Microchip Technology Incorporated

Good day, everyone, and welcome to this Microchip's first 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 Microchip's chief financial officer, Mr. Eric Bjornhold. Please go ahead, sir.

Thank you, and 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 well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Steve Sange, Microchip's Chairman and CEO, and Ganesh Murthy, Microchip's President and COO. I will comment on our first quarter fiscal year 2020 financial performance. And Steve and Ganesh will then give their comments on the results, discuss the current business environment, as well as our guidance, and provide an update on our ongoing integration activities associated with the microsemi acquisition. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full gap to non-gap reconciliation on the investor relations page of our website at www.microchip.com, which we believe you will find useful when comparing our gap and non-gap results. We have also posted a summary of our outstanding debt and leverage metrics on our website, and I understand that those schedules aren't showing up right away, but we should have that issue corrected very shortly here for all of you. 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 where revenue on such transactions was deferred until the product was sold by our distributor to an end customer. As discussed in previous earnings conference calls, we continue to track and measure our performance internally based on direct revenue plus distribution sell-through activity and each quarter 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 distributions sell-in, we will also provide investors with our end market demand based on distributions sell-out, but will not provide a P&L based on end market demand. End market demand in the June 2019 quarter was $1.35 billion, which was up 0.7% sequentially from the March 2019 quarter. and market demand was about $27 million more than our GAAP revenue in the June quarter. I will now go through some of the operating results, including net sales, gross margin, and operating expenses. I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based compensation, and certain other adjustments that's described in our press release. Net sales in the June quarter were 1.323 billion, which was down 0.5% sequentially, and slightly below the midpoint of our guidance of $1.33 billion. I remind you that our guidance for the quarter was made prior to the ban on shipments to Huawei, which has historically been between a 1% and 2% revenue customer for us. We have posted a summary of our gap 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 62%, operating expenses were 25.8% of sales, and operating income was 36.2% of sales. Non-GAAP net income was $357.6 million. Non-GAAP earnings per diluted share was $1.41, which was 3.5 cents above the midpoint of our guidance of $1.37.5. On a GAAP basis, gross margins were 61.6% and include the impact of 4.9 million of share-based compensation. Total operating expenses were 643.6 million and include acquisition and tangible amortization of 248.5 million, special charges of 8.1 million, 9.6 million of acquisition-related and other costs, and share-based compensation of 35.8 million. The gap net income was $50.7 million, or $0.20 per diluted share. Our June quarter gap tax benefit included $12.6 million of discrete income tax benefits primarily related to a tax reserve release due to a statute of limitations expiring. The non-gap cash tax rate was 5.5% in the June quarter. We expect our non-gap cash tax rate for fiscal 20 to be between 5% and 6%, 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. We have many tax attributes in net operating losses and tax credits, as well as U.S. interest deductions that we believe will keep our cash tax payments low. The future cash tax payments associated with the transition tax is expected to be about $246 million, and will be paid over seven years with 10 million of that being paid this quarter. We have posted a schedule of our projected transition tax payments on the investor relations page of our website. Our inventory balance at June 30th, 2019 was 733.1 million. We had 132 days of inventory at the end of June, up four days from the prior quarter's level. Inventory at our distributors in the June quarter were at 32 days compared to 35 days at the end of March. We believe that barring any negative developments on the U.S.-China trade front, our distributors are holding a reasonable, albeit lower than normal, level of inventory to support end market demand. The cash flow from operating activities was $380.6 million in the June quarter. As of June 30th, the consolidated cash and total investment position was $437.1 million. We paid down $257.5 million of total debt in the June quarter. and the net debt on the balance sheet was reduced by 263.7 million. Our EBITDA in the June quarter was 537.1 million, and our trailing 12-month EBITDA was 2.212 billion. Our net debt to EBITDA, excluding our very long-dated convertible debt that matures in 2037 and is more equity-like in nature, was 4.65 at June 30th, 2019. We are committed to using substantially all of our excess cash generation beyond our dividend payments to reduce our debt levels, and we expect our debt levels to reduce significantly over the next several years. Our dividend payment in the June quarter was $87.1 million. Capital expenditures were $23.9 million in the June quarter. We expect about $30 million in capital spending in the September quarter, and overall capital expenditures for fiscal 2020 to be between $110 and $130 million. We continue to add capital to support the growth of our production capabilities, of our new products and technologies, and to bring in-house more 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 micro-semi-manufacturing activities that we are bringing into our own factories. Depreciation expense in the June quarter was $46.2 million. I will now turn it over to Ganesh to give us comments on the performance of the business in the June quarter and provide an update on some of our ongoing microsemi integration activities. Ganesh?

Thank you, Eric, and good afternoon, everyone. Before I get started, I'd like to clarify that the product line comparisons I will be sharing with you today are based on end market demand, which is how Microchip measures its performance internally. Also, with the start of a new fiscal year and a full year of microsemi results under our belt, We are making an adjustment to our product line reporting for our conference calls. We will continue to provide product line reporting for microcontrollers, analog, and FPGA, which make up almost 90% of our revenue. We will report licensing, memory, and MMO, or multi-market and other, as a fourth category called LMO, which stands for licensing, memory, and other, which is about 10% of our revenue. Let's start by taking a closer look at microcontrollers. Our microcontroller business was sequentially up 1.8% compared to the March quarter, reflecting some strength in what otherwise continues to be broad macro weakness in the markets we serve. During the quarter, we shipped our 25 billionth microcontroller, a milestone in our rich heritage as a microcontroller solutions provider. We also continue to introduce a steady stream of innovative new microcontrollers including several new touchscreen microcontrollers with industry-leading noise immunity for screen sizes of 9 to 20 inches, the industry's first commercially available enhanced serial peripheral interface known as eSpy, the low pin count known as LPC bridge product for industrial computers, the addition of a single port solution to our USB smart hub family targeted at entry-level automotive applications, And last but not least, we unveiled our MetaDX1 family of Ethernet devices, the industry's first terabit scale Ethernet device that enables high density, 400 gigabit Ethernet, and flexible rate Ethernet connectivity. Microcontrollers represented 53.8% of our end market demand in the June quarter. Now moving to analog, our analog business was sequentially down 0.7% compared to the March quarter. reflecting the broad macro weakness Microchip and others in the industry are experiencing. During the quarter, we continue to introduce a steady stream of innovative analog products, including the production release of our 700-volt silicon carbide MOSFETs, as well as our 700-volt and 1,200-volt silicon carbide Schottky barrier diodes, high-precision 16-bit and 24-bit analog to digital converters, an IEEE 802.3 compliant power over Ethernet switch, and the industry's first clock buffers that meet PCIE Generation 4 and Generation 5 specifications. Analog represented 28.5% of our end market demand in the June quarter. Our FPGA end market demand reached an all-time record, even after going back through the microsemi and ACT-L history. with 7% sequential growth compared to the March quarter, coming in at almost $101 million. The FPGA business does have some lumpiness because of our significant exposure to space, aviation, and defense markets, where procurement timing can be a function of programs and their shifting priorities, schedules, and budgets. Design wins on our new low-power, mid-range polar fire family continue to grow strongly, and we remain optimistic about this product family adding another leg of growth for the future. FPGA represented 7.5% of our end market demand in the June quarter. Our licensing, memory, and other product line, which we refer to as LMO, was sequentially down 4.9% in the June quarter as compared to the March quarter, reflecting the broad macro weakness that Microchip and others in the industry are experiencing. Collectively, LMO represented 10.2% of our end market demand. A quick update about the ongoing microsemi integration. Business units and sales have substantially completed their integration activity. We are pleased with the synergies we have achieved since we closed the transaction, despite the weaker macro environment over the last four quarters. As we said before, business systems and operations integration will take the longest time to complete. as we execute this transition in phases. We expect the overall business and operational integration will take about another 12 months to complete, and we expect continued synergy gains for many quarters to come. Finally, a short update about the Huawei situation from our perspective. We estimate that our exposure to Huawei to be approximately 1% to 2% of our end market demand. Our revenue with Huawei is a combination of what we ship to them directly, as well as what we ship indirectly to their subcontractors, and in some cases through distributors. We stopped all shipments to Huawei when the Department of Commerce issued their Export Administration Regulation, or EAR, in May. About a month after that, based on further analysis of the EAR, we began allowing shipments to Huawei for several products that were permissible to ship under the EAR. However, the benefit for the June quarter was limited as Huawei in many cases did not want the product since they could not complete their bill of materials. There remains continued uncertainty as to whether Huawei will want all that we can ship this quarter as they may or may not be able to complete their bill of materials. Let me now pass it to Steve for some comments about our business and our guidance going forward. Steve?