Microchip Technology Earnings Call Insights: Orders & Real Demand, Bookings Outlook

Microchip Technology, Inc. (NASDAQ:MCHP) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Orders & Real Demand

Chris Caso – Susquehanna Financial Group: I guess if I start with a high level question and understand your comments with regard to some of the strength in some of the broader segments such as housing, industrial and automotive. As you talk to your customers and new distributors, perhaps you could tell us what gives you confidence that the orders that you’re seeing do in fact reflect real demand. And perhaps, you could talk a little bit about the inventory levels to the extent you have visibility enter customers?

Steve Sanghi – Chairman, President and CEO: Well, our expedite activity is very high. We are just expediting products on multiple fronts in multiple markets for customers in multiple geographies and multiple sectors. There is very little inventory at the end customer. The distributor inventory is lower compared to any historic norms and was up two days last quarter, but still on a very low end of really the historical norms. So, that really what gives us confidence that the order the real were not getting any net push out activity or anything like that. There are always moving parts and somebody scheduled a few parts out, somebody else pulls it in, but the net-net demand continues to be very strong. The backlog is very healthy and we are actually struggling to meet all the demand we have in the current quarter.

Chris Caso – Susquehanna Financial Group: As a follow-up to that, obviously you mentioned you are increasing production now in response to the order rates that you have in the inventory levels. Could you remind us the impact that the increased production would have on your gross margins? What sort of improvement can we expect going over the next couple of quarters? And as you talk about the 60% long-term gross margin target, is that tied to a particular revenue number and if so, would you care to share that with us?

Steve Sanghi – Chairman, President and CEO: It is tied to a particular revenue number but we care not to share that. There is internal modeling on it. But if you look at it at the bottom of the cycle, do you recall what our gross margin was? I think it was 55 point something, is that?

J. Eric Bjornholt – VP and CFO: Yes, I think that’s right.

Steve Sanghi – Chairman, President and CEO: Something in that area. So, the gross margin has continued to come up every quarter. Going into this quarter at the last conference call, our guidance for the gross margin for the current quarter was 57% and we delivered 58.04% or something. Actually, I just got the number. The gross margin at the bottom of this cycle was 56%. So you could see that we have come up substantially, and it’s come with a higher utilization, recalling all of the employees back for – back to our fabs for full production, and we are currently increasing wafer starts further. So the impact of the gross margin is very positive. We are guiding another increase in gross margin this quarter from 58% last quarter to a midpoint of about 58.4%, and depending on how the quarter goes, we will further strengthen it, there can be upside to that. And gross margin will continue to increase. Our long-term target is 60% and there’s another 200 basis points to go.

Bookings Outlook

James Schneider – Goldman Sachs: I was wondering if you can address some of the longer dated backlog you referred to in your opening commentary, say, some of it was out past the end of September quarter. Can you maybe give us some context, how much of the bookings are scheduled past the end of the quarter – this quarter versus last quarter, the quarter before?

Steve Sanghi – Chairman, President and CEO: Well, the bookings have been strong now for a couple of quarters. I think this is a repeat comment that we made last quarter also. So, from that standpoint, there is not really a substantial change in that. I think what’s more important is how much of the backlog customers are requesting in the current quarter, but we are giving them few days out. We’re getting significant visibility. So, there is a fair amount of backlog into next quarter already, but that is requested in the next quarter. We’re delivering in the next quarter. That’s business as normal. The problem is where certain portion of the backlog customers would take it in September and we are scheduled out a week to two weeks out. We’re struggling hard to pull it in and we’ll be successful in some and not in some other…

James Schneider – Goldman Sachs: Then as a follow-on, could you maybe talk about how much your internal factory utilization has increased over the past several quarters from say trough to the current levels. In other words, maybe if you can express it in points that would be helpful.

Steve Sanghi – Chairman, President and CEO: We don’t like to give that numerically, but where the where the – with rotating time off we had taken the production down significantly and a lot of that has come back and we have increased production even beyond that to really meet the current demand and will continue to increase it. But neither I have the numerical number in front me nor we like to share that.

James Schneider – Goldman Sachs: Then some mix between our wafer fab and our assembly and testing. Assembly and test is cranking out a lot of product today and it’s what we utilized.

Steve Sanghi – Chairman, President and CEO: So, there are two other factors. One is the assembly and test which we have been ramping it all last quarter and before, because a lot of the inventory we had built during slow time was being held at the die level. So, as the demand came back, we can immediately think of the back-end to start to produce more output. The fab cycle time takes longer to improve the output. So, that’s one factor. The second factor is, as we mentioned in the last conference call, 40% of our value production now comes from outside foundries where we do not produce them internally and there we are dealing with foundry lead times and queue times and others. And we don’t really have under our full control where we can expedite our own fab.

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