Q2 2021 Microchip Technology Inc Earnings Call
Thank you operator, good afternoon, everyone.
During the course of this conference call, we will be making projections and other forward looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially we refer you to our press releases of today.
As it relates to our recent filings.
$9 million and in market capitalization.
$85 million in the last 27 years as a public company.
Microchips net sales grew to $5.2 billion and its market cap related capitalization grew to approximately $30 billion.
In July of this year.
I often talk about transitioning to an to an executive chairman role by that date.
I discussed this with our board of directors as part of our succession planning process.
Earlier this year.
But no decision was made at that time, then given the unexpected COVID-19 pandemic.
2009.
Girlish has served as president and Chief operating Officer from February 2016 since.
Since then Canadian I have jointly lead microchip now.
Now starting March one 2021 financial will become the president and CEO of Microchip I will remain as an executive chairman I will work with managed to continue to drive the strategic direction of this company and maintain a strong culture and succession plan.
That we have developed here.
We also announced today that starting January four 2021.
Karen wrapped will join the board of directors of Microchip and will also join this audit committee.
Currently is no stranger to the technology investment community.
We have our GAAP net sales as well as end market demand by product line and geography on our website for your reference.
On a non-GAAP basis gross margins were very strong and near record levels at 62.2%.
Operating expenses were at 23% and operating income was an outstanding 39.2%.
Engines and tax law occurring during the period deferred tax impacts of our convertible debt exchange transactions occurring during the period and other matters.
Our non-GAAP cash tax rate was 5% in the September quarter, we expect our non-GAAP cash tax rate for fiscal 21 to be about 5.5% exclusive of the transition tax any potential tax associated with restructuring the microsemi operations into the microchip global structure and any tax audit settlements related to taxes.
Accrued in prior fiscal years.
Does that.
We have accomplished this despite the adverse macro and market conditions. During most of this period, which we feel is a testimony to the cash generation capabilities of our business as well as our ongoing operating discipline.
We continue to expect our debt levels to reduce signet significantly over the next several quarters and.
And the September quarter, we also exchanged $796 1 million of our 2025 in 2027 convertible senior subordinated notes for cash and shares of common stock.
While these transactions did not impact the overall level of debt on our balance sheet. We believe that these convertible exchanges will benefit stockholders by significantly reducing sure count dilution to the extent our stock price appreciates over time.
Destiny during periods of industry wide constraints depressed.
You've been going back to the Microsemi history.
Frank.
For the expanding smart energy and industrial markets.
<unk> products and technologies that we believe have no impact to us national security interest we.
We do not know if or when such licenses maybe granted.
Therefore, we have no file we revenue in our December quarter guidance that Steve will provide.
During the September quarter, we began to experience rising constraints in our supply chain due to a number of industry wide factors.
Among them.
Always push throughout the supply chain to complete manufacturing of all their products prior to their shipment Ben.
Competition for market share by always competitors seeking to replace them, which further stressed the supply chain and ongoing shift of semiconductor manufacturing out of China to avoid tariffs and trade sanctions pressuring the capacity in other Asian countries, where we manufacture through our partners.
Okay.
Get the partnership we have forged over many years of working together.
In addition to the support of a long tenure to execute executive team at Microchip.
Gives me confidence to lead the next phase of Microchip.
I would especially like to thank Steve for being my mentor and my partner through the many years that we have engaged business challenges and opportunities together.
And for everything I've been privileged to learn from him.
I am, particularly cloud and thankful that microchip than I can count on his continued support and advice in as executive chair role.
Thank you once again Steve.
Let me know I'll pass it to Steve for comments about our business and our guidance going forward Steve.
Thank you good news.
I would like to first reflect on the results of the fiscal second quarter of 2021.
We will then provide guidance for the fiscal per quarter of 2021.
The September quarter continued to demonstrate what the best of Microchip culture and its people represent.
Our global team of operations business units.
Is in marketing and support groups all came together in the middle of a global pandemic, while I'm working with the Patriarch and delivered a superb quarter.
Despite the COVID-19 pandemic challenges, we delivered net sales of $1.31 billion that was essentially flat sequentially and down only 2% from the year ago quarter.
This is compared to a net sales guidance.
Which was to be down 4% sequentially at the midpoint add to be capitalized on strong turns opportunities in September.
We also delivered outstanding non-GAAP gross margin of $62, 2%, which were needed an all time record level. We also achieve non-GAAP operating margin of 39, 2%.
Above the high end of our guidance.
Our consolidated non get EPS roads dollar 56.
15 terms above the midpoint of our guidance.
I was looking for a very strong in the September quarter, we begin the September quarter with a backlog position on July one.
To be down 8% from the backlog for June quarter on April one.
With strong bookings and strong turns filled in the quarter. We ended the quarter at essentially flat compared to minus 4% of the midpoint of our guidance.
Now I will discuss over guidance for the December quarter.
Our bookings have remained strong in October we.
We're seeing a good recovery in the automotive industrial homework lines and medical device medic.
Medical devices for elective procedures markets.
At the same time work from home related markets of computing and data center as it realized certain medical devices that surged with the pandemic revert to more normal demand.
There is one of the factors that we have to account for in our guidance for the December quarter and that is a rubbery effect Robert was over 1% customer in the September quarter, and it will be zero and the December quarter.
Taking all these factors into consideration, we expect our net sales for the December quarter to be between flat to up 5% sequentially.
Considering that seasonally December quarter is down by approximately 2% to 3%.
And counting minus 1%, while they check we believe that our guidance is well above seasonal and represents multiple industries recovering as well as microchip continued to gain market share in multiple and markets and forest land.
Investors and analysts have asked us in the last few months about making a call about the bottom of this cycle with tremendous uncertainty about COVID-19 situation and the elections, we have not been willing to make the call today.
Today, we are making that call, we expect that June and September quarters for the bottom for this business cycle for microchip, where guidance to a much stronger than seasonal December quarter, and we expect a significant growth in calendar year 2021.
Based on the much better than expected financial reserves in the September quarter, we gave up with employees half of the September quarter salary sacrifice back in the form of a bonus.
We have also been gradually lowering the percentage of salary sacrifice.
And just yesterday the board of directors approve the entire company to the work back to full salary later this month.
These salary changes are dialed into our guidance that we are providing today, we tank all of our employees worldwide that have trouble with Germany, I've shared salary sacrifice with us in the past three quarters, enabling us to be prepared for multiple contingencies as COVID-19, uncertainties unfolding.
This represents the best of Microchip culture, and the commitment of employees to ensure the long term success of the company.
For December quarter, we expect our non-GAAP gross margin to be between 62.4% and 62.8% of says which will be in new all time record.
We expect non-GAAP operating expenses to be between 23.1% and 23.7% of sales, we expect a non-GAAP operating profit to be between 38, 7% and 39, 7% of sense.
We expect a a non-GAAP earnings per share to.
To be between dollar 51 per share $2 63 per shape.
We also expect to pay down another approximately $300 million of her dead in the December quarter.
We continue to believe in the strength and diversity of the businesses and markets where in.
To achieve long term growth in excess of the average semiconductor market growth.
I would like to advise investors and analysts about one of his change.
In the past, we have been providing and midcourt or update offering to coincide with our presentation at sell side financial conferences.
Peers and competitors typically do not provide in mid quarter update.
Beginning this quarter, we will discontinue this practice and no longer plan to provide such updates.
Given all of the complications of accounting forever acquisitions, including amortization of intangibles restructuring charges and inventory liked up on acquisitions Microchip will continue to provide guidance and track gets resolved on non get this is except for net says.
Which will be on a get basis, we believe that non-GAAP results provide more meaningful comparison, two prior quarters and request that the analysts continue to report their non-GAAP estimates too for us to call but.
With this operator will you please pull for question.
Certainly if you'd like to ask a question on today's call. Please press star one on your telephone keypad. We ask that you. Please limit yourself to one question once again that is star one.
Just joined the question queue.
And we'll take our first question from Embry Srivastava, Please must be M. L. Please go ahead.
Okay. Thank you <unk>, congratulations and you'll be missed and then go national recognition C. As well I guess, you'll have to take over Steve told to keep us on our toes that'd be get on this call to ask a question.
It's a hard act to follow.
[laughter] addiction to fill but <unk>, we'd be expecting you to two questions for me one is on the constrained site.
Already of our products, we still have pretty good lead times.
Go ahead Eric.
Okay. So the the second piece of your question was there was kind of multifaceted there, but we've got some capacity questions. So we are making investments as we walk through in our prepared remarks, and wafer Fab Assembly and test to increase our capacity and if you look at last quarter.
We did about 39% of our wafer fab in house, 47% of our assembly and about 54% of our test.
These are relatively slow moving metrics, even with making investments, but overtime, we absolutely would expect the assembly and test percentages to go up as we make these investments, but again the relatively slow moving metrics, but the investments that we're making.
Our all gross margin accretive and.
You can see that our gross margin, we're guiding up in the current quarter and we are expecting lower under utilization charges in the current quarter as we ramp our factories and all.
All these incremental adds to capacity that we're making whether at stat Assembly or test should add all should all add to gross margin benefits for us down the road.
Unable to quantify at this point I think as to how to think about the longer term not the gross margin what would the steady state Assembly and test would look like and front end what looks like.
In source Mercedes.
So again I don't expect the wafer fab to move significantly in terms of the percentage that we do in source versus outsource as the business grows obviously, where we're making investments on the assembly and test side. We do expect those percentages to go up in EPS do you want to give a comment on where you think they can go over time.
Yes, they move a little bit more slowly overtime, and we expect that they will probably be in the north of 60% longer term for assembly, probably north of 70% for cash.
And there's a lot of moving parts into going to that but that's what we like to be at it gives us and control. It gives us capacity and it's difficult to get outside gives us and controlling our costs as well and it all pays for itself in short periods of time in the way we measure what we do or don't do.
Very good thank you.
Listen the international acquisitions, we were at about.
70% Assembly, 95% test.
So as we bought these two large companies admin and microsemi there.
They were much more outsourced and we were not percentages dropped quite dramatically.
And we have been working our way up then.
Ideally, we'd like to get back to you know.
Higher than 60% Assembly and.
In the quarter after or just you know very very large.
We're getting really really strong bookings now some of that is there.
Concerns about their supply chain, a lot of constraints and all that so people are giving orders earlier.
You know not that to a backlog is much larger than than before at a similar point in time, but that doesn't mean, all that becomes growth because people give you orders earlier and then then the call charter rolls off because you already got the booking but despite all that we are expecting a much much better March quarter.
And a significant growth after that you after what does significant mean it means that more than 7% that you have a consensus.
Thanks very much.
Welcome.
And we'll go ahead and take our next question from John Pitzer with Credit Suisse. Please go ahead.
And I'll add my congratulations to both Steve and get Ash.
Steve appreciate all the help over the years I'm sure a lot of the analysts on the call feel the same way.
I guess my first question, Steve you're calling sort of for the bottom of the cycle June September levels. I think what's very impressive is where your operating margins are despite the fact that we're at the bottom of the cycle I'm just kind of curious I know the expenses have been a little bit light. This year, because you guys have pulled back on things like variable comp, but given that you.
Not in the market buying assets and you really going to be just focusing focusing on operational efficiencies. How should we think about incremental operating margins is kind of where operating margins can go from here.
So I think.
We have given the longer term model, which is 63% gross margin.
22.5% operating expenses and 40 and a half person operating margin, we're not quite there we are getting close to the midpoint.
The midpoint of our guidance is about 62.6% in gross margin. This quarter, then I don't quite have the number on the top of my head on the operating margin, we got a little bit more to go before we really get to a numbers and Oh, we will be analyzing going into the next fiscal year, we'll be looking at all.
And at some point in time coming back to the street was a new longer term targets. When we think that you know current targets have you didn't achieve that are within striking range.
That's helpful and then for my follow up forget Nash your commentary around the PGS in your prepared comments notwithstanding kind of your caution that's a lumpy business I'm just kind of curious if you can talk a little bit about kind of your core advantage in that market, you know thats, becoming sort of a rarer asset over time now with some of the M&A activity in the space what kind of.
Longer term prospects do you see in the P.J. space for you.
Sure.
So NDF PPA expat market, we play specifically in the mid range of SBG Ace, which is measured by how many logic elements that already that we.
We don't go after the very high end there are other players who are invested there but in the mid range and lower end, we focus on applications that need low power. We have non volatile memory on these products that have security needs kind of robustness needs and those take us into end markets said, we really like.
Those end markets, our defense and aerospace.
Our automotive now with microchip, taking SPJ products into our historical strength and industrial up once again microchip, taking ft Jane to our historical strength. So those are the end markets that we believe we're able to take over the long term the advantages of what we bring with RFP Jay products in terms of low power security robot.
Softness.
And being able to position it into markets, where we have to strengths.
Thank you guys.
And we'll go ahead and our next question from Toshiya Hari with Goldman Sachs. Please go ahead.
Hi, guys. Thanks for taking the question and congrats to both Steve and Ganesh.
Steve you talked about.
Your December quarter guidance being roughly five percentage points above.
Typical seasonality, maybe 6% when you take into consideration the fall way.
Dynamic you also talked about end market strength and share gains contributing to two that outperformance what portion of that 5% to 6%.
Outperformance relative to typical seasonality is share growth and what percentage is end market strength and you sort of alluded to this before but are.
Are you concerned at all that customers are pulling in demand and you see a correction in sometime in the first half of 21.
Thanks, well first of all it's impossible to break down.
You know to be.
The seasons because growth rather than seasonality into the two components that you described what portion of the guilty as marketshare and what portion of the growth is really just better than market, that's really very very difficult when a short term basis. It could really do you.
No longer term comparison on a growth. This is looking at how everybody else through we have no idea how everybody else is going to do this quarter or next quarter or next year. So we really have a good answer to that question.
But your question about to you know.
Correction next year because customers are pulling in.
We don't really see customers pulling in demand we see customers.
Pulling in placing their orders.
And then scheduling them into their next year next quarter in the quarter after.
And this is something we asked for our two outlet of back in July.
We ask the customer then that in addition to the near term orders that you've been giving US. Please give us a longer term backlog tell us your requirement.
The time of building constrained so we can plan accordingly, and put the capacity in place and customers have responded.
Pretty strongly so we're getting very strong bookings.
What are the compliment of the bookings that.
You know debts aging into the next quarter and even a quarter. After is very very good we have lot of backlog already for the June quarter, and we have very very strong backlog for the March quarter.
So they're not pulling in deliveries, they're pulling in placing orders and scheduling that liberty. So.
They're not you know left shows in case it a constraints.
Got it and then as a quick follow up Steve obviously, you've had a very successful career.
Over multiple decades.
Anything you feel like you left on the table I know, you're not necessarily leaving the company, but anything on on your to do list that give us and the team can potentially move forward with thank you.
Well you know.
I don't have any regrets soon the timing you know as I'm doing it it's more much more age related and family situation and grandkids and all that.
But I could really you know go back to the Microsemi acquisition, which we announced in.
Could be near $200, rather than what it is today and I leave that for the niche to put eight 200 in front of it.
Thank you and good luck.
Okay.
And we'll take our next question from Highland start with J P. Morgan.
Good afternoon, and that'd be all sorts of my congratulations to Stephen Dinesh I guess first question what was book to build on the corner and then given the strong demand environment and constraints no may not be the right time to be executing to this but I believe that you guys still have a network of very small fabs in your manufacturing footprint. So if you can.
Just maybe how much of this has yet to be consolidated can you just remind us how much more cog savings or so to come as you consolidate these smaller fabs and over what period of time.
So we're not specifically providing a book to really racial for Q2 I I I think.
We have given the reason for that many times in the past booked a Alicia was very good unusually.
We have seen investors and analysts essentially pick the book to Bill racial and tried to translate that into a gross number you know which doesn't really work because I already said.
I already said that a lot of the bookings strong bookings that we are receiving you.
You know I'd actually aging into the March quarter, and somebody was into the June quarter.
Aw bookings the bookings we received for aging over the next 12 months.
And you divide that number by billions and one quarter. So it's a little bit of apples and oranges, you know bookings over the next 12 months aging over the next 12 months, but billing shipped into the last quarter. The number was very good but providing that the medical at that number we have seen investors not interpret it correctly.
What was the second part of your question.
Yeah.
If you have it.
Gotta do with cost of sales improvement, an ongoing consolidation of factories and things like that so I'll I'll I'll I'll start and then Steve are gonna ask them can add onto that we announced last November some restructuring of our Colorado wafer fab and we're we're making excellent progress on those fronts and achieve.
A large amount of the cost savings that we outlined at that time and you've seen are gross margins hold up extremely well, there's still work to be Donna our operations teams in both the front and operations in the back and operations are extremely busy in and we talked about our capital expansion plans and the improvement that will see and gross margin there and you know.
The more product running through her own factories absorbs the large flywheel of activities that we have on the cost side. So we've got a lot of good things working on gross margin we've guided at the midpoint this quarter, the 62.6%, which isn't very far away from our 63% target. So we feel good about that and but.
Don't think we're going to talk specifically about some of the specific actions that are being taken but we're we're doing well on structuring the operations appropriately Steve are gonna ask you anything to add to that.
Yes, you know what I will add is that if you look at the gross margin or an operating margin performance in this down cycle.
I mean, it's been exemplary and compare it to any of the prior psychos. We did you know just extremely well our gross and operating margins did not go down by many hundreds of you know this is boring and so I think are gross margin used to go down by 600 plus at this point now in your ways that you know I think that's partially.
The result of diversifying the business, creating several and market. The acquisitions. We did you know really help us build a that you know serving the entire solution.
Customer with total system solution. So you know there's ever you didn't fall as much the gross margin didn't fall as much in the operating margin didn't fall as much and we're sitting at.
Near record of gross margin and just said.
Ted shy, so that could operating margin at the bottom of the cycle and as we go from here as a revenue increases and we're ramping all of the factory that I spoke about and all of you know a high volume Fads and assembly and test. It all on his epigram to provide that grows did they seem to next year we have.
Capital expenses budget.
So as we achieve that room.
Incremental cost of the next project you make as much lower than the cost of the product, we're making today, because you get better absorption and.
And you know the incremental gross and operating margin you understand that concept. So it's a very very exciting time, you're going into.
Wait at the bottom of the cycle, we are near the record and and then from that as the factories, Iran's and the under utilization festivals to zero and then you go above that and incrementally stocks are dropping gross and operating margin that would be you know very very good and what we need to do it.
Put some numbers around it and at some point in time.
Talk to you regarding what does that mean in the long term model that we're not prepared to do today.
Got it okay, and maybe just a quick follow up on the products Unpack site I found that you guys actually introduced the risks five B S. P. G product, but wanted to get your views on any initiatives that the team has in terms of risk five open architecture. As in addition to your M. C. You put a portfolio. Thank you.
So we are part of the rest of the <unk> Foundation through the Microsemi acquisition matrix taught it before us.
The first point of implementation is on the FPGA SMC product lines and we did introduce that is you know.
There are many possibilities with the risk five and they are being evaluated within microchip, but there's really nothing to report at this point beyond what we have done an FPGA.
Okay. Thank you.
I will go ahead and take our next question can crack head.
Oregon sent me. Please go ahead.
Okay. Thank you I certainly quite that the journey Stephen the last few decades and see that the company involved just organic lean through them in a you know and the last point, including M&A I think one of the things that can focus now is with total system solutions. Maybe you can just give some context or update of kind of where you stand with that and some of the opera.
You're driving to the sales force.
So I think you know when you look at your.
Better control system and microcontroller bit system.
It has a large number of component surrounded and over the years. The number of confidence have increase no. You know you wouldn't go back 10, 15 20 years ago. It was usually have you know some sort of poverty management <unk> converters reference devices, maybe some discreet devices.
You know some study Glenn some you know memory flash memory nonvolatile memory. It will have those kind of tunes.
But you know over the years the amount that goes around that microcontroller has increased substantially.
And it increased substantially with connectivity. So today, you know you need a U S. B E connect Wifi Bluetooth.
You know display driver clutch functionality.
So just to you know.
Hi, voltage sensors and others. So the number of components that go into an embedded control system have really multi blood in the last 20 years.
And we begin our journey freely.
Selling things around up microcontroller, you know beginning in about 99 2000, and then we did a small analog acquisition of telecom semiconductor in 2001 and with those resources, then and adding to it we started building.
Analog franchise, and then we didn't really start doing drumroll acquisitions till about 2010.
But the result has been.
That we have added all of those products now available from Microchip you can buy them as a kid, but you can buy them separately, but if you know look at.
Reference design put an application almost find any embedded control application in home in industry and card in you know in any place you know opening open an appliance look at it's you know vintage Circuit Board.
You can essentially have everything on that from microchip today.
Yeah, microcontroller immensity analogue converters offence, some sensors power management drivers.
Connectivity, Bluetooth Ethernet Wifi era, too dark 11 anything else.
And so we feel that you know we have done all that and now we have a powerful franchise to be able to sell that entire solution and the challenge in the last couple of years has been no training the sales force to really be able to take that kind of message to the market and they're doing very well at it.
So at this point in time, we do not really feel it burning desire.
To have to do another acquisition evaluations of Sky I.
We will never meet other test.
And number two we still have high leverage whooping down dead and.
And we have clearly signal to the street that when our leverage goes down and then we're still producing a large amount of free cash flow and most likely use up that free cash flow is the increasing dividend in stock buyback and all that and not the not the news type of acquisitions.
So I think that's where we are because they feel we have completed the solution. We have an enormous skill and do not have the scale disadvantage anymore.
And with that we're gonna grow the business organically.
Got it thanks for all that.
Thank you.
And we'll go ahead and take our next question from Williamstown with Trista Katie's. Please go ahead.
Well, thanks for taking my question and I'll add my congratulations.
On the on the transition uhm.
It's been quite a rock so congrats on that.
I Wanna dig into the the concept of book to Bill backlog that you've made very positive comments around Steve but.
Maybe I can ask about it this way.
It sounds like the book to Bill was very strong backlogs up a lot, but it's coming more in the form of duration of backlog as opposed to what's deliverable in the near term is there any metric you can give us around that around the the duration or around maybe what portion of March you think is now filled and then.
The concurrent question with that is those behaviors from customers typically happen under one of two conditions either the customers suddenly have a lot more confidence or optimism in their business and the other is when they think they're not gonna be able to get supply.
I Wonder if you could comment as to which of those do you think is driving the improved duration of the backlog.
[laughter].
So you know I I think it's it's it's a combination of it obviously you know having such a broad customer base 125000, plus customers you often don't really know how the customer is thinking. So you know you get samples of it you know as you talk to the lodge customer and visit them and we really.
Not even a visiting them. This is interaction is largely virtual.
But I think it's a combination ah.
Customers of eating about you know strengthening lead times in the industry.
Constraints, there hitting and when they have an experience.
From not being able to acquire one component, let's say from one of the other suppliers. The purchasing managers action often is really go ahead secure and place your order on all the components.
Whether the lead times are going out already a particular supply it or not.
And in case, we specifically advise the customers back in March.
That we were getting largely short term murders and we neutral promoters, who make the quarter. That's great. We take them, but we also needed your longer term older. So we can more efficiently build the parks and batch process. It and you know place the orders in our supplies ahead of time, and so on and so forth and what I would say is that.
The customers have responded.
You know extremely well I'm in our customers have always responded to our letter is extremely well and and what you've seen is a quarter later, where exactly a quarter. After we looked at leather.
And customers have placed a large amount of backlog you know that that their ages into the following quota.
Maybe just want to clarify one thing Steve sat there. He met he mentioned the letter in our customers in March It was actually in July I know, that's what he meant decided but just for the record.
I I meant and just yeah. Just July seven was the date I thought.
Yeah somebody will give jewelry.
Thanks again.
I'm Gonna go ahead and take our next question from Sean Harrison, We sleep capital. Please go ahead.
Hi afternoon and my.
Best wishes, an easy question hopefully and then a question more on distribution with the volatility in F. P. G. A associated with the aerospace business should we assume that and kind of see more of a normalization here and the December quarter.
And then second Steve.
Or would the distributors reacting to the to the tightness and supply or the the the tightening up to play out there I know you highlighted that channel inventory days.
Are still low but is there any pressure for them to to add more microchip stack.
So what was the I'll take the distribution what was the first part of the question.
On the FPGA trends why don't I take out when Steve.
So as we have said many times you know FPGA is amor lumpy business.
Trajectory wise, if you plot the last many quarters, you'll find that it is up into the right quarter to quarter that are gonna be changes, depending on which lumpy business is coming through on his delay for whatever reason and that's what he was continue to see but if you look at it over eight 910 quarters, you'll see that it it up into the right.
As an overall FPGA business for us.
Oh actually.
So you know on the distribution front, we're getting you know huge orders from distribution Ah just says well we're getting it from you know direct customers. So our bookings were strong.
In both in the distribution channels as well as in the direction of.
And the behavior is largely similar.
We're we're we're getting bookings to make the.
No we got the bookings to make the September quarter, and we're getting good bookings to fill up the December quarter.
But very large number of bookings are really actually aging into the March quarter and some even in the June quarter. So distributors also are leading into backlog. So that if the lead time pushups further you know, they're not impacted and placing the backlog already going into the next quarter. So.
When we wrote the letter the letter was not only to our direct customers. If there's also the thing that says cause the distributors and they have responded in time.
And are just didn't leave I guess, where they look at all inventory has been low for quite some time.
I think it hit 15 year low and then from that it is only come up with their too so in the coming year as we are expecting significant growth.
You know my my my sense is you know, it's really up to a distribution. When my sense is that the distributor will have to increase the inventory and can sit out at 15 you know.
Fantastic. Thank you.
And we'll go ahead and take our next question shrimp, Chris costume with Raymond James.
Yes, Thank you and and Stephen can ask congratulations to you both it's been a pleasure working with you both.
So the question is regarding seasonality and you mentioned your your view of of normal December seasonality down in 2% to 3% sequentially I know in the past since the Microsemi acquisition, you've hesitated to make a call on seasonality because there really hasn't been much of a normal environment since since.
That acquisition closed you know given that you've you've offered that for December do you have a a viewer and updated view on what you would consider to be normal seasonality for the March June and September quarters.
We we really don't.
I think I think I'm gonna have to run the whole year normal and kinda start to look at it if you go back prior to them Microsomia acquisition.
Then you know March quarter will usually be up sequentially I would say you know a couple of percent two 2.5% this year.
March was up 1.3 or where he got infected at the Lake part of March where.
You know the China not coming back from the COVID-19 crisis. Despite all that I think we went up a couple of percent and could have been more so I I think the march seasonality somewhere around two 2.5%.
But I think there are less data points on it you know with the acquisition then would be otherwise if you take them microsemi out.
Feel comfortable with a couple of two 2.5%.
The Microsemi and we don't have enough data points.
Right.
Okay understood just as a follow up with regard to the the repayment of that Eric. This is for you. Just you could could you give us a sense of what your expectations will be over the next few quarters. You know again, assuming that there is some degree of recovery as you say you should be generating more cash.
And how does that affect the timing on on getting cheaper and that that target, which I believe street.
Yeah, I mean, we've we've been generating a bunch of cash each quarter. Yeah. We we indicated that we expect about $300 million debt pay down in the current quarter. You know, there's there's some positives or negatives, obviously revenue was growing and we're gonna throw off more operating margin and we are you know specifically trying to invest a bit more in capital as we talked about.
So our Capex was extremely low in both the June and September quarters, and it's going to be higher here than in December and Mark So a bit of an offset but you know I I would expect $300 million plus range and you know as the business environment improves that's the only gonna go up so we're making really good progress on that pay down and.
[noise] expect that to continue and.
You mentioned, the three three times or less than you know that's what we're looking for looking to be an investment grade rated company and over time, we will absolutely get there.
Got it thank you.
As a reminder, and the Internet have time, if you could please just limit yourself to one question to allow everyone in the queue be able to pose that question once again that this guy.
I went to during the question queue will take our next question have Janet Ramkissoon. Please go ahead.
Hi, Congratulations guys, Steve Thanks, very much that's been a real pleasure.
To be a long your side for the last 30 some years.
Since you became C E O and again congratulations to all I had actually to really quick I'd say can you give a little color on what's going on in the auto business do you feel that we that as a secular change happening and.
Demand fatos because of Covid and safety.
And secondly can you provide them done more color on wall way.
When did you apply for the license.
And what is can you give us your best case scenario might be if you were to get the license and when you get it how fast can you ramp up.
Well first of all you know thank you I think you've been with us for probably the entire 30 years or so or 27 years as a public company and prior to that even.
Long Association so 10-Q.
I remember you came to visit our booth in Las Vegas at the C. V. S Conference earlier this year.
Regarding your specific question on a barbie another motive.
So you know the automotive business is you know saw the largest decline.
Any and a market back in the June quarter, because many many factory just downright shut down.
And then in the September quarter, they started to bring the factories back up and the business was up from June quarter to September quarter, but.
But the September quarter factories would not flu and you know from the beginning they were ramping during the quarter. So there is a you know quite a substantial growth in the automotive segment.
At least for us from September quarter to December quarter.
The country's continued to rent so the automotive business now you know from this point on kinda looks normal you know cause they're selling the inventories laws so they're rebuilding their inventory.
Yeah lots and lots of automotive customers I'm, making investments into electric week or wherever you have no significant content and the content and electric vehicle is actually higher than the content in a you know regularly girls. So automotive business should look growing going forward from.
From here the.
Other part of your question is a robbery license when did the apply let me hand, it up to <unk> to answer that question.
Yeah. So our application was you know within the last month.
It is a very uncertain process of how if navigate through.
Commerce and whoever else would have to weigh in on it.
I think it's impossible to give you a.
An estimate of what might happen and when and what would it mean.
The the business with hallway has many products and is not just a single license we would need multiple licenses and each one has a separate application you would have to go through so and we have a prioritized process that by going through with it.
Given the uncertainty off the process, we did not believe trying to count on any revenue.
Makes sense and once we have line of sight to the license we were still need to work with Huawei on what day would need when we would be able to ship them product to be able to provide any kind of guidance on what does it mean to our business.
Thank you.
I'm sorry again.
Great show up.
And we'll go ahead and take our next question from Matt Ramsey with talent. Please go ahead.
Thank you very much good afternoon, and and congrats to you both Ganesh.
I wanted to ask a question I noticed some of the private company tuck ins and some of the investments that you've been making over the last.
A few quarters regarding that.
H mm opportunities our team's done quite a lot of work on.
On edge as an emerging market and both on edge clients and on on sort of edge cloud and I Wonder if you might give a little context as to how big of an opportunity you guys might think about this being over the next three to five years for microchip and if it's something that might've balls out of your FPGA franchise or or out of.
[noise] your microcontroller franchise or if there's need for a bit heavier handed compute that that might be required as you guys approach somebody's edge opportunities. Thank you.
When we when.
When when we think of the agent.
It all comes around the megatrend of artificial intelligence and machine learning that we've spoken about and now we think of that in three different.
Bucket so to speak as a part of it which is best known for many people, which is what happens when the cloud and.
That is the domain of many people who have very large and highly.
Processor intensive compute we do play in the cloud, but our our role in the cloud is predominantly around pcie switches and a few other things that are associated with how Cpus Gpus from other companies I talk.
<unk> is the second part and HSA.
An exceptionally important part as you think of track.
Factory automation in the industrial Iot because at that edge compute for the factory is where much of that machine learning is going to be taking place and the application of artificial intelligence.
There we have introduced using FPGA as one of the platforms a number of solutions smart embedded vision is one piece of that which can go into.
Machine vision for factories, a physical security medical vision, depending on that and application.
But surrounding these products are many of our standard products to it needs Microcontrollers analog security things I, just said that process.
And then the third element of artificial intelligence machine learning, we're looking at all the way at the end, where the fencing is taking place.
And there again, we're looking at our standard Microcontrollers and some of the other products as to how can they do a to a lesser extent, but what is exactly needed at the end nodes.
Learning and influencing that is needed how using standard microcontrollers. So it's.
It's a much bigger field than just the edge along fine in terms of our interests are certainly FPGA at the edge is a key part of how we intend to prosecute Pat.
Thanks for the perspective really appreciate it.
Okay.
And we'll go ahead and take our next question from David O'connor with Eczema P. M. P. P. Paribas. Please go ahead.
Great. Thanks for taking my question and congratulations on the results maybe a question on my side going back to the supply chain constraints, which.
Which exact category of products or Composted, there and <unk> in your prepared remarks, you talked about while we you talked about the mobile phone, we should refresh some reshuffling of chairs weapon capacity, maybe since it seems more short term related.
Question is it do you think these constraints dissipate from the March quarter are they here to see what it was for for some time and they have a follow up on the gross margin.
So the the general comment would be that.
It affects the supply chain off people, who are packaging product their supply chain, which can be lead frames. It can be substrates can be equipment that does bonding and various other things.
And.
So it may not be things that we are directly involved in but it consumes bandwidth and capacity of the supply chain both directly what we deal with and then their supply chain as well.
And so all of these compete in many cases for either the materials or the equivalent capacity that is out there that we wouldn't otherwise be using.
And then as we go to use them, we find that in some cases they are constrained we've been able to manage through a lot of it. We do have second sources for some of these things and now we do have a lot of internal capability and is Eric mentioned, we are accelerating bringing more capacity internal for some of the package types.
So.
What what normally happens in business is when you have these constraints.
The companies that are in the business of providing.
That capacity or that material.
Respond with what they can do to take advantage of that situation and so there is a capacity response that they come with some of it also it's possible that it could be a surge in demand that then begins to dissipate.
We can't really predict where that is.
But we think that they're not going to be constrained through the December quarter, and it's possible some of that will spill over into the March quarter, as well, but I don't have any line of sight into.
Exactly went all the constraints will dissipate.
That's very helpful and maybe a quick follow one on the gross margin for Eric E. M. D. You talked about the strength in the March quarter and it seems from just the higher utilization you could hit that 63% gross margin in the March quarter my questions on the on the additional topics that's it your budget.
Is it for calendar your 21, how much of a headwind as fast as that capacity comes on line does that come on slowly 221 or is that gonna come. Initially you may have to factor that into two as a gross margin headwind into 20 <unk>. Thanks.
So in terms of when the capacity comes online it it it depends whether it's wafer fab assembly or test and so it just just just depending on what qualification we have to go through and the work that needs to be done on our factories. So it comes on gradually over time I don't I don't view it at all as any sort of headwind the gross margin.
Just a matter of can we get it installed on up and running and and get product out the door. So I think I think gross margin is in good shape I didn't make a specific comments on gross margin for the March quarter. So I want to I want to make it clear we were just speaking about the current quarter, but.
There are lots of things that we're doing in our business and not the not the least of which is if we get into a better revenue environment as we look forward in the 21.
That's going to do very good things for our gross margin and we will continue to evaluate the long term model because we're getting close.
I'd like to thank you for <unk> you said.
Somehow the capacity or the capex exit headwind to the gross margin.
That's entirely opposite of what we will experience I believe the the calming dove.
You know the Capex the.
The writing headwind to the gross margin comes from you know when you build a large green field fab and you spend a billion dollars.
In the process has to be qualified and they're slowly Rams. Meanwhile, the factories depreciating that's the kinda.
A headwind to the gross margin totally you're talking about and we experienced that you know back in 2003, when we lived bringing up a fast Florida up and.
In a direction, Oregon, the kind of capacity, we're talking about is not that it's.
Made up for you know $300000 to a one and a half million dollar videos pieces of equipment and assembly and test and fab in the diffusion tubes, and others incremental capacity and it becomes productive really the quarter. After it is added and it never has it had been to the gross margin it's.
Always a collegiate cause I gross margin because the product. It produces it produces incrementally lower costs and the evidence product without that.
So there is no had been to the gross margin, there's only accretion to go to those movies.
Alright, I'll go ahead and take our next question friends gave a cash with me Sue how please go ahead.
Just saying that would make a notation Steven goodness you just come by my two questions I know they can't the back half here are you seeing some strength in the auto industry and elsewhere nicer Cody in China. Just wondering walk you, though in your expulsion was in that industrial auto and especially or into China.
And lastly, I'm sure there's some covid impact on the gross margin line, even though my does seem very impressive where they have rebounded just wondering what that if you. If you have kind of sites that quoting back then that should go away or or does you into next year. So that's it. Thanks.
I don't know if I got all that I think are the first part was really.
The mix of industrial and automotive.
In China, we have that the last quarter, we only prorated once a year.
Yeah, right it doesn't move dramatically quarter to quarter, we what we have shown publicly measure to the end of March towards a prior year wise pad.
Industrial was 28% of our revenue automotive was 15% of our revenue.
Obviously in the June quarter.
There was a more headwinds in those two and markets, but I don't really have a number and then those are all reversing as we went into the September quarter and into the December quarters itself. So.
Those and market percentages for us I, usually don't change that dramatically overtime.
And then I'll I'll pass it back on the other part of the question.
The gross margin question can you restart the.
Oh I was wondering in terms of Covid on a logistics and operational basis.
There are some impact so I was just wondering what the Covid impact goes to the gross margin and I would assume that would reverse what would be a tailwind next year. So.
It's very important.
The impact of Covid on gross margin was more like in the June quarter when.
We then I were factory in the Philippines, and much lower capacity because you couldn't get all the people in and we had 150 people are living in the facility and are working and sleeping do you know the 30% of the factories capacity.
There was no covid impact.
And September quarter, I'm, you know minus the writing them either than others to the people who are living there, but there was really no meaningful impact and September quarter, and there is no recovery of that next year, because there's no impact now.
Right the amount in the June quarter was $2.8 million and you'll see that on our press release, but there was nothing nothing that we broke out separately because it was immaterial to the September quarter results.
Alright. Thanks.
And we'll go ahead and take our last question from my package with Jeffries. Please go ahead.
Great. The the last question on Steve's last call, that's quite Ah Ah Ah.
And honor so thank you for taking the question guys goodness, congratulations and Steve. Thanks, a lot for all the great insights that you saved I will miss them I just had a kind of a strategic question for Steve you <unk> you you kind of described it a scenario where they they emanate slows down you enter a deleveraging cycle and.
<unk> you know and then a capital kind of a cup of return cycle. What is what does that say what should that's what what should investors take away what that means about the the semiconductor industry and does it doesn't necessarily mean that they're very I'll ultimately that there's a there's a different set of.
Requirements from microchip to their to their customers does that mean that there's there has to be a week gearing of of microchip on microchip three dot O. If you if you will.
How should what should investors sneak away from hours or it's microchip <unk> you know the perfect equation for what we expect to see next and seven you said for microchips specifically thank you.
Well it until you know.
Look at a microchip off you know 10 years ago.
It was providing predominantly microcontroller, which was you know 80% lots of our business.
And a small amount of business remaining whereas either some analog products of memory products, but there were you know largely we couldn't complete a customer solution. So it wouldn't be called on a customer we largely provided microcontroller and maybe a little bit over this stuff they wanted and the customer will surround over microcontroller.
Wood analog coming from Maxine media I T. I interest you love others Goodbye Wifi connectivity from people who made.
Maybe you know USB, some Cyprus, maybe Ethernet from Muslim Ethernet company, and so on and so forth.
And we you know many times yeah.
You know, there's an old story I think if you took a couple of minutes I'll tell you back in.
1993 times women live in public.
We used to have a partnership with the Maxim.
Where we will you know get you know get hotel rooms, where we will invite the customers and give seminars jointly and you know we will take the front half of the room and Maxine will get some type of the day and maximum take the back half of the day will tell them how to do.
Microcontrollers maximum will teach them how to add analog an islander, microcontrollers and he was a great partnership it lasted for about five years, we both benefited sure.
Sure the expenses and we didn't have any any love products at that time.
And the stories 20 years old it was with Jack gift sort of Maxine who died many years ago. So many people would annoyed.
And then Mexican Jack Gifford wanted microchip too.
To pay him some team because he said, we're bringing all the customers and you're benefiting from selling them microcontrollers.
I said this has been a great partnership for five years, we saw the microcontroller you sort of analog you know why you're disturbing this partnership book He got greedy.
And that broke the partnerships, but we decided to go into the analog it isn't it.
And fast forward 20 years, we're doing $161.7 billion, an analog now attaching over the phone and the laws around microcontrollers and in the process, we have acquired or build USB Wifi Internet Bluetooth.
You know flash memory study Graham and all the others. So when you look at it from our customers perspective.
Customer is getting a complete solution available from us today.
And it's future and my knee is not really required some customers perspective, because we can complete the solution. Now now you can always have an acquisition that further depth any quite a more analog that are quite right for you to play them or something but we also have large number of design team that a bill.
And some keeping those solutions.
So what we really said is the.
You know.
The late stage of industry consolidation devaluation have been on Sky High you know we bought microsemi at five Bucks is.
And you know and you just big clinic sales for ratings.
So we believe the valuation of the way too high we're not gonna pull dog, we don't need other acquisitions and our customers are going to be very very well served by you have a complete conditions already.
Does that make sense.
That's very helpful. Thank you see I really appreciate it thank you.
And that concludes today's question and answer session I'd like to turn the call back over to you. Mr. Thank you for any additionally, closing remarks.
No I think when I think of investors living with us for so long and I suddenly have.
Which relationship in a long career with all of you.
I'll still be here not going away, we still have a conference coming up a credit Suisse conference in in.
Early December then the next names call in February.
And then on much one I become executive chair, but you will still see me at the investors Circuit in conference calls in English.
Industrial conferences and others. So I'll still continue to be involved with microchip and not going away.
Thank you very much.
Once again that does conclude today's conference. We do appreciate your participation you mean disconnect you frontlines.
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