Microchip Technology Inc (MCHP) — Q4 2022 Earnings Call Transcript

Thanks, Erin, 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 Moorthy, Microchip's President and CEO, Steve Sanghi, Microchip's Executive Chair; and Sajid Daudi, Microchip's Head of Investor Relations. I will comment on our fourth quarter and full fiscal year 2022 financial performance. Ganesh will then provide commentary on our results and discuss the current 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 our 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 our GAAP and non-GAAP results. We have 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 part of the effects of our acquisition activities, share-based compensation, and certain other adjustments as described in our press release. Net sales in the March quarter were $1.844 billion, which was up 4.9% sequentially, and near the high end of our quarterly guidance...

Thank you, Eric, and good afternoon, everyone. Our March quarter results were very strong across the board, and set several records in the process. Revenue grew 4.9% sequentially and 25.7% on a year-over-year basis to achieve an all-time record of $1.84 billion. Despite a number of operational challenges, including the rapid spread of the COVID Omicron virus, which affected several of our factories, the shutdowns in several cities in China, and the suspension of shipments to Russia, we finished just shy of the high end of our revenue guidance. This was our fifth consecutive quarter of new revenue records. Non-GAAP gross margin was another record of 66.6%, up 50 basis points from the December quarter, and at the high end of our guidance, as we continue to ramp our internal factories and benefit from improved operational efficiencies as well as product mix changes. Non-GAAP operating margin was also a record of 44.7%, very close to the high end of our guidance...

Thank you, Ganesh, and good afternoon, everyone. I would like to reflect on our financial results announced today and provide you further updates on our cash return strategy. Reflecting on our financial results, I continue to be very proud of all employees of Microchip that have delivered another exceptional quarter and fiscal year, while making new records in many respects, namely record net sales, record non-GAAP gross margin percentage, record non-GAAP operating margin percentage, record non-GAAP EPS, and record adjusted EBITDA, and all of that in a very challenging supply environment. The Board of Directors announced an increase in the dividend of 9.1% from last quarter to $0.276 per share. This is an increase of 33.7% from a year ago quarter. During the last quarter, we purchased $259.6 million of our stock in the open market. We also paid out $140.8 million in dividends...

Wonder if you could just talk to your visibility into the supply remaining kite in the context of markets that you guys don't serve if you're seeing smartphones feel a little bit weaker, you should be seeing foundry capacity free up in other places. Do you see that showing light at the end of the tunnel in a supply situation or no?

So, because we're not in the end markets you described like smartphones, we don't have direct visibility into what they're facing. We do read the same industry reports as to what might be happening. There is sometimes a delay between when something is perceived to be in the market to when it actually filters into the supply chains. And at this point in time, we do not see any major relief in the capacity as a result of some other end market that is weak. That may happen in time, but not at this point.

Let me extend my congratulations to a strong finish to the fiscal year. You mentioned that your first quarter guide contemplates a lot of the different issues that we're all dealing with, including supply chain issues and customers' inability to manufacture. I was hoping maybe you can break that down quantify the total impact that you have embedded in your first quarter guidance and what the split may be between customer-specific issues and your own supply chain issues?

It's a good question, but it's a very difficult question to quantify the way that you're looking for. There are upsides and downsides, and the different risks that we're dealing with. What we have applied is a way to look at all of that and come up with an aggregate risk that we have built into the guidance. And so I don't have a specific breakdown that would be helpful to you on China customer or China supply or Russia, et cetera. It's all built in to what we have.

Well, I just view the difference as really small. If you look at our fiscal year, I think there's an $11 million difference between GAAP revenue and what sell-through was through distribution channels. So I think it's minor. Distributors are challenged, just like customers are today in terms of getting the product that they need to support their customers. We're generally seeing that what we're shipping into them is shipping out almost immediately to support their customers.

Gary, I would also add that as the business expands, distribution inherently requires more products to be shipped to them to accommodate that growth. The days of inventory serve as a more standard measure that indicates how much they're receiving in relation to what they're shipping out. Therefore, there is no concern about the fact that we are shipping in slightly more.

Thanks for taking my questions. There's a lot of concern about the possible downturn whether it's late this year or next year. So Ganesh, I wanted to get your thoughts on reality versus perception...

It's a hard question to take in the hypothetical, but let's look at where some of the cushions are if and when that change happens...

I'd like to add to that, Vivek, your question began with, if Microchip goes down 5% to 7%...