In a development reminiscent of Mobileye Global’s recent revenue guidance cut for FY24, semiconductor company Microchip (MCHP) has reduced its Q3 revenue outlook. The reason behind this downward revision is a similar inventory buildup experienced across its customer base. This article delves into the details of Microchip’s Q3 guidance cut, its impact on the semiconductor industry, and what lies ahead for the company.
Microchip’s Q3 Revenue Guidance Cut
Microchip initially projected a sequential revenue decline in the range of 15-20% for Q3. However, it now expects a more substantial drop of 22% in Q3 revenue. The company attributes this decline to an increasing number of requests from customers to postpone or cancel their backlog orders. The negative impact of these requests on Microchip’s Q3 results has prompted analysts to reassess their outlook on the company.
Analyst Reactions
Analysts from leading firms, including Stifel and Truist, have responded to Microchip’s Q3 pre-announcement. Stifel’s Tore Svanberg lowered the price target on Microchip from $100 to $96 while maintaining a Buy rating on the shares. Truist, meanwhile, reduced its price target from $97 to $93 but retained a Buy rating. These adjustments in price targets reflect the cautious sentiment among analysts following the company’s negative pre-announcement.
Microchip’s Explanation
In a statement addressing the Q3 revenue guidance cut, Ganesh Moorthy, President, and CEO of Microchip, shed light on the factors contributing to the decline. He highlighted the weakening economic environment faced by customers and distributors during the December 2023 quarter. Many customers sought reduced shipments to mitigate inventory risks, while others faced extended shutdowns or closures, affecting order fulfillment. Consequently, certain backlog orders that were part of Microchip’s initial guidance did not materialize by the end of the quarter.
Common Threads with Mobileye Global
A striking similarity between Microchip and Mobileye Global is the impact of macroeconomic headwinds leading to a reduction in customer orders. Both companies are semiconductor manufacturers with a focus on advanced driver-assistance systems (ADAS) and self-driving technology, serving the automotive industry as a key end market. The shared struggles in the automotive sector underscore the challenges faced by semiconductor companies catering to this industry.
Broader Market Weakness
While the automotive end market is indeed a soft spot for Microchip, the weakness extends beyond this sector. During the Q2 earnings call in early November, CEO Ganesh Moorthy emphasized that volume, not pricing, was the primary driver of the downturn. The weakness affected multiple geographies and end markets, with the exceptions being the resilient aerospace and defense sectors.
Mixed Guidance and Optimism
Microchip’s earlier outlook for Q3 had already indicated challenging conditions. The company’s Q2 results included guidance for Q3 EPS of $1.09-$1.17 and revenue in the range of $1.803-$1.916 billion, significantly falling short of expectations. At that time, Microchip warned of slowing business as customers adjusted their inventory levels and postponed deliveries. The company also anticipated a sequential revenue decline in Q4, albeit less severe than Q3.
One positive aspect amid the challenging scenario is Microchip’s commitment to increasing free cash flowThe cash flow statement provides a detailed overview of the cash inflows and outflows of a company over a specified period of time. It includes cash received from operations, inves... More returns to shareholders. The company plans to achieve a 500 basis point improvement in this regard each quarter until it reaches the goal of returning 100% of adjusted free cash flow to shareholders. Microchip anticipates accomplishing this objective in approximately five quarters.
The Road Ahead
In conclusion, Microchip’s Q3 revenue guidance cut highlights the persistent inventory correction challenges that the semiconductor industry continues to grapple with. While the company faces uncertainty regarding the timeline for resolving supply/demand imbalances, market participants remain optimistic about improved business conditions in 2024. As the inventory correction process unfolds, Microchip, along with the semiconductor sector, will remain under scrutiny, with investors and analysts closely monitoring developments in this dynamic industry.
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