Microchip Technology Earnings Call Insights: Customer Orders Analysis, SG&A Performance
Customer Orders Analysis
Chris Caso – Susquehanna Financial Group: Steve, just maybe to start. Given your vantage point in the industry and number of your customers you touch – I think you guys are in good position to answer this. There is obviously a concern and it’s not just Microchip, it’s the whole industry and really the whole market because of the downturn that happened in the second half of last two years. Because I guess, based on what you’re seeing now maybe you could help us by maybe comparing what you’re seeing now in terms of the customer orders, the activity for last two years and maybe talk about what you see different this year than perhaps over the last two years?
Steve Sanghi – Chairman, President and CEO: Well, if I could refer to one report I was reading, I don’t want to name the report, but I was reading an analyst report from investment analysts, I read that for my personal investments. It said in the last two years in both years Fed drew the stimulus out of the market, right around April timeframe. Last year, the Q2 ended, and then they started it again in September or so with Q3 and the year before also the housing and bunch of other stimulus ended. This report at least pointed a significant finger towards the reduction of that stimulus which then resulted into a weakening of the market in the second half. Actually the GDP was already slowing down. This year as you look at it in U.S. market at least, the GDP is actually up from the prior quarter. It’s accelerating and there is no sign at least today of any kind of stimulus to be withdrawn. So that’s not my analysis and I am just reading the analysis from a different report. As we see from our own data the bookings are very strong, they were very strong in the last quarter, we mentioned this at the last conference call also and as we continue finish the month of April it was very, very strong. So, currently there is no sign that this thing will really follow the pattern it followed in the last two years.
Chris Caso – Susquehanna Financial Group: Just as a follow up to that. Maybe you can comment a bit about it sounds like you are getting some longer dated booking now and some customers bookings into the calendar third quarter does that imply that your own lead times are starting to expand. What’s the incentive for those customers to start booking a little farther out right now?
Steve Sanghi – Chairman, President and CEO: You pretty much said it. So, one change that has happened in the Microchip business over the years is today 40% of our business comes from wafers made in the foundry and this is a result of two acquisitions and Microchip’s own strategy of significant number of products that we are sourcing from outside. 100% of SMSC’s products are bought from foundries, 100% of SST, Silicon Storage Technology products are bought from outside and many of Microchip products over the years where rather than adding expensive equipment inside we have gone outside. So, that change in the mix shift has really added the complexity where today our lead times are anywhere from 2 weeks to 16 weeks depending on the product. We make 60,000 different product types, so if you ask me what’s your lead time there isn’t really one number it is anywhere from two weeks to 16 weeks plus. There are products which are in stock and you can take immediate delivery and there are other products, you’ll be in line if you ordered them in less than 16 weeks. So, yes, we are getting orders out in time for products that have longer lead time. And any time that happens, there is a drag effect on other products, even those products which are available on a much shorter term basis, customer just reads it as those may go longer lead time also or they place a bulk order in a kit fashion for the outer month and you tend to get bookings on all different products out in time.
Chris Caso – Susquehanna Financial Group: Just to clarify, was — if I look at it versus the second half of last year, was there any meaningful change in the lead times across your portfolio from the second half of last year?
Steve Sanghi – Chairman, President and CEO: Yes. Very, very meaningful change, yes. Obviously, SMSC was acquired in the second half. It was acquired on August 2. So, all that impact was since then and many of our internal products, they have ramped significantly. They were much newer products last year, contributed much smaller portion to our volume and a year later, they are in significantly high volume position.
Sumit Dhanda – ISI Group: Just a couple of questions. The SG&A performance came in below the low end of expectations. Could you help us understand what exactly drove that performance?
J. Eric Bjornholt – VP and CFO: That’s really just great expense control across the board. We had indicated that how we share information with our employee base about the state of the industry and expense control and I’d say all employees across the company really stepped up and helped us deliver much better performance in the operating expense area. So, not much else I can share outside of that other than it was a collective effort of the entire Microchip team.
Steve Sanghi – Chairman, President and CEO: When employees are on a pay cut and some employees on a rotating time off, there is a culture where everyone thinks it’s their money. If you spend some money something superfluous or just want a new computer while the old one still works, you’re really spending your own money because the bonuses and pay cut reversal and RTOs and all that depend on the performance. So it’s really one of the best cultures and it creates employees to then really grow out of the way in watching expenses and making it an efficient OpEx operation.
Sumit Dhanda – ISI Group: Then just following up on your commentary around lead times. How do we reconcile the fact that your own internally produced inventories at a reasonably higher level, but your lead times are still expanding. In other words is the mix so out of (indiscernible) with how the demand requests are coming in or help us understand what the disconnect might be?
Steve Sanghi – Chairman, President and CEO: So lot of the longer lead times are not from in-house produced products, not all the longer lead times are from a foundry products, but a lot of the in-house produced products we were holding all the inventory in the die stores where we have really in the last many quarters cut back on the production and assembly and test to not really add further value and the inventories were quite high. As the demand has come very, very strong, we have to move that die through assembly and test and that’s where some of the challenges are in acquiring new capacity, new handlers, new testers and other stuff. Third piece is on a good number of – select number of products. The demand has exploded and the products are built inside, but the inventory on those new products were not very high and the demand has exploded, so we are expediting them even inside the factories.
J. Eric Bjornholt – VP and CFO: So, just to add on to that real quickly, I want to really emphasize the point that Steve made earlier about 40% of our products being from outside foundries and lead times from our foundry partners have extended also and so that has compounded this and we have taken appropriate steps to build that inventory backup in the June quarter, and you can see that in our guidance for inventory even though the internal inventory is coming down the foundry product will go up and allow us to have competitive lead times.
Steve Sanghi – Chairman, President and CEO: So, the mix is not – the mix was (indiscernible) we would be writing-off inventory because lots of products would have inventory write-downs, while the other products (are shored). So, the mix is really not out of (indiscernible) it is anytime when large surge in demand happens lots of new designs take off and on those new designs you couldn’t predict how much customer is going to buy because their newer designs and they were incubation and many of those are 32-bit microcontrollers and many of them are dsPIC and 16-bit microcontrollers. That’s where the demand has exploded.
A Closer Look: Microchip Technology Earnings Cheat Sheet>>