微晶片科技 (MCHP) 2012 Q3 法說會逐字稿

Good day, everyone.

Welcome to this Microchip Technology third-quarter and fiscal year 2012 earnings results conference call.

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

At this time, I would like to turn the call over to Microchip's Chief Financial Officer, Mr.

Eric Bjornholt.

Please go ahead, sir.

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 Steve Sanghi, Microchip's President and CEO, Ganesh Moorthy, Microchip's COO, and Gordon Parnell, Vice President, Business Development and Investor Relations.

I will comment on our third-quarter fiscal year 2012 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environment, and discuss our guidance.

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

We are including information in our press release and this conference call on various GAAP and non-GAAP measures.

We have posted a full GAAP to non-GAAP reconciliation on the investor relations page of our website at www.Microchip.com, which we believe you will find useful when comparing GAAP to non-GAAP results.

I will now go through some of the operating results.

I will be referring to gross margin and operating expense information on a non-GAAP basis, prior to the effects of share-based compensation and acquisition-related expenses.

Net sales in the December quarter were $329.2 million, and were down sequentially 3.4% from net sales of $340.6 million in the immediately-preceding quarter, and were down 10.5% from net sales of $367.8 million in the December 2010 quarter.

Looking at revenue by geography for the December quarter, Americas were down 3.4% sequentially, Europe was down 15.3% sequentially, and Asia was up 1.9% sequentially.

All geographies were impacted by the weak economic and industry conditions we experienced, with Asia being the strongest, and Europe being the weakest as compared to our expectations.

Our non-GAAP results were in line with our quarterly guidance provided on November 3, 2011.

On a non-GAAP basis, gross margins were 56.8% in the December quarter, and non-GAAP operating expenses were 26.3% of sales.

Operating income was 30.5% of sales, and net income was $85.4 million, or $0.42 per diluted share.

On a full GAAP basis, gross margins including share-based compensation and acquisition-related intangible amortization were 55.8% in the December quarter.

Total operating expenses were $95.7 million, or 29.1% of sales, and include share-based compensation of $8.6 million, acquisition-related expenses of $1.2 million, and $0.7 million of special income associated with acquisitions from prior years.

GAAP net income of $77.5 million, or $0.38 per diluted share, and was favorably impacted by $4.1 million of non-recurring tax events.

In the December quarter, the non-GAAP tax rate was 12.7% and the GAAP tax rate was 7.4%, as a result of the nonrecurring tax events discussed earlier.

Our tax rate is impacted by the mix of geographical profits, withholding taxes associated with our licensing businesses, gains or losses on trading securities, and the percentage of our cash that is invested in tax-advantage securities.

We expect our combined forward-looking effective tax rate on both a GAAP and non-GAAP basis to be about 12.5% to 13%.

To summarize the after-tax impact that the non-GAAP adjustments had on Microchip's earnings per share in the December quarter, share-based compensation was about $0.043, acquisition-related items were about $0.011, non-cash interest expense was about $0.006 and the favorable tax event was about $0.02.

The dividend declared today of $0.349 cents per share will be paid on March 6, 2012 to shareholders of record on February 21, 2012.

The cash payment associated with this dividend will be approximately $67.1 million.

Moving on to the balance sheet, Microchip's inventory at December 31 was $217.9 million or 137 days, up five days from the prior-quarter levels.

The total combined inventory held either by Microchip or its distributors was down six days on a sequential basis.

Inventory at our distributors was 35 days, which was down 11 days from the prior-quarter level.

The change that we experienced in distribution inventory levels is the largest one-quarter change we have ever experienced.

However, I remind you that our distribution revenue throughout the world is recognized on a sell-through basis.

At December 31, Microchip's accounts receivable balance was $149.3 million, an increase of 4.8% from the balance as of the end of September.

Receivable balances continue to be in great condition, with excellent payment performance from our customers.

As of December 31, Microchip's cash and total investment position was approximately $1.77 billion, and was down $5.1 million from the prior-quarter levels.

The significant reduction in distributor inventory holding levels negatively impacted our cash collections during the quarter.

Our total cash and investment position is projected to grow by approximately $80 million to $90 million in the March quarter, prior to our dividend payment.

Capital spending was $6.1 million for the December quarter, and is expected to be about $68 million for fiscal 2012.

Depreciation expense in the December quarter was $21.5 million, which was down $0.5 million from the September quarter.

Depreciation expense is projected to be about $21 million in the March quarter, and about $86.5 million for fiscal 2012.

I want to remind investors and analysts that fluctuations in Microchip's share price impact the diluted shares outstanding used in our earnings per share calculations.

The average share price of Microchip's stock in the December 2011 quarter was $34.75.

Dilution from Microchip's outstanding convertible debentures occurs at average quarterly share prices above $28.21, which is the current conversion price.

We have updated the schedule on the supplemental financial information section of the investor relations page of our website that shows what the incremental share count from the convertible debt will be at various share prices.

This should continue to be helpful to investors and analysts when trying to estimate the impact of share count increases on earnings per share.

Our financial guidance for the March 2012 quarter is based on an average Microchip share price of $38, to calculate the additional dilutive effect from the convertible debt.

The negative impact on the earnings per diluted share calculation from the difference in the assumed average stock price for the March 2012 quarter compared to the actual share price in the December 2011 quarter is about $0.005 to $0.006.

Investors and analysts should refer to the table on our website if they want to model the diluted shares outstanding using a different weighted average share price for the quarter.

I will now ask Ganesh to give his comments on the performance of the business in the December quarter.

Ganesh?

Thank you, Eric, and good afternoon, everyone.

Let's now take a closer look at the performance of our product lines.

Let's start with Microcontrollers.

Our Microcontroller business was down 4.4% on a sequential basis, with both 8 bit and 16 bit product lines down sequentially.

Our 16 bit business was down 5.4% sequentially, as we experienced some short-term pushouts from customers in the computing segment, who were affected by supply chain issues stemming from the flooding in Thailand.

For the first nine months of fiscal year 2012, our 16 bit business was 11.5% higher than the corresponding period in fiscal year 2011, and we're expecting good growth in the March quarter as customer demand rebounds.

We continue to retain the designs we had established and we're securing many new design wins at new and existing customers.

Our 32 bit Microcontroller business had another strong quarter of growth, up 33.7% on a sequential basis, and up 137.3% from the year-ago quarter to achieve a new record.

For the nine months of fiscal year '12, our 32 bit business was 134.1% higher than the corresponding period in fiscal year '11, and we're again expecting strong growth in the March quarter.

Despite the challenging environment, this product line continues to demonstrate growth as many new designs continue to go into production.

Our 32 bit results also reflect market confirmation of our belief, that what customers care about is that we offer a PIC Microcontroller solution with all the attendant brand promises, and that the choice of the core itself is not as important.

The number of customers in volume production grew to 809, and we continue to build a broad base of customers to grow this business.

Over the last 12 to 18 months, we have been investing in accelerating the pace of new Microcontroller product introductions, especially in the 16 bit and 32 bit space, where our portfolio is not yet as rich as our 8 bit Microcontroller portfolio.

We expect that in the next 12 months we will bring to market over 150 new 16 bit and 32 bit Microcontrollers, as we expand our served available market and accelerate our market share gains over the next cycle.

Moving to development tools, we shipped over 43,100 development tools in the December quarter.

Cumulatively, we have now shipped over 1.25 million development tools.

Development tools sales remain an excellent leading indicator of continued strong design in activity, and acceptance of our solutions by our customers.

Development tools get used by our customers for multiple projects over several years, and as such, the continued trend of strong development tools sales bodes well for future growth.

Moving now to our analog products, our analog business was up 1.75% sequentially, and performed exceptionally well in the current environment.

The strength of our analog business is due to two factors.

One, the introduction of a steady stream of innovative new products that target a broad range of applications, and second, our strategy to focus not only on attaching to our Microcontrollers, but also to other Microcontrollers as well as other devices like DSPs, FPGAs and ASICs that require analog around them.

We remain pleased with the design win momentum our analog business has shown.

We also have a number of significant new product announcements planned in the next few months, which we expect will drive strong revenue growth in the future.

Moving to our Memory products, our Memory business, which is comprised of our Serial EE Memory products, as well as our SuperFlash Memory products, was down 6.6% on a sequential basis.

We continue to run our Memory business in a disciplined fashion that maintains consistent profitability, enables our licensing business and serves our microcontroller customers to complete their solutions.

With that, let me now pass it to Steve for his general comments, as well as our guidance going forward.

Steve?

Thank you, Ganesh, and good afternoon, everyone.

Today, I would like to first comment on the results of the December 2011 quarter, and then provide guidance for the March 2012 quarter.

Our December quarter results were consistent with what we had guided during our last earnings call.

The thesis that we had described to the investors two quarters ago was that industry was going into a broad-based demand weakness and inventory correction.

Our thesis has played out exactly as we had predicted.

We explained to the investors and analysts that we see the effect of industry events first.

Microchip went into this correction a quarter before many of the others in the semiconductor industry.

Since then, we have seen this sentiment get reflected in results coming from nearly every semiconductor company through the earnings season.

Then in the last earnings call, we said that we saw December as the bottoming out quarter for the current cycle for Microchip.

We are reconfirming our belief that December was our bottom quarter for this cycle and we will begin to see sequential revenue growth starting in the March quarter.

We went into this cycle one quarter earlier than most, and we will also come out of this cycle a quarter earlier than most.

You have seen that many of the semiconductor companies missed their initial December quarter guidance, have guided down further for March quarter, and have called the March quarter their bottom.

For Microchip, the December quarter was our bottom, and we will grow in the March quarter.

Now, when you start to compare calendar year 2011 to calendar year 2010, Microchip's results look favorable to the industry's results, particularly if you adjust for the acquisitions made by the other companies.

Ganesh has commented on the product lines.

I wanted to further highlight three product lines.

32 bit Microcontrollers, with a 33.7% sequential growth, made a new record, and was a star performer.

Licensing, with a 4.9% sequential growth also made a new record, while analog, with a 1.75% sequential growth, really bucked the trend with the industry down in double digits.

On the factory side, in our two fabs we took some shutdown days around Thanksgiving, Christmas and New Year.

As Eric reported, our total inventory at Microchip plus distributors combined went down by six days from its peak in September quarter.

We continue to expect that the total inventory position will come down as the recovery further unfolds.

I will now provide guidance for the March 2012 quarter.

Our guidance is based on recovery starting to take place from the inventory correction with December as the bottom quarter.

We also have taken into account the effects of the Lunar New Year in Asia in the March quarter.

We expect our net sales in the March 2012 quarter to be up 1% to 5% sequentially.

As the holiday shutdowns are reversed from the March 2012 quarter, we will expect to see significant recovery in gross margin.

We expect the non-GAAP gross margin percentage to be between 57.75% to 58.25%, which is 125 basis points better than the December quarter.

We expect non-GAAP operating expenses to be about 25.75% to 26.25% of sales.

We expect our non-GAAP operating profit to be between 31.75% to 32.25% of sales, and non-GAAP earnings per share to be $0.43 to $0.47 per share.

After 125 basis points improvement in gross margin in the March quarter, we will see further improvement in the subsequent quarters, and expect to hit 60% non-GAAP gross margin by the end of fiscal year.

On a longer term basis, with the low amount of new capital continuing to shut off old depreciation, gradual ramp in factories as the inventory's burned off, and ongoing die shrinks and other cost reductions, we will start to work the gross margin back up towards a corporate target of about 61% on a non-GAAP basis.

Given all the complications of accounting for the acquisitions, including amortization of intangibles and restructuring charges, sale of non-core businesses, gain or loss on public securities, Microchip will continue to provide guidance and track its results on a non-GAAP basis.

We believe that non-GAAP results provide a more meaningful comparison to prior quarters, and we request that the analysts continue to report their non-GAAP estimates to First Call.

Finally, the December quarter was our 85th consecutive profitable quarter.

Our non-GAAP gross margin of 56.8% and a non-GAAP operating profit of 30.5% are the type of results that are not achieved by most of our competitors, even in the best of times.

We feel very positive and confident about the long-term prospects in our business, and are continuing to invest in our strategic initiatives to drive growth.

With that, Operator, will you please poll for questions?

(Operator Instructions).

We'll go first to Christopher Danely with JPMorgan.

This is Venk Nathamuni in for Chris Danely.

Thanks for taking my question.

First question is how does -- you said you have lowered inventory, combined inventory of both Microchip and distributors, but how does inventory now compare to what it was during the 2008, 2009 downturn?

Eric, I think you have some data on that?

Yes.

Inventory went higher in the last downturn, and then when the recovery spiked up it went down pretty significantly from there.

But this is definitely not the high we've seen in inventory.

I think we were at 143 or 144 days before and we're at 137 now.

Okay.

Thanks.

And then as my follow-up, you talked about recovery in orders.

Is it, in your opinion driven primarily by demand coming back, or is it more from the inventory restocking phenomenon that's going on?

It's always a combination.

The downside was both weak demand as well as inventory correction, and the recovery would really have both elements in it.

Okay.

Thank you.

We'll go next to James Schneider with Goldman Sachs.

Good afternoon.

Thanks for taking my question.

Realizing it's still very early post the Chinese or Lunar New Year, can you give us any kind of sense of color from your customers in terms of bookings levels after the Chinese New Year holiday versus the ones you were seeing in the rates in January before the holiday?

I think Monday was the first day back from Chinese New Year so we'll really get the first data point next week, after one week is over.

Right now, we basically have two or three days, so I don't really think there's any data yet.

Okay.

Understand.

And then on the white goods market, I think some of your peers have talked about somewhat mixed results out of that market in terms of the demand that they're seeing, and I think the retail results over Chinese New Year were also somewhat mixed.

Can you talk about that vertical in particular for you?

We can't break it down by vertical.

Our customer mix is much, much broader than many other people who tend to sell into large verticals.

We have 30,000, 40,000 plus customers in China so we can't really break it down by vertical, but we do know after looking at some large customers worldwide, our automotive business was slightly up last quarter, but all the others were down.

Even the automotive was driven by really a couple of customers, where we had some significant design wins during the tsunami period.

But otherwise, it was really a broad-based weakness.

As far as China or Asia was concerned, our business was up in Asia.

Our far east business was up 1.9% sequentially.

That's helpful.

Thanks very much.

We'll go next to Chris Caso with Susquehanna Financial Group.

With respect to the gross margins and the gross margin improvement that you're expecting in the March quarter, what does that imply with respect to your own inventory levels and the channel inventory levels as you go forward?

Do you plan to keep the inventory flattish from here, or do you anticipate some replenishment going on, going forward?

I think, we don't really know what the distributors will do.

We take the revenue only on what the distribution sells through.

So the distribution activity in a given quarter on a sell-in basis doesn't really impact our revenue and we don't really care.

The lead times are short.

If they want to build inventory, we have the product available.

If they don't want to build inventory, so be it.

What's really important is a combination of distributor inventory plus ours.

If they hold more, we'll have less.

If they hold less, we'll have more.

The combined distribution plus our inventory will do roughly what?

We expect it will be about flat in the March quarter.

Okay.

Great.

And just as a follow-on, a clarification.

I thought I heard you say back at the 61% gross margin rate by the end of the fiscal year.

Just confirming that my understanding is right.

And if that's the case, and as you grow back to the 61% level, is that predicated on a certain revenue run rate level in order to get back to those levels, to that gross margin level?

Yes, of course it is.

We're not going to tell you that.

We're not going to tell you the number.

Okay.

Just for clarification, Steve's comments were that by the end of fiscal 2013 we would expect to be back at about the 60% non-GAAP gross margin range, and our long-term model of 61% hasn't changed.

60% by the end of fiscal 2013 non-GAAP and 61% eventually.

That's right.

He was trying to triangulate 61% means what kind of gross margin.

Obviously internally we have a model, but it also depends on the mix of the product lines and mix of where the demand comes in.

So it has a lot of moving pieces.

It's not kind of constant, because various product lines have various different gross margins, but we have a model internally, and yes, it does tie to a revenue number.

Okay.

That's fine.

Thank you.

(Operator Instructions).

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

Thanks for taking my question.

On your 32 bit results, can you say what applications were you winning the most with your 32 bit processor?

What we've said before is that we have a broad set of customers, we're at over 800 customers and a broad set of applications.

We don't really detect a particular application or segment that is driving the strength.

It's pretty broad based in terms of the 32 bit wins, as well as the 32 bit revenue growth.

How about with the analog being up quarter-over-quarter, far exceeding the market.

Are they being tied to the same 32 bit controllers, or is it just the general lift that you're getting in the new products?

Combination of both.

Certainly, as we have strength in 32 bit, it does bring some analog along.

The analog business is a larger business, and clearly has strength in a number of areas that we have brought new products over the last one to two years, that have gone to production, so it's also pretty broad based in how it's driving growth.

Okay.

Great.

Thank you.

We'll go next to Brendan Furlong with Miller Tabak.

The inventory in the channel at 35 days, how does that compare to previous bottoms in the cycle?

Disty inventory over time has really ranged.

It's had a broad range.

It's been kind of low 30s to about 50 days.

If you look over the last three years, this is on the low end of where we've been, at 35 days.

So I would think that over time, distributors will do some restocking, but I don't know when that's going to happen, if that's going to be in March or quarters further out.

Okay.

Great.

Thank you.

And then the other question I have, some of your peers have noted a particular weakness out of China in the December quarter, and also in the March quarter.

I'm just curious what you're seeing in the Chinese market in particular?

I think it's hard to talk about general, some of the others, depending on what their revenue recognition is, was it the sell-in or the sell-through and I've spoken about it in the last two or three conference calls.

If their revenue recognition is sell-in, then it's happening what we told you, where the sell-in guys took a huge reduction of distribution inventory, as the negative revenue.

Microchip's distribution inventory went down significantly, but it doesn't affect our revenue because we're sell-through.

That's why we went into this correction first, a quarter earlier than most, and we're coming out it before, earlier than most.

So our Asia business was up slightly while other people were down double digits, because they were recognizing reduction in distribution inventory as a reduction in their revenue.

Understood.

Thank you.

My last question, if I look at the tax rate for fiscal '13, should we consider it staying more or less at 13% level?

Yes, it will be in the general range that we are in the March quarter.

Thank you.

We'll go next to Terence Whalen with Citi.

Good afternoon.

Thanks for taking the question, and congratulations on the results.

The first question relates to a higher level of thinking on the business.

It's been a while since you've added to the analog business.

And obviously, there's some activity in the M&A market.

I was wondering, I don't anticipate you to comment directly on your strategy, but I wanted you to comment on the proportioning of the business, and to what degree would having a little bit of a larger analog business perhaps help with cross-selling Microcontroller or Memory?

Thank you.

What activity are you talking about?

Activity in terms of potential sales of activity, [Genem] recently was purchased.

There are other activities, proposed sale of companies.

You're referring to the M&A activity in the market?

Correct, yes.

So if you lay out a chart of Microchip's analog growth over the last few years, you will see that we'll be nearly in the top of the list of analog Company growth.

You can compare that to the standalone analog companies which are in the $100 million, $200 million, $300 million, $400 million, $600 million range, or you can even include the companies which have large analog businesses as part of other large companies.

So even at our size, we have done very well in introducing very good products, being able to acquire very good analog talent, having a pretty good strategic plan and executing it to really grow market share and do substantially better than the others.

As far as M&A is concerned, we continuously look at opportunities.

As you know, in the analog business we have acquired some companies in the past.

If a good opportunity were to become available, we certainly would be interested.

But we are not willing to pay the kind of premiums that you have seen in some recent M&A markets.

That's just not our style.

Okay.

Very helpful.

And then the second question I have is in regards to the timing of why Microchip sees either improvement or softness, perhaps one quarter earlier than other companies.

I know that you talk a lot about your operational excellence and lead times being so low, That being a contributing factor.

The question that I had is to what degree does the programmability of your products enable distributors to more rapidly stock and destock your product?

To what degree does that have a timing element versus other companies with fixed hard wire solutions that have much longer skew tails.

Thank you.

I don't think that's a significant factor, because the distribution stocking or destocking doesn't affect our revenue.

We don't take that as revenue.

The biggest effect, and I've seen this earlier is because we are 100% sell-through around the world.

Our competitors are sell-in.

So that's the largest difference.

When the distributor stocks it, it makes the revenue higher.

When they destock it, it makes the other people's revenue lower.

Stocking and destocking has no effect on Microchip's business.

It only has the effect on the inventory.

It has no effect on revenue.

Our revenue's driven by demand creation and distributors selling out.

Now, programmability makes it easier, makes our products more desirable.

It has many other positive effects on the market, but being able to see it early is probably not as much one of them.

Great.

Thank you for the insight.

(Operator Instructions).

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

Hey, guys.

First of all, congratulations on great numbers.

Steve, you talked about a fiscal gross margin target of 60% and then longer term 61%.

I'm curious if you could elaborate on what the biggest factors are that would play into that thinking.

So I think some of the factors are obviously the factory utilization, we took a number of shutdown days last quarter because inventory levels were high, and the business was weak, and distribution was destocking so when the distribution was destocking we were running our factories lower, but longer-term there are a number of factors playing.

So number one, the factories will go to full production as the factories ramp.

That has probably the single largest effect on incremental gross margin.

We're also continuing to shed off old depreciation, so in our factories with our business model, we use equipment for many, many years after the equipment is fully depreciated, so that has a positive impact on gross margin.

We're adding a low amount of new capital, so that again, there is a less amount of incremental depreciation being added.

And there are ongoing die shrinks as we take the products to more advanced technologies and other cost reductions and yields and all that.

So those are really the main factors.

The other factor is the product mix, but I think that's fairly slow-moving.

Where you could have product lines which have better gross margin than the others and over long term you don't really know which one is going to grow more than the other and they could have minor deviation in overall gross margin, the effect of those product mixes.

So I think those are the number of factors which will drive it.

Got it, Steve.

Thank you for that help.

And then there's a lot of -- there's some fair bit of thinking that because communication and industrial businesses in general, not yours, but the industry as such got hammered last year towards the end, that they would spike back up a little bit better than most.

I'm curious if you could maybe not give numbers, but if you could just give us your sense of exposure to those areas, that's comm and industrial.

We don't really have any breakout by segment, by industry segment.

So we don't really break our business internally by how much is industrial, how much is communication.

In the kind of products we sell, it's exactly same Microchip product that could go into industrial application, same product could go into a commercial application and same large customers have divisions that are building industrial products and other divisions that are building commercial thermostats, and so it's impossible for us to track it.

Sometimes they buy it as one line item and use it in both, so therefore, we don't really break our business that way.

We don't look at our business that way.

Got it.

Thanks, guys.

Great execution.

Thank you.

Ladies and gentlemen, that does conclude our question-and-answer session.

I'd now like to turn the call back over to Steve Sanghi for any additional or closing remarks.

Thanks for attending the call.

We are heading to a conference I think Eric Bjornholt will be at the Stifel conference coming up, and we'll see some of you on the road shows that we offer from time-to-time, and there are some planned this quarter.

So thank you very much.

Bye-bye.

Again, that does conclude today's call.

We do appreciate everyone's participation.