Microchip FY 3Q16 Earnings Call Notes

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Microchip Technology’s (MCHP) CEO Steve Sanghi Discusses Q3 2016 Results

The majority of the inventory correction is behind us

“I will now provide guidance for the March 2016 quarter. We believe that our business has stabilized and that the majority of the inventory correction is behind us. The March quarter is impacted negatively by the Chinese New Year holidays in Asia but it is also the strongest quarter of the year for Microchip in Europe. Based on our analysis of economic and semiconductor industry conditions, as well as our own business indicators, we are guiding the March quarter non-GAAP net sales to be between flat to up 3% sequentially.’

The Atmel acquisition doesn’t change our opinion of the ARM architecture previously expressed

“When Microchip was dismissive of the ARM architecture it was in response to investors question about replacing our PIC32 architecture which is MIPS based. In that regard, nothing has changed. We continue to hear from distributors and our customers that ARM has commoditized this market and Microchip’s PIC32 based solutions are differentiated in superior products in the marketplace. Therefore, Microchip has no plans to shell one or the other architecture. We will be the only company that will have ARM architecture when the customer demands an ARM solution, and we will have PIC32 when we can sell a differentiated solution like we have been doing for several years.”

December marks the bottom for us

“In closing, I would like to say that the December quarter marks the bottom for us for this correction and we are expecting a low single-digit sequential growth in the March quarter. Beyond the March quarter we get into two back-to-back seasonally stronger quarters for Microchip. These quarters beyond organic growth will also have incremental accretion from the restructuring of Micrel and these quarters will begin to have accretion from the closing of the Atmel transaction.”

Demand is normal in the US and Europe, weaker in China

“The demand environment in U.S. and Europe is about normal. The demand environment in China has been weaker than normal but we were the first ones to call the weakness in China which the industry has been experiencing for some time now. And we have modeled that weakness of China and especially also because of the Chinese New Year into our guidance that we have provided today.”

Acquisitions are an enormous amount of work

“the thing the investors and analysts have to recognize is that these acquisitions are an enormous amount of work, we take an enormous amount of Microchip executives and our people and our energy to bring these acquisitions which were underperforming, really doing nothing. Micrel had done 6.7% operating profit in the quarter we bought them. And now their operating profits are approaching 20% and will be 30% or higher by the time we are done. All that effort would have gone into our business.”

We are still formulating our opinions about what to do with Atmel

“Well, we’re not learning much about the business at this point in time. Atmel is essentially not shedding anything about the business. We still see that Antitrust hasn’t cleared and we still see the businesses as competitive. We’re largely getting through the people, we tour the facility, we’re learning where people are located, we’re starting to formulate some initial thoughts about how we will go about the integration. We have done enough of these that we know what burdens we have to push and what we have to do so we can get there quite quickly. But in the two weeks that have passed, they are not letting us into the business yet.”

The world knows that China is weaker than normal

“I don’t have any end market commentary but from a geography standpoint it is clearly a distinction, I mean the world knows at this point in time that China is weaker than normal and we’re finding that U.S. and Europe to be normal.”

We never look at an acquisition like it’s something we have to do

“The way we look at it is, we don’t look at any of the acquisition that is a must for us. We have not preceded any of the past acquisitions we have done with the eye towards that it’s an acquisition that we must do. We have done them because we found them, we were able to get them either at a reasonable price or we’re able to build a model where it would make sense but you’ve seen us walk away from acquisition, like we’ve walked away from CSL, we walked away from many, many other that did not come in the public domain.’

Ganesh Moorthy

Automotive has remained one of the more resilient market segments

“Automotive was strong as you noted in the December quarter and continues to be a stronger segment than some of the other ones. It’s consistent with what you’ve seen and in the other reports about automotive. It remains one of the more resilient market segments even in the broad-based weakness.”