Q2 2020 Earnings Call
Good day, everyone and welcome to this microchips second quarter fiscal 2020 financial results Conference call. As a reminder, today's call is being recorded at this time I'd like to turn the conference over to microchips.
Chief Financial Officer, Mr., Eric Bjornholt.
Please go ahead Sir.
Thank you and good afternoon, everyone.
During the course of this conference call, we'll be making projections and other forward looking statements regarding future events for the future financial performance of the company.
We wish to caution you that such statements are predictions and actual events or results may differ materially.
We refer you to our press release as of today as well as our recent filings with the FCC that identify important risk factors that may impact microchips business and results of operations.
And then tenants with me today, or Steve Sanghi, Microchips, Chairman and CEO and can ask more the microchips president and COO I.
I will comment on our second quarter fiscal year, 2020 financial performance and Steven going to US will then give their comments on the results discuss the current business environment as well as our guidance and provide an update on the ongoing integration activities associated with the Microsemi acquisition.
We will then be available to respond to specific investor and analyst questions.
We are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip Dotcom, which we believe we'll find useful when comparing our GAAP and non-GAAP results.
We've also posted a summary of our outstanding debt and our leverage metrics on our website.
I want to remind investors that during the June quarter 2018, we adopted a new GAAP revenue recognition standard which requires revenue to be recognized at the time products are sold to distributors versus our historical revenue recognition policy, where revenue on such transactions was deferred until the product was sold by our distributor to an end customer.
As discussed in previous earnings Conference calls, we continue to track and measure our performance internally based on direct revenue plus distribution sell through activity and each quarter will provide a metric for this called end market demand in our earnings release.
Therefore, along with our GAAP and non-GAAP results based on distribution sell in who will also provide investors with our end market demand based on distribution sell out but will not provide a piano based on end market demand.
End market demand in the September 2019 quarter was 1.346 billion.
End market demand was about $8.6 million more than our GAAP revenue in the quarter.
I will now go through some of the operating results, including net sales gross margin in operating expenses.
I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our press release.
Net sales in the September quarter were 1.338 billion, which was up 1.15% sequentially and modestly below the midpoint of our guidance of 1.349 billion.
We have posted a summary of our GAAP net sales and end market demand by product line and geography on our website for your reference.
On a non-GAAP basis gross margins were near all time highs at 62.24%.
Operating expenses were at 25.56% and operating income was 36.7%.
non-GAAP net income was 365.7 million.
non-GAAP earnings per diluted share was $1.43, which was inline with the midpoint of our guidance.
On a GAAP basis gross margins were 61.9% and included the impact of $5.2 million of share based compensation.
Total operating expenses were 643.9 million and include acquisition intangible amortization of 248.2 million special charges of 3.6 million 10.1 million of acquisition related and other costs and share based compensation of 40.1 million.
The GAAP net income was 108.9 million or 43 cents per diluted share.
Our September quarter, GAAP tax benefit included $12.7 million of net discrete income tax benefits related to tax reserve releases due to statute of limitations expiring, partially offset by foreign tax assessment.
The non-GAAP cash tax rate was 6.5% in the September quarter and was negatively impacted by foreign tax assessment that microchip will pay in fiscal year 2020, but defendants position and seek a refund of these taxes in the future.
We expect our non-GAAP cash tax rate for fiscal 20 to be between six and 7% exclusive of the transition tax any potential tax associated with restructuring the microsemi operations into the microchip will tax structure and any tax audit settlements related to taxes accrued and prior fiscal years.
We have many tax attributes in net operating losses and tax credits as well as us interest deductions that we believe we'll keep our cash tax payments low the future cash tax payments associated with the transition tax is expected to be about $236 million and will be paid over the next six years.
We have posted a schedule of our projected transition tax payments on the Investor Relations page of our website.
Our inventory balance at September Thirtyth 2019 was 734.2 million, we had 131 days of inventory at the end of the September quarter down one day from the prior quarters level.
Inventory at our distributors in the September quarter were at 30 days compared to 32 days at the end of June we have only had one quarter in the past 15 years, which was Q3 of fiscal year 2013 or days of inventory at distribution have been lower than the current levels.
The cash flow from operating activities was 396 million in the September quarter.
As of September Thirtyth, the consolidated cash and total investment position was 405.1 million.
We paid down 315.5 million of total debt in the September quarter, and the net debt on the balance sheet was reduced by 283.5 million over.
Over the last full five quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down 1.7 to 9 billion of the debt and continue to allocate substantially all of our excess cash beyond dividends to aggressively bring down this debt.
We have accomplished this despite the adverse macro and market conditions. During most of this period, which is a testimony to the cash generation capabilities of our business.
We expect our debt levels to reduce significantly over the next several years.
Our adjusted EBITDA on the September in the September quarter was 540.2 million and our trailing 12 month adjusted EBITDA was 2.178 billion.
Our net debt to adjusted EBITDA, excluding our very long dated convertible debt that matures in 2037 and is more equity like in nature was 4.59 at September Thirtyth 2019.
Our dividend payment in the September quarter was 87.3 million.
Capital expenditures were 17.7 million in the September quarter.
We expect between 20 million in 25 million in capital spending in the December quarter.
And overall capital expenditures for fiscal 2020 to be between 90 million and $100 million, a 25 million dollar reduction from the forecast we provided last quarter.
We continue to add capital to support the growth of our production capabilities of our new products and technologies and to bring in house more be assembly and test operations that are currently outsourced.
We expect these capital investments will bring some gross margin improvement to our business, particularly for the outsourced atmel and microsemi manufacturing activities that we are bringing into our own factories.
Depreciation expense in the September quarter was 39 and a half million.
I'll now turn it over to connect to give his comments on the performance of the business in the September quarter and provide an update on some of our ongoing microsemi integration activities can ash.
Thank you Eric and good afternoon, everyone.
Before I get started I'd like to remind you that the product line comparisons I will be sharing with you today are based on end market demand, which has helped microchip measure thats performance internally.
Also as I go through the product line reports they will reflect continued broad macro weakness in the markets we serve.
This broad weakness was further accentuated in the month of September .
Let's start by taking a closer look at Microcontrollers.
Our microcontroller business was sequentially down 1.3% as compared to the June quarter.
We continue to introduce a steady stream of innovative new microcontrollers.
Including the industry's first commercially available serial memory solid state drive controller, which won the best of show Award in the 2019 Flash memory summit.
As well as two different USPI type C power delivery controllers, which enables fast device charging and simplifies implementation of this functionality.
Microcontrollers represented 53.3% of our end market demand in the September quarter.
Now moving to analog analog business, a sequentially up 0.2% as compared to the June quarter.
During the quarter, we continue to introduce a steady stream of innovative analog products, including the introduction of the trust platform for crypto authentication. The industry's first pre provision solution, providing secure key storage to small and large volumes.
Analog represented 28.7% a front end market demand in the September quarter.
Our SPJ business was sequentially down 8.9% as compared to the June quarter.
As we have mentioned in prior conference calls the FPGA business does have some lumpiness because if a significant exposure to space aviation in defense markets.
Procurement timing can be a function of programs and is shifting priorities schedules and budgets.
During the quarter, we announced our smart embedded vision initiative, providing for designing intelligent machine vision systems with our low power pull our fire SPG ace.
Design wins for the pull off our family continue to grow strongly and we remain optimistic about the prospects for this product family.
Thats PPA represented 6.8% a front end market demand in the September quarter.
Our licensing memory and other product line, which we refer to as L. ammo was sequentially up 10.5% in the September quarter as compared to the June quarter.
Strengthen our licensing business as well as a timing systems business.
Pays the broader macro weakness we experienced.
Hello represented 11.2% of our end market demand in the September quarter.
In September we completed the acquisition of two small early stage private companies.
The first acquisition enables low power embedded computing solutions for machine learning in France, and smart embedded vision applications for our FPA product families.
This acquisition also adds domain knowledge depth in the areas of machine learning algorithms and vector processing.
The second acquisition provides digital gate driver solutions.
For wideband, GAAP, MOSFET and IGBT technologies.
The acquisition complements our silicon carbide discrete and modular power conversion offerings.
And enables us to provide more comprehensive total system solutions.
These two acquisitions for a very small and more akin to acquiring intellectual property along with domain experts to help us accelerate our business agenda in specific laser focused areas.
The combined cash outflow was less than $6 million and hence not materials to the rated which were paying down our debt.
Finally, a quick update about the ongoing microsemi integration.
We continue to plough forward with the business systems and operations integrations.
On the business systems front, we went live with a few more systems on November 1st.
And as I've mentioned on prior conference calls this is a tedious and time consuming effort and we estimate that were about 50% of the way to completion.
And have about another year of work ahead of us.
We are pleased with the synergies we have achieved since we closed the transaction. Despite the weaker macro environment and we expect continued synergy gains for many quarters to come.
Let me now pass it to Steve for his comments about our business and our guidance going forward Steve.
Thank you are going edge and good afternoon, everyone.
Today I would like to first reflect on the results over the fiscal second quarter of 2020.
I will then provide guidance for the fiscal third quarter of 22.
Our September quarter gap mix is based on selling revenue recognition.
Was the $1.338 billion.
Up 1.15% sequentially versus our guidance of flat to up 4%.
So we missed the GAAP sales guidance slightly at the midpoint.
I would end market demand based on sell through rose 8.6 million dollar higher than GAAP sales, which we believe shows that the channel is continuing to manage their working capital conservatively by introducing inventory due to uncertainty.
Recall that recorded the bottom of this cycle back in February of 2019 contingent on the resolution of the Us China trade dispute.
Districts settlement or did not happen and remains unresolved.
Since then I would end market demand has been flat.
At 1.34 billion 1.35 billion and 1.346 billion for March and June and September quarters, respectively.
Due to a multitude of headwinds from trade tensions and resulting impact on automotive industrial and consumer appliance end markets.
Our consolidated non-GAAP gross margin of 62.24 person was just above the high end of our guidance and was needed record high I.
Our consolidated non-GAAP operating margin of 36.7% was also higher than the midpoint of our guidance of 36.2%.
The integration of Microsemi continues to proceed very nicely since the closing of the acquisition. We are continuing to see strong synergies and improvements in gross and operating margins for microsemi products.
Our consolidated non-GAAP earnings per share was dollar 43, right at the midpoint of our guidance.
Our non-GAAP basis. This was also over 116th consecutive profitable quarter.
In the September quarter, we paid down $315.5 million deferred debt, our total debt payments since the end of June 2018 has been $1.73 billion. The pace of debt payments has been strong despite the weaken uncertain business conditions.
As we continued to squeeze working capital.
Now before I provide your guidance for the December quarter, Let me comment on geographical and end market sales.
While the uncertainty begin with us China trade friction.
The uncertainty has become Globo the week of business conditions can be seen in all geographies.
Our Americas business in September quarter based on end market demand was down 6.1% over the year ago Corridor, Europe was down 12.9% and Asia was down 12.6%.
We did experience our business being weaker in September then we had expected.
In the month of September .
This weakness was also reflecting the lower starting backlog for the December quarter as well as the unusually low distribution inventory exiting the September quarter.
From an end markets endpoint.
Industrial automotive and consumer appliances end markets are down significantly.
Aerospace and defense and communication markets have been flattish and data center market has been strong.
The uncertainty in all geographies is continuing.
In this environment direct customers and especially their distributors are continuing to manage their working capital by reducing inventory.
However, there are some signs of an inflection point too.
In the September quarter distributor inventory was down to 29.6 days, we have had only one quarter in the past 15 years, which was a third quarter fiscal year per team. We had over days of inventory a distribution have been lower than the current levels Secondly.
Bookings for the month of October was the highest bookings achieved since June of 2018.
While the backlog for December quarter is much lower than the backlog for September quarter at the same point in the quarter the slope of the backlog food for the current quarter is much steeper would steeper backlog Phil.
Where the backlog in shipments end up is that guessing game, especially with the holidays coming.
Our judgment is that the net sales are based on selling revenue recognition will take another leg down this quarter, but with several indicators showing inflection point, we may see the forming our for bottom here, even though we saw a false bottom deck in the March of this year.
In trade dispute was not reserve.
We expect to GAAP net sales based on selling revenue recognition for our products to be between minus 2% to minus 10% sequentially in the December quarter.
Due to this sharp reduction in GAAP sales at the midpoint of the guidance.
We are taking steps to reduce our manufacturing capacity capital expenditures as well as expenses.
We are planning to reduce the clean room footprint in order to Colorado six inch fab that we acquired with Atmel acquisition.
Six into wafer size, the fab is no longer to competitive with the other high value eight inch Fabs. Therefore, we will be turning this six inch fab into a discreet and specialty fab doing silicon carbide.
Field effect transistors.
Fits their transistors, Mems and other discrete devices.
We will be transferring high volume at metal products from the six inch Colorado Fab two hour eight inch feds in Arizona and Oregon.
This transfer will take about 12 months to complete largely because we brought up the highest volume process in 18 fabs for dual sourcing earlier.
In addition, we will be transferring some of the discrete products from Microsemi footings fabs to the six inch fab in Colorado.
These actions will create about $65 million in cost of goods savings per year when completed.
The first phase of this transfer will take about one year to complete and we'll achieve about two third of the savings the balance or the transfers Henry long tail and we'll take another two years after the first phase.
Regarding capital expenditures, we're reducing our capex for fiscal year 2020 to be between 90 million in $100 million for the year introduction of 25 million from our guidance on Capex last quarter.
Regarding the reduction of for Opex.
We are doing three things.
Some of those a continuation of what we have been doing.
First we had approving new and replacement of acquisitions various sparingly.
Second we will be managing discretionary spending very tightly and third our bonus program will yield a lower pay out through the reduction in net sales.
For December quarter, we expect our non-GAAP gross margin to be between 61% to 61% of sales.
Gross margin to be between 61% and 61.4% of sales.
We expect non-GAAP operating expenses to be between 26.2% in 28% offices.
We expect to non-GAAP operating profit to be between 33% and 35.2% of sales and we expect over non-GAAP earnings per share.
To be between $1.12 per share to $1.32 per share.
Given all the complications of accounting for acquisitions, including amortization of intangibles restructuring charges and inventory write up on acquisitions Microchip will you continue to provide guidance and track its results on non-GAAP businesses, except for net sales, which will be on a GAAP basis.
We believe that non-GAAP results provide more meaningful competitors into prior quarters and request that the analysts continue to report that non-GAAP estimates to first Carl.
With this operator will you please poll for questions.
Absolutely.
I would like to ask a question. Please signaled by pressing star one on your telephone keypad.
You are using speakerphone. Please make sure your mute function is turned off to a larger signal to reach.
Once again press star one to ask a question.
We'll pause for just a woman to allow everyone an opportunity to signal for question.
Alright, well take our first question from Chris Caso from Raymond James. Please go ahead.
Yes. Thank you good evening.
I guess the first question, Steve is the expectations for selling versus sell through in the December quarter, you've already said that the distribution channel inventory is that a record low. So you know is this guidance for December .
Suggesting that that end demand is actually declining in December could you could you explain the difference there.
The the.
The end demand is declining there has been.
There has been some destruction offend demand.
In various end markets or automotive clearly.
Where the number of full units built in automotive are much lower than our Eurs Europe and China.
The industrial market end demand has.
Been weaker because before the impact of tariffs and increased cost and similar thing, we're just seeing India home appliances market. So yes. The end demand is weaker anda.
Sell in we're guiding down we do not knowing what the.
With the net to distribution inventory will be in terms of increasing or decreasing whether end market demand will be higher than gap to the lower slightly but we think the there could be roughly in the same and Amgen could go either way.
Right.
Okay is as a follow up then maybe can reconcile that with your comments of the potential of this inflection point I guess, but I understand you're saying is the opening backlog coming into the quarter was lower but you're seeing stronger Phil as you go through the quarter.
How are you reconciling that that that better order fill with the prospect of of end demand perhaps that weaker.
So how we reconciling it is a the starting backlog in the quarter.
There was a significantly motor weaker then minus 6% guidance at the midpoint.
Significantly weaker so some of that fair amount of that has closed in the last five weeks because the the curve of backlog Phil is much steeper.
And we expecting that.
You know that can occur will continue and we will end up.
Really close to the guidance, we're providing but where we end up would still be lower than the last quarter.
It will require significantly more steeper curve.
To be even with the last quarter's who we are expecting improvement.
Because a steeper curve, but it doesn't get us to a flat compared to last quarter and and I am probably is worth repeating what what Steve has already said that our October 2019 bookings were the strongest month of bookings we've seen since June 2018.
Right.
Alright, thank you.
Well there came a lot of mixed messages.
We could backlog, but some inflection points and.
He leaves a very hard to read in this environment we.
We said back in February that could be bought down but it was very much tied to the trade settlement, we didn't get it. So this time with this just being cautious in giving you all the.
Puts and takes.
Right.
Understood got it thank you.
Thank you next we'll go with Gary Mobley from Wells Fargo Securities. Please go ahead.
Hey, guys. Thanks for taking my question.
You mentioned that.
Sort of the retooling of your Colorado facility could bring on maybe a 50 basis point positive impact to gross margin long term the near term looks like we're contemplating a 100 basis point sequential decrease how much of that.
Degradation in the gross margin near term is due to other utilization and how much is due to mix.
So I can address out and see we're going us can add onto it. So this quarter. We just completed we had a under utilization charge of about 8.9 million that charge will be higher and the December quarter. So that is having an impact on gross margins that were seeing on a sequential basis and as always things like product mix that factor and.
Who is also and then with demand down I'm you know, it's likely that we'll have some accounting charges related to obsolescence doesn't mean that the product isn't good anymore, but we'll have have some obsolescence charges level also impacted gross margins that we produce this quarter.
Okay.
And just I know it's Barry.
Very early to call, but could you give us some sense of seasonal trends in the March quarter.
Based on past history, and perhaps how you're feeling about the linear you bookings as we sit here today.
Well you know seasonality is a harder it's fun to talk about because of Movidius acquisition that we have completed.
You know prior to the Microsemi acquisition for example, or low end market.
Mix was dominated by industrial automotive and consumer appliances.
With the addition of Microsemi now we have added three other significant end markets Aerospace and defense data Center and communication, where we had very little exposure.
And you know last year to year five quarters. Since you have had microsemi the environment hasn't been order Mo.
Just a significant inventory correction in the last June and September of last year, and then subsequently fighting through the use China trade sanctions and all the other issues. So we haven't really seen a combined company normal environment for a year longer to be able to figure it out with the seasonality with the current mix.
This is.
So I think there would be my answer that we.
At the minus 6% at the midpoint clearly that is below seasonal we're not defending that due to seasonal prior to.
Any out for this acquisition I think a seasonality for December quarter used to be bug minus three if I remember, we don't know what it is today.
Alright, Thank you guys.
Thank you we'll next go with feedback from the Bank of America.
Thanks for taking my question steamer I was hoping you could.
Yes, Dan chronology here because.
Back in August you gave some guidance then in September you kind of come from the midpoint of guidance and at that time hope well is that September would be a normal demand.
And then I'm very excited about 11 issues again somewhat below so not bad.
You know somewhat below and since that time, we are just heard such a wide range. Your views from year to one of the appear I was ready to be but then most others have kind of being in line and now you are saying that.
Silver bookings are very strong backlog is very weak I think investors that there's hardly confused as to what's really.
Going on I'm, you know what is driving such a week backlog and what is now driving this I'm sorry, you know what is causing all this.
Well, we work in terms of for confusion joining the party.
And this has been a very very confusing environment.
You know on no on one hand, they've been fits and starts from the trade fund.
And the three largest cellphone markets within industrial automotive and consumer appliance is a heavily hit with large amount or Ted its and therefore, there has been lower demand destruction.
In any time, you make any kind of gets with some resolution of the trade dispute it really hasn't happened.
And then you have had multitude of other issues with ZT about a year ago. Then why we you can ship is not ship. It then hit Hikvision and many other customers added. So there has been a lotta confusion.
And every company you know I think if you look at the number year over year.
You will see the outperformance year over year is pretty reasonable but quarter over quarter.
It just depends on when somebody went into inventory correction, how long they mentioned inventory correction lasted.
No we measured over September performance.
To this September performance of last year, However September last year.
We were still reporting numbers based on sell through revenue revenue recognition as a non gap.
If you compare the numbers gap to gap September quarter of the September quarter, we would actually up because last September quarter. There was a substantial reduction in distribution inventory I don't know if it's exactly equal that yes. We were we were not up but a that we had about an $80 million reduction last September and distribution.
Inventory in the quarter here, so as you compare to that the you know the numbers get pretty confusing. So in parallel with all these other confusions last year, we also going through change of revenue recognition.
So I would say simply you known layout the numbers for various companies then you'll find that I would have year over year performance is better than the other large competitor you talked about.
Back in terms of the chronology. The other thing to keep in mind as if you remember I think it was in early August there were additional tariffs that were announced and we're going to be taking place at various points in time, I think that creates more uncertainty in the markets.
I think what happened was September ended up being a lot quicker as people are trying to sort out customers are trying to sort of what are they going to do and that was reflected in distribution inventory going down the overall results being less than what we had expected at the midpoint and then beginning to reverse as big went into October .
And then reflected in the guidance you're seeing today.
Correct.
Oh my follow up steep how much do you think distributers it'd be very good Cowen <unk> co your active manager.
Lois that you're seeing and the loss girl like 15 years, or so or that you mentioned that cannot be far below historical trends what are you hearing from them.
And the I couldn't be.
But at some point you could you see the benefits of perhaps where PRB crunching from their distribution channel or or does that too early to give a sense or well what there are a normalized distribution never look for you.
I think the you know the macro trends the and the demand destruction body.
You know the tariffs and all these confusion created.
Much larger impacts than the other secular trends of.
Are you know impact of food and other competitors in distribution and distribution, putting more focus on a you know those things that happen over two three years and.
And the effect of for trade friction and all that is really much more immediate and much more severe.
So you know we've been telling you now for a few quarters that their distribution inventory even down the sell through in several quarters now I would say at least five quarters have been better than sell in and one would think words distribution inventory no lowest in 15 years, except one strange quarter in fiscal year two.
18, you wouldn't go down further, but we don't we can't be sure of that distributors don't have confidence they are seeing the same issues we have seen.
A weakness in industrial market in automotive market in consumer appliance market at a space in defense in communications are going to flat ish.
If distributors can manage their business, but even lower inventories of Hollywood.
Right during during they're going to leverage our generally short lead times there to their advantage.
Despite to no deporting.
No GAAP numbers based on selling your ready well aware of FFO scans.
We manage the business to sell through and we do not go to quest any distributor would take any kinda inventory.
You struck the show so you know we're focused on it.
Uh huh.
True and sell through is weak and therefore, the selling as we plan.
Okay.
Hi, thanks to the cover.
Well.
Thank you well, taking our next question from harsh Kumar from the Piper Jaffray. Please go ahead.
Yeah, I hate things, thank Steve for all the color so far I'm trying to square someone to comments, so you're taking some steps in opex and capex, but October suggesting from your commentary some sort of an inflection point upward. So should we just read into it as okay, maybe where we're not going to go down.
Yeah. They had the current guidance that you gave for December that's sort of the new base should we look at an annual just adjusting your business do going out.
I guess be more profitable more cash than just optimizer, a little bit or is there something else I can read into it.
Well I think.
I think were good I'm reading into it is.
That we started the December quarter with much lower backlog on October 1st then it wasn't July 1st.
And and you know if that had continued in the last Friday weeks.
Yeah, the guidance would be a double digit negative.
But we have made up significant gap by the fill being much stronger.
And and if that strength hope that fill continues.
Then that as those could be reasonably good but then also holidays coming short month at November short month of December you know a Europe shuts off in the middle of December so by all those puts and takes.
I guess is at the December quarter still ends up.
About 6% lower.
Then September quota.
And that minus 6% is a huge makeup from hello, the backlog backlog was on October one.
And then with the strength of the bookings October was strong bookings November so far it looks like good strong bookings if the bookings continue.
Then hopefully the January one backlog for the March quarter could be better than what we experienced a as a backlog on October one and would continued strength of bookings hopefully.
We could we have some sort of recovery, but I'm not really giving any guidance for March it.
Understood. Thanks for the color Stephen and I think earlier, you mentioned that the classic Microchip as you call. Your core business from some acquisition does though typically down about 3% in December eight using some of that and maybe the Chinese new year stacked cannot closer to Christmas This time.
Has some effect on you know some small portion of your consumer business. You think part of that's going on or perhaps impacting September and then then coming back up in October .
I I think you know earlier gentlemen adds to that we gave guidance in early September .
Did we reconfirmed the midpoint of guidance, so kind of what happened.
You know Ganesh mentioned and I mentioned also said the month of September was quite weak.
Weaker than we had expected, causing us to.
No I missed the sales by about 10 $11 million.
You know the month of October was much stronger in November is going to much stronger. So you know could it be because of some sort of light at the end of the tunnel on first phase of.
Settlement with China could be the inventory has gone low enough you ended up all these puts and takes and we really have put them all on the table you know the good points you know the bed points.
And then we gave you a judgment and you could you make your own judgment or agree or disagree with others, but that's that's where it is numbers are very hard to call in this uncertain environment.
Understood. Thank you for the color.
Yeah.
Thank you all taking next Shawn Harrison from Longbow Research. Please go ahead.
Hi, good afternoon. Thanks for taking my questions I guess my first would be is there anyway to quantify I know you've talked about it a lot. So far just how much September disappointed in terms of either the backlog or actual sales would do you have been tracking toward.
The higher end of guidance otherwise.
No I'm when we when we.
Reconfirmed our guidance, we were essentially tracking towards the midpoint.
And September was weak, causing us to Miss by 11 million am I correct yeah.
In that's the amount that we should consider what the shortfall was also in kind of general backlog as well.
On a the backlog was much much weaker.
Remember backlog crosses over into the December quarter engine exceeding quarters as well on you know earlier I mentioned that the backlogs started.
On October one the backlog was down in double digits compared to July one.
If you're giving minus six person guidance now.
You know you, even a 4% change would be $52 million rate on a revenue number.
And the backlog on October one started much worse and minus 10.
Significantly worse than minus 10, so we have made up a huge amount of gap with significantly steeper slope.
It's very helpful. In just as a follow up the rule around the slope and get to a number and tell you that's a number on.
Unfortunately, we have seen that you know when the backlog start slow can be a steeper slope, but then the slope can change and it could end up early in the middle of December and not filled during the holidays. So you got to account for all that and that's where you have been keep keep stressing that there are lots of puts and takes them and putting them all.
Into consideration, we were giving your guidance.
Yeah, We believe is where we're headed.
That's very helpful. Steve If I may have follow up just the incremental weakness you saw in the backlog was it more on the analog set of the portfolio or the microcontroller side.
It was largely.
Pretty much across the board, there's no product specific backlog that was weaker than the other.
Understood. Thank you.
Thank you were next going to William Stein from Suntrust. Please go ahead.
Great. Thanks for taking my questions. Steve you already told us that the weakness was very broad based by markets and by Geo I Wonder if the strength in or the very recent strong recovery in bookings trends could be.
Attributed to any staying in particular any geo any end market any event.
Well I would say.
If you have to pick a geography that ish that has shown strength it would be China.
And not it but nothing by end market there, we've heard about China auto recovering significantly.
Are you seeing that as well.
Yeah, I mean, you know we manage the business by product line goes you know so you know we have rough end market commentary, where we believe that the only stronger end market has been data centers communication and aerospace and defense were flattish and automotive industrial and consuming appliances was where the weakest market.
With a one month booking and in October we can't really.
You know tell you a change in the tone, we just don't track it that way.
Thanks, one more if I can.
With regard to the Microsemi system.
ERP.
Integrations that you're doing can you remind us that timing to complete these and I just forget whether there's a step function cost savings that happens at the end of it all or is it more linear as we go it reminds us of the size of that please thank you.
So if you recall, we began this a year ago and have had a number of transition as we make a every quarter.
We just at the most recent of that on November 1st to have this year.
In my prepared remarks, I said, we have at least another four quarters to get to substantially complete we're about halfway through at this point in time.
And the savings are more overtime, rather than a step function change.
And as we get through enough of the systems, you know, we take the savings and.
That becomes a synergies that we add too I will take time.
Alright. Thank you wouldn't next going with Heartland <unk> from JP Morgan.
Good afternoon. Thanks for taking my question I know, it's always tricky to reconcile the as they did it with your results, but if I look at the assayed data for calendar Q3.
The overall general M.C., you market grew about 5% sequentially, but almost all of that growth came from 32 bit while EBIT declined 16 bit was relatively flattish sequentially you've grown the size of 32 bit pretty strongly but I think it's still about a third of your overall m. few business. So Nixon.
Adjusted because you still have more eat in 16 bit exposure is this the potential reason why your M.C. you business slightly underperformed the general industry in the September quarter.
We have not analyze the numbers again for us so yes. So.
I'd, rather not guests and make any comments I think.
You know or.
Oh, you mentioned a end market demand based microcontroller business was down 1.3 person there.
I I think many of the results we have heard.
From a various companies a wooden lead us to believe that the business in September quarter was up 5%.
Don't know how if somebody comes up with the numbers if you add up the numbers from T. a in others.
Oh, I don't know where they can construct that number.
Yeah dollar what is our 30, new that business is doing a you know a much much stronger than the eight in the 16 I think these are businesses that are not as much 816 32 bit focused they are broad market trends in automotive and industrial and consumer appliances.
And they affect all segments of the 30 to have a microcontroller market.
I believe has in history, the you know as fairly.
You know, especially during turbulent times like this is their device the numbers and the significant changes reported in and it's easily causes confusion like it's causing right now if I look at add up the results of most companies that make microcontrollers I don't really think they can get to the numbers.
Yeah, that's a fair point, Okay, and then my follow up you know we've been through a couple of quarters of cloud data center spending digestion, but looks like spending is picking up back here in the second half of this year looks like you guys, you're seeing that as well I think via the Microsemi acquisition you guys have relatives relatively strong position in a and B in me enterprise.
This is Steve controllers, you've got a strong platform for PC. He switching products and then you've got some of your core products white like secure M.C. use and Ethernet products that go into the cloud as well [noise] roughly how big is cloud data centers in end market for the team I assume it's probably a bit easier to track given that.
These products are purpose design for data center applications.
So the product lines that address data center are more than just the microsemi product line that came to datacenter clearly that is a big position that we have some of what you mentioned relative peace took the strength in storage the strength in the ssds and all that is good but I don't know if I have a good way to breakout.
Exactly what our data side, if it's in that mid teens is what Mike My guess would be based on where we had seen the combined company, but that's from several quarters ago.
Great. Okay. So products into data center from the classic Microchip business prior to the Microsemi and some of those products go into power supply is there going to you know you know other I O control in various between 80 or so we.
Had some data from two exposure before but obviously the big one can be more because for me.
Okay. Thank you.
Thank you very much for your question I've never mind or if he would like to ask a question. Please press star one.
Please limit yourself to one question and we Q4 follow obsolete.
Well take our next question from Mark Delaney from Goldman Sachs.
Yes. Good afternoon. Thanks for taking the question I'll give it to one the October bookings a strength at the company spoke to are those primarily bookings that are for shipment in the December quarter or are some of those bookings for shipment in the March quarter, and maybe giving you a good start on your backlog for the March quarter. Thanks.
Those are those bookings at age the every month from head on and into the future six eight months out. So some are for December quarter summer for March quarter, some of it even spill or beyond the March quarter.
Thank you will next to occur next question from John <unk> from Credit Suisse. Please go ahead.
Yeah you guys. Thanks next question, Steve the entire December we'll do Youve been pretty clearly that your assumptions turns are higher I'm, just kind of curious given the strength you've seen quarter to date.
You want to how what's the expectation to interpret terms relative to trend do you expect you get Steve is to continue to mid point or are you embedding kind of a more normal turns business in the second after the quarter do you have to me 20 God.
So I won't speak qualitatively rather than quantitatively, because we haven't disclosed what the backlog was whether it is now and you know all that.
If the if the current slope off backlog feel continues.
Then the results would be very good.
We're not expecting the slope to continue.
So we you know judgment has the moderator did that slope, but I'm slope.
Some just because the backlog started very low and then people place. The older slope is highly has backlog starts to fill up the slope will moderate and the other is the effect of holidays. Because you know you don't do a lot of bookings over the Thanksgiving week, and then December Europe is the weakest usually.
U.S. is the second and then you know Asia, usually continues to work over the holidays. So we have based or not experience from a history, we have model that Dan.
But I will admit that we have moderated that slow because routine to slow because in our sustainable.
I I think I'll also point out thanks.
Broad range of guidance and be a given a pretty broad range of guidance to account for all those puts and takes.
Thank you were talking or next question from Cree Stan Lee from Citigroup.
Hey, Thanks, guys, I'll try and behavior and to stick to one question.
Steve. This this Ah I guess sluggish type of environment continues into the March quarter.
Theoretically what would you be looking to do a as far as Opex goes in your own and inventory.
Well, if the sluggish environment look to continue the opex would be basically in the range, we will keep on.
No controlling any head count additions the sparingly approve any replacement acquisitions.
No bonus will continue to be lower you know within the target could type of bonuses.
Capex food you know continue to tighten because there's no growth, we will need capacity and a lot of the capital. We're investing is this incremental hit on the there's no big capital needed for growth in this environment. So you know those are the things we would do if the environment continues to be sluggish.
If the environment where to accelerate.
I would think we still have a sufficient capacity and sufficient inventory to ship the upside so you wouldn't see.
It grow 10, Ah you know Capex, a immediately and you wouldn't see a growth in expenses either.
So if the upside in revenue were to come through.
I think it'll be pretty good leverage for the earnings to go to the bottom.
Great. Thanks, guys.
Okay.
Well with Vijay Rakesh from the Mizuho group.
Please go ahead.
Yeah, Thanks, and just a Steven I think just briefly you talked about 15 mentally has come down quite a bit I was just wondering if the they submit the extended to the end customer also you have you seen then customers stock up ahead of the status or do you think enventis I'm going out to their customers have come down as well.
You know, we really have no meaningful visibility into and customers and what they're doing with their inventory. They don't report to US we don't see the change from week to week as we do in the case a distribution so.
You know they are we presume doing what they think it the right thing for their business, but we have no color one way or the other.
Got it and I know you mentioned October you saw nice snap back a a pickup in backlog, mostly from China, given that Steve mentioned auto and industrial but the weakest what do you expect those to snap back faster than others, we see some.
The bottom, though that's it thanks.
No, it's really hard to call a future by end markets, it's easier to talk about the past Oh.
Yeah, if there's some sort of food trade show demand there was to be clear rules, where overnight to another tweaking of the duties will not go high it or something then.
You would see some stability and return to normalcy on the industrial market and appliance market.
Oh automotive that is a settlement with GM and Jim now and so you should see some impact there.
So I think a you know those are the things that would show strength is.
Got it thanks.
We'll next go with Christopher Rolland from this.
Susquehanna International Group.
Thanks for the question Steve Thanks for all this big picture so.
Your experience maybe you can talk about how this cycle has been different from prior ones you know kind of what most surprised you this time around and then.
How do you feel about this being a more about semi conductor specific turban cycle or versus no an economic cycle and do you have any thoughts on an economic cycle, given how long that's economic cycle.
Wow.
Well that's a that's.
That's a tough boil that you answered.
Yeah, that's a I'm not an economic economist and that's a that's not my field. So.
Give you some feel for really you know how I'm thinking.
Many of the cycle that industry have seen.
Oh the cycle, it's created by your own industry.
Through a long lead times, a excessive inventory build it and then and a bubble bursting and going the other way and no company shipping below demand for awhile.
And then the cycle correcting. So those are you know semiconductor industry and its customer cause psychos by successfully under shipping demand in over shipping demand.
This cycle hasn't been caused by the industry.
This cycle has been cause buddy.
The much larger economic forces and you probably want to name a single one it would be the U.S. China trade.
Oh, it's really been caused by that I tried to explain it before I, let me take another shot at it.
You know the world economy.
The runs on manufactures building the product and putting in the Intuity.
With a forecast that the customers will come in by that product.
Now given an example of a grocery store our industry electronics store you can go into these stores, there's lots of hinman duty and you can come out with bags full up your grocery.
You do not order your grocery a week ahead of time and then go pick up the delivery.
In fact, if you were to go into the grocery store what you want it isn't there you go to another store in by it.
So world economies are largely zones on inventory.
No enter the 10 different uncertainty.
Imagine a customer billing the product in China.
And and let's say there were no tariffs on it.
And bringing it to you as.
I'm sorry, you know there were tariffs on a lets it is 25% telephone it.
So they bring the product to U.S. with 25% telephone and.
And having them the uncertainty to be able to pass on that Ted if to that end customer they don't know whether they can or they can.
And the second risk is that bring the inventory to U.S. and then there is settlement announced once a settlement is announce no end customer will pay that 25% tariff.
Because of the manufacture brought it here with Ted is at their own risk. So what it does is.
It makes everybody stopping that tracks.
The cut down the inventory on the loading docks to their manufacturing lines to the raw materials to the finished goods to the transportation hubs everywhere.
People drawdown the inventory because they do not know what the lender to cost is and what they can pass to their customers.
That is the impact we have seen in many many of the market.
And when there is a clarity on the 10 different then you will see rebuilding up that supply chain inventory, which would have a very positive effect on us.
Got it thank you for that extra insight very helpful.
Yeah that that's great. Thank you Steve.
Thank you were going next with Gail Alexander from the Darphil Associates. Please go ahead.
Okay.
Okay.
I assume as you look at your long term.
But you still have.
Gross margins at 63% operating margins at 40 in a half once we get over this.
These problems.
Yes, good or we have not changed our longer term model.
In fact, the changes we announced today on the restructuring up for Colorado Fab.
And I'm, bringing some of those six inch products.
Two hour to a higher a hard volume eight inch fabs.
And and and really creating $65 million in savings in the process. What we have done is we have lowered their revenue at which we achieve our target model.
So prior to that.
It requires a certain amount of revenue to fill up or factories and remove the under utilization to achieve 63% target margin by making those changes we have we're not dollarized for you how much would we have lowered the revenue we need to achieve to achieve good target margin, because you're taking too much cost sort of assume.
Two.
Hi, Thank you May I, just I guess one question on China, you can skip it.
Uh huh.
You talk of this 25% tariffs.
Have you seen.
Any.
Talk.
That they made that people will want to reduce that tariff or is that all open ended.
Oh, you have some information you should.
Are you talking about the trade discussion between the U.S. in China.
Because I think that is that the entire point is going to beat the 25% tariff is creating uncertainty on both sides of the ocean is creating uncertainty in other regions of the world as well in phase one settlement that has been touted by the administration the 25% tariff doesn't go away.
The only agreed to not increase that Ted it from 25 to 30.
But there is some talk the whether it's in phase two or gets done in phase one.
Ah, where certain 100 million billion dollar with a good the tariffs will go down but those are just talk so far I think we see different news reports that come out we don't have any direct insight into the discussions and decisions I think that are they in good faith effort to try to de escalate from where we are.
And it may take more than one phase, but the rate at which that comes down and the time when it impacts the products that we are designed into our customers that impacted by is unclear to us.
Even even if there is a settlement, which creates a fund alipay they tetrasun exito tariffs or some number 10% 15 person, but their content.
And is not going to be another tweet, which is going to increase those Ted is once the customers distributors.
You know contract manufacturers everybody has that phonology.
And they can run the business in a normal away and the inventories will get replenished.
It is the uncertainty which causes it because they don't know what the lender costs will be.
I want to thank you.
Thank you good.
Anything else operator.
Our next question from Craig Ellis.
B. Riley <unk>.
Hey, guys. This is korlym when John for Craig I'm, just wanted to ask a question on the cross selling opportunities with Microsemi I think last quarter. You had said that the muted environment had kind of slowed down some of that progress. If we were to get to a normalized environment next year could we see those cross.
Selling opportunities kind of springboard you know as is the design activity going on and we're just seeing muted demand everywhere or any kind of qualitative color you could give on the cross selling opportunities would be great.
So as you noted the cross selling opportunities are all at the design and stage. So these are platforms that get designed and then go to production over 18 24 months of time. They design in activity is going extremely well and across the board. The combined sales teams combined business unit teams up microchip.
Our all highly focused on enabling that a new designs. They environment today is really for products separate design back in time, and you know that muted environment doesn't change, but the seats that are being planted new designs and the increase total system solutions were able to address.
Clearly will pay off a in time at the current that's a new designs go to production.
And you know 12, 18 24 months of time.
So just if I could clarify there. So we would expect some of that cross selling opportunity to start to manifest next year, even if the.
Firemen kind of just gets along the bottom here.
Yeah, and you got to take it over time it does it not a single application single customer that drives in one way or another there's hundreds of applications customers over which that's what happened, but clearly there is a multiplier that comes from cross selling from selling a more complete solution to the customer and as that ramps in you know I don't know if it is exactly.
First half of next year second half, but into in time as the environment improves its new designs go to production, we will see the benefits that come from it.
Alright, thanks, guys.
Thank you going next to Craig Hettenbach.
Family.
Last question, Steve I wanted to secondary impacts of the trade War is just the acceleration of China to try to most of them often localization effort on can you talk about just maybe park city your portfolio, where you see maybe some overlap or to that versus other parts that you think you know a lot more on you tend to what China might be.
To do from a development perspective.
So you know we hear a lot of Cogs and we don't see a lot a action on that front.
They're maybe action on certain product lines I think they really maybe you're trying to build a processors and graphic processors in others.
Are we doing then do not really see that can impact today on a.
No data center products on a refugee products on Oh discrete and other products.
Or microcontroller and analog we hear a lot of talk about it and no longer term the there there could be an issue where.
They want to either designed their own product or not I prefer to design with Americans I think a in a short period of time and less than a year of this trade war.
You can truly design a massive portfolio that microchip has to make a meaningful impact on that so really not seeing that on the on revenue today, but we're seeing it in sentiment.
And I would add to it you know the the threat from local suppliers in China is nothing new spend there for many years. It's a question that do they have the types of products the quality of the product capability to support the designs the wide range of applications and customers that you need to be able to serve with it.
That is a very large tasks and they may be more environment. Today that says you know you should consider more of a local supplier, but the task is very very large for anybody who wants to do it and if they could there would have been doing it for several years before.
Got it thanks.
Thank you were going to.
From Bank of America.
Thanks for the very quick follow up my actually Oh, well on that those same blinds and comes a competition. That's substitution. So you have you seen any design shifts to your perhaps your European or Japanese competitors, who happened at the market.
On a longer period of time, you know does that become.
Hi, good going forward.
[laughter] you know like I said first we have very very broad customer base was sort of over 120000 plus customers. So it's you know really really hard to track.
We're not seeing any preponderance of evidence to see that has any design shift.
We're hitting in sentiment. The so called non is sentiment you may have you heard that gonna language, where.
You know government is saying you know design with Chinese customers first designed with probably monies that Asian second.
Designed with the European third and then when it comes a lost.
But you know 95, 97% on products, we build out all the proprietary nature.
But no pin compatible part available so in a short period of time, we really haven't seen any of that shift.
The shift will first to become visible at the design in stage, if it does and I don't think we have strong evidence today the that's happening.
Not losing designs like Crazy I from Middle size is still very very long really large and was able to leverage.
Lot of for more commodity like products would most advanced products with a total system solution if they're on the same board.
Thank you.
This cause for concern and we're watching.
And we are making the products better training or the sales and mechanisms to bundle it and all that so negative sentiment in China is definitely there, but it's not really.
You know being seen in a bookings and revenue dollars today.
Thank you.
There are no further questions at this time, Mr. Sanghi I'd like to turn the conference back to you for any additional closing remarks.
Well I'm going to think everyone. This has been a difficult a year with all the.
Uncertainty please continue to bear with us and we'll see some of you on the road as we go to various conferences.
Thank you very much.
This concludes today's call. Thank you for your participation you may now disconnect.
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