Microchip (MCHP) BofA Securities 2024 Global Technology Conference summary

Financial strategy and capital allocation

• Executed a $1.25B, 6-year convertible debt with a capped call up 75%, costing $104M, and an investor put feature at 3 years, lowering coupon and providing flexibility.

• Cost of capital for the convert is about 2.25%, cheaper than a comparable investment-grade bond at 5.5%.

• Proceeds used to pay down higher-rate commercial paper and address upcoming maturities, resulting in immediate interest expense savings.

• Free cash flow return program targets 100% by March 2025, with a gradual increase each quarter and a long-term 50/50 split between dividends and buybacks.

• No plans for large-scale M&A; focus remains on small tuck-in acquisitions to support specific business units.

Business performance and inventory dynamics

• Experiencing a significant inventory adjustment phase, with last quarter down 25% sequentially and current quarter guided down another 6.5%.

• Distribution drained $125M in inventory last quarter; both distribution and direct businesses are correcting inventory.

• Bookings have improved monthly since February, but remain below normalized revenue levels; lead times are short and customer order behavior is shifting to more pull-ins.

• Signs of recovery are emerging, but the process is uneven across customers and not specific to any geography or end market.

• Industrial business, 43% of revenue, is broad-based; aerospace and defense (11% of revenue) is the strongest segment, while other areas are still bottoming.

End market and product segment insights

• Automotive represents 18% of revenue, with broad product exposure; average content in EVs is about double that of traditional vehicles, and EVs account for 3% of total revenue.

• Data center is also 18% of revenue, with about 5% tied to AI; AI-related business grew significantly last year, while overall data center revenue was flat.

• No plans to build large internal fabs; about 40% of wafer fab is internal, with the rest outsourced to foundries. Capital intensity expected to remain low due to existing capacity.

• Distribution accounts for 47% of sales and is expected to remain stable; larger customers tend to be direct, but distribution provides valued services.