微晶片科技 (MCHP) 2003 Q2 法說會逐字稿

Welcome to the Microchip Technologies second quarter 2003 conference call. Today's call is being record. At this foam for opening remarks I'll turn the call over to Gordon Parnell CFO of Microchip Technologies.

Good afternoon. During the course of this conference call we'll be making projections and forward-looking statements regarding future events or the future financial performs answer of the company. We wish to caution up such statements are predictions and actual events or results may differ materially. We refer you to our press release of today as well as our 10-k for the fiscal year ended March 31, 2002. Our 10-q for the quarter ended June 30, 2002 and our 8k current reports that we have filed with the SEC that identify important risk factors that may impact Microchips business and results of operations.

In a with me today attendance is Steve Sanghi Microchips President and [Ganesh-ph] Murphy, vice president of advance mircocontroller and automotive division. I'll start with a review of the September quarter results. Steve will comments on the quarter and out line or guidance for the December quarter. We'll then be available to respond to investor and analyst questions.

Net sales for the Sept. quarter 169.7 million. And up from the June quarter increased by 20% on a year over year basis. Geographical mix was essentially in line with our expectations with Asia growing stronger sequentially at 12% and the Americas growing sequentially by over 9%. Business in Europe continued to be weaker than the other two regions. Resulting in sequential revenue declines of approximately 4%. Total revenue for the quarter resulted in sales for Asia representing 40% representing, America at 35% and Europe at 25%. These obviously all reflect can the sequential changes I [inaudioable] lined. Net sales from micro controller products represented 79% of revenue in the quarter analog products 8% of revenue and memory products represented 13% of revenue. Steve will address the performance of east product areas during his comments in a few minutes.

Proforma diluted earnings were 35.2 million or 17 cents for diluted share. Increase of approximately 14% from 31 million over 15 cents per diluted share in immediately preceding quarter. Year over year proforma earnings per share in the September quarter increased by over 51% from net income of 23.1 million or 11 cents for diluted share. Gross margin for the September quarter was 53.9 percent and increase of approximately 140 basis points from the prior quarter. Gross margins in the September quarter per primarily impacted by the product mix of microcontrollers and analog products, flat pricing environment for product sales, manufacturing yields, fixed costs absorptions as well as competitive conditions. Factor utilization level were 84 % in the September quarter. Operating expenses at 26.8% of sales in the September quarter compared to 27.2% in the previous quarter. The research and development cost 22.3 million representing 13.2% of sales. Sales in general administrative expenses were 23.1 million representing 13.6 % of sales. Operating expenses overall showed an increase of two million from the June quarter including the quarterly cost s associated with the acquisition. The leverage improvement from the growth and revenue resulted in the .4% change period over period. As we indicated in our press release the results of our review of the accounting costs of fab-3 determined we should take an impairment children of 41.5 million including 4.6 million in respect for equipment. Based on the currents analysis for fab-4 which has been completed we determined we can produce 1.4 billion in revenue from the Gresham location. Based on this information we're determined that the Washington site will be carry carried as an asset held for sale. Overall earnings per share in the Sept. quarter on a GAPP basis was 10.3 million or five cents for diluted share. Microchip's total inventory position 92.1 million. Increase of approximately 3.4 million from the prior quarter level. Inventories are flat at 3.4 in both periods with days of inventory representing 107 days. 2.9 million of the increase in inventory is reflected increased raw silicon levels from June to September. We invested in these raw silicon levels to offset any potential impact that could arisen from issues stemming from the anniversary of September 11 which fell in the quarter. The overall work in progress in finished goods level were only up modestly from June to September. It is our intent to reduce inventory levels of raw silicon to more normal level in the December quarter. At September 30, Microchip Technologies' receivable days were 46 days compared to 47 days at the end of June and 49 days a year ago. Total receivables for 89.9 million, which shows increase of 6.2 million from the prior quarter or approximately 7.4%. The increase in receivables reflect the overall increase in sales for the quarter and non linearity of shipments in the September quarter which impacted by the summer, summit effect in Europe. Receivables beyond 90 days continues to be at low level with only 1.3% in these categories. As of September 30 Microchip Technologies' cash position was 141.3 million and no borrowings against any of our lines of credit. During the quarter Microchip Technologies generated 57 million in cash from operations, which was off set by capital expenditures of 17 million and 182 million associated with the acquisition of fab-4 Gresham that was completed on August 23. The cash balances netted 7 million dollars associated with stock buy back program. Capital spending was approximately 201 million for the quarter and this includes the purchase of fab-4 located in Gresham. The depreciation expense was 28 million dollars versus 27 million dollars for the same quarter last year. And equivalent to the June quarter, which was 28 million dollars. Microchip Technologies shipped 7700 new application development systems to customers. And we shipped one 69 largest use per bases of development tools in the semiconductor industry today. I'll ask Steve to give us additional color on the September quarter, outline or guidance for the December quarter and because discuss big opportunities including manufacturing facilities in Gresham, Oregon.

Good afternoon everyone. I would like to reflect on the financials that we have announced today. Then I shall give you an update on fab-4 startup. I'm proud of our excuse during this most difficult business environment. While a majority of the industry is still posting losses, Microchip Technologies has announced operating profits exceeding 27%. Proforma earnings per share were up 14% sequentially and up 51 % over a year ago quarter. Our gross margins improved further for 553.9 percent such results would be excellent in a good business environment. Achieving these results in the middle of the worst business environment this industry has ever seen is truly exceptional. Our performance was the result of a deliberately honed business model consisting of a well diversified customer base of over 37,000 customers worldwide. A well balanced geographical revenue mix for three major geographies of U.S., Europe and Asia. A proprietary and differentiated product mix, which is 87% much our business, the memory products only 13% of our business. Consistently gaining market share in microcontroller's and finally sales and marketing culture focused on relentless purchase design wins on our proprietary products. Our business model has been tested through three industry cycles of 1996, 1998, and the 2001-2002 recession. During these times our operating profit has stayed old at 20% or above and currently at 27.2% in improving further. Next I would like to briefly comment on the revenue from each product line. Our flagship microcontroller product line was up 7% sequentially and up 22% year over year. While the overall business sentiment continues to be weak, we continue to benefit from a large number of design wins in the pipeline. Even though a lot of customers are not committing their designs to production, sighting poor conditions, there are enough designs going to production that we continue to achieve an extremely respectable growth in the micro controller business as shown my 7% sequential great last quarter and 22% growth year over year. We believe that we continue to be positioned very well and accelerate the growth rate further when the market sentiment improves. In the analog segment of our business we were up 2% sequentially. While it continues to be strong acceptance of our analog product for the polio and they are now over 600 million dollars in our opportunities management funnel, the quarter to quarter growth continues to be lumpy and unpredictable. This has been shown by a sequential growth of 10% in the March 2002 quarter, 16% sequential growth in the June 2002 quarter and now 2% sequential growth in the September 2002 quarter. A large number of analog opportunities are needing production and we're optimistic of a significant growth ahead. The memory portion of our business grew 5% sequentially verifying our comments in the prior conference calls that the serial east [inaudible] market is stabilizing near the bottom and we do not expect strong moves in either direction short term.

Now fab-4 update. Microchip Technologies completed the acquisition of fab-4on August 23, 2002. A startup team that been put together with all critical positions filled from Microchip Technologies trained executives and engineers from our Arizona [inaudible]. These personnel are familiar with our processes and business methodology thus insuring the timely success of fab-4. With two months past since the acquisition no negative surprises have been found and a more comprehensive analysis of floor space and lay-out has determined that we can produce up to 1.4 billion dollars of output from fab-4 thus providing clean room space for many years in the future. Therefore, after a total analysis and discussion, we have decided that fab-3 in Washington will be treated as an asset held for sale. There are approximately 1.5 million dollars of expenses in fab-3 per quarter, which are included in our cost of goods sold today. Once fab-3 is cold she's expenses will go away improving gross margins by an additional 80 basis points, there will be no snow stoppers in fab-4 and it is slated to come up for production in June -July of 2003 time frame.

Gross margins in the December quarter is expected to be approximately 54%. But this includes an incremental approximately $3 million of fab-4 startup expenses. Excluding these startup expenses the gross margin for our core business would be approximately 55.5% which is almost 160 basis points above the quarter we just completed. But, that would be negated by the $ 3 million of fab-4 startup expenses the resulting gross margin only 10 basis points or so on a GAAP basis.

Now the guidance. The bottoms up design driven analysis continues to points to a significant growth. Near the high end of guidance of 5% sequential and 26 % year over year. However, the weakness of the current business sentiment together with unpredictable factors like the lingering effect of U.S. west coast port lockouts. Dwindling consumer confidence and the threat of war cannot be ignored. Looking at all these factors our guidance at this point in time is for the business to be sequentially up from 2% to 5% from September quarter, which translates to net sales of between 173 and 178 million dollars December. This equates to a year over year growth of between 22 to 26%. In a year where the semi conductor industry sales will be zero to slightly negative. The operating prospects for the December quarter is expect to be between 27.5 to 28%. We expect earnings per share between 17 to 18 cents, which would equate to a year over year over year EPS growth of between 50 to 60%. With that, Jason, would you poll for questions.

The question and answer secession will be conducted electronically. If you do have a question please press star one on your telephone. Once again if you do have a questions press star one on your telephone. We will take as many questions as time permits and take questions in the order we are signaled. Right now we will pause to assemble the roster. And we will go first with Hans Mosemen Credentials Securities.

How much will Fab 3 get next year? What turns requirement do you expect in order to meet guidance in the December quarter?

In how much Fab 3 would fetch, we would rather not signal to any potential buyers what we are willing to take. It is an asset held for sale. We are currently interviewing real estate agents and would be putting this on the market sometime this quarter. We haven't decided whether there will be a price on it or if we be looking for offers. Until that marketing strategy has been determined, it will be premature to comment on what it will be fetching.

Is this an eight inch Fab and capable of 0.18 micron?

Either the eight inch or the 12 inch, whatever the buyer would like. The floor and ceiling height and systems are capable of doing 12 inch. There will be no equipment left in it because we will be drawing all the equipment from the Fab, taking it to our existing facilities for expansion. It is basically ballroom style clean room, state of the art, that can either be facilitized for eight or 12 inch equipment. It can go to 0.18 or 0.15, any kind of a target anyone wanted it to do.

Turns requirement?

Turns requirement for this quarter will be approximately 60%.

We will take our next questions from Mark Edelstone from Morgan Stanley

What was the turns in the September quarter?

Turns in September were 50%.

You have to go up 10 points to get to the midpoint of the range?

Yes that is the approximate calculation.

What did you see in distribution in the quarter?

The overall inventories are about 2.7 months in the distribution channel. That is slightly higher than we saw at the end of last quarter, but still very much in the low end of the range. The range is somewhere between 2.4 months to 3.4 to 3.5 months. Still very much at the low end of the range, indicating that distributors aren't looking to hold significant inventories. They are looking at the fact that we have short lead times and are relying on that to deliver product to them. Overall the business climate in each of the regions dictates how much inventory they would hold. Typically we would expect to see distributors that have rates of return hold slightly larger inventories than our Asian local disties [phonetic].

What will the start-up costs for Fab 4 look like 1H of calendar 2003 up until the turn on into production?

We have the analysis. I don't have it with me. Why don't we give it out in a future conference in the next two weeks.

Margins will remain much in the range of 54%. The additional start-up costs in Fab 4, until it goes to production in the June July timeframe, will be offset by other improving factors in the business. Margins will remain very much in the same 54% level.

That is two quarters, and then the Fab 4 goes to production and margins increment very rapidly as the start-up expenses are absorbed. To give more color on turns, they go up and down. A quarter ago our turns were 62% and last quarter they were 50% and this quarter they were 60%. We have done turns as high as 65%. Time and time again in the history of our industry, we have seen that every time the turns requirement goes higher, MCHP gets very competitive. One because the inventory is in very good mix, second we dominate the field programmable section of the microcontroller market. When turns are high, which means lead times are short, it is much more difficult to get custom ROM product or anything like that. MCHP products become the dominant products that are used in an environment like that. We aren't concerned. We have done significantly high turns before. The quarter-to-date, the 23 days that have gone in this quarter, turns are running in excess of 71%, so we have done these numbers before

We will take our next questions from Joseph Osha from Merrill Lynch.

Can you give more color by end market in how the quarter shaped up?

We have 37,000 customers worldwide and many through distribution. It is hard to have any color very short term. We look at end markets more broadly. Our consumer business is about 34-35%.

Automotive is about 18%. The other three are telecommunications, office automation, and industrial, which are between 16-17% each.

We don't ever see any substantial change of more than half a percent plus or minus on a quarterly basis. It is largely immeasurable because there are so many accounts are through distribution.

In looking at your design win activity, can you see areas that seem to be getting more interest than others?

Looking at it from any factor including design wins, we continue to see strong growth in the future out of four business segments: consumer, industrial, office automation, and automotive. The telecommunications segment of our business continues to be relatively weak. It is one of the smallest segments for MCHP. We don't have very high exposure in it and fortunately so. A lot of the commodity markets within communications like cell phones, we don't like, we don't focus on, we don't go after. There are certain MCHP products with use in cell phones like Serial E2, battery chargers, and things like that. Driven by that, we have a portion of the business in those communications markets, but the other four markets have stayed strong for us all through the cycle

How is the competitive environment given the focus on the MC market?

There are 25 microcontroller competitors in any one day. If you look at the history of the same question on these conference calls, seven years ago it was Zylog [phonetic], six years ago it was Atmal [phonetic], five years ago it was someone else, I think three years ago it was Cyprus [phonetic], and two years ago it was Maxim [phonetic]. It hasn't change the rate MCHP has gained market share in a decade. It is a competitive market of 25 customers. We continue to dominate the market, and have grown 7% last quarter alone and 22% YoverY in a year when the microcontroller market would probably be zero growth this year. It wouldn't make a difference if one more guy comes in

We will take our next questions from Jeff Rosenberg from William Blair.

Is the Fab start date of June or July next year dependent on how you grow between now and then?

There are two things. At the growth rate we have between now and then, we would need the Fab. Second, we are running much higher than 84% capacity on our advanced products and technology, so we need it no matter what because otherwise we will have to add substantial amount of equipment. I had talked in a conference call that to build the advanced technology capacity in our existing Fab would require well in excess of $150m of capital this year in our Tempe Fab. We bought the entire Fab over there for $180m, that doesn't even include all the capital in the company. Part of the Fab 4 bring-up is to provide advanced capacity where the majority of demand growth today is coming from. On our flash microcontroller products and some advanced serial products. That is where all the demand growth is coming from. So we need to bring the Fab 4 up on that schedule otherwise we will be out of advanced capacity.

Fab 4 will come up in 0.5 micron not 0.35.

What percent of sales is flash and where do you see it trending?

We don't break that out.

Are you continuing your increases in wafer starts?

There are minor growths required by various products. We went up from 82 to 84 and will go up somewhat more this quarter in wafer starts and capacity utilization. It is mostly driven by the need for advanced technology and advanced products, which are growing pretty rapidly. Some of that is coming from the conversion of the older to advanced technology. Some are brand new products that are really growing.

How is the growth of your 18 series?

18x should be the fastest growing segment in calendar year 2003. That largest elements of design wins today going forward, looking on a system and all that, are in the in the 18x CD products. They are all flash-based, are all on the latest technology. That is what is driving the demand and growth.

Is the port lockout a potential risk factor?

It isn't impacting the flow of goods today, but in the short eight weeks you have to get product here for Christmas, 125 ships are going to miss one cycle of turns. Going back over to Asia and bringing it back. This comes up in discussions with buyers and we are, people are talking to them in what their plans are for Christmas. People bring that up and we don't really know. We hope we have ships available to lure the stuff. We are concerned there may be some lingering effect of that. While we see design win driven growth to be in the higher end of the estimate, that and the low end is really 3%. It may be a large number for you, but on the large scale of running a business, it is really pretty small. We miss one or two days and then you get there

We will take our next questions from Doug Lee from Banc of America Securities.

What was the utilization for the company and 4Q expectations?

September quarter was 84% and we expect to see that up very modestly in the December quarter.

We will take our next questions from Ben Linch from Deutsche Banc.

US automotive market has been strong for the last year and dropping off in the last month. Are you worried about that business in the next couple of quarters?

No, we aren't concerned about the outlook for that. Somebody is always going up and someone going down. People seem to multiply that effect several times last year. Even in the last two or three quarters or last year, people have concerns about 0% financing, automotive is down, automotive is up. Ford and General Motors said that. We never see an impact on our business. We continue to grow sequentially. We are in the middle of a fairly strong, model year changeover that happened just a few months ago and the number of cars that ramped in the model year. Early next year you will pick up midyear model year changes in which we have several more designs

How much is Germany of your European business?

Germany is a pretty strong.

It would be a guess and I would rather not. It is the most significant region overall in size.

Is that the only country behind your weak Europe?

In the quarter that just ended, you have lingering effects from the holiday process in France, Spain, and Italy that impacts the quarter, because the number of workdays in those areas. I don't think the only point of that is the German economy at this point.

What will book-to-bill be like this quarter?

It is too early, but our business is very high turns oriented. Over the five and six years and through the recession, the book-to-bill ratio hasn't resulted in growth or lack of it for MCHP, because you can get a large number of business in the current quarter and turn it, and its book-to-bill contribution is one but the business is growing.

Do your think your turns requirement for the March quarter is going to be up again vs. the December quarter?

It could be. It could be in the same range to slightly up.

We will take our next questions from Doug Lee from Banc of America Securities.

A lot of the chip companies have a front-end loaded December quarter. Is that a typical pattern for MCHP?

For us the quarter is reasonably linear. We run 4-4-5, which tends to linearize it.

Even with turns running strong so far, you are comfortable with the higher end but are just cautious?

Exactly.

We will take our next questions from Tom Smith from Standard and Poor.

What is the attach rate for analog chips for the microncontroller product?

We don't have the September quarter numbers yet. It is a little early. That analysis gets put together after we have announced earnings and are looking at the next ALP[phonetic]. The number has been running in the 60-65% range.

Is that similar for double E prom [phonetic]?

It is the same range, 50-60% range.

We will take our next questions from Gil Alexander from Garfield Associates.

Longer term, where do you think your gross margins can go to?

Gross margins can go up to the 58% range driven by the very substantial effect of Fab 4. Even in this December quarter, the core gross margin of our products will be about 55.5%, up from 53.9% in the last quarter. We will have about $3m for operating expenses coming in. $3m of Fab start-up expenses for Fab 4. Once a Fab goes to production, the start-up expenses turn into the production value earned out of that Fab, then the real core gross margins start to show. Based on that we are seeing the company's gross margin, year or a year and a half out, approaching 58% as the Fab 4 is in volume production. Driven by that the d-text profit approach is 34%

We will take our next questions from Ben Linch again.

On the fixed assets, you had $716m and added part of the Gresham acquisition cost and the impairment write-down of $41m. How do you get to the $785m?

The asset in WA is carried in current assets. It was an asset held for sale. That may be the piece you are missing.

Does two thirds of the Gresham acquisition cost go into the fixed assets line?

The entire Gresham was $183.5m.

The entire amount goes into fixed assets?

Correct.

So the fixed assets balance fell more than just the $41m impairment charge.

That is right. The WA asset is re-classed from fixed asset to current asset as an asset held for sale.

That is all the time we have for questions.

If you have more questions you can call Microchip Technologies's investor hotline the 480-792-7373.