Microchip Technology's Q3 2025: Contradictions in Inventory, Margins, and Capacity Utilization

These are the key contradictions discussed in Microchip Technology's latest 2025 Q3 earnings call, specifically including: Inventory Management and Customer Relationships, Gross Margin Trajectory, Capacity Utilization and Strategic Adjustments:



Inventory Correction and Business Resizing:
- Microchip Technology reported inventory days of 266 as of December 2024, up from 247 days at the end of September 2024.
- The company plans to reduce inventory by $250 million, aiming for an inventory target of 130 to 150 days.
- These corrections are due to high levels of inventory across both direct and distribution channels, particularly high at large direct customers served preferentially during supply constraints.

Financial Performance and Guidance:
- Net sales for December 2024 were $1.026 billion, down 11.8% sequentially and 41.9% from a year-ago quarter.
- For the March 2025 quarter, net sales are expected to be between $920 million and $1 billion, with non-GAAP gross margins of 52% to 54%.
- The decline is attributed to a large inventory correction following a post-COVID super-cycle, with broad-based weakness across all major geographies and business segments.

Operating Expenses and Cost Management:
- Operating expenses increased to 34.9% of net sales, reflecting a pay cut ending for employees.
- The full quarterly impact of this increased operating expense is reflected in the March quarter guidance, with a projected peak before returning to lower levels.
- The company is working to rectify this by addressing excess capacity and rightsizing operations post the super-cycle peak.

Product and Strategic Investments:
- Microchip introduced a new generation of 64-bit RISC-V processors and expanded its Wi-Fi portfolio with 20 new products.
- These strategic investments are aimed at strengthening its position in growth markets like industrial and aerospace, with strong initial customer response and promising design win momentum.
- These advancements are part of Microchip's broader strategy to drive above-market growth through new product introductions and design wins at targeted customers.