Microchip Technology Incorporated

Good day, everyone, and welcome to Microchip's first quarter fiscal 2021 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 president and chief, excuse me, Microchip's chief financial officer, Eric Gernholtz. Please go ahead, sir.

Thanks, Brandon, and good afternoon, everyone. During the course of this conference call, we will 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 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 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 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.microchip.com, which we believe you will find useful when comparing our GAAP and non-GAAP results. We've also posted a summary of our outstanding debt and leverage metrics on our website. I will now go through some of the operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of acquisition activities, share-based compensation, and certain other adjustments as described in our press release. Net sales in the June quarter were $1.31 billion, which was down 1.3% sequentially and above the midpoint of our upwardly revised guidance from June 2, 2020, when net sales were expected to be flat to down 6% sequentially. We have posted a summary of our gap net sales as well as end market demand by product line and geography on our website for your reference. On an on-gap basis, gross margins were strong at 61.7%. Operating expenses were at 23.1%, and operating income was an outstanding 38.6%, all better than the high end of our upwardly revised guidance. Non-GAAP net income was $401.9 million. Non-GAAP earnings per diluted share was $1.56, and three cents above the high end of our upwardly revised guidance from June 2nd. On a GAAP basis, in the June quarter, gross margins were 61%. and include the impact of $6.4 million of share-based compensation and $2.8 million of COVID-19 shelter-in-place restrictions on manufacturing activities. Total operating expenses were $580 million and include acquisition and tangible amortization of $235.4 million, special charges of $0.3 million, $6 million of acquisition-related and other costs, and share-based compensation of $36 million. The GAAP net income was 123.6 million, or 48 cents for diluted share. Our June quarter GAAP tax benefit was impacted by a variety of factors, including tax reserve releases associated with the statute of limitations expiring, deferred tax adjustments related to intercompany movements of intellectual property rights, offset by tax reserve accruals associated with the outcome of the Altera case during the period and other matters. The non-GAAP cash tax rate was 6% in the June quarter. We expect our non-GAAP cash tax rate for fiscal 21 to be about 6%, exclusive of the transition tax, any potential tax associated with restructuring the micro-semi-operations in the microtrip 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. tax interest deductions that we believe will keep our cash tax payments low. The cash tax payments beyond the June 2020 quarter associated with the transition tax are expected to be about $245 million and will be paid out over the next six years, including a payment that we made in July 2020 of $23.2 million. We have posted a schedule of our projected transition tax payments on the investor relations page of our website. Our inventory balance at June 30, 2020 was 657.2 million. We had 117 days of inventory at the end of the June quarter, which was down five days from the prior quarter's levels and right in the middle of our publicly stated inventory target of 115 to 120 days. Inventory at our distributors in the June quarter were at 30 days compared to 29 days at the end of March. We believe distribution inventory levels for microchip are still low compared to the historical range we have experienced over the past 10 years, which is between 27 and 47 days. The cash flow from operating activities was $501.8 million in the June quarter. As of June 30th, the consolidated cash and total investment position was $380.2 million. We paid down $394 million of total debt in the June quarter. And over the last eight full quarters since we closed the microsemi acquisition and incurred over $808 billion of debt to do so, we have paid down $2.62 billion of debt and continue to allocate substantially all of our excess cash beyond dividends to aggressively bring down this debt. We have accomplished this despite the adverse macro and market conditions during most of this period. which 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 significantly over the next several years. Our adjusted EBITDA in the June quarter was $562.2 million, and our trailing 12-month adjusted EBITDA was $2.154 billion. Our net debt to adjusted EBITDA, excluding our very long-dated convertible debt, that matures in 2037 and is more equity-like in nature was 4.24 at the end of June 2020, down from 4.46 at the end of March 2020. Our dividend payment in the June quarter was 90.4 million. Capital expenditures were 9.5 million in the June 2020 quarter. We expect about $15 million in capital spending in the September quarter, and overall capital expenditures for fiscal 2021 to be between $50 and $70 million. We continue to add capital to maintain and operate our internal manufacturing operations, support the production capabilities for new products and technologies, as well as to selectively bring in-house some 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 at-mil and micro-semi manufacturing activities that we are bringing into our own factories. The appreciation expense in the June quarter was $41.1 million. I will now turn it over to Ganesh to give his comments on the performance of the business in the June quarter. Ganesh?

Great. Thank you, Eric, and good afternoon, everyone. Let's start by taking a closer look at microcontrollers. In a weak macro environment, our microcontroller business performed better than we expected. On a gap basis, our microcontroller revenue was sequentially down 1.3%, as compared to the March quarter, while from an end-market demand standpoint, our microcontroller business was sequentially down 2.8%. On a gap year-over-year basis, our microcontroller business was up 1.2%. We continue to introduce a steady stream of innovative new microcontroller solutions, including the industry's smallest automotive-grade MaxTech controller family, the first functional safety-ready AVR microcontroller family, with a peripheral touch controller. The SwitchDeck Advanced Fabric Generation 4 PCIe switch family, which enables complex fabric topologies with greater scalability, lower latency, and higher performance than traditional PCIe switches. And last but not least, the Adaptec SmartRAID 3100E RAID, which stands for Redundant Array of Inexpensive Disks Adapters, designed to provide reliable hardware rate protection for customer data in cost-sensitive end applications that require low power and high performance. Microcontrollers overall represented 54.9% of our end market demand in the June quarter. Now, moving to analog, on a gap basis, our analog revenue was sequentially up 0.7% as compared to the March quarter, while from an end market standpoint, our analog business was sequentially down 0.7%. In both scenarios, our analog business performed better than we expected in the midst of a weak macro environment. On a GAAP year-over-year basis, our analog business was down 4.2%. During the quarter, we continued to announce and introduce a steady stream of innovative analog products, including an extended portfolio of over 25 transient voltage suppressor vertical arrays and a 32-channel high-voltage analog multiplexer, further enabling miniaturization of medical ultrasound applications. Analog represented 28.1% of our end-market demand in the June quarter. Our FPGA revenue on a gap basis was down 10.3% sequentially as compared to the March quarter. From an end-market demand standpoint, our FPGA business was sequentially down 6.5%, Our FPGA business in the June quarter had one significant aerospace customer who was shut down hard due to COVID-19 restrictions for pretty much the entire quarter, resulting in lower than expected results. Despite this customer being unlikely to resume production in the September quarter, we are expecting the FPGA business to sequentially grow meaningfully in the September quarter. On a gap year-over-year basis, Our FPGA business was down 4.6%. During the quarter, we continued to introduce a steady stream of innovative FPGA products, including the VectorBlock Accelerator software development kit, which enables developers to take advantage of Microchip's qualifier FPGAs to easily create low-power neural network applications. FPGA represented 6.7% of our end market demand in the June quarter. Our licensing memory and other product lines, which we refer to as LMO, was flat as compared to the March quarter from an end market demand standpoint. During the quarter, we introduced a new phase noise analyzer designed for engineers and scientists who rely on precise and accurate measurements of frequency signal generated for 5G networks, data centers, commercial and military aircraft systems, base vehicle communication satellites, and metrology applications. LMO represented 10.4% of our end market demand in the June quarter. An update regarding coronavirus and its impact on our operations. Most of our non-factory employee base continues to work from home. Our global teams have been highly engaged, collaborative, and productive under the circumstances, resulting in strong customer engagement for new designs and effectiveness in our new product development programs. We would like to thank our teams worldwide for adapting as needed to changing conditions while continuing to deliver results. Our manufacturing operations, especially those in the Philippines and our outsourced partners in Malaysia, worked through various constraints throughout the June quarter and delivered increased output as reflected in our better than expected results. By the end of the June quarter, we had dug out of most of the delinquencies in our shipments that accumulated in April and May when unpredictable constraints from government mandates were in effect. Our customers and our supply chain partners also endured some constraints with their factories and logistics, primarily during the months of April and May. As we progressed through May and June, we experienced many short lead time orders from customers, some of which we could not support in the quarter, primarily due to three factors. First, customers whose businesses strengthened due to COVID-19 conditions like from work-from-home initiatives and medical devices. Second, the partial recovery in May and June of some customers' business, which experienced a sharp decline in the March-April timeframe, automotive being the biggest example of that and some industrials. And third, an unrealistic expectation from some customers that orders placed with short lead times can be supported by the slack in the supply chain. We are working with our customers to improve the visibility of their backlog so that we may serve them better. Given the current market dynamics, we are providing some qualitative insights into our principal end markets. Now, before we provide commentary for the June quarter, we would first like to share with you our best estimate for our fiscal year 20 revenue by end market. With over 120,000 customers served by Microchip, and given the complexity of our customer base, It is laborious to collect this data, and we only do so every few years. We remind you that this data is only estimated, and it is not something we can track with high accuracy. Based on our analysis done in the June quarter for the fiscal year 20 revenue, industrial remained our largest end market at 28% of revenue. Computing and data center was next at 18% of revenue, followed by automotive, 15% of revenue, communications at 14% of revenue, consumer at 13%, and finally, aerospace and defense at 12% of revenue. With that backdrop to provide context, here are some end-market trend insights for the June quarter that we'd like to share with you. Data center and computing continue to show strength from the shift to work-from-home requirements. However, we anticipate that these segments may revert to more normal demand patterns in the coming months as the surge requirements start to dissipate. Automotive car sales and production in China recovered nicely to grow sequentially and year over year, benefiting our China automotive business. Our automotive business everywhere else had a very poor quarter, as April and May were adversely impacted by widespread automotive factory shutdowns. We began to see recovery in June and believe that the worst for automotive is behind us. Medical devices necessary to treat COVID patients like ventilators, respirators, oxygen monitors, portable ultrasound machines, they were all strong. In addition to a host of other hospital equipment needed for increased patient loads, medical devices for elective procedures such as hearing aids, pacemakers, defibrillators, some of the large ultrasound MRI machines, those experienced a slowdown as individuals in hospitals delayed elective procedures. Even within the broad-based industrial and consumer markets, which were generally weak, we could see pockets of strength related to COVID-19. In consumer, the strengths were related to gaming, home improvement, and hobbyist projects for people sheltered at home. In industrial, the strengths were related to UV disinfection systems, air filtration systems, infrared temperature scanners, and a generally increasing trend towards touch-free controls. Let me now pass it to Steve for comments about our business and our guidance going forward. Steve?