微晶片科技 (MCHP) 0 Q0 法說會逐字稿

Good day ladies and gentlemen and welcome to the Microchip Technology quarter one fiscal year 2012 net sales and EPS preliminary results conference call.

As a reminder, today's call is being recorded.

At this time I would turn the call for its over to Microchip's President and Chief Executive Officer, Mr Steve Sanghi.

Please go ahead sir.

Thank you.

Good afternoon everyone.

During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the Company.

We wish to caution you that such statements are predictions and that actual events or results may differ materially.

We refer you to our press release of today, as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

In attendance with me today are Eric Bjornholt, CFO; Ganesh Moorthy, Microchip's Chief Operating Officer and Gordon Parnell, Vice President of Business Development and Investor Relations.

I will comment on our preliminary financial results for first quarter of fiscal year 2012 and provide a preliminary guidance for second quarter of fiscal 2012.

We will then be available to respond to specific investor and analyst questions.

I would also like to caution you that at our results announced today are preliminary, and have not gone through our usual review with the independent auditors and the audit committee of the board.

We will complete our financial statement closing process and after the customary reviews, we will announce the final results on August 4, 2011.

Net sales in the June quarter 2011 were approximately $374.5 million and were down approximately 1.5% sequentially, but were up approximately 4.9% from the June quarter of a year ago.

Geographically, sequential net sales in the Americas were down 1%, in Europe were down 5.5%, and in Asia, they were up 0.3%.

All numbers are approximate and preliminary, I would remind investors that we account for sales in the geography where the product is shipped and not where it is designed.

Looking at sequential sales from a product line perspective, net sales on microcontrollers were down 2%, analog products were down 7%, licensing net sales were up 1.3% to a new record, and memory products were up by 0.6%.

Again, all numbers are preliminary.

On microcontrollers, we continue to make excellent progress on 32-bit MCUs, with net sales of approximately 18.7% sequentially and up 108% from a year ago quarter to a new record.

16-bit microcontroller sales were down 3.1% sequentially, but were up 43% from year ago quarter.

On gross margin and operating expense side, we expect our gross margin for June quarter to be between 58.4% to 58.8% on a GAAP basis and 59.3% to 59.7% on a non-GAAP basis.

Operating expense for June quarter are expected to be about 27.1% to 27.6% on a GAAP basis and 24.75% to 25.25% on a non-GAAP basis.

I would remind again that gross margin and OpEx numbers are preliminary and approximate, as we have more analysis to do to complete our financial closing process.

Moving onto earnings per share, we expect GAAP EPS for June quarter to be between $0.47 and $0.49 per share and non-GAAP EPS to be between $0.53 and $0.55 per share.

As we described in the press release, we are seeing broad-based weakness in our business due to a number of factors.

In the June quarter, our automotive business was down significantly from the March 2011 quarter due to lower automotive production activities, including supply issues from other manufacturers associated with the earthquake in Japan.

We also believe that some of the revenue upside that we saw in the March 2011 quarter was the result of customers being cautious and accelerating purchasing activities to minimize supply-chain disruptions.

Therefore, we believe we were also impacted by the correction of that inventory in the June 2011 quarter.

Additionally, our consumer business was soft due to poorer global economic conditions including high unemployment, high oil prices, and the resulting low consumer confidence.

The computing portion of our business was also lower than our expectations as we saw reduced purchases by multiple large customers in this sector.

While we are obviously disappointed with our June quarter results, we continue to see excellent design win traction in our microcontroller, analog, and licensing product lines.

We believe that our June quarter results reflect weak overall market conditions, which we believe will impact the broad-based semiconductor industry in the June or September quarter, depending on the individual market exposures and revenue recognition practices of the Company.

Our longer-term investors and analysts have seen Microchip experience these industry events first.

In fact, some of you have referred to us as canaries in the coal mine.

Microchip tends to see changes in business conditions earlier than most of our peers due to a number of factors.

Number one, we recognize distribution revenue on a sell-through basis worldwide.

Number two, we run very short lead times, which gives customers more time to make purchase decisions based on more current business conditions.

And number three, we have a large number of small and medium-sized customers who tend to be quicker in adjusting their inventories.

Now, turning to our preliminary guidance for September quarter, we are cautiously modeling the September quarter to be sequentially down by low to mid-single digit percentage.

We expect our inventory in the June and September quarters to be in the range of 120 days to 130 days range.

While this inventory is higher than what we experienced in our recent past, we believe that short lead times is one of our competitive strengths.

We, therefore, believe that the inventory is acceptable and we will bring it down over time without any harsh actions in manufacturing.

Our products have very long lifetimes and we have a history and track record of managing inventory without one-time write-offs and selling them over the business cycle.

One of the immediate benefits of higher inventory is a substantial reduction in capital expenditures.

Earlier guidance for CapEx for fiscal year '12 was $125 million, we are now lowering CapEx to $75 million for fiscal year '12.

Our gross margin in September quarter is expected to be flat to June quarter, between 58.4 % to 58.8% on a GAAP basis and 59.3% to 59.7% on a non-GAAP basis.

Our long-term target for non-GAAP gross margin remains in the 61% to 62% range.

Regarding operating expenses, our long-term guidance for non-GAAP operating expenses has been in the range of 24% to 26%.

With very strong growth in net sales in the last year, our operating expenses have been at the lower end of this range.

We expect our operating expenses to be now in the middle to upper end of that range.

We are controlling expenses through our variable compensation and other discretionary programs, but do not plan to lay off any employees.

We will remain committed to many of our strategic investments for the long-term benefit of our customers, shareholders, and employees.

With that Keith, would you please poll for questions?

(Operator Instructions) We will take our first question from Craig Ellis with Caris & Company.

Thanks for taking the question, guys.

Steve, can you just identify the relative contribution of the four items that you mentioned that contributed to the shortfall in revenues versus expectations?

We are not to provide that level of detail.

These are -- we have very, very broad customer base, we in fact, cannot provide a percentage of net sales by -- market segment.

This is done preliminarily through looking at some very large customers, and taking some of the few large customers and comparing them to the March quarter.

In some of the segments, a lot of the shipments happen through subcontractors, awaken the computing segment.

To ship anything directly to the computing customers.

They all go through the subcontractors, and many of them use multiple subcontractors, and subcontractors buy other product also.

So, it's painstakingly collecting information from various subcontractors, and trying to triangulate to a given customers and orders and comparing them to the prior quarter.

So, therefore, we can't really allocate the total miss to these four sectors.

We will go next to Uche Orji with UBS.

Thank you very much.

Steve, a couple of questions.

First of all, in automotive area where you talked about issues with components from other suppliers, any sense what the end inventory of your customers are?

We anticipate a situation where once some of these component issues are fixed, we might see a pooling for demand across the board from components.

And while you're talking about that, any other comments you can make about end market inventories further that you talked about will help us understand the extent of the (inaudible) data and possible recovery in the back half of the year, if at all?

Automotive is a puzzling one.

Our assessment originally was that since our production wasn't impacted at all, we will actually get some upside by substituting product for the Japanese microcontrollers and analog products that were affected due to the earthquake.

And there was always the risk where a customer is not able to complete their complete kit of materials, so they really cancel all the parts, but we thought that would get balanced by some of the upside we get.

We did get a significant number of design opportunities around the world related to where originally Japanese product was designed in, and we did even get a small number of orders that shipped in the quarter against it.

But that was miniscule compared to the downside we got from automotive.

From simply customers pushing out the orders because they cut back on the production.

We have a large amount of products going into automotive around the world.

US, Europe, Asia and Japan and its really a global business, there are parts we ship to automotive parts suppliers in the US, which then go into Japanese cars in Japan.

Similarly, there are parts we have going and shipping into US that go into cars that are built in Europe, along with some other parts coming from Japan, which may or may not arrive.

So at the end, it's a very global business, and it's very, very hard to decipher which parts were short where.

But the end result was that it was an automotive and this was global in nature.

We were down everywhere.

US, Europe, Asia, Japan.

We'll take our next question from Ruben Roy with Mizuho Securities.

Thank you.

Steve, you didn't mention industrial at all.

I was wondering if you could just give a brief overview of what you're seeing, if anything, across some of your smaller customers in the industrial area.

And then analog, being down 7% for June, is analog related more to any of the end markets that you discussed, auto, consumer, or computing?

Or was that a broad-based decline as well?

Thank you.

Well, we didn't mention industrial because we did not see large industrial customers impacted.

So, if you look at in the industrial segment, a given customer over March to June, we didn't really see a weakness stand out there.

We saw that in the large automotive customers, we saw it in the large consumer customers, and the large automotive customers.

We have 70,000 customers overall, so small and medium-size customer analysis is really not possible.

We can only do analysis on some large global multi-national customers, and industrial wouldn't see a problem.

The other part of your question was on analog, and our mix on analog and micro, on any product line is not really a whole lot different than the others.

So, I think maybe micro overall was down 2%, because we did much better on 32-bit and better on 16-bit, and analog was down further, but it's smaller in size, so don't have specific reasons.

When we peel the onion, it could have been possible that there were one or two computing customers which were down more significant than analog, but nothing that we can comment right now.

We'll go next to Kevin Cassidy with Stifel Nicolaus.

Thanks for taking my question.

The September guidance, I guess, what are some of your assumptions there?

Is it the same markets that you expect to be weak and with short lead times, how much visibility do have for September now?

One of the things we have consistently said is that bookings or book to bill, or starting backlog do not correlate to the quarters results.

And we have proven it over and over and last quarter is a good example of that.

Our starting backlog for June quarter was very strong.

And our book to bill was good, and we had good guidance, and if you were simply to do the analysis based on that, you would not have expected the results we are announcing today.

Again, I could give you starting backlog for the September quarter, and the bookings and all that, the history shows that it really does not correlate.

So, we usually do our bottoms up analysis for the past 80 quarters or so, I think 73, 74, 75 quarters we were correct.

But we do list them in small single digit percentage of the time.

June quarter was one of them.

So, our September quarter we are modeling cautiously.

And our assessment is that consumer and computing marketing -- markets will continue to be weak, the economy continues to be fairly weak.

China is slowing down their inflation, the raising interest rates, Europe is a mess and US is a mess, so I think the economies are not good.

So, we expect those sectors to continue to be weak.

Automotive is a wild card.

Will automotive see recovery, will the Japanese part catch up?

We certainly will ship a lot more on those designs which we won, but we are not able to ship enough last quarter to make a difference.

So, automotive is a wild card.

And then large amount of business ships through distribution.

We take only sell through from distribution, and sell through from distribution last quarter came out very weak.

And we don't get that data right away.

We just got the June data, we got the made it some time, a few days into June.

So, that data usually comes out late.

So, we are looking at June distribution sell through to be very weak.

So, our assessment is that we don't see a good reason why July or August should pick up.

It's also a month of -- a quarter of European holidays.

A number of countries in Europe take the month of August off.

So, that's usually a stretch quarter, and we make that quarter usually on the strength of Asia that starts building for Christmas holidays and all that in the month of September.

And how strong that entire environment would be, we don't really know.

We are cautiously modeling after making some assumptions that we will be down low to mid-single digits.

We will go next to Terence Whalen with Citi.

Thank you, this is Dean speaking for Terence.

Follow-up question on your September guidance.

You mentioned the inventory corrections June quarter.

Did you factor in any continuous correction in the September quarter, or you just try to conservatively guide September?

Thanks.

Well, we didn't look at the June quarter as an inventory correction quarter.

We didn't think there was an inventory correction in the consumer.

We didn't think there was an inventory correction in the computing segment.

We believe we saw demand weakness.

Inventory correction will often mean that the business continues to be strong, but customer had access parts.

That didn't seem to be the case.

The only place where we mentioned inventory correction was could be possible some of the automotive customers pulled in some products from April into March to be cautious after the earthquake.

That could have made some small impact.

We didn't call the June quarter to be an inventory correction quarter, and we are not calling September to be down because of inventory correction.

We believe there is a fundamental weakness in demand that is pretty broad in nature.

We'll go next to Doug Freedman with Gleacher.

Great, thanks for taking my question.

Steve, can we dig in a little bit on what your comments around distribution, and if you could, I know you don't analyze as you have clearly stated the end markets, but you do call out computing, and can you give us an idea of how much the computing market was down for you?

You said it was down -- did you see a decline there of what percentage magnitude?

And then on the distribution side, you did mention that your sell through looked like it was weak.

Any forecast on what you think is driving that and when that could reverse course?

Is this something that your sales force has an ability to quantify what they are seeing, what their customers are telling them from a demand on the expected to return?

Doug, two questions.

The first again, the end market, how much was the computing down.

I just to do that.

Out of our 70,000 customers, if you divide them into by vertical market's, we have 15,000 plus customers in each of these segments.

Consumer is broader, but we've got lots of customers.

So, our analysis depends on taking a handful of some very large customers and trying to analyze and see what's happening.

We saw weakness at multiple of those customers.

And there are broad-based designs in those customers.

Tens of their locations, it could be designs in centers in one hand, servers in another hand, PCs another hand, laptops or pads or whatever.

These are different divisions, they go through different subcontractors, this is a very, very difficult analysis.

And then looking at that, I give you a percentage, and you start to model, well, that segment was down that percentage, I don't think it's representative.

Because we just don't have the ability to do that.

Our overall business was down about 1.5%.

That's a good proxy overall.

But beyond that, for me to -- a given customer could be down 5%, but somebody else was up slightly, but I called it out because I saw weakness at multiple customers of varying amounts.

That's the best I can do on that one.

And the other question he had was a distribution, do you have a common on that Eric?

He was asking when we thought sell through could reverse, I don't think we have a good call on that right now.

I think distribution sell through represents general economy based on what people are buying, and if we think the general economy is weak, then it recovers when the economy recovers.

We'll take our next question from Chris Danely with JPMorgan.

Hi guys this is Sean Buckey calling in for Chris.

Thanks for taking the question.

Just real quick on the end market break outs.

I know you guys didn't want to provide exact numbers, but is it fair to assume that automotive was the worst in the June quarter followed by consumer and PC?

And how do you expect those markets to recover, which one is going to be the first do you think?

So, minus semantics, what I want to correct in saying it's not that we don't want to provide the numbers, it's that we don't have them and we can't.

We don't really have a way to break down our business.

Because of 70,000 customers.

Please understand we don't have them.

It's not that we don't want to provide them.

Now I can comment on your second question, which is which one was the worst.

I can say that automotive was the worst.

I don't know if I can necessarily break that between consumer and computing.

They were second and third or third and second.

But the automotive was worse than the others.

Was very there a third piece?

Okay.

I think the third piece was which one do you think recovers first?

I believe automotive recovers first.

Because fundamentally, a large number of cars have not been built, and they've got to be -- automotive manufacturers got to build those cars.

The lots are empty and all that.

They've got to be the recovery in that, either with Japanese parts or substitute parts, and all that design win activity is taking place.

In many cases, Japanese factories are coming back.

In other cases some of the substitute parts are coming in.

How that layers in, in this current quarter and the next quarter, I don't really know, but I think the automotive recovery first is more likely.

We'll go next to Ray Rund with Shaker Investments.

Hello, thanks for taking my question.

Steve, I was just curious if you've seen any sort of indication that automotive demand may be picking up in July?

Because I keep on hearing from various economic forecasting firms that they see a big build up coming in terms of unit production this quarter over last quarter.

That's the same comment I was making earlier that automotive recovery is likely to take place first.

Obviously, with the shortfall of automotive build out last quarter, there's certainly a desire on the part of the automotive to increase production in the third and fourth quarter calendar.

Are all the parts available in third quarter, I don't really know.

Do we have any comment on the automotive backlog?

For the current quarter?

We don't have it handy.

And we obviously have a lot more information on all these things when we talk to you on August 4.

We will have had more time to analyze these, and answer your questions and we can specifically try to answer the automotive question on the backlog.

Because for automotive, by the time I talk to you in August, I should have most of the backlog in.

Because automotive usually gives the backlog to us, well six or eight weeks ahead of time.

So, that will have good visibility.

Although, some of the automotive backlog pushed out last quarter.

So, there is always risk involved in that.

But I think we will have more information by August 4.

Go next to Blayne Curtis with Barclays.

Thanks for taking my questions.

Steve, just kind of following up on that, I was just trying to understand the linearity in the quarter here.

When did you see the weakness and obviously with automotive, you probably couldn't design in your part and take a socket, so I was trying to understand was it more of a more of a factor of -- which end markets were you looking to get the upside in the business, obviously not automotive, and then just the timing of the automotive falling off?

Over 60% of our business is through distribution.

And April was a strong month.

And we didn't get May complete distribution data until sometime in June.

And that's when we first thought there was an issue.

May sometimes can be week, but usually there is a very strong build up in June.

June is actually very strong.

June didn't materialize.

As we get the June data.

We'll go next to John Pitzer with Credit Suisse.

Yes, Steve.

Thanks for taking my questions.

A couple of them here.

You said the industrial market didn't see any weakness in the June quarter.

I guess what is your confidence level that, that end market will stay immune given the macro backdrop?

And then on the auto side, I just want to get a little bit of a clarification.

Your guidance for September, there is clearly a portion of your auto business which is being impacted by supply constraints elsewhere.

Do you think those supply constraints in Japan alleviate in the September quarter or is part of your guidance for September an assumption that those constraints will still be in place?

Taking your second question first, automotive is a wild card.

So, we did not completely assume that all the automotive constraints go away and after we get a complete recovery from the last quarter, in terms of higher automotive order.

Because there's not complete Companies yet.

I know that the automotive guys would like to build more cars.

Can they build more cars?

I'm not sure.

Our product is available as everything else is available, by Toronto.

I don't think our analysis assumes that, that complete recovery happens.

And that's why it's a wild card, and -- said that automotive recovery could be much harder than would be anticipated.

And the first part of your question was what?

Industrial today, not a lot of.

What your confidence level going forward given the macro backdrop of that end market stays immune?

That I don't know.

I think we will probably have to watch the rest of the industry reports and people who break out their industrial, and better exposure to it, and see what they think and what they say.

I would be just speculating.

Thank you.

We'll go next to Harsh Kumar with Morgan Keegan.

Hi guys.

Steve, simple question for you on pricing.

Have you seen any deterioration on pricing?

And I've got a follow-up for you.

Any time these events happen, it's never a price phenomenon for us on the majority of the business, which is proprietary.

We price these things at the time the design is done, not really when the purchasing takes place.

So, the answer is always the same.

There's really not a pricing issue here.

You can't substitute our product with anybody else's product within the quarter.

By having somebody else lower the price.

Go ahead with your follow-up?

At one point in time, Steve, in the September quarter do you start to see a push for Christmas, and kind of coming back to some of these earlier questions, is it a situation given the economic -- the metrics that you gave out about China and some of the other countries, is that the builders and the OEMs are getting cold feet, and we may have a situation where we don't have enough inventory?

Any color would be helpful.

When you say, don't have enough inventory, of our parts or don't have inventory of end product by the customer or what?

Your parts as well as just generally semiconductor content in the distribution channel.

There will not be a shortage of Microchip products.

We're sitting on a very healthy wafer and die inventory that we are keeping in the die inventory firm, and that's a very short time to finish, assemble and task.

Since we have two of our own facilities where we do most of the work.

So, there will not be a problem with Microchip lead times, or our product shortage.

I think I can take care of that one.

As for the September quarter is concerned, September quarter gets made or gets destroyed in September.

August is usually weak because of Europe and Christmas bills usually start late in the quarter, and usually a September phenomenon.

So, we're going to have to really do a very, very strong business in September to make it a very strong quarter.

We'll go next to Craig Ellis with Caris & Company.

Thanks, guys.

Appreciate taking the follow up.

Ganesh, this one is for you.

I think the Company has typically said in the past that design analogs are one of the best leading indicators of the business.

I'm wondering if you can give us an overview of what's happened with design connectivity in the first calendar quarter and the second, and how that factors into your thinking for the back half of the year?

I'm sorry, could you say that again?

Design what?

Your design kits?

Development tools.

I don't have the exact numbers with me, but during the course of the quarter, design kits and design -- the ID downloads we had, all were pretty strong, but I, unfortunately, don't have that number yet.

We will have that on August 4.

Thank you.

We'll go next to Mike McConnell with Pacific Crest Securities.

Thanks.

Steve, just a question relative to China and some of the inflationary pressures you had talked about.

Could you comment on the white goods vertical and what you're seeing specifically there with respect to China?

Again, that would be breaking our business down in China to various elements which I don't really have.

But in general, I think the trends we saw in China are not any different than other places.

We saw weak consumer, weak computing, weak automotive, so I think we saw the same stuff in China that we saw elsewhere.

China's also building a lot of stuff for US and Europe that muddies up the equation.

Most of the computing softness we talked about, it's all shipments in China to contract manufacturers who build for large computing manufacturers here.

So, that always complicates the equation.

We'll go next to Suji De Silva with ThinkEquity.

Thanks for taking the question.

Can you talk about in the gross margin guidance and the results here, what the utilization levels are that you are running at versus your typical level?

You want to comment on that?

At this point we haven't made any changes in our wafer starts or anything like that.

Factories are still running at a strong level of output at this point in time, and we made comments on inventory and how inventory will be in the 120 to 130 day range and we are comfortable with those levels.

The factory output that we get is -- continues to be quite strong, and that bodes well for the cost structure.

Thanks.

And if you talk about if the production rate is unchanged, can you talk about why the gross margin is a little weaker here?

We had sales being down, and when you have sales down, you have, from accounting purposes standpoint you need to have an obsolescence chart that occurs associated with your demand forecast into the future.

That's the major driver.

And can you talk about why the 8-bit products are weaker relative to the 16 and 32-bit?

I would think 16-bit was what was in the autos, but maybe that is a mistaken assumption.

What is the question again?

I'm sorry.

Why 8-bit micros are weaker relatively to 16 and 32-bit micros?

I don't know how you divide that.

How do you divide that?

I only said overall microcontrollers were down 2%, 16-bit were down 3.1%, and 32-bit were up 18.7%.

How you can divide the per bit number -- let me know.

I misheard the 16.

That's fine, that's fine, and last, by how much China's down relative to the rest of the segments?

Thanks.

We gave you the Asia number, that's all we have.

That's all we break out.

Asia was up 0.3% sequentially.

It was the only geography that was up slightly.

US was down 1% and Europe was down 5.5%.

Ladies and gentlemen, due to time constraints, this does conclude today's question-and-answer session.

At this time I would like to turn the conference back to your speakers for any additional or closing remarks.

These were the preliminary results, and as we said, we'll have another conference call on August 4, when we announce the complete results and will have some more information for you at that time.

Thank you very much.

Bye bye.

Ladies and gentlemen this does conclude today's conference.

We appreciate your participation.