Q3 2020 Earnings Call
[music].
Good day, everyone and welcome to this microchips third quarter fiscal 2020 financial results Conference call.
As a reminder, today's call is being recorded.
At this time I would like to turn the call over to Mr., Eric Bjornholt, Chief Financial Officer, Sir Please begin.
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 releases 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 will comment on our third quarter fiscal year 2020 financial performance and Stephen Good asked will then give their comments on the results and discuss the current business environment as well as our guidance.
We will then be available to respond to specific investor and analyst questions.
We are including information in our press release and in 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 you will find useful when comparing our GAAP and non-GAAP results.
We have 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 of 2018, we adopted the 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.
Our revenue on such transactions were deferred until the product was sold by our distributors to an end customer.
As discussed in previous earnings Conference call, we continue to track and measure our performance internally based on direct revenue plus distribution sell through activity and each quarter. We 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 we will also provide investors with our end market demand based on distribution sell out but will not provide a PNM all based on end market demand.
End market demand in the December 2019 quarter was 1.3 to 4 billion.
End market demand was about 36.1 million more than our GAAP revenue in the December 2019 quarter.
I will now go through some of the operating results, including net sales gross margin and operating expenses I.
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 December quarter were 1.287 billion, which was down 3.76% sequentially and near the high end of our updated revenue guidance provided on January six 2020.
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 61.5%.
Operating expenses were at 26.4% and operating income was 35.1% and above the high end of our guidance.
Non-GAAP net income was 340.8 million.
Non-GAAP earnings per diluted share was $1.32.
Which was above the high end of our last provided non-GAAP EPS guidance from December 3rd 2019 of $1.30.
On a GAAP basis gross margins were 61%.
And include the impact of $5.7 million of share based compensation expense.
Total operating expenses were 654.3 million and include acquisition intangible amortization of 248.7 million special charges of 17.8 million.
10.9 million of acquisition related and other costs and share based compensation of 37.8 million.
The GAAP net income was $311.1 million or $1.20 per diluted share.
Our December quarter, GAAP tax benefit was significantly positively impacted by the tax benefit related to the intragroup transfer of certain intellectual property rights.
The non-GAAP cash tax rate was 6% in the December quarter.
We expect our non-GAAP cash tax rate for fiscal 2000 to be about 6% exclusive of any transition tax any potential tax associated with restructuring of the microsemi operations into microchips global structure and any tax audit settlements related to taxes accrued in prior fiscal years.
We have many tax attributes and 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 245 million and will be paid over the next six years, we've posted a schedule of our projected transition tax payments on the Investor Relations page of our website.
Our inventory balance at December 30, Onest 2019 was 708.8 million.
We had 129 days of inventory at the end of the sent the December quarter down two days from the prior quarters level.
Inventory at our distributors in the December quarter were at 28 days compared to 30 days at the end of September.
We've only had one quarter in the past 15 years, which was Q3 fiscal year 2013, where our days of inventory a distribution have been at lower than the current levels.
The cash flow from operating activities was 395.5 million in the December quarter as of December 30, Onest, the consolidated cash and total investment position was 402.3 million.
We paid down 257 million of total debt in the December quarter, and the net debt on the balance sheet was reduced by $254.2 million.
Over the last six full quarters since we closed the microsemi acquisition and incurred over 8 billion in debt to do so we have paid down $1.986 billion of the debt and continue to allocate substantially all of our excess cash generation 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 we feel as 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 in the December quarter was 503.4 million and our trailing 12 month adjusted EBITDA was 2.1 to 5 billion.
Our net debt to adjusted EBITDA, excluding a very long dated convertible debt that matures in 2037 and as more equity like in nature.
Was 4.58 at December 30, Onest 2019.
Our dividend payment in the December quarter was $87.7 million.
Capital expenditures were 14.1 million in the December 2019 quarter, we expect between $20 million and 25 million in capital spending in the March quarter, and overall capital expenditures for fiscal 2020 to be between 76 million and 81 million.
We continue to add capital to support the growth of our production capabilities for our new products and technologies and to bring in house more of the 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 December quarter was 41.4 million.
I will now turn it over to get Nash to give us comments on the performance of the business in the December quarter Ganesh.
Thank you Eric and good afternoon, everyone before I get started I'd like to remind you that the product line competitors and I will be sharing with you today are based on end market demand, which is how microchip measure this performance internally.
Let's start by taking a closer look at Microcontrollers.
Our microcontroller business was sequentially down 1.1% as compared to the September quarter.
We continue to introduce a steady stream of innovative new microcontrollers, including next generation Bluetooth 5.0 dual mode audio solutions.
Production ready open source tools for managing our adaptec smart storage offerings and industry support for development of the open compute projects accelerator infrastructure through our PPA switches.
Microcontrollers represented 53.6% tough on end market demand in the December quarter.
Moving to analog analog business was sequentially down 3.6% as compared to the September quarter.
During the quarter, we continue to introduce a steady stream of innovative analog products, including the triply Aito 2.3, PT compliant power over Ethernet injectors and mid spent that enable up to 90 watts of power without changing switches or cable.
Analog represented 28.1% of our end market demand in the December quarter.
RFP GE business to sequentially flat as compared to the September quarter.
During the quarter, we introduced the radiation tolerant pull a fire FPA for space and other high reliability applications.
As well as the early access program for the pull a fire system on chip at PA offering the world's first hardened real time, Linux capable risk five based microprocessors tips and sub system.
Design wins for the pull off our family continue to grow strongly and we remain optimistic about the prospects for this product family.
Thats PA represented 6.9% far end market demand in the December quarter.
Our licensing memory and other product line.
Which we refer to as Lmtwo was sequentially down 0.7% as compared to the September quarter.
During the quarter, we enable we delivered new family of electrically erasable Ram products, providing cost effective alternatives to non volatile Ram solutions had a number of memory densities.
Alamo represented 11.3% of front end market demand in the December quarter.
And update regarding Corona Vias and what we're seeing.
First of all our employees, a safe and what remains and that remains our highest priority.
We implemented travel bans in and out of China, Hong Kong, and Taiwan, two weeks ago.
We also implemented self quarantine requirements for anyone who may have traveled to these countries.
Mandatory medical assessment and clearance for anyone who may have symptoms as screening questionnaire for all external visitors to any microchip facility and common sense preventive sanitizing steps on a continuous basis in all our facilities worldwide.
As you will know most provinces in China have extended the Chinese new year holidays to February nine.
Okay Province, where we'll hone is located has extended the holidays of February 13th.
Our manufacturing footprint in China is small and we expect little impact to our operations from this extension.
Also at this time, we do not anticipate any significant supply chain issues for materials sourced from China.
Some of our customers would could be affected by the extended Chinese new year holidays.
It is too early to determine what impact there may be as most are not hit back from the extended holiday.
Because Chinese new year. This year was early in the quarter. There is more time for our customers to catch up lost production within the quarter.
We also believe that is slacken manufacturing capacity, which can be upheld while recovering lost production.
These outbreaks are unpredictable and they may yet be other twist and turns to come into days ahead.
We continue to process the news daily as well as monitor information from the center for disease control and the World Health organization.
We will adapt our response as needed and focus on the things that we can control.
Finally over the last few months, we started to share six mega trends that we believe provide significant growth opportunities for microchip over the next five to 10 years and I'd like to summarizing.
First the Fiveg infrastructure rollout, which is just getting started and as a decade ahead event.
Each prior generation of wireless infrastructure deployment to GE Threeg and Fourg lasted for about 10 years.
The internet of things comprised of smart connected and secure end nodes is picking up steam, especially for industrial Aiotv, where there is compelling ended that are compelling business models for customers to make money save money and mitigate risk.
Third for datacenter to datacenter demand the store in process data is exploding data is created at a hyper exponential rate.
To put this in perspective estimates are that 90% of the wealth data was created in just the last two years and that trend continues unabated.
Fourth electric and hybrid vehicles are riding a wave of consumer and regulatory forces, which are driving substantial investment in technology and capacity.
First is the advanced driver assist which is already a growth application and its proliferation to more car car models and its natural progression to increasing levels of autonomous driving.
Six is a file is finally, the artificial intelligence and machine learning, which we see as another explosive growth area not only in the cloud, but even more so at the edge.
These mega trends cut across a diverse end markets, we serve and guide up product development priorities.
We believe these mega trends in conjunction with a total system solutions go to market approach will provide key opportunities for organic growth in the coming years.
With that let me pass it to Steve for some comments about our business and our guidance going forward Steve.
Thank you in Asia and good afternoon, everyone.
Today I would like to first reflect on the results of the fiscal third quarter of 2020, I will then provide guidance for the fiscal fourth quarter of turning towards.
Our December quarter was an interesting one in which we revised the midpoint of our guidance upwards twice our ones on December occurred 2019 prior to the credit Suisse Conference and second on January six Tony Tony Prior to JP Morgan Conference.
Our final December quarter, GAAP net sales alone on the high end of our latest guidance.
And came in at 1.287 billion.
Down 3.76% sequentially.
I would end market demand based on sell through.
$36 million higher than GAAP sales, which we believe shows that the chenodal was continuing to manage their working capital conservatively.
By reducing inventory due to uncertainty.
At December was the seventh consecutive quarter, where our sell through revenue was higher than our selling revenue.
Our consolidated non-GAAP gross margin of 61.5% was just above the high end of her guidance.
Consolidated non-GAAP operating margin of 35.1 person.
Was also just above the high end of for guidance.
Our consolidated non-GAAP earnings per share was Dollarsthirty, two which was also above the high end of further revised guidance. So overall December quarter turned out to be a lot better than originally guided.
On non-GAAP basis, we're going through over 117 consecutive profitable quarter.
In the December quarter, we paid down $257 million of our debt.
Our total debt payments since the end of June 2018.
Has been about $2 billion the pace of debt payments has also has been strong despite the weak in uncertain business conditions.
Underlining the strong cash generation characteristics of our business.
As well as ever active efforts to continue to squeeze working capital efficiencies.
Now before I provide you guidance for the March quarter, Let me comment on some of the inflection points that we saw during the December quarter.
However December quarter bookings were up double digit percentage over the September quarter bookings.
And that resulted in our starting backlog for March quarter.
To be up double digit percentage or the starting backlog.
For the December quarter.
Our restarting backlog was up in each of the geographies of North America, Europe and Asia.
From an end market perspective, we saw strength in data centers.
And started to fuel recovery in industrial and automotive.
Continue on the inflection points the book to Bill ratio for December quarter was well above one after multiple quarters, a book to do being below one.
Our distributor inventory at the end of September was already at low levels and lowest in 15 years, except the one quarter in fiscal year 13.
In December quarter, the distribution inventory went even lower.
During December quarter.
We saw increased the level of customer requested pullins.
Many of which required factory expedites.
Seeing these multiple signs of infection point, we call the December quarter to be a bottom for microchip for this cycle barring any negative developments on the us China trade fund.
For the impact of could owner wires.
Now I turn to guidance for March quarter, the backlog for March quarter that started are quite strong continued to fill in during the month of genuity.
Taking all these factors into consideration.
And after rolling up revenue expectations from sales regions as well as business units.
We expect GAAP net sales based on selling revenue recognition for our products to be up between 2% to 9% sequentially in the March 2020 quarter.
The midpoint of our guidance for the March 2020 corridor reflects what we believe our business can deliver assuming newer extraordinary events.
However, the wider than normal guidance range is to help account for the uncertainty associated with the evolving Corona revitas situation.
We are still in the early days of how this intuition is playing out.
We have no go to model, how the rest of the quarter will play out further Corona light a situation and what the consequent business impact maybe.
We believe that our guidance range incorporates our best judgment for the possible scenarios.
Regarding capex, we expect to finish fiscal year 2020, where their capex of between 76 million in $81 million.
Significant reduction from fiscal year, 19, capex of $229 million.
This is consistent with what we have said before.
At our Capex is divided between growth capital maintenance capital and new products and technology capital.
In fiscal year like 2020, enrich our net sales declined the growth capital, which is the largest portion of the capex declines to virtually nothing and therefore, the corporate capex declined significantly.
For the December quarter.
This should be for March quarter for March quarter, we expect our non-GAAP gross margin to be between 61.5% and 61.9% of sales, we expect to non-GAAP operating expenses to be between 25% in 26.2% of sales.
We expect to non-GAAP operating profit percentage to be between.
35.3% in 36.9% of sales.
And we expect our non-GAAP earnings per share to be between Dollarsthirty five per share two dollarsfifty one per share.
Given all the complications of accounting for acquisitions, including amortization of intangibles.
The restructuring charges and inventory write up on acquisitions.
Microchip when continued to provide guidance and tracker to reserves on non-GAAP basis, except for net sales, which will be on a GAAP basis.
We believe that non-GAAP results provide more meaningful competitive and decided to corridors and we requested that the analysts continue to report the non-GAAP EPS to move to post Carlo.
With this operator will you please poll for questions.
Yes, Sir.
Thank you to time constraint to try to limit your questions to line.
All right time follow up questions you addressed.
I would like to ask your question. Please.
Star wind on your telephone keypad.
You are using all speakerphone, please make sure that your mute function it turned off to allow your signal.
Thanks.
Again, Please press star one to ask your question.
And our first question will come from Craig.
With Morgan Stanley.
Yes. Thank you.
Just a question on the expedite on activity can you just maybe put that into context with currently kind of way lead times are saying here looking to do to may be kind of the trust that as business improves.
So.
During this down cycle, we build the substantial amount of inventory that is headed in the die bank.
So when an order comes in it's really taking the day from the Die Bank.
And now crossing processing, a true which can be anywhere too.
As low as three weeks to as much as six seven weeks, depending on where it has to go inside and outside or were difficult package at assembly test it might be.
What we're finding is that.
You know customers station and a fair amount of backlog.
Just outside the corridor.
And then when they need the product the expedite into the corridor.
This way that kind of have books choices that could not ticket in the quarter and leave you, though we should talk further to the needed ask us to pull it in.
We've been seeing this strange phenomenon now not only this quarter, we've been seeing it for some time.
But it really became even on mode essentially did so there's a fair amount of backlog sitting outside the quarterly in April and customers expediting it into the code.
Okay.
Does that answer your question.
Yes. Thank you.
Okay.
Our next question comes.
Bank of America.
Thanks for taking my question.
Steve I'm curious what are you expecting.
Distributors to do in the March quarter, I think you're giving a net sands outlook so any color on.
Selling and sellout trends would be helpful and engender what are the same deal why are they taking down microchip inventory to such low levels. Because it's such an outlier then we don't have anything other theaters added inventories being taken down to similarly, no nothing.
Well.
No I don't really know if as we speak distributors are taking owned inventory further but they have in the last is seven quarters ASO through December we don't really have a guidance for the March quarter on sell through we we can't really provide both ends of the guidance, it's just too much world. So.
Providing the selling guidance that we have given you.
And in the December quarter, when we provided the guidance we expected that.
Distributors will reverse that trend and we'll start to build a some inventory towards normalization. It did not happen in December.
We are expecting it would happen again in March but there is no. Good NP distributors will do what they will do.
I think part of the reason is for 30 years, our culture at Microchip in our business unit sales organization up and down through the change with the distribution.
Our conversations with the distributors.
Winning designs, creating a large of fund Nolan pulling those designs to production and creating sales, though that's how we pay our salespeople thats, how we peer business unit this whole double in the through the structure.
And we don't really have a whole other conversations regarding what we given to the distribution.
That has often always been less important to us because we manage our business based on sell through so distributors tick the inventory what they want to run their business and based on getting returns for that business.
In contrast, I think we see many off.
You know appears in competitors are more focused on selling revenue recognition with today.
And then may make deals to put more product into distribution and divesting the follow the inventory that way.
No I would add one more thing we've always had.
Low lead times in our products and I think that gives distributors an opportunity to run the inventory to whatever the lowest level. They think they can get away with while continuing to focus on sell through so.
Short lead times give them the opportunity to carry less inventory as well.
You know I had that sometime we charge expedite charges for expediting the product. So some time expedite charges the required us to.
Spend weekends pay over time or.
Pay expedited for shipping.
Going through hen Kt products, and all sorts of charge incurred incurred and we we often pass those to their customers.
It doesn't move the needle in terms of revenue room, but if somebody wants to expedite the parts, it's not always free.
But you're not assuming any restocking benefit any major restocking benefit in March.
We have now over to model it.
Okay. Thank you.
Yes.
Our next question comes from Gary.
Pardon.
Hey, guys. Thanks for taking my question I wanted to ask about job you relative performance in the microcontroller segment. It looks like for the full calendar year 2019, you.
Outperformed that microcontroller market in terms of sales growth.
And believe in the same sales metrics, but.
The second half the year looks like and to take on the in the fourth calendar quarter looks like you might have underperformed the market.
To what should we attribute that to is it sort of.
Short term disruption there are any anything to look into their long term.
Good.
I'm not sure what data it is that you're referring to so we were sequentially down 1.1% on Microcontrollers September to December.
If you look at the year over year numbers, you know, we're on Microcontrollers were down about five 5.5% somewhere in that neighborhood.
End of the story is not written we don't see any annualized numbers that are out.
Yet maybe ASI has some early numbers, we'll get that by March April and middle at the next.
Conference call have the typical gartner.
2019 numbers, there's nothing in our business that has any indication that something was better in the first half and got worse in the second half.
I think if you look at this quarter results sequentially and compare it to.
We are very large competitors I think we substantially algorithm so either on quarter arcelor by year over year.
Understood. Thanks, guys.
Thank you. Our next question comes from Chris <unk> with Raymond James.
Yes. Thank you good evening.
A question with regard to gross margins and assuming we are have started a recovery.
We'd hope to see some gross margin improvement as a result, perhaps you could answer it in terms of production utilization levels.
With some of the better order rates has that cause you to change any production levels and then from a cost standpoint.
As we go forward I think you still have some integration benefits still to come could you help to quantify those and when they kick in and how the helps the leverage if indeed, we're in a recovery.
Sure. The so this is Eric so in the December quarter, we incurred about a 16 million dollar factory under utilization charge that was reflected in our and our cost of sales that was up about $7 million quarter on quarter.
We expect that charge to be lower in the March quarter.
Particularly in our and our back end Assembly and test operation, we're running the factories higher Steve talked about and earlier response that our die bank is pretty healthy, but backend operations, we Ben Ben training finished goods and looking to run the factories harder this quarter, which should help on the gross margin on the the guidance that we're giving so thats a piece of it.
We continue to turn our factories as efficiently as we can we're continuing to invest to bring some of the outsourced Assembly and test in house set a moderate rate and all those things are Bennett kind of benefit gross margin long term and lead us to our long term guidance, which has to get to about 63% non-GAAP gross margins as a long term model of.
Versus the 61.7% guiding to at the midpoint of guidance for the current quarter.
Alright, thank you.
Our next question will come from William Stein Suntrust Robinson Humphrey.
Great similar topic only not just gross on operating as well maybe Eric you can take a step back and frame up relative to where you are now and contemplating your longer term goals.
What's the path to getting there is a chest.
Modest amount of revenue recovery is nicks part of the equation is there still restructuring for Microsemi I know, you're still bringing capacity in house. It seems to us that it seems fairly likely that you'll be able to exceed these long term targets given the revenue level that you're you're achieving today relative to what the next.
Pete could be for example.
Thank you.
Okay. So I think I've kind of touched on gross margins, so far and we've been told by others that they think thats, a conservative forecast, but we're not going to update that model until we get to the target and are on Opex were guiding the current quarter to be between 25% in 26.2% of sales on our long term models.
The 2.5% I would say, we have been pretty conservative and how we've been managing the business. During this current cycle and with that we need to make sure that we're making the appropriate investment whether it's an R&D support functions technical sales outreach to the customers to make sure we drive the long term health little business.
Now some of our variable compensation programs too.
We will kick back in as revenue grows so we have confidence in the long term model, which is just above 40% operating margins on we've got a ways to go when we're guiding the current quarter at the midpoint of guidance to about 36.1%. So I'd say be patient, we do need revenue growth to get there, but I think we're well positioned with a the into.
Segments that we've made to add to drive to higher levels than what we're seeing today.
Thank you.
Thank you again to ask your question. Please press star one on your telephone keypad.
Our next question comes from Ambrish Srivastava with BMO financial crime.
Hi, Thank you very much Steve I was wondering if you could give us a little bit more detailed on the the source of strength in bookings weather or end markets. Our Geo has had believe last earnings call. You had indicated the China was stronger.
In terms of Geos any updates on that front would be helpful. Thank you.
So I think from in market perspective, we said that your data center has been strong all along.
And we are seeing a startup recovery in the industrial market in the automotive market.
The communication market remains weak in the appliance market remains weak.
And aerospace and defense is going to always lumpy and it's hard to call.
From a from a geographical perspective, yes, we we saw strength in the China market last quarter, what you would see the weakness in China market this quarter driven by the lunar new year.
And again, we nobody knows what's going to happen with the Corona riders. So this quarter, you would see stronger us in Europe, and we could China.
Okay. Thank you.
Thank you.
Our next question.
And gentlemen, human capital.
Yes. Thank you.
If we think about business.
The business now that we have some timing.
How do we think about it coming out of the bottom of the cycle.
And kind of perhaps entering into.
Mid cycle recovery.
Excluding the impact.
Virus I'm, just trying to get a sense of the.
[noise] seasonality.
Petitions post.
The bottom of cycle.
I think I think you veggie.
No seasonality is still hard to measure.
Where the all of the acquisition that we have completed.
The the events that have happened in the last couple of years.
Well the on the tree extension situation general economic conditions now the Qunar why it is prior to that we had a significant.
Inventory correction event turn, especially the microsemi inventory.
We really haven't finish enough quarters in the healthy business environment.
Get to Pega seasonality, so I would think it still remains difficult.
Thank you. Our next question will come from Craig Ellis with B. Riley.
Yes, thanks for taking the question and congratulations on the good execution I wanted to go back to some of the comments around performance on debt reduction, which over the last six quarters. It almost 2 billion is very strong. The question is perhaps spoke to you Eric and you Steve as you look ahead and given the trajectory you are on it seems like you could be.
At a three X net debt to EBITDA level and as soon as four quarters or so so how do you think about deploying that cash to create value for shareholders. When you get to that level would a vast majority of available cash we'll go to debt pay down or would you start looking at other things and what with the priorities be at that point. Thank you.
Let me, let me take that a net it can add to it first of all I don't think were I've looked at a model, which will take the leverage down to three X in four quarters that seems awfully aggressive roto I don't know what assumption, you're making in revenue growth of the recovery were largely large.
The new depend on that.
But basically yes, we need to bring that debt leverage below it three hand.
Can I have it to you know.
Somebody in the high twos.
Once we get the.
Then we'll still be generating.
Yeah. It was somewhat of the order of well over $1 billion of free cash per quarter.
And we need to figure it out would we do and we we are having been in that situation in liquid along time.
You have obvious choice is euchred.
Hey, down more debt and bring leverage down further.
But more preferably you could increase the dividend you conservative buyback program.
And that all assuming that that is not a further them any possibility. We have said before that we tinker.
By the time, we come up for is.
Majority of the company is a smaller companies that we would like to buy it probably would have been Bart.
There isn't as much more opportunity there.
But there could be one more possibly.
Secondly, we think that to.
The remaining asset for very expensive, David large amount of M&A bid on them already because every small companies really on food.
No, we don't really pay that kind of multiple.
We have seen paid in the recent deals.
You know cypress as well as some of the do those those those multiples will wait too high for case, we cannot find a reasonable that acquisition.
Then our focus will switch to other uses of cash including higher dividend for more stock buyback and possibly some we'll do that period to period.
I think what am I going to add to that is just kind of a short term view here as well because I know all get that will get this question. A lot is you know what do we expect for debt pay down and the current quarter. The March quarter, and really we expect that to be somewhere between 225 in 250 million in the last quarter was to 57 on but are starting accounts receivable balances law.
Lower just because revenue was down last quarter, so really to to get some tailwinds behind those on it from a revenue perspective as topline growth I think the EBITDA EBITDA will start growing nicely and that's going to help with the leverage metrics coming down but kind of depends on what the environment's going to be over the course of the next year. If we were able to get to that three to.
Times number that you mentioned a week I think we'd need some pretty pretty good revenue growth.
Got it thanks guys.
Thank you again to ask your question. Please press star one.
And our next question comes from Chris Danley.
Hey, Thanks, Steve.
Steve You mentioned that some customers were expediting orders out of the June quarter into this quarter. So do you think that that.
The June quarter could be at risk of a little bit of the disappointment like we're running from the June quarter to.
To pay the March quarter and then.
Further to that you talked a little bit about lead times do you think that there is risk of extended lead times. This this expediting continues.
The lead times are not at risk short term, because we had a fair amount of diamond duty in.
Theres, a fair amount of capacity slack in the system since the revenues are down year over year.
The.
The backlog of bottomed out some time ago and a total extended backlog.
It really growing nicely. So when when people are taking backlog from June quarter moving into March quarter, that's not putting during the quarter at risk their reserves due to higher and higher backlog. The overall backlog is growing book to Bill was strongly positive. So we put a very large amount of 200 backlog in the system, Chris we had expedite.
In the December quarter, where people have placed backlog in the March quarter and pulled in you're seeing a stronger March quarter. Despite that so as you go into an up.
An upward trend in the business. It is not on natural we've seen another cycles, where customers start to seek their business recovering and wanting to have product sooner than they had originally planned for yeah and in addition to those orders that are that are being pulled in by customers requesting them into the current quarter were also receiving orders that are just within our normal our normal.
Published lead times and that can create some expedite activity also often with short lead times and Chris. This phenomena is not a new one we have seen before in prior cycles and we've been seeing it in this cycle, it's eichler kind of correlate to heavier cake and eat it too.
You know so customers will place in order to.
With they are still in the cancellation of push our window and if they don't want any of that business is not strong they can push it out delivered out but if their business is stronger in the needed then they ask us to expedite it kind of have their cake and 82.
It's not a new phenomenon, but we're seeing is.
Quite a situated right now and that's why I called it out.
Okay. Thanks, a lot guys.
Yes.
Thank you.
Next question comes from harsh Kumar.
Yes, Hey, Steve I was curious with this sudden pick up in China are you aware of any areas of shortages not just in your business, but in the industry overall.
Im not seeing any shortages I'm in China right now is shut down so you really wouldn't get any data.
And they were shut down for the Chinese new year that just about coming back.
But most stridency theyve extended it in this February 19th.
But prior to going for the Chinese new year, no why we were not experiencing any shortages.
Thanks, guys.
Yes.
Thank you. Our next question comes from Christopher Rolland with Susquehanna International Group.
Thanks for the question.
Eric perhaps asked another way.
If you could talk about Mel and microsemi, bringing them in house remind us kind of where we are on our frontend and backend.
And then also the gross margin benefits that you would get there.
Also how you're able to do this in such a small capex top off as well thanks.
Okay. So there's a a couple pieces to that so we did tighten our investment criteria in terms of making those capital investments over the course, the last year when business was or what was difficult and so we started the window the payback window from a cash flow perspective from two years down to a year and we really haven't chain.
That at this point in time, so thats one of the reasons of spend than lower and this is very detailed work. So it's no package by packaged part by part and none of these investments are moving the needle movers, but.
In aggregate they do help gross margin slowly over time, so yeah. I think Thats response of your question lets discuss if anything else I'd like to give them the person to as we head inside and outside for kind of assembly in both yes. So fab is 39% internal assembly is 45% and test is 54%.
That's useful thank you.
And we would expect those assembly and test percentages to increase overtime as we gradually make these investments.
Thank you Sir.
Our next question.
Let's start with <unk> Morgan.
Good afternoon, guys. Thanks for taking my question and congrats on the strong start to 2020 I know lead times is still pretty short, but given the strong bookings trends coming off of the depressed September quarter strong bookings, thus far here in the March quarter, and maybe some backlog build for June.
That's seen out the potential issues for Corona virus, but do you think you're setting up given the backlog that you're seeing at least for a seasonal June quarter, which is typically one of your seasonally strongest quarters.
Well, we're we're not giving guidance so commenting on the June quarter.
Especially especially in light of food.
On significant uncertainty because it equivalent on writers.
Removed those uncertainties and led to there's no impact and business comes back in the right is contained to rapidly and all the than your assessment for the June quarter would be correct.
Yeah, I think I would just add or we are very well positioned from a capacity perspective to be able to respond quickly to upside if that develops.
Got it and then I guess on that note you know back.
In early January when you did you update you know it didn't sound like you were going to be increasing front end utilizations near term just because you guys have pretty substantial died banks, but let's say as the March quarter Progressive is in the backlog you know is indicating the potential for normal seasonal growth slowed June and September.
I assume the team would start to ramp capacity utilization say in the back half of this quarter is that kind of at the right way to think about the potential timing of utilization is going up.
So.
This is Stephen let me take that I think let's start from the Bakken first and will come to the front end.
In the back end utilization is going up as we speak and as we ran it will continue to go up because we depleted the finished goods and when the orders a strong without it takes a die bank and finished in so that will continue to have it positive effect on gross margin pretty much starting now.
When you look at the front end the framed in still has a fair amount of Die Bank. But then also you go to separated.
On the production, we do inside versus a production we buy from outside.
The the inventory in the products, we buy from outside was depleted to a lower level.
And do we are increasing the bye.
As we speak.
But there is another utilization impact of that because there was being done outside what we were doing inside that's where we had the substantial die bank and I think in world.
Please ticket you know new humor quarters before we have to started increasing their production in our fabs.
Got it okay, but then the the lowering of the the Underutilization charges I'm here in the March quarter is simply because you are filling out you are.
Your packaging and test Assembly Utilizations are going up but is that the primary driver for the lower under utilization charges.
Yes.
Well you know there's already okay, let some moving parts mix went on that but yes that is a new phenomenon with even in the December quarter, we were depleting finished goods.
We were quarter backend utilization was lower than the September quarter.
In the March quarter will be up significantly from the December quarter.
I want to glad I think your comment on on the question you asked regarding.
Regarding the June quarter seasonality how'd would be in and the comment was made the June quarter will at least be season, though.
I would say I hope.
That one of these quarters given quarter as well as June quarter in September quarter, well above seasonal.
Because the inventory that solo and if I take or any cues from any prior recoveries whether it goes from saw zone was the recovery into the during 2009 cycle or any of this cycle recovery.
Usually you got two three quarters of were well above seasonal recovery and that me on pixel business back to the old Heights, and then goes from there so.
I I like to think that to any kind of forecast here it becomes really conservative.
Yeah, that's a fair point, Steve Thank you.
Yes.
Thank you next question.
JV.
With Mizuho Securities.
That's one thing as you look at.
Your business as well, if we give some color by by markets in markets automotive industrial how do you see that laying out the rest of the thanks.
So as Steve mentioned, you know, we're starting to see automotive and industrial picking up from the bottom that they were out they had pretty bad years in 2019.
And our expectation is that barring any outside events as we go through 2020, both those end markets should see continued improvements.
Got it another industrial and on that end markets.
You see a similar trend into the back half where do you see.
On the first half year, though.
So my comment was the both automotive and industrial.
I've talked about datacenter. It was strong remains strong we don't see anything that suggests it's different.
There may be some communication.
Market changes that are driven by what happens with Corona virus, we don't know but.
There is a large fiveg cycle investment cycle that starting.
And then as far as defense and aerospace tends to be pretty cheap.
Steady and how it goes.
Remained steady with winter sad.
And then the consumer cycle, we have yet to see if we'll see some benefits it meets farther trade resolution for it to see any significant benefits.
Nothing new to report on that's on the consumer end at the market.
Great. Thanks.
Great. Thank you.
Last question will come from John So credit.
Hi, guys. Thanks for letting me, good and I've been jumping around costs I apologize. If this is a repeat but but Steve if you kind of look at the operating model for the business. Historically you guys have may always made good progress and then kind of taken a step back as you've made acquisitions to then kind of move forward again Im just kind of curious if we go to weakness.
Attended period, where you're not sort of in the acquisition game, how should we be thinking about operating margin targets and incurred incremental gross an op margins for the business over time.
So John you know you're ready connect that to you know we make substantial progress in gross and operating margin after an acquisition.
You know and then when we do another acquisition.
Most times, we're not buying businesses at over 60% gross margin, 40% operating margins for our overall company margin gross and operating drop and then we look back up to two steps only tredegar fall again, when we buy the next acquisition.
Now if you make the assumption that for an extended period of time, we were to not do another acquisition.
And then first thing that were to happen is that we will reach of other operating model. So operating model to remind everyone is 63% gross margin.
And 22.5% operating expenses, leading to a 40.5% operating profit. So two ends affair to you know first the gross margin, we're guiding 61.7% gross margin. This quarter. So that's 130 basis points away. If you just take the under utilization trends of 16 million Deputy.
Mr gets you there in 12 months.
And do the second issue is the is the operating expense so operating expense.
You know basically a we're guiding 25 to 26.2.
And there is a huge leverage there with the revenue increases.
The current revenue.
I think what couple of hundred million dollar behind the past the record right you know on and very round numbers. So once you gain that you know you had a significant leverage.
With the operating expense comes down some leverage still remains in a integration of microsemi.
You known good all these go lives and all that are happening, which we will pick another nine months.
But once we get all that done then you have achieved gross margin as well as the operating expense and you have reached the model.
Now it's your question is.
So where does the model go do we continued to grow hired in gross margin and continue to grow hired an operating margin for that to you know getting line and we'll talk about when we get this.
That's helpful. And then just secondly on Microsemi. It was an acquisition you kind of made as the industry was going into a correction and you're talking a little bit about kind of the expense leverage there I'm just kind of curious from a revenue leverage I mean, one of the things you guys have always done well as you've bought these assets is going and kind of apply.
Better pricing discipline to the business is there still more to go with the Microsemi acquisition earn or is that mostly played out.
First of all I don't think we had the same pricing discipline issues and microsemi as we did at Atmel Microsemi just to remind you as gross margins that were right around 60%. When we did the acquisition the product lines at Microsemi are extremely sticky proud.
Okay, and many of them a very long lifecycles and does that extend.
Those margins will stay high the product line revenues will stay high now we have in the time, we have owned Microsemi started to work on so how are we going to take advantage of Microsemi is position in the end markets. They were strong in datacenter communications and aerospace and defense to be able to sell a more complete portfolio and that work.
As well underway and reverse how can we take microsemi products into the end market that microchip was strong and prior to the acquisition automotive industrial and home appliances and that work is going in now we have a six seven quarter window, where the environment has been weak and as we as we emerged from a weak environment as we go into a more normal.
But all the hard work that has been done we'll begin to play itself out and so I think there our revenue synergies yet to come but in part its work to be done and lot of that is underway and has been for some time, but a lot of it has to come as the environment strengthens.
And John I think if you.
Study some of the past cycles I know you another analysts are very good.
Concerning the pass any live in past cycles.
What really happens is.
Nobody believes the depth of the downturn.
And the estimates always stay high end, they get cut multiple times in.
In this cycle the estimates fully had been cut for time generally for microchip, but for the industry and various other players could be more than four times.
And then when the rewards happens.
The the estimates always go higher beaten raise beaten raise beaten raise for many quarters.
I've seen this in prior cycles, because nobody has the confidence.
To to gifts that revenue a guide the revenue to be higher than seasonal and it continues for many quarters in the other direction, that's what I'm, hoping for.
But not guiding to.
Alright. Thank you at this time there are no further questions MCU, So I would like to turn the call back over to Mr., Steve. Thank you for any closing remarks.
Hi, everyone and thank everyone for attending this call Len.
We're going to about three different conferences I think this quarter.
So we'll see some of your those conferences. Thank you.
Thank you ladies and gentlemen, this concludes todays teleconference. Thank you may now disconnect. Please enjoy the rest.
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