Microchip Technology MCHP reported third-quarter fiscal 2025 non-GAAP earnings of 20 cents per share, which missed the Zacks Consensus Estimate by 28.57% and plunged 81.5% year over year.

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Net sales of $1.03 billion decreased 42% year over year and missed the Zacks Consensus Estimate by 2.02%. Sequentially, revenues declined 11.8%.

Following the disappointing fiscal third-quarter results, Microchip shares were down more than 6% in after-hours trading. MCHP shares have declined 37% compared with the Zacks Computer and Technology sector’s growth of 22.8% in the trailing 12-month period.

Microchip’s Segmental Details

Sales from Mixed-signal Microcontroller, Analog and Other accounted for 52%, 26.6% and 21.5% of net sales, respectively. Revenues from Microcontroller, Analog, FPGA and Other businesses declined sequentially.

In terms of channel, direct sales accounted for 57%, while 43% came from distribution.

Geographically, revenues from the Americas, Europe and Asia contributed 29%, 17.9% and 53.1% to net sales, respectively.

MCHP’s Operating Results

Non-GAAP gross margin contracted 830 basis points (bps) on a year-over-year basis to 55.4%.

Non-GAAP research & development expenses, as a percentage of net sales, increased 750 bps year over year to 21.2%. Non-GAAP selling, general & administrative expenses, as a percentage of net sales, jumped 490 bps to 13.7%.

Non-GAAP operating expenses, as a percentage of net sales, were 34.9% compared with 22.5% reported in the year-ago quarter.

Consequently, the non-GAAP operating margin declined to 20.5% compared with 41.2% reported in the year-ago quarter.

Microchip’s Balance Sheet & Cash Flow

As of Dec. 31, 2024, cash and short-term investments totaled $586 million compared with $286.1 million as of Sept. 30, 2024.

As of Dec. 31, 2024, total debt (long-term plus current portion) was $6.75 billion compared with $6.42 billion as of Sept. 30, 2024.

Inventory at the end of December 2024 was 266 days, up from 247 days at the end of September 2024. MCHP’s targeted inventory is in the 130-150 days range.

For the fiscal third quarter, cash flow from operating activities was $43.6 million compared with $43.6 million in the previous quarter.

Free cash flow was $22.8 million compared with $304.2 million in the previous quarter.

Microchip returned roughly $244.6 million to shareholders through dividends in the fiscal third quarter. The company announced a quarterly dividend of 45.5 cents per share, up 1.1% from the year-ago quarter.

MCHP Offers Cautious Q4 Guidance

Microchip expects net sales to be $920-$1 billion for the fourth quarter of fiscal 2025.

Non-GAAP earnings are anticipated between 5 cents per share and 15 cents per share.

Non-GAAP gross margin is anticipated between 52% and 54%. 

Non-GAAP operating expenses are projected to be 37.7-40.5%.

Non-GAAP operating margin is anticipated to be 11.5-16.3%.

For fiscal 2025, Microchip expects capital expenditure of roughly $135 million and fiscal 2026 capital expenditure to be lower than the fiscal 2025 figure.

Zacks Rank & Stocks to Consider

Microchip currently carries a Zacks Rank #5 (Strong Sell).

Arista Networks ANET, Twilio TWLO and DoorDash DASH are some better-ranked stocks in the broader sector. While ANET and TWLO sport a Zacks Rank #1 (Strong Buy) each, DASH carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arista Networks is scheduled to report its fourth-quarter 2024 results on Feb. 18. Twilio is set to report fourth-quarter 2024 results on Feb. 13, while DoorDash is scheduled to report its fourth-quarter 2024 results on Feb. 11.

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