Microchip 1Q17 Earnings Call Notes

posted in: Notes | 0

Microchip Technology (MCHP) Steve Sanghi on Q1 2017 Results

Six problems with Atmel when we acquired it

Weak accountability

“Then as we look into Atmel’s weaknesses, we have summarized those weaknesses in six major areas. First is accountability. Atmel had a culture of poor accountability. The dismal financial results of the last few years say it all. That is why we had to make drastic leadership changes at Atmel early on.”

Poor teamwork

“Second area was poor teamwork. Atmel did not have a culture of teamwork. Instead, the company was highly siloed into various business units and other functional groups.”

Culture of spending what is needed versus what can be afforded

“Third area was that Atmel had a culture of high operating expenses, which routinely ran over 40% of sales. The culture was one of spending what is needed versus what can be afforded. Atmel had a very top-heavy management structure with very poor accountability, leading to significant underperformance”

“Since the acquisition, we have removed 33 of the 41 vice presidents in the company. That layer is not needed and will not be replaced.”

If you allow me to sell $1 for $0.90 I can get a lot of love from customers too

“A few former sales employees have told us that the customers liked Atmel. Well, if you allow me to sell a large amounts of $1 bills for $0.90, I can get a lot of love from the customers too. Microchip’s customer relations are built on charging a fair price for our proprietary value-added products. There’s nothing wrong with some healthy and constructive tension with customers on the pricing front. ”

Atmel had a culture of swinging for the fences

“The fourth area is swinging for a home run. Atmel had a culture of swinging for the fences in terms of going after large accounts and often signed onerous contracts with them. Atmel often struck out and lost many of the designs or won them at very low gross margin.”

Poor pricing discipline

“The fifth area is the lack of pricing discipline that Ganesh also commented on. Atmel had a very poor pricing discipline. ”

Atmel did not train and develop employees

“And number six, Atmel made no investment in training and development of employees. At the higher level of the company it was largely a revolving door with an average tenure of executives at less than three years. In contrast, the average tenure of executives at Microchip is over 20 years. ”

There’s no shortage of acquisition targets, the problem is leverage and bandwidth

“Well, there is no shortage of interesting targets. The shortage right now I have is basically one financial shortage for the leverage which is already 3.22 as we reported today. So I don’t really have sufficient more cash to do anything short term. And the second issue is the management bandwidth. As you mentioned, it’s really very, very busy on consolidating seven different business units of Atmel and all the financial and IT and other systems. So those are the challenges, financial as well as the management bandwidth. There is no shortage of target.”

Ganesh Moorthy – President & Chief Operating Officer

Nothing in our end markets that stands out as particularly good or bad

“We serve such a large number of customers and a broad base of applications that we’re not end-market-focused on what we go do. So I think what you’re seeing in both our guidance and the relative comparisons are, it’s normal business. There is nothing that stands out as bad, or stands out at good. It’s just normal.”