Ganesh Moorthy
President and CEO at Microchip Technology
Thank you, Eric, and good afternoon, everyone.
Our December quarter results were disappointing and below our expectations with net sales down 21.7% sequentially and down 18.6% from the year ago quarter. Non-GAAP gross and operating margins came in at 63.8% and 41.2%, respectively, down from our recent strong performance, but somewhat resilient despite the significant sequential decline in revenue. Our consolidated non-GAAP diluted EPS came in at $1.08 per share, down 30.8% from the year ago quarter.
Adjusted EBITDA was 45.1% of net sales in the December quarter, continuing to demonstrate some resiliency. As a result, we had good debt reduction in the December quarter and despite the lower adjusted EBITDA we generated, our net leverage ticked down to 1.27 times. However, we expect our net leverage ratio to rise for a few quarters, as trailing 12-month adjusted EBITDA drops when replacing stronger prior year quarters with weaker ones. Our capital return to shareholders in the March quarter will increase to 82.5% of our December quarter adjusted free cash flow as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025. My thanks to our worldwide team for their support, hard work and diligence as we navigated a difficult environment and focused on what we could control so that we are well positioned to thrive in the long term.
Taking a look at our December quarter net sales from a product line perspective, our Mixed Signal Microcontroller net sales were down 22.3% sequentially, and down 18.5% on a year-over-year basis. And our Analog net sales were down 30.9% sequentially and down 29% on a year-over-year basis.
Now for some color on the December quarter, and the general business environment. All regions of the world and most of our end markets were weak. Our business was weaker than we expected as our customers continue to respond to the effects of increasing business uncertainty, slowing economic activity and a resultant increase in their inventory. In addition, many customers implemented extended shutdowns or closures at the end of the December quarter as they managed their operational activities.
We continue to receive requests to push out or cancel backlog as customers sought to rebalance their inventory in light of the weaker business conditions and the increased uncertainty that we're experiencing. And we were able to push out or cancel backlog to help many customers with these inventory positions. With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe that there is inventory destocking underway at multiple levels at our direct customers and distributors who buy from us, our indirect customers who buy through our distributors and in some cases, our customers' customers.
The very strong up cycle of the last 2 to 3 years drove many of our customers to build inventory in order to be able to capitalize on strong business conditions in an uncertain supply environment. The term, "just in case", instead of "just in time," was used by customers to express their approach to these conditions. But as the macro environment slowed, many of our customers found their business expectations to be too optimistic and ended up with high levels of inventory. And as a result, they sought to cancel or reschedule backlog.
An update on our PSP program. During the early stages of the up cycle, we launched our PSP program requiring noncancelable backlog in exchange for supply priority in a hyper constrained supply environment. The program was aimed to discourage speculative demand and achieve mutual commitments between our customers and us for future demand. The program worked extremely well for many customers who participated during all of 2021 and 2022 as well as the early part of 2023, supporting strong growth in their businesses. However, the business challenges which led to the creation of the PSP program are no longer relevant, and we have, therefore, decided to discontinue the program effective today.
If business conditions warranted we may at some point in the future initiate a similar program, which will, of course, have to be adapted to whatever that situation requires.
Reflecting the slowing macro environment, our distribution inventory grew to 37 days at the end of the December quarter, as compared to 35 days at the end of the September quarter. We are working with our distribution partners to find the right balance of inventory required to serve their customers, manage their cash flow requirements and be positioned for the eventual strengthening of business conditions.
Our internal capacity expansion actions remain paused. Given the severity of the down cycle, our factories around the world will be running at lower utilization rates and also taking up to 2 shutdown weeks in each of the March and June quarters in order to help control the growth of inventory. We expect our capital investments in fiscal year '24 and fiscal year '25 will be low even as we prepare for the long-term growth of our business.
To that end, we reached a preliminary memorandum of terms with the Department of Commerce for $162 million in grants targeted at existing projects for 2 of our U.S. fabs. These grants are subject to diligence by the chip's office as well as capacity investments by Microchip over multiple years.
We have been driving our lead times down and have reduced average lead times from roughly 52 weeks at the start of 2023 to roughly 8 weeks by the end of 2023 on average. During a period of macro weakness and business uncertainty, we believe short lead times are the best way to help customers navigate the environment successfully and improve the quality of backlog placed with us as it enables our customers and Microchip to engage an uncertain environment with more agility and effectiveness. However, a significant reduction in lead times is also resulting in lower bookings and reduced near-term visibility for our business.
We're also taking steps to reduce our expenses. In addition to the variable compensation programs, which provide automatic reductions during a down cycle and normal containment of discretionary expenses, we will be implementing broad-based paid reductions. Our team members who are not a part of the factory shutdowns will take a 10% pay cut and consistent with our normal practice, the executive team will take the largest reduction with a 20% pay cut.
The shutdowns for manufacturing team members and pay cuts for nonmanufacturing team members are consistent with our long-standing culture of shared sacrifices in down cycles and shared rewards on up cycles. Thus avoiding layoffs, and in the process protecting manufacturing capability as well as high priority projects which are important for our customers and us to thrive in the long term.
We took similar actions in prior periods of business uncertainty such as the COVID pandemic in 2020 and the global financial crisis in 2008 and 2009, and we believe such actions were quite effective to navigate our business.
Now let's get into our guidance for the March quarter. As our customers take further actions to adjust to a weakening macro environment and uncertain business conditions, we are continuing to support customers and channel partners with inventory position to push out or cancel their backlog. We recognize that our short lead times and increased flexibility with backlog will result in customers reducing inventory aggressively, and that this could result in some degree of overcorrection. However, in response to these conditions, we are continuing to work with our customers to absorb as much of the inventory correction as we can at this time.
Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the March quarter to be between $1.225 billion and $1.425 billion. The guidance range is larger than normal to reflect the macro uncertainty and the resultant low business visibility. We expect our non-GAAP gross margin to be between 59% and 61.6% of sales. We expect non-GAAP operating expenses to be between 26.9% and 30.7% of sales. We expect non-GAAP operating profit to be between 28.3% and 34.7% of sales and we expect our non-GAAP diluted earnings per share to be between $0.46 and $0.68.
To keep things in perspective, while our business results have degraded significantly over the last 2 quarters as a larger-than-normal inventory correction has played out, our full fiscal year '24 revenue decline at the midpoint of the March quarter guidance is expected to be roughly 9.5%, comparing favorably with weakness that other industry players have experienced.
Our non-GAAP operating margin for full fiscal year '24 at the midpoint of our March quarter guidance is expected to be 43.6%, continuing to be among the best results across other companies in our industry. While we don't know how and when the inevitable up cycle will play out, we believe the fundamental characteristics of our business remain intact.
Finally, notwithstanding any near-term macro weakness, we are confident that our solutions remain the engine of innovation for the applications and end markets we serve. Our focus on total system solutions and key market megatrends continue to fuel strong design win momentum, which we expect will drive above-market long-term growth.
With that, let me pass the baton to Steve to talk more about our cash return to shareholders. Steve?
