- Sequential Sales Growth: Q1 sales rose 10.8% sequentially to $1.075 billion, driven by inventory correction and demand recovery.
- Gross Margin Expansion: Non-GAAP gross margin reached 54.3%, up from prior periods, with a long-term target of 65%.
- Inventory Reduction: Inventory days fell to 214, with a $124 million reduction in the quarter and a $350 million annual target.
- September Guidance: Net sales expected at $1.13 billion (+/- $20 million), with non-GAAP gross margin of 55-57%.
- Productivity Boost: AI coding assistant improved customer development efficiency by 40%, strengthening Microchip’s competitive edge.
Financial Performance
CFO Eric Bjornholt highlighted the company's financial performance, including net sales of $1.075 billion, non-GAAP gross margin of 54.3%, and non-GAAP operating expenses of 33.7%. The company's cash flow from operating activities was $275.6 million, and adjusted free cash flow was $244.4 million. The company's strong financial performance is a testament to its effective cost management and operational efficiency.
Product Line Innovations
CEO Rich Simoncic discussed the company's product line innovations, including strength in aerospace, defense, AI applications, and network connectivity. Microchip is a leader in the microcontroller industry and is enabling customers with its AI coding assistant, which has achieved 40% productivity improvement. The company's focus on innovation is driving growth and increasing its competitive advantage.
Business Environment and Guidance
CEO Steve Sanghi discussed the business environment and guidance for the second quarter. The company expects a recovery in its key end markets, including automotive, industrial, communication, data center, aerospace, and defense. The backlog for the September quarter is higher than the starting backlog for the June quarter, and bookings for July were higher than any month in the last three years. The company provided guidance for the September quarter, expecting net sales of $1.13 billion, plus or minus $20 million, non-GAAP gross margin of 55-57%, non-GAAP operating expenses of 32.4-32.8%, and non-GAAP diluted earnings per share of $0.30-0.36.
Inventory Digestion and Lead Times
The company is experiencing strong growth, with sales up 10.8% sequentially in the September quarter, which is above seasonal norms. Inventory digestion is driving the recovery, rather than tariff-related pull-ins. The company has done a forensic analysis of its distributors' sales and identified only a small impact from tariffs, around $7-9 million. Lead times are lengthening, with some products going from 4-8 weeks to 6-10 weeks or even 8-12 weeks, which is a warning to customers to plan ahead and give the company a healthy backlog.
Valuation
With a P/E Ratio of 7.59 and a P/S Ratio of 7.59, Microchip Technology seems fairly valued. However, with a strong track record of innovation and a competitive advantage in the microcontroller industry, the company's valuation may not fully reflect its growth potential. Analysts estimate next year's revenue growth at 5.3%, which is a conservative estimate given the company's strong performance in Q1.