Microchip FY 1Q18 Earnings Call Notes

Steve Sanghi – Microchip Technology, Inc.

Strong business environment, inventories at the low end of normal

“we are continuing to see a very strong business environment for our products worldwide and have a number of company-specific demand drivers. Our bookings rate in the June quarter was extremely strong. Our inventories at Microchip as well as at the distributors are towards the low end of the normal range. Both inventories at Microchip as well as distributors declined further sequentially in the June quarter. While our manufacturing operations produced a lot more units in the June quarter, we shipped them all for growth and did not progress towards improving our inventory position.”

Lead times are not getting any longer

“While lead times are still longer than what we would like them to be, they’re not getting any longer and we appear to have created a soft landing so far without triggering any double ordering or panic from our customer base.”

Pricing discipline is improving

“The pricing discipline is improving and to a different extent with various manufacturers. I can’t mention it, the names of the competitors and specifically what they are doing, but we have seen some discipline on others also, some more than the others. Microchip has kind of led this charge in the last five years, and especially after the acquisition of Atmel, whose pricing was really below acceptable pricing, we have quite substantially corrected those pricing and we have seen others who were relatively undisciplined also make some correct moves in that direction.”

Not going to comment on the industry but we’ve engineered a soft landing

“I don’t have any comments on the industry. I resigned from that job two years ago. We’re just simply – I will comment on Microchip. And what I’m seeing is that by lead times really not going longer and taking almost a year to bring these lead times down, that we’re guiding to really by the middle of next year, we believe we already have engineered a soft landing and not creating any panic, not having runaway book-to-bill ratio, strong backlog, fair amount of unsupported product. But still largely good behavior on the part of customers and distributors. Inventory is still very low all over the board. Our distributor inventories are low. Our Microchip inventories are lowest in seven years. This is essentially engineering a soft landing.”

Competitors haven’t treated distributors as well

“But what we’re experiencing is currently, as a number of our competitors have defranchised either distributor completely or they have narrowed their margins and not giving them demand creation margin, we have seen these distributors put a tremendous attention and focus on Microchip and especially with a broadened product line sort of under the Microchip 2.0 initiative that we have, we are finding that distributors are finding the new Microchip 2.0 product portfolio to be so much more desirable and essentially being able to replace the number of other competitive companies where they have lost a franchise on, including microcontroller, analog, wireless, USB, Ethernet, wired products, USB, Ethernet and wireless, just really timing is just perfect for the distribution to grab onto our broad portfolio, and do a great job for us. So I think we are taking advantage of it right now.”

Microchip FY 4Q17 Earnings Call Notes

Steve Sanghi – Microchip Technology, Inc.

End market breakdown

“Based on fiscal year 2017 results, our largest market is industrial, with 35% of our business in this market. The second-largest market is automotive, with 25% of our business. Then comes consumer, with 24% of our business, computing with 9%, communication with 5% and, finally defense and aerospace, with 2% of our business. Over the last several years, our fastest-growing markets have been industrial and automotive, which together account for 60% of our business now. Additionally, our consumer exposure of 24% is not made up of mobile phone; it is made up of home appliances, security systems, thermostats, televisions, remote controls, power tools, drones, joysticks, headphones, furniture, consumer toys, et cetera.”

Seeing a very strong business environment

“We are seeing a very strong business environment for our products worldwide. Our bookings rate is extremely strong. As you know, we have not broken out our book-to-bill ratio in a long time, since it is largely misunderstood. However, to make you aware of the strength of our bookings, we are providing this indicator for one time.”

*Inventories are low and lead times extending

“Other inventories at Microchip as well as at our distributors are towards the low-end of the normal range, therefore we are starting to see some lengthening of our lead times. We’re starting to see challenges in fab, foundry, probe, assembly and test capacity. We have increased wafer starts in our three internal fabs and we’re adding capacity in our three back-end facilities. Despite all this, we are seeing significant business that we’re not able to support by the customer requested dates.”

There are only three uses of capital

“There are three uses of capital. There can be three different uses: using it in our own business in making investments, giving it as a dividend or using it as M&A, and you can call it maybe, fourth, stock buyback.”

We’re also seeing general strength in the economy

“Beyond that, we’re also seeing general strength in the economy, especially happened post-election in U.S. The whole world seems to be positive. You can talk to distributors and they are seeing strong bookings and a strong environment. Lead time for equipment is lengthening, lead time for packages, all sorts of things is lengthening. So those are some of the signs of what’s happening generally in the economy. But I think what we are seeing has really also a significant company-specific element on the top of that.”

Microchip FY 3Q17 Earnings Call Notes

Microchip Technology’s (MCHP) CEO Steve Sanghi On Q3 2017 Results

We continue to see the environment as being pretty good

“Well, I think we have been kind of telling you all along that we see the environment to be pretty good and many of the concerns that Street has shown on the environment or in China in the past a year or so, we have been continuously arguing that we were not seeing those, our results were very good, they were good by month and for the whole quarter. So, true, if you take that 1% away our result would still have been about to flat to the September quarter and we have never had a flat December quarter. It’s always down two percentage points.”

Inwardly focused

“So we have been extremely inward focused lately to make sure all this integration goes flawlessly and while we’re doing all that and basically running two companies. The Microchip core performance is not slip and you have seen that that we have performed miraculously in both end. So there is currently not a company in our funnel, I mean, we have to after we complete the Atmel integration and we have to restart the work of really reenergizing the funnel and look at what is available and start to date and try to find something. So right now we can’t give you any update on next M&A.”

Inventories lighter because orders have outpaced

“Our inventories definitely on the lighter side they are lower than they have been in recent past. But every quarter we have been kind of beating the numbers and honestly not been able to build the inventories we set a target where the inventory would slightly grow and then we ship it all and the inventory does not grow. Last quarter especially we shipped all those product requested by the customers because of the go live shipping out. So that product got shipped otherwise that would have been in the inventory.”

The market is normal

“I mean all this is not strictly speaking about Microchip really nothing to say about the overall semi-industry. We’re finding that demand environment to be normal. Really I mean if you look at the industry numbers for 2015 and 2016, I believe 2015 industry was low single-digit negative and so the numbers I’ve seen for 2016 was plus 1% give or take some. And the numbers for 2017, I’m hearing numbers to be positive. So after two years of really flatter down industry, I’m hitting industry numbers to be positive but not giving any personal view on it. When I look at the Microchip opportunities and we see our markets in U.S., Europe, Asia and Japan, I’m seeing market to be normal.”

Industrial market is true strength of IoT

“So I think we’ve always believe that the industrial market is where the true strength of a IoT fits. It’s where there are very strong business models for the investments that are required in the IoT infrastructure that’s going to be put in. We have many, many designs that I would fit within that category. And we’re optimistic how that growth will be a part of our overall growth going forward.”

Microchip FY 2Q17 Earnings Call Notes

Microchip Technology (MCHP) Q2 2017 Results
Steve Sanghi

We have never bought into the notion that 8 bit is dead

“Well, it’s all of the above. We have never bought Street notion that 8-bit is dead, everything is going to 32-bit. That notion has been around from 1994, and I have a cover page EE Times article from that time. And so Microchip has been short for those people since 1994, when the stock was $0.57 in the current currency. So our 8-bit business is extremely profitable, extremely good margins, operating as well as gross. The business did record on core as well as total, as Ganesh mentioned. We are continuing to introduce a large number of new products with new features. We’re garnering new customers, existing customers where businesses are growing. We are not seeing what everybody keeps talking about, but please, everybody keeps talking about because that takes everyone away from 8-bit and turn to something else and we’re enjoying this business quite a bit.”

We’re one of the few companies that continued to innovate in 8 bit

“Yeah. I don’t think it’s necessarily with Bluetooth and wireless. I think there are plenty of areas where people are trying to make devices smart. And if you have innovative new products available as 8-bit microcontrollers, often they are the most cost-effective products to apply to these new systems that are being designed. And we are probably the minority of companies that has innovated to put lots of new capabilities in 8-bit microcontrollers. We are doing that not only on PIC but the Microchip product line before but also an AVR, the Atmel product that we’ve inherited. And I think if you have products that are innovative at the right price point, which are easy to design in to many systems, they will. I don’t think they’re anything related necessarily to Bluetooth and wireless – and Wi-Fi specifically.”

We do all our wafer probe and 60-70% of assembly ourselves

“Now when you look at the back end, Atmel did majority of the assembly and test all at the subcontractors. They did no assembly themselves and 90% of the test was outside. They only did some wafer probe in Philippines. If you compare that to Microchip, we do all of our wafer probe and about 60%, 70% of our assembly and about 90% plus of our test ourselves. So that’s where we see some opportunities where as we compare the assembly and test cost structure, Microchip’s testing technologies, assembly technologies at lower cost than some of that Atmel is using”

Christmas builds have gotten later, partially due to gift cards

” It used to be the case that most of the Christmas builds would be in our revenue in the September quarter because parts get built in Asia. So whatever is being built, equipment gets built by the end of September and gets on ships for six-week journey to U.S. over the ocean and arrives here in time for Thanksgiving when the stores are then full of merchandise. That used to be the case. Increasingly in the last five years plus, what we have seen is the Christmas build is later and later and later. Nobody rushes to build it in September anymore. Parts get built all the time in October and November. A lot of it gets shipped by air rather than getting shipped by sea. And even the heavy items sometimes it gets shipped by the sea and they arrive in November and December. And many a times, there are IOUs where certain product is not available before Christmas, and you put an IOU under the Christmas tree and then you take delivery in January. A lot of the gift card giving has driven that also where people kind of gift gift-cards and then they’re actually buying the merchandise in January. So the entire Christmas buying, which largely used to happen prior to the end of September, is now really spread out.”

Microccontroller market is competitive

“Well, people ask us the same question when Freescale was getting acquired. They asked us the same question when Renesas was forming with NEC, Hitachi, Mitsubishi. And now we’re getting the same question with NXP. And I think microcontroller market remains competitive. There are a number of players. We compete with Renesas, NXP, STMicro, Microchip, and others, some smaller players. The market remains vibrant and competitive and Qualcomm purchasing NXPI would not really change anything, because Qualcomm was not a microcontroller supplier. So the same product line that NXP had will continue, and we’re not seeing any change now. Although the close of the acquisition is about a year away, we’re not expecting to see any change coming out of that.”

Not clear Qualcomm any different

“It is not clear that Qualcomm’s sales force had a similar focus in NXPI, and then they didn’t have a sales force to call on all of the thousands of NXPI customers. as much of a distribution line. We didn’t think Qualcomm had factories themselves where NXPI could leverage. So there were reasons for that acquisition, whatever Qualcomm’s reasons were to diversify. It’s not clear to us that in terms of the microcontroller and analog offerings of NXPI, the Qualcomm acquisition makes them anything different, which could be troublesome to us. We don’t see that.”

Microchip 1Q17 Earnings Call Notes

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.”

Microchip 4Q16 Earnings Call Notes

Microchip Technology (MCHP) Steve Sanghi on Q4 2016 Results

Inventory correction is over

“March quarter marks the start of the growth period for us after ending the inventory correction in the December quarter.”

Business represents real demand today

“So our business is running normal. We completed the inventory correction back in December quarter. As we reported, the distribution inventory was basically flattish. It was down by two days last quarter. Our internal inventory seems reasonable. So I don’t really think there’s movement going in either direction. I think the business is really normal. Our business represents the real demand today.”

In industry consolidations there are companies at the bottom that are underperforming

” in consolidation of any industry, there are companies at the bottom that have been underperforming for years. They are being forced by either their boards or the activists investors to seek strategic alternatives, which is another word for basically selling the company. Such consolidation is now taking place in the semiconductor industry, and we have been kind of one of the consolidators. ”

Five problems with Atmel: poor accountability, poor teamwork, high spending culture, swinging for homeruns and poor pricing discipline

” First, very poor accountability for results. I mean, kept giving bonuses and raises or whatever, irrespective of the performance of the company. So very poor accountability for results. Number second, poor teamwork. As we have seen, teamwork between sales and operations and planning and inventory and just everybody does what they need to do, and very poor teamwork. Number three, very high spending culture. Obviously, operating expenses in excess of 40% of revenue. Number four, always swinging for homeruns and essentially getting struck out, versus Microchip building its businesses with singles and doubles. And finally, number five, very poor pricing discipline.”

Atmel is the worst performing company we’ve ever bought

“I think I kind of have been on record that this is probably the worst performing company I bought, and the size and scale of it kind of makes it that much more challenging. But we’ve a deep experience inside of Microchip. The people we have prepared and battle-hardened to do these integrations over many, many different acquisitions.”

Management works on the system, employees work in the system

“We always say that management works on the system and employees work in the system. So employees work in a system with very little accountability and they were not empowered to really make, maybe possibly, the improvements that they could have made. And system was very top-down; there was too much bureaucracy in the system. As we have traveled to all the Atmel sites internationally, in places, that team has constantly come that there was so much central command and control from the headquarter where it took levels and levels of approvals and just there was a constipation of the funnel, essentially, where nothing got approved and nothing got done.”

Getting pushback from Atmel’s sales people because they were commissioned and selling negative GM products

“Then on the top of that the sales force is commissioned. Atmel’s sales force is commissioned. Microchip is not. And we have had conversations with sales people where we say, this is a negative gross margin business. Why do you do that? Well, I’m making commission on it. You can’t take it away. So as you start to interrupt that environment and start to change that culture, you will get reaction from those people.”

Microchip FY 3Q16 Earnings Call Notes

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.”

Microchip FY 2Q16 Earnings Call Notes

We believe that we are nearing the end of this inventory correction

“We believe that industry conditions continue to be very weak. At the same time, we began this inventory correction earlier than most companies and believe that we are nearing the end of it.”

We are poised to resume growth in the March quarter

“We basically do not measure visibility by backlog, because it tends to vary by lead-times. We measure visibility by analyzing our business region by region, customer by customer, division by division, distributor by distributor, and looking at the inventory and sellthrough and all that. So just like we see the effects of the industry events earlier and began this correction earlier, we can also see that we are ending this correction earlier, and we are now poised to resume growth in the March quarter.”

We told you about the inventory glut before anyone else

“We were telling you when nobody was admitting that there is a substantial sell-in driven inventory build being built in distribution, and we were not getting a lot of agreement from a lot of the analysts at that time. But now you have seen, as the results have come out, that there is a substantial inventory build, and a number of companies are guiding down quite substantially, as they take that drop because of sell-in driven revenue recognition.”

Next quarter we expect business in China to be down but that will be offset by very very strong Europe and good US

“Now, as you look at the next quarter. Yes, it’s a year of the Chinese New Year, the quarter of the Chinese New Year, and we will expect our business in China and Asia to be sequentially down. But we make up for that elsewhere with a very, very strong Europe and a good America. ”

Have plenty of space inside our fab for expansion

“We can absorb all of Micrel products in our inside fab and still have plenty of clean room space left over in our Oregon fab to really add many, many hundreds of millions of dollars of additional revenue, so there’s no really problem. There’s lots of clean room space here to install the equipment as we go. With several quarters of weak performance we have had driven by very weak market, our factories are not full today. We just took a nine-day shutdown in our Oregon fab in the month of October, and in the current quarter, we have scheduled a similar shutdown in our Arizona fab in December. So even after absorbing all of Micrel products, I think we still have internally slightly higher inventory, not fully loaded, room to expand, and no problem.”

We have good insight because our business is so diversified

“We do business with – so, for example, just two weeks ago, I was in Asia, and I spent two weeks there. I met during that trip – I personally had meetings with 60-plus Asian distributors, at their presidents and product marketing heads that drive Microchip business, 60-plus, personally. And so, that’s the view on a first-hand basis I bring to you regarding what I see there. And you cannot match that by any kind of so-called channel checks. So I just have trouble telling you really what you could track, because the business is just so diversified, so broad and 90,000 plus customers.”

Business was up in March last year too but then the Chinese stock market fell. What we don’t know is there another shoe to drop

“last year without any effect of any acquisition, totally clean. Our March quarter was sequentially up. And then, lots of other events developed, the whole falloff of the Chinese stock market, lots and lots of customers invested their money in the Chinese stock market and lost it, and Chinese payment terms are starting to mimic Italy. In many cases, our distributors are telling us they’re concerned about getting paid. People are pushing out schedules, pushing out launch of the new products, cutting down the run rates, cutting down inventories, so there are additional things that happened. Now, all that environment is currently dialed in our guidance. You know, question is does it get any worse than that? Is there another shoe to drop or driven by anything. That we don’t know. That kind of view we don’t have. This is based on what we are able to see today.”

An explanation of Chinese distributors:

“all these distributors, they hold the inventory. They also have dedicated application engineers for Microchip, which help the customer to design-in our products into the end customer socket. And then, they ship it from the inventory. The Asian distributors will hold in months of inventory, lesser inventory than an equivalent U.S. distributor will hold just because they work on much lower margin. So if they work on a lower margin, they have to hold lower inventory. Otherwise, it’s not affordable. But they’re all stocking distributors. So these are not like reps. What you’re talking about is either reps or…Design houses”

Microchip FY 1Q16 Earnings Call Notes

When we talked about a slowdown in October, the first signs of China weakness were visible

“while it’s really painful to visit that period again, we do believe that the first signs of its slowdown in China, were visible at that time. We saw that through thousands of small customers, who were experiencing the economic headwinds and not buying enough products. This was further, enhanced by a very tight credit environment that was prevalent at that time in China, then after a warning, the December quarters numbers for most semiconductor companies were cut by an average of about 5%”

Now we have semiconductor companies admitting that there was an inventory build in China

“Then came in the June quarter which is traditionally a very strong quarter in China and we saw a broad based miss from the industry led by China and the September quarter guidance has been very weak also driven by China. Now we have semiconductor companies admitting that there was indeed inventory build in China and in the distribution that needs to correct. We knew from the companies that we have acquired and others that we conducted diligence on but did not acquired that there was a broad based selling driven inventory build in distribution channel which the prevailing rate of demand could not support. You can only play a selling gain for so long and this time it can truly went a bit longer.”

So, yes, this is pretty much a continuation of what I said we saw in October

“But now everyone’s numbers have been cut significantly, a large number of companies are now selling well below the stock prices on October 9th prior to our call, when I said I quote “we believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future. But it probably took a quarter longer than it has taken historically, likely mached by the smartphone supply chain with everyone having some exposure to it. But really in answer to investor and analyst question, I see yes this is pretty much a continuation of the phenomena that we saw last October.”

We’re not through all the inventory corrections in China

“We’re not through all the inventory corrections, no. There will again be differences in sell in versus sell through also, all of our revenue is sell through. ”

It’s tough to say what the December quarter will look like because June and September quarters are weak. December is usually weak, but September and June are usually strong.

“I think, I resigned from the forecasting business last year, you might recall that in November. I am not going to make that comment looking forward for the industry. If we just look at ourselves, we think we gave you September quarter guidance already, December [technical difficulty] is seasonally a weak quarter for Microchip and really also for the industry. Considering this correction happening in June and September, what would manifest for December, it’s kind of hard to see right now. But as we go through the quarter, one could make a guess that December quarter should not seasonally be weak because ordinarily December quarter is followed by a very strong June and September. This time it is not. But I am not making that prediction today.”

Bookings have been a little better in July, but that doesn’t mean they’ll be better at the end of the quarter

“this quarter’s bookings look better than it was last quarter and there was some strength in the overall numbers. But that’s baked into the guidance and I think if you look at various people’s commentary last quarter, April was good and May was good and then June fell off. So I think people make these adjustments through the quarter and better a July doesn’t necessarily mean better end of September for us or anybody else because customers can correct that anytime in the quarter.”

Customers put in orders to save their place in line and can end up canceling them

“customer seem to have very little penalty for getting their queue in line, almost no penalty. So therefore, it’s not unusual for the first quarter sometime to see stronger bookings only to get corrected later on. And I would not read so much into it for anybody.'”

Microchip Technology 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Not happy with September quarter

“We are disappointed with the level of business activity in the September quarter. September quarter is usually a very back-end-weighted quarter, because of traditional weak August, due to holidays in various parts of the world.

The month of September is usually a very strong month for our revenue after the summer holiday period. This time, the September sales did not materialize to our expectations, leading us to pre-announce the quarter on October 9, 2014.’

We always talk about how we see things first, and yet every time you don’t listen to us

” In each semiconductor business cycle, this debate rages in the investment and analyst community. Does Microchip have an internal Microchip problem or do our results reflect a weakening macro?

And each time we give the same explanation regarding how we see the effect of industry events earlier than others, and we have subsequently been vindicated when the entire industry softens a quarter or so later. But after all these times of telling us that we were right in the previous cycles, the controversy after we make the comments the same as we have seen in the prior cycles. This time it is no different, and it seems that it is really par for the course.”

I have seen an unprecedented amount of spin from other companies

“I have seen an unprecedented amount of spin in explaining the weak guidance of other companies. One company even called it amplified seasonality, with customers wanting to make sure that they position inventory where they’re going to be comfortable at. Now what is that, that sounds like a correction.”

It usually takes two quarters to see the whole story unfold

“According to Needham’s report, 73% of the companies that have reported thus far have issued guidance lower than consensus, and that does not include companies that reported yesterday or today. This process at other companies in the past have taken two earning cycles to complete, so you have to wait for the January earnings season to see the whole story unfold, and see what happens at all the selling companies.”

You’re starting to see commentary from late-reporting companies about weakness

“you are already starting to see commentary from late reporting companies about bookings weakness; weakness in industrial and consumer markets; inventory management by distributors; weakness in Asia; and some even — some companies even calling for broad weakness across most end markets; and weak macro conditions, combined with seasonality to cause near-double-digit revenue declines. That is, and I quote, amplified “seasonality”.”

Some analysts who have followed us for a long time get it

“I also want to point out that many of Microchip’s analysts who have gone through this experience before, and have invested time to understand our business dynamic were very constructive after our warning, and recognized that we have called this correctly several times before. Our thanks are due for their taking time over the years to understand the dynamics of our business, and for their support.”

The correction is going to be slight

“n pre-release we simply made the statement that we see a correction coming. The street reaction and their interpretation of that correction was grossly overestimated. And, we see a yes, we see a slight correction and one to two quarters worth. ”

We do business with everybody

“You’ll have to go deep tail, we’ve got 80,000 customers. We do business with everybody, you know, people making no matter what, because microcontroller and analog, they are the most ubiquitous devices. You’ve got chips in light pens and cables and just everything.”

We see directly into the end customer

“So we have a very, very broad business and with such a broad business, you’re very much tied into the sentiment of every little company building stuff and lots and lots of small companies who build their stuff in their own garage shop and don’t use the large subcontractors and don’t have the sophisticated supply chains and multiple subcontractors building products for them. In that kind of environment information is very hard to get and can easily take a quarter.

Because every subcontractor thinks well they gained market share. They’re doing 60% of the total. If there are three subcontractors, everybody thinks they’re doing 40% of the total, and that number adds up to 120%, just like there’s inventory in the channel.

But with our customers with a long tail, it’s the chief engineer who is the President and he’s directing the buy. We see the impact of any market moves economy related directly on our revenue on a sell-through basis from distribution and also from our direct customers. And with that kind of business, it’s very, very difficult to give you end market breakdown, because we do business with everybody.”

The problem was China

“US and Europe were very good. So our problem was in China. Our business in Asia is a much larger percentage than Arrow’s and Avnet’s business is, so that will really explain one.”

Apple has been the only place to hide

“The other big cell phone guy has been weak, also. So there’s really only been one place to hide, which is if you’re exposed highly to the guy in Cupertino.”

Softness is in the customer demand level

“The softness is not at a contract manufacturer’s level. The softness is in a customer demand level. If somebody in the June economy wanted to build 100,000 widgets, in September and December economy he wants to build 95,000 widgets.”

This is a very mild inventory correction

“It’s nothing like late 2008, and it’s nothing like year 2000. But some of these smaller inventory corrections that have come every couple of years or so, it’s really one of those.

This is a very mild one. And then I think we get out of that with a probably 5%, kind of or less than that, total cut and what we were thinking before was what we’re thinking before.”