Microchip Technology Incorporated

Good day everyone and welcome to Microchip's first quarter fiscal 2022 financial results. As a reminder, today's call is being recorded. At this time, I would like to the conference over to Microchip's CFO, Mr. Eric Bjornholt. 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 Ganesh Murthy, Microchip's President and CEO, and Steve Sange, Microchip's Executive Chair. I will comment on our first quarter fiscal year 2022 financial performance, Ganesh will then provide commentary on our results and financial business environment, as well as our guidance, and Steve will provide an update on our cash return strategy. 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, and included reconciliation information in our press release, which we believe you will find useful when comparing GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and leverage metrics on our website. We will now go through some of the operating results, including net sales, gross margins, 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 our acquisition activities, share-based compensation, and certain other adjustments as described in our press release. Net sales in the June quarter were $1.569 billion, which was up 7% sequentially and about 150 basis points above the midpoint of our quarterly guidance given on May 6th. We have posted a summary of our GAAP net sales by product line and geography, as well as our total end market demand on our website for your reference. On a non-GAAP basis, gross margins were a record at 64.8%, and operating income was a record 41.7%. Non-GAAP net income was a record $558.8 million. Non-GAAP earnings per diluted share was a record of $1.98, eight cents above the midpoint of our guidance. On a GAAP basis in the June quarter, gross margins were a record at 64.2% and include the impact of $8.8 million of share-based compensation expense. Total operating expenses were $638.8 million and include acquisition and tangible amortization of $215.6 million, special charges of $10.5 million, $3.6 million of acquisition-related and other costs, and share-based compensation of $47.8 million. Gap net income was $252.8 million, or $0.89 per diluted share. Our June quarter gap tax expense was impacted by a variety of factors, notably tax reserve releases associated with the statute of limitations expiring. Our non-gap cash tax rate was 6% in the June quarter. We expect our non-gap cash tax rate for fiscal 22 to be about 6%, exclusive of the transition tax, any potential tax associated with restructuring the micro-semi operations into the microchip global structure, and any tax audit settlements related to taxes accrued in prior fiscal years. Our inventory balance at June 30th, 2021 was $683.8 million. We had 111 days of inventory at the end of the quarter, which was down one day from the prior quarter's level. Inventory at our distributors in the June quarter were at 20 days, which is a record low level and down from 22 days at the end of the prior quarter. We are ramping capacity in our internal and external factories so we can ship as much product as possible to support customer requirements. In the June quarter, we issued a $1 billion senior secured note maturing on September 1st, 2024 and bearing interest at 0.983%. We used the proceeds from this bond offering to repay a $1 billion senior secured note that matured on June 1st, 2021 that had an interest rate of 3.922%. We believe this was another excellent transaction for us as we continue to enhance our capital structure on our path to becoming an investment grade rated company. Our cash flow from operating activities was a record at 629.9 million in the June quarter. As of June 30th, our consolidated cash and total investment position was 279.7 million. We paid down $388 million of total debt in the June quarter. Over the last 12 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so, we have paid down almost $4 billion of the debt and continue to allocate substantially all or 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 time 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 a record 711.7 million, and our trailing 12-month adjusted EBITDA was also a record at 2.524 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 3.34 at June 30, 2021, down from 3.71 at March 31. Our dividend payment in the June quarter was $113.1 million. Capital expenditures were $86.3 million in the June quarter, Our forecast for the September 2021 quarter's capital expenditures is between 75 and 95 million. Our capital expenditures for all of fiscal year 22 are expected to be between 300 million and 350 million. As a reminder, our fiscal year 2021 capital expenditures came in lower than originally planned due to longer equipment lead times and deliveries pushing out due to overall industry conditions. We continue to add capital equipment to maintain, grow, and operate our internal manufacturing operations to support the expected growth of our business. We expect these capital investments will bring gross margin improvement to our business and give us increased control over our production during periods of industry-wide constraints. Depreciation expense in the June quarter was $41.2 million. I will now turn it over to Ganesh to give his comments on the performance of the business in the June quarter, as well as our guidance for the September quarter. Ganesh?

Thank you, Eric, and good afternoon, everyone. Our June quarter results continue to be strong, leading off our fiscal year 22 on a positive note. June quarter revenue was an all-time record of $1.57 billion, growing 7% sequentially, and was 150 basis points higher than the midpoint of our guidance provided on May 5th. On a year-over-year basis, our June quarter revenue was up 19.8%. Non-GAAP gross margins were another record at 64.8%, up 70 basis points from the March quarter as we continue to ramp our internal factories and benefit from improved fixed cost absorption. Non-GAAP operating margin was also a record at 41.7%, up 100 basis points from the March quarter. Our consolidated non-GAAP EPS was above the high end of our guidance at a record $1.98 per share, Adjusted EBITDA for the June quarter was again very strong and achieved another record at $701.7 million, continuing to demonstrate the robust profitability and cash generation capabilities of our business through the business cycles. The June quarter marked the 123rd consecutive quarter of non-GAAP profitability. I would like to take this occasion to thank all our stakeholders who enabled us to achieve these outstanding and record results in the June quarter. and especially thank the worldwide Microchip team whose tireless efforts not only delivered our strong financial results, but also supported our customers to navigate a difficult environment and who worked constructively with our supply chain partners to find creative solutions in an extremely constrained and challenging environment. Taking a look at our business from a product line perspective, our microcontroller revenue was sequentially up 10.7% as compared to the March quarter and set a new quarterly record. On a year-over-year basis, our June quarter microcontroller revenue was up 26%. Each of the 8-bit, 16-bit, and 32-bit microcontroller product lines established new all-time revenue records. As we have told you many times in the past, rumors of the death of 8-bit and 16-bit microcontrollers have been greatly exaggerated. The customers and applications served by microcontrollers are highly fragmented and require a wide range of solutions that span the breadth of our microcontroller product lines. Microcontrollers represented 57.5% of our revenue in the June quarter. Our analog revenue was sequentially up 4.1% as compared to the March quarter, also setting a record in the process. On a year-over-year basis, our June quarter analog revenue was up 16.7%. Analog represented 27.5% of our revenue in the June quarter. Other revenue was sequentially up 5.1% in the June quarter, bouncing back from a 6.4% sequential decline in the March quarter. Other revenue represented 15% of our revenue in the June quarter. Taking a look at our business from a geographic perspective, America's was up 6.1% sequentially. Europe was down 2.3% sequentially, which is better than typical seasonal performance, and came off of a very strong 30.4% sequential growth in the March quarter. Asia was up a strong 11.1% sequentially, reflecting better than typical seasonal growth. From an end market perspective, all end markets were strong in the June quarter. Business conditions continued to be exceptionally strong through the quarter, with record bookings and backlog for product to be shipped over multiple quarters accentuated by our preferred supply program, or PSP, which continues to be over 50% of our aggregate backlog and 100% of our backlog in the most constrained capacity product areas. Demand outpaced the capacity improvements we were able to make, or we were able to implement in the quarter. As a result, our unsupported backlog, which customers want to shift in the June quarter, continued to climb significantly. resulting in lead time for many line items continuing to stretch out. We experience constraints in all of our internal and external factories and their related manufacturing supply chains. We continue to work closely with our supply chain partners who provide wafer foundry, assembly test, and materials to secure additional capacity wherever possible. Through the combination of internal and external actions that we have taken, we expect we will be in a position to support revenue growth for at least each of the next four quarters. Despite that, we also expect that wafer fab, as well as assembly and test constraints, will persist through at least the middle of 2022. We believe our backlog position, especially the proportion of PSP backlog, is giving us a solid foundation to prudently acquire constrained raw materials, invest in expanding factory capacity, and hire employees to support our factory ramps. Our capital spending plans are rising in response to growth opportunities in our business, as well as to fill gaps in the level of capacity investments by our outsourced fab, assembly, and test partners in technologies that they may consider to be trailing edge, but which we believe will be workhorse technologies for us for many years to come. The increase in capital spending will enable us to capitalize on growth opportunities, improve our gross margins, increase our market share, and give us more control over our destiny for trailing edge technologies. We will, of course, continue to utilize the capacity available from our outsourced partners, but our goal is to be less constrained by their investment priorities, which may not align with ours. We also expect that while our capital intensity may be slightly higher in any given year than the 3% to 4% of revenue guidance we have provided in the past, when looked at in the context of a rolling three-year view, we believe we will very much be in the range of our capital spending guidance. Now let me get into the guidance for the September quarter. Our backlog for the September quarter is very strong. In addition, we have considerable backlog requested by customers in the September quarter that currently cannot be fulfilled until later quarters, despite us growing capacity from last quarter. This is because the entire semiconductor supply chain remains very constrained. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the September quarter to be up between 3% and 7% sequentially. Our guidance range assumes continued operational constraints, some of which we will work through during the quarter, others that will carry over to be worked in future quarters. At the midpoint of our revenue guidance, our year-over-year growth for the September quarter would be 25.8%. We believe achievement of this revenue level would be remarkable in and of itself, but even more so given how resilient our business was a year ago during the pandemic because of the diversity of our end market exposure, thus making the year-over-year comparisons that much tougher and meaningful. For the September quarter, we expect non-GAAP gross margins to be between 64.8% and 65.2% of sales. We expect non-GAAP operating expenses to be between 22.8% and 23.2% of sales. We expect non-GAAP operating profit to be between 41.6% and 42.4% of sales. And we expect our non-GAAP earnings per share to be between $2.05 per share and $2.17 per share. We also expect to pay down another approximately $350 million of our debt in the September quarter. Now, we recognize that our gross and operating margin percentage guidance effectively gets us to the long-term targets we shared with you just nine months ago. We will be working to update our business model for annual growth, gross margin, and operating margin percentage, and we'll share our conclusions with you later this year. Given all the complications of accounting for our acquisitions, including amortization of intangibles, restructuring charges, and inventory write-up on acquisitions, Microchip will continue to provide guidance and track its results on a non-GAAP basis, except for net sales, which will be on a GAAP basis. We believe that non-GAAP results provide more meaningful comparison to prior quarters, and we request that analysts continue to report their non-GAAP estimates to First Call. Now let me pass the baton to Steve to talk about our cash return to shareholders.