Progress
CEO Steve Sanghi provided an update on the 9-point recovery plan initiated on March 3, 2025. Key actions completed include resizing the manufacturing footprint (Tempe Fab 2 closed, actions in Fab 4 and Fab 5 complete, back-end Philippines facilities complete), reducing inventory (first meaningful reduction in 3 years), reviewing megatrends (replacing 5G with AI, ADAS with network and connectivity), conducting business unit deep dives, and strengthening customer relationships (78% of stressed customers restored). A global layoff of approximately 10% of employees was executed to improve operating expenses, and discussions with the CHIPS office were reinitiated.
Inventory Correction and Production Strategy
The company achieved its first meaningful inventory reduction in three years, with days of inventory decreasing from 266 to 251 days. Management expects further substantial reductions in the June quarter, targeting 215-225 days, and a total reduction of over $350 million in FY26. Production will remain reduced in the June quarter to facilitate destocking. While the long-term target is 130-150 days, production will need to ramp up before reaching this level to avoid a steep capacity hill to climb later, with an inflection point expected later in FY26.
Revenue Inflection and Demand Signals
Management declared the March quarter as a revenue bottom, citing strong demand signals. Bookings were significantly up in the March quarter, with a book-to-bill ratio of 1.07, the first above 1.0 in nearly three years. April bookings were higher than any month in the March quarter. Distributor sell-through is increasing, and direct customer shipments are rising due to inventory depletion. This 'trifecta effect' of distributor inventory correction, sell-in catching up to sell-through, and direct customer inventory correction is expected to drive sales growth in FY26.
China Strategy and Tariff Impact
Microchip is re-evaluating its China-for-China strategy due to changes in the definition of 'Made in China' from assembly location to diffusion location. The previous strategy of selling Microchip die for local assembly and branding is less effective for U.S.-made products. The company is giving feedback to the U.S. government that current rules incentivize moving production out of the U.S. Direct tariff impact🌐 is minimal as less than 4% of parts are made in China and those don't typically go to the U.S. The company has modeled hypothetical revenue haircuts and believes its reduced production rates can absorb such impacts without further drastic actions.
Product Innovation and AI Focus
Microchip continues to invest in next-generation technologies, including Switchtec PCIe switches for automotive and embedded computing, ARM-based microprocessors for HMI, and 32-bit microcontrollers with high-performance analog peripherals. The MPLAB AI coding assistant is helping customers accelerate design cycles, reducing embedded software development time by up to 40%. The company has also created an AIML product group to coordinate AI-related efforts across business units. AI-related sales now represent just over 6% of total sales, up from 4% last year.
Capital Allocation and Dividend Commitment
The company is committed to returning 100% of adjusted free cash flow to investors via dividends. Despite adjusted free cash flow currently being less than the dividend due to depressed sales, management has no plans to cut the dividend. A $1.485 billion mandatory convertible preferred stock offering in the March quarter reduced total debt by $1.125 billion and net debt by $1.31 billion, reaffirming the company's investment-grade debt rating. The company expects adjusted free cash flow to exceed dividends as inventory liberates cash and capital expenditures remain low.