Microchip TechnologyMCHP

The company gave a financial forecast for the upcoming quarter that came in higher than what analysts were expecting. Management is seeing a pickup in orders for the specialized chips used in artificial intelligence data centers, cars, and industrial equipment.

This is a significant signal that the long slump in the chip industry is fading. Microchip's business depends on customers clearing out old stock before ordering more, and this upbeat outlook suggests that inventory glut is finally over. If the company can keep filling its factories with these new orders, it should see profit margins start to climb back toward their historical highs.

Source: Reuters

The company reports its quarterly results today. Analysts are looking for profit of about 70 cents per share on revenue of roughly 1.46 billion dollars.

For those watching the long-term health of the business, the focus is on how quickly customers are working through their old stockpiles of chips. We are looking to see if the company is filling its own factories more efficiently, which helps lower the cost of every chip it sells and protects its profit margins.

See the full quarter, and how our tracked metrics did

Key highlights

• Strong revenue recovery: Sales grew 35.1% compared to a year ago to reach $1.31 billion, a sign that the company is emerging from a difficult period as customer demand returns. Revenue also grew 10.6% from the previous quarter, which is the first double-digit sequential gain in several quarters.
• Improving inventory efficiency: The time it takes to sell through products fell to 185 days from 201 days in the prior quarter. This metric, which measures how much cash is tied up in unsold goods, is now down by $320.9 million from its peak as the company works through a massive glut of chips.
• Healthy channel levels: Inventory held by distributors fell to 26 days, which is at the low end of the company's historical range. This means there is less risk of future order cancellations because there is no excess stock sitting on the shelves of the middleman.
• Margins trending higher: Adjusted gross margin, which is the percentage of sales left after manufacturing costs, reached 61.6% this quarter. Management is now aiming for a range of 62.25% to 63.25% in the upcoming quarter as they ramp up factories to meet rising demand.
• Bullish growth outlook: Management expects sales to climb to roughly $1.456 billion next quarter, representing a 35.3% jump from a year ago. If reached, this would be an 11% increase over the current quarter and shows that the recovery in the semiconductor market is gaining speed.

Our take: This was a very strong quarter that confirms the worst of the chip slump is over. The combination of falling inventory and rising sales suggests Microchip has cleared its backlog and is ready for growth. These results significantly strengthen the long term case as the business returns to its high margin model.