Microchip Technology Incorporated

Good day, everyone, and welcome to this Microchip's 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 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 third quarter fiscal year 2020 financial performance, and Stephen Ganesh 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 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 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, where 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 gap and non-gap 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 P&L based on end market demand. End market demand in the December 2019 quarter was $1.324 billion, and 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 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 6, 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 3, 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 and tangible 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 gap net income was $311.1 million, or $1.20 per diluted share. Our December quarter gap tax benefit was significantly positively impacted by the tax benefit related to the intra-group 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 20 to be about 6%, exclusive of any transition tax, any potential tax associated with the restructuring of the micro-semi-operations and the 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 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 $245 million and will be paid over the next six years. We have posted a schedule of our projected transition tax payments on the investor relations page of our website. Our inventory balance at December 31, 2019, was $708.8 million. We had 129 days of inventory at the end of the December quarter, down two days from the prior quarter's 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 of fiscal year 2013, where our days of inventory and 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 31st, 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 is a testimony to the cash generation capabilities of our business. We expect our debt levels to reduce significantly over the next several years. Our adjusted EBITDA in the December quarter was $503.4 million, and our trailing 12-month adjusted EBITDA was $2.125 billion. Our net debt to adjusted EBITDA, excluding a very long-dated convertible debt that matures in 2037 and is more equity-like in nature, was $4.58 at December 31, 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. The appreciation expense in the December quarter was $41.4 million. I will now turn it over to Ganesh to give his 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 comparisons I will be sharing with you today are based on end market demand, which is how Microchip measures its 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 PCIe switches. Microcontrollers represented 53.6% of our end market demand in the December quarter. Moving to analog, our analog business was sequentially down 3.6% as compared to the September quarter. During the quarter, we continued to introduce a steady stream of innovative analog products, including the IEEE 802.3BT compliant power over ethernet injectors and mid spans that enable up to 90 watts of power without changing switches or cabling. Analog represented 28.1% of our end market demand in the December quarter. Our FPGA business was sequentially flat as compared to the September quarter. During the quarter, we introduced the radiation tolerant pull-off fire FPGA for space and other high reliability applications as well as the early access program for the PolarFire system-on-chip FPGA, offering the world's first hardened, real-time, Linux-capable, RISC-V-based microprocessor subsystem. Design wins for the PolarFire family continue to grow strongly, and we remain optimistic about the prospects for this product family. FPGA represented 6.9% of our end-market demand in the December quarter. Our licensing, memory, and other product line, which we refer to as LMO, was sequentially down 0.7% as compared to the September quarter. During the quarter, we delivered a new family of electrically erasable RAM products, providing cost-effective alternatives to non-volatile RAM solutions at a number of memory densities. LMO represented 11.3% of our end market demand in the December quarter. An update regarding coronavirus and what we're seeing. First, all our employees are safe, 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, a 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 well know, most provinces in China have extended the Chinese New Year holidays to February 9th. Hubei Province, where Wuhan is located, has extended the holidays to 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 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 yet back from the extended holidays. 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 there is slack in manufacturing capacity which can be of help while recovering lost production. These outbreaks are unpredictable and there may yet be other twists and turns to come in the 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 megatrends that we believe provide significant growth opportunities for Microchip over the next 5 to 10 years, and I'd like to summarize them. First, the 5G infrastructure rollout, which is just getting started and is a decade ahead of it. Each prior generation of wireless infrastructure deployment, 2G, 3G, and 4G, lasted for about 10 years. The Internet of Things, comprised of smart, connected, and secure endnotes, is picking up steam, especially for industrial IoT, where there are compelling business models for customers to make money, save money, and mitigate risk. Third, for data centers, the data center demand to store and process data is exploding as data is created at a hyper-exponential rate. To put this in perspective, estimates are that 90% of the world's 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. Fifth is the advanced driver assist which is already a growth application and its proliferation to more car models and its natural progression to increasing levels of autonomous driving. Sixth 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 megatrends cut across the diverse end markets we serve and guide our product development priorities. We believe these megatrends, in conjunction with our 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?