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Microchip Technology Inc
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Ladies and gentlemen, thank you for standing by and welcome to the Microchip's Q4 and Fiscal 2020 Financial Results Conference Call. At this time, all participant's line are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator instructions] And please be advised that today's call is being recorded. [Operator instructions]
Now I would like to turn the conference over to your speaker today Mr. Eric Bjornholt, Microchip's Financial Officer. Sir, please go ahead.
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 Sanghi, Microchip's Chairman and CEO and Ganesh Moorthy, Microchip's President and COO. I will comment on our fourth quarter and full fiscal year 2020 financial performance. And Steve and 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 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 have also posted a summary of our outstanding debt and our 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.
I will now go through some 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 March quarter were $1.326 billion which was up 3% sequentially and above our revised guidance for March 02, 2020, but net sales were expected to be about flat sequentially. We've posted a summary of our GAAP net sales as well as end market demand by product line and geography on our website for your reference.
On a non-GAAP basis, gross margins were strong at 62%, operating expenses were at 25.4% and operating income was 36.6% compared to 35.1% in the previous quarter. Non-GAAP net income was $375.5 million, non-GAAP earnings per share was $1.46, which was up significantly from $1.32 for this in the prior quarter. On a GAAP basis in the March quarter, gross margins were 61.4% and include the impact of $5.1 million of share-based compensation and $3.3 million of COVID19 shelter in place restrictions on manufacturing activities, total operating expenses were $653.2 million and include acquisition intangible amortization of $248.5 million special charges of $17.2 million, $15.3 million of acquisition related and other costs and share based compensation of $35.6 million.
The GAAP net income was $99.9 million or $0.39 per diluted share. At March 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 movement of intellectual property, tax reserve releases associated with tax audits and other matters.
For fiscal year 2020 net sales were $5.274 billion. On a non-GAAP basis gross margin were a record 61.9%, operating expenses were 25.7% of sales and operating income was 36.2% of sales. Non-GAAP net income was $1.44 billion and EPS was $5.62 per diluted share. On a GAAP basis gross margins were 61.5%, operating expenses were 49.2% of sales and operating income was 12.3% of sales. Net income was $570.6 million and EPS was $2.23 per diluted share.
The non-GAAP cash tax rate was 7% in the March quarter and 6.3% for fiscal year 2020. We expect our non-GAAP cash tax rate for fiscal '21 to be between 6% and 7% exclusive of the transition tax, any potential tax associated with the restructuring, with the Microsemi operations in the Microchip's global structure and 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 US interest deductions that we believe will keep our cash tax payments low. The future cash tax payments associated with the transition tax are expected to be about $245 million that we paid over the next six years. We posted a schedule of these projected transition tax payments on the IR page of our website.
Our inventory balance at March 31, 2020 was $685.7 million. We had 122 days of inventory at the end of the March quarter down seven days from the prior quarter's level. Inventory at our distributors in the March quarter were at 29 days compared to 28 days at the end of December. We believe distribution inventory levels for Microchip are still quite low compared to historical averages.
In the March quarter, we exchanged cash and shares of our common stock to retire $650 million of principal plus accrued interest of out 2025 convertible senior subordinated notes. The cash used to pay the principal on this exchange was funded by 364 day bridge loan. This exchange will significantly reduce your count solution to the extent Microchip stock price appreciates in the future.
During the quarter, we also amended our credit facility. As disclosed in our March 21, 2020 press release, the total leverage and senior leverage covenants were favorably modified as part of the amendment giving Microchip greater financial flexibility. The cash flow from operating activities was $371.7 million in the March quarter. As of March 31, the consolidated cash and total investment position was $403 million. We paid down $236 million of total debt in the March quarter.
Over the last seven full quarters since we closed the Microsemi acquisition and incurred over $8 billion in debt to do so, we've paid down $2.222 billion of debt and continue to allocate substantially all of our excess cash beyond dividends to aggressively bring down the debt. We've 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 businesses 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 March quarter was $548.1 million and our trailing 12 month adjusted EBITDA was $2.129 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 $4.46 at March 31, 2020 and our dividend payment in the March quarter was $88 million.
Capital expenditures were $11.9 million in the March quarter and $67.6 million for fiscal year 2020. We expect between $12 million and $18 million in capital spending in the June quarter and overall capital expenditures for fiscal '21 to be between $50 million and $70 million. We continue to add capital to maintain and operate our internal manufacturing operations, support the production capabilities for our 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 Atmel and Microsemi manufacturing activities that we are bringing into our own factories. Depreciation expense in the March quarter was $41.8 million.
I will now turn it over to Ganesh to give his comments on the performance of the business in the March quarter. Ganesh.
Thank you, Eric and good afternoon, everyone. Let's start by taking a closer look at microcontrollers. On a GAAP basis our microcontroller revenue was sequentially up 5.9% as compared to the December quarter. From an end market demand standpoint our microcontroller business was sequentially up 2.9%. From an end market standpoint [indiscernible] microcontrollers in the March quarter represent an all-time record of just over $349 or 47% of our microcontroller demand.
We continue to introduce a steady stream of innovative new microcontrollers, including a new cryptography enabled 32 bit microcontroller designed to stop malware for systems that boot from flash memory as well as a new high end [indiscernible] microcontroller product family for improved designs in real-time control and connected applications. Microcontrollers overall represented 55.2% of our end market demand in the March quarter.
Last month Gartner released their microcontroller market share report for 2019. We're pleased to report that Microchip retain the number one position 8-Bit or 8-Bit microcontrollers. Once again we gained market share as we grew faster in the overall 8-Bit market. In fact we are now twice as big as a number two player. In the 16-bit microcontroller market we remained at a number five position and continue to gain market share as we grew faster than the overall 16-bit microcontroller market:
In the 32-bit microphone market, we remained at a number six position for the Gartner report and gained significant market share again as we grew faster than the overall 32-bit microphone market. These results are despite Gartner rolling up our 32-bit microcontroller revenues to be about $400 million lower than the $1.2 billion results we actually achieved in 2019.
Had Gartner used our actual calendar year 2019 32-bit microcontroller results, we would have achieved a number four ranking and as I shared with you earlier our 32-bit microphone business in the March quarter ran at a approximately $1.36 billion annualized run rate based on end market demand. For microcontroller overall, we remained at a three number position despite Gartner rolling up our revenue to be about $400 million lower than our publicly reported results for calendar year 2019.
By using our publicly reported results, we would be approximately 7.5% away from the number two player and 16.5% away from the number one player ahead of us as we continue to relentlessly march towards number one spot. Our microcontroller portfolio and roadmap had never been stronger. We believe we have the new product momentum and customer engagement to continue to gain even more share in 2020 as we farther build the best performing microcontroller franchise in the industry.
Now moving to analogue, on a GAAP basis our revenue was sequentially up 1.1% as compared to the December quarter. From an end market standpoint our analog business was sequentially down 1.8%. During the quarter, we continue to introduce a steady stream of innovative analog products, including the industry's first space qualified radiation tolerant Ethernet transceiver as well as an expanded silicon carbide family of power electronics to provide system level improvements in efficiency, size and reliability with 700 volt, 1200 volt and 1700 volt power modules. Analog represented 27.6% of our end market in the March quarter.
Our FPGA revenue on a GAAP basis was up 4.6% sequentially as compared to the December quarter. From an end market demand standpoint our FPGA business was sequentially up 1%. FPGA represented 7% of our end market demand in the March quarter. Our licensing, memory and other product lines, which we refer to as LMO was sequentially down 10.7% as compared to the December quarter from an end market demand perspective.
During the quarter we introduced a new miniaturized rubidium atomic clock, the industry's highest performance atomic clock for its size and power. LMO represented 10.1% of our end market demand in the March quarter. An update regarding coronavirus and its impact on our operations. We have had nine employees who tested positive for the virus with over 18,000 employees worldwide this was inevitable but thankfully they're all recovering nicely or have already recovered. Most of our non-factory employee base is working from home as we rapidly transformed business processes to run the marketing.
Our global team have been highly engaged, collaborative and productive under the circumstances, resulting in enhanced customer engagement for new designs and high effectiveness in our product developed programs. We would like to thank our worldwide team for rapidly adapting to changing conditions and making the best of workflows possible under difficult circumstances to continue delivering results.
Our manufacturing operations have varying degrees of constraint last quarter as what started the China shutting down for several weeks, expanded to many other locations that shutdown. Our operations team minimally adjusted to constraint as they emerge and implement our contingency plans where needed, to ensure that we continue to serve customer needs despite the challenges. In most of our manufacturing locations, we were able to get essential services designation as our products are quite ubiquitous in medical, work from home, defense and communication infrastructure applications.
Our Philippines operations had the largest impact with restriction of people movement, being so strict that we've had a large number of our dedicated employees living in our two factory there since mid-March to support production and customer shipments. Our global team also successfully worked through a myriad of ground and air logistics issues throughout the quarter as conditions change regionally over time.
Our customers and our supply chain partners also endure constraints with their factories and logistics have made the March quarter challenging. We are appreciative of our global people engaged and work through a rolling step of customer and supplier challenges even as we work through challenge and constraints have a place on our own factories.
Pandemics are inherently unpredictable and there maybe yet 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 and we will adopt our response as needed and focus on the things that we can control.
Given the current market uncertainties, we are providing some qualitative insight into our principal end markets. The area of strength we see are data center driven by continued strength from the exponential rate at which data has been created and the consequent seemingly insatiable with demand for data storage. For computers, printers, monitors and other accessories enabled by the increased shift to working from home, for medical devices COVID19 related items like ventilators, respirators, oxygen monitor and ultrasound machines but also a host of other hospital equipment needed for increased patient loads.
For contact-free consumer and industrial product like hands-free dispensers or soap, water, paper, hand sanitizers for infrared thermometers as well as barcode readers for retail shopping all in an attempt to prevent the spread of COVID19 and then for communication infrastructure in part because of work from home related network loading changes but also in part due to stimulus investments in infrastructure especially in China. The area of the weakness we've seen from an end market perspective on automotive, broad based industrial, consumer home appliances and aviation or aerospace. Our defense and space business remains relatively even here.
Let me now pass it to Steve for some comments about our business and our guidance going forward. Steve?
Thank you, Ganesh and good afternoon, everyone. Today I would like to first reflect on the results of the fiscal fourth quarter of 2020 and the whole fiscal year 2020. I'll then provide guidance for the fiscal first quarter of 2021. The March quarter had unusual business challenges as the effects of COVID19 pandemic unfolded in many dimensions. I'm proud of how rapidly the Microchip team adapted to the new constraints we faced so that our employees would be safe, our customers will be well served and our partners engage to ensure mutual success despite the challenges we face.
Despite the COVID19 pandemic challenges we deliver 3% sequential net sales growth as compared to our early March updated guidance, which was for net sales to be about flat. Our final March quarter GAAP net sales came in at $1.326 billion up 3% percent sequentially and down just to 0.3% from a year ago March quarter. Our end market demand based on sell-through was approximately $3.8 million lower than GAAP sales.
After seven quarters of end market demanding higher than selling based net sales, March quarter was nearly even for end market demand versus selling net sales. We also delivered outstanding non-GAAP gross margin of 52% just above the high-end of our original guidance from February 04, 2020 and non-GAAP operating margin of 36.6% near the high-end of our original guidance and we did all that while reducing our days of inventory from 129 days to 122 days.
Our consolidated non-GAAP EPS was $1.46. We did not provide EPS guidance when we revised our net sales guiding on March 02, 2020. Our original non-GAAP EPS guidance provided with our earnings release on February 04, 2020 was $1.35 to $1.51 with the midpoint of $1.43 and we beat the original guidance by $0.03. On a non-GAAP basis this was also our 118 consecutive profitable quarter.
In the March quarter, we paid down $236 million of our debt. Our total debt payment since the end of June 2018 has been about $2.22 billion. The pace of debt payments have been strong despite the week and uncertain business conditions underlining the strong cash generation characteristics of our business as well as our active efforts to continue to squeeze working capital efficiency. On a full fiscal year 2020 basis our net sales was $5.274 billion down 1.4% over fiscal year 2019.
Now I'll discuss our guidance for the June quarter. Ganesh in his prepared remarks discussed the impact we are seeing on our supply chain as well as our customers. Ganesh also described the end markets where we are seeing strength and those where we are seeing either current or expected weakness. Our March quarter bookings were up double digit percentage over the December quarter booking. The book-to-bill ratio for March quarter was very strong at 1.17. That resulted in our starting backlog for June quarter to be strong compared to the starting backlog for the March quarter.
In April H 2020 press release, we said that we believe that the strength in bookings maybe a result of customer concerns about supply chain disruption due to COVID19 virus. With economies around the world contracting rapidly with millions of people getting laid out and with customer factory closures due to sheltering place, ordinances in various countries we believe that product demand is likely to weaken significantly.
With another month under our belt now, we have seen some of the customer order pushouts and cancellations. Our backlog for the June quarter compared to the backlog for March quarter at the same point in time has now deteriorated somewhat in the last month. We believe the backlog position compared to March quarter will continue to deteriorate due to the combined effects of supply chain disruption, customer factory closures and demand destruction. Taking all these factors into consideration, we expect our net sales for June quarter to be down 2% to 10% sequentially.
The guidance ranges to help account for the uncertainty associated with the evolving coronavirus situation. We have no way to model how the rest of the quarter will play out for the coronavirus situation and what the consequent business impact may be but we believe that our guidance range incorporates our best judgment for the possible scenarios. We have prepared the company for a downside scenario by putting the employees on a 10% salary cut and are adjusting the factory by reduced work hours or rotating time offs. We have also frozen all business travel and cut discretionary expenses.
Regarding CapEx, we finished fiscal year 2020 with a CapEx of $67.6 million, a significant reduction from fiscal year '19 CapEx of $229 million. This is consistent with what we have said before that our CapEx is divided between growth capital, maintenance capital and new products and technology capital. In a fiscal year like 2020 in which our net sales declined, the growth capital which is the largest portion of CapEx declines to virtually nothing and therefore the total CapEx declined significantly. We expect CapEx for fiscal year '21 to remain low in the range of $50 million to $70 million.
For June quarter we expect our non-GAAP gross margin to be between 60.4% and 61.2% of sales. We expect non-GAAP operating expenses to be between 24.4% and 25.2% of sales. We expect non-GAAP operating profit to be between 35.2% and 36.8% of sales and we expect our non-GAAP earnings per share to be between $1.25 per share to $1.45 per share.
We believe that despite the near-term pandemic-driven challenges, we are confident in the strength and diversity of the businesses and end markets we are in to achieve long-term growth in excess of the average semiconductor market growth. 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 provide more meaningful comparison to prior quarters and we request that the analysts continue to report their non-GAAP estimates through first call.
With that operator, will you please poll for questions.
[Operator instructions].
Yeah I don’t think that's possible. Let's stay open here for a while. Our Investor Relations manager is just indicating that we're having quite a few problems here. So let's hold and see if we can this solved. I know there is questions to be asked. So I've been told we have 12 questions in queue. We just need to figure out how to get them available so those questions can be asked/
Your first question is from the line of Chris Caso from Raymond James. Sir please go ahead.
Yes. Thank you. Appreciate that. So I guess for the first question, Steve if you could give us some thoughts about perhaps the magnitude of the downturn that I guess we're all expecting. I realize that's a difficult question with what's going on with the backlog here, but I guess compare with some of your competitors have compared what we're seeing now to the 2009 cycle. I'm not sure if that's the right way to look at it right now, but I guess Microchip is also a different company as compared 2009 and what you're guiding to is not quite as bad. As we put all that together, how are you thinking about things going forward?
So I think we're really unable to speak about anybody else's business but our own. We mentioned some of the companies, I believe all companies have a different end market and customer exposure. We have been building this franchise for many years now through organic efforts as well as acquisitions and have compiled the very large number of very, very good assets and then deployed a program called TSS, Total System Solutions that we have discussed with you in which we are garnering larger and larger share of the customer's board with our product.
So the outperformance that you may be seeing from us in business today is really nothing to do with what we have done today or last year it's been a result of really many years of effort and new products organically as well as through acquisitions and our customer support, customer support activities, the distributor relationships and everything else over the past several years. I don’t know if that helps you.
Okay I guess perhaps you could take us through what you've seen in the order rates and you put through some of that in your prepared remarks about what you've been seeing since March. I guess what's interesting now is that the customers came in, the channel at least came into this crises with very low inventory levels and that's I guess unusual in a downturn in our industry. How does that affect things going forward and what sort of visibility do you have on what customers may be doing with the inventory levels here?
So this is a very unique cycle. We have for the first time ever we're experiencing a demand shock and a supply shock. We have seen demand shock before like 2008, 2009 cycle you mentioned. We also saw a major demand shock during the 2001 tech burst and I think we saw a little mini demand shock really even during SARS in 2004 or 2003 whenever it was. And we have seen some supply shocks from our industry the two that I remember, one was during tsunami in Japan and Southeast Asia where we have a number of factories were closed down or shut down and there was a major demand shock and the other demand shock I recall was during the major floods in Thailand a few years ago where many of our peers factories were under water. Microchip factory was okay though.
So we've seen really either a supply shock or a demand shock. This in the first time ever in my 40 years of experience that I am seeing a simultaneous demand shock and supply shock. The supply shock is driven by this various shelter in place ordinances and Ganesh talked about it extensively, Philippines being the worst and Malaysia being the second where we could get our workers into the factory and in some cases, the workers are living in the factory believe they believe they will not be able to come back and number of our product lines that ran in those factories produced limited output because the whole workforce wasn't working. That resulted into a supply shortage and a supply shock in some of the lead times run out and that drove some of the demand further from customers and distributors.
And on the demand side of it, our customer's factories shut down, the worst being in the automotive business where I think you guys keep track of file data and if you look at the file data, you'll find that Europe has been the worst and US the second and lot of factories were shut down in Asia also but those factories are coming back in automotive. So the automotive business is going through this [indiscernible] demand shock and industrial somewhat and while on the other had like you look at the market like data centers where demand shock is in the upward direction with all the data and work from home ordinances their demand has gone up and the other area which is really quite sleepy for us in general, I don't think it's a very large percentage of our business is medical. We melt that into industrial, the medical is really we contact in industrial but a month and a half ago, I wouldn't know what a ventilator was and now we found that all the ventilator designs around the world ,everyone is using our products and the demand has gone up 100X if not more.
The hospital will have two to three ventilators only for emergency purposes and now a single hospital is requiring 1,000 to 2,000 ventilators. So that demand has gone up 50X to 100X. Same thing on digital thermometers to automatic soap dispensers and bathroom products that when you put your hand into the soap falls down, they all use microcontrollers or senses or many of our products. So that's kind of the end market here.
So in certain markets demand is very strong. In other market, demand is very weak. In some cases they're impacted because of supply chain disruption, in other cases the impact is because of stronger demand. So I think you know how do you make sense with all that? We started June quarter with a very strong backlog and our backlog for June quarter is still higher than our backlog was for the March quarter at the same point in time, but it has deteriorated significantly compared to where it was on April 1 and at the rate we're seeing customer's adjustments, push outs and cancellation where the customer may have ordered more product really shows up that this deterioration in backlog in June compared to March will continue.
We know how much we lost in one monthly. We got two more months to go and putting all that into the equation really our crystal ball tells us in the midpoint of minus six and it end up minus two to minus 10. Sorry for the long answer but the question deserved it.
I think that's the discussion we're looking for.
Thank you. The next question comes from the line of Ambrish Srivastava. Sir, your line is open.
Lot of details there. Can you focus on the gross margin and just how those understand the dynamics, it's more than hanging in the slide to you actually drawing down lowering inventory on the balance sheet the inventory didn't really go by that, but kind of help us understand the factors there seems to be a structural change in Chris asked the question about the difference between Microchip from 10 years ago and all the stuff we've followed you for a while but just talk through the structural changes and then you mentioned that with some manufacturing the CapEx which enable you to bring more Microsemi and Atmel indoor and that will have some positive and this is obviously a longer-term question that I am asking thank you.
So let me ask Eric Bjornholt will answer that question and I'll add something if needed at the end. Go ahead Eric.
Okay. Gross margins held up extremely well in the March quarter and we closed 62% non-GAAP margin because it was really outstanding. As you know we've been running our factories at less than optimal levels and we reported a underutilization charge in the quarter of about $14 million. That was actually $3 million better than the prior quarter as we were running our assembly and test factories further than we have in the previous quarters and we were draining finished goods.
So the strong gross margins are really driven by a variety of factors, including attainable product mix and then just ongoing cost reduction and cost containment activities in our factories. So that term quarter we're guiding the gross margin to be down at 60.8% at the midpoint. We expect higher underutilization charges in June compared to March due to some of the rotating time off that we're going to be doing in the factories and just lower production output. But we believe we're really well positioned for the long-term with gross margin improvement in the future as we grow back into our factory capacity.
So there is a number of things that influence that other than the factory capacity. We've been also doing a good job of really holding average selling price flat with our customers and that has long-term gross margin benefits also. So that's the general summary there. Steve, what would you like to add?
No I think that's good. This down cycle, let me add a couple of sentences. I think we started this down cycle with probably the lowest inventory we had, 122 days at the end of March. I recall prior down cycle when we started with really high inventory and so I think it's such a low inventory and we're keeping the flow by factory rotating time offs and other.
So I think when we get on the other side of it and start ramping up factory back up and we're starting with the gross margin in the 60's I think we'll be very, very well positioned longer term, but it really good record gross margin.
The second piece of Ambrish's question related to CapEx and we will still focus longer-term on bringing some more assembly and test in-house but we're really locked down capital pretty significantly to see where our forecast is for fiscal '21 of between $50 million and $70 million. So where there is benefits to be gained, we'll evaluate those, but we're being pretty conservative of our posture in terms of making adjustments right now.
The next question comes from the line of Gary Mobley from Wells Fargo Securities. Sir your line is open.
In the interest of time, I'll post my questions now. Steve you gave your opinion on the recent export -- recent change in export control rules and the impact this may have on the owners process of applying for licenses to shift China customers or any sort of limitations on that and then my next question really on behalf of many different people, but I would interested to get your perspective on how safe your dividend is, thank you.
Sure, I'll pass on to Ganesh to answer the question about export control and then I'll come back and answer the question on the dividend.
As a recent announcement that was made, we're still sorting through what the Commerce Department's rules are. The specific item that we are paying attention to the possible military use of products and how we can provide confirmation that it is not going with those applications. We think it's fairly straightforward to be able to do it but we have time until the 29 June to be able to implement it but at this point in time we do not expect that it has an issue in terms of Microchip's business. Go ahead Steve.
So regarding the dividend, your question was how safe is the dividend. Dividend is very, very safe. We were one company that did not cut over dividend back in 2009 when peak to bottom our revenue went down almost 36%. Today we're so much more profitable on gross and operating margin level, we have done a stress test on our business you can't find a number lowering up, you could lose a very, very large amount of sales and the company still is cash flow positive with regard $1.2 billion of money remaining on line of credit.
So I think really we are unable to model a scenario, a reasonable scenario where the dividend would be at risk and if we felt that the dividend was at risk we certainly would not be increasing the dividend which we are little bit every quarter.
The next question comes from the line of Craig Hettenbach from Morgan Stanley. Sir, your line is open.
Question for Steve just on kind of the downturn playbook and so that the employee cost cuts, pay reduction in CapEx you’ve done it in prior cycles, as you mentioned this is a very different cycle. So just trying to gauge how you're thinking about the depth of this cycle and similar things you're doing to protect margin as it plays out.
So I think we learn a little bit through every cycle and one of our goal is to never let a cycle go to waste. What happened in 2008, 2009 was the cycle really hit in early part of October of 2008 and the business was down very substantially in that December quarter and down lot more even in the March quarter and we didn't implement pay cuts and all that till we were well into the cycle where the strong authority there and we were being better just.
So this time what we've done in understanding that with 33 million people I think already lost jobs in US alone, I don’t know how many around the world. These people are not going to be buying cars and refrigerators and other stuff that really would have our product. So this time we bend down the hatches and got it up the window. They're ahead of time before the storm really hit.
So we finished the March quarter actually sequentially up 3% and we implemented the pay cut starting April 20 and at that time our business really hasn't even weakened. Where our June quarter was still backlog higher than the March quarter backlog at the same point in time. So what we have really done is really out of abundance of caution just thinking that this storm internally at Microchip we have described that to be a category fixed storm waiting in the wing where category five is the highest category because we have never seen this before and a simultaneous demand and supply shock the pandemic and no place to hide and 33 million people laid up in the five weeks in US alone.
So we have prepared the company with a cost structure in the June guidance we have given you has the paycheck now pay cuts for June quarter dialed in but not for the whole quarter because we started in the middle of the quarter and September expense will be down even slightly further from that. So we essentially have positioned it for any extreme case that may materialize.
It's a lot easy to give the money back undo the cuts on the salary, change them from X% to Y% lower that. It's much easier to do that than you have spent all the money and then really fight and you have the supply. So that's really how we're looking at it. We're looking at it as don't know and until anybody knows, anybody says he knows. they're lying. They don't. So what we've done in really out of abundance of caution prepared the company for a worst case analysis and we'll give the money back if we didn’t need it.
Just as a follow-up on the push outs and cancellations, is it pretty broad based are there any certain products that are you're seeing more than others?
It's not by product. It is more by end market. The worst is automotive, the second would be industrial and general consumer like appliances and all that I think that Ganesh described all those areas, where the strength is the strongest area is data center. I would think the next is really 5G related, work from home related, PCs, printers, computers and all that. Medical is extremely strong. So those are the areas we're not seeing push outs and cancellation. We're seeing those in the automotive and some general industry.
The next question comes from the line of John Pitzer from Credit Suisse. Sir, your line is open.
Steve you said in your prepared comments, that clearly, the June backlog is deteriorating, but at least through the month of April, it would still suggest the potential for sequential growth in the June quarter. So I am just curious when you think about the range of revenue you've given for June. What's the expectation as we go into May and June? Does the rate of deterioration, the backlog needs to accelerate from here to kind of hit your midpoint or just kind of give us any sort of color you feel comfortable with helping us understand what you're embedding in further deterioration of the backlog from here?
There is a way to model it. So there are two challenges, maybe three. One is that the existing backlog further cancels or pushes out the following quarter. Second is we still need turns to take. If there is zero cancellation from here on, but we get no more turns for the quarter, that's not a good scenario either. So that would be fairly soft too and the third is a supply depending on what product the demand comes on.
The products where if you place an order today the earliest I can give you is July, August and those are from the most constrained areas or factories that have had a six weeks for six weeks they haven’t been able to run full production and now as they're coming back to production, we are so far behind in delinquency. We'll leave the June quarter with a fairly large amount of product delinquent. Same thing happened at the end of March quarter.
So in a way some day when we catch up on that product get shipped, it's a good news but for now we're not going to be able to ship all the backlog in the June quarter, neither will be able to ship that all in March quarter. In fact, if just the supply side shock had not happened and our factories were running, for March quarter we would have met or exceeded our original guidance, which was about 5%, 5.5%. We only did three and I was largely because we couldn’t supply the product.
That's helpful Steve and you also mentioned that some of the OpEx control that you put in place this quarter or not even for the full quarter so it will have a positive effect on OpEx declining again in September. I'm curious, are there more leverage you can pull on OpEx and should we take OpEx being down sequentially in September as a sign that you feel like revenue might be down again in September as well?
So the only reason that the September OpEx will be down below June would be because the pickup would be for the entire quarter and the pickups didn’t kick in until June 20 in US and probably May 1 for some of the international geographies depending on the various international laws but the September quarter we get the full quarter.
If your question is what if we didn’t need it and the business as well then you remodel it and you change the pickup from 10% to 6% to 5% or if you see growth you make it zero. Anything is possible, but I'm saying right now in the game prepared for the category fixed on we are structured to take the June quarter expenses below the March quarter because of the full quarter saying and then December compared to September will be about the same if you don’t make any change in and the pickup and at the end of December that's currently the case.
We've announced the employees that the pickup ends at the end of December, So the March quarter OpEx will rise again and hopefully we're well out of the words from the site and if we're not then we do something different.
The next question comes from the line of Chris Danely from Citi. Sir your line is open.
Can you just expend on I guess what percentage of your revenue is dealing with the supply issues and are the supply issues worsening as we speak or do you think you got a handle on them and they should get better as the quarter progresses?
Let me have Ganesh comment on it. I don’t think we have quantitative numbers but Ganesh can talk qualitatively.
So it's not our entire product line right. So we build a lot of product in many countries Thailand, Philippines, Malaysia depending on our factory or subcontracted factories. Our principal issues from a constraint standpoint were in the Philippines and in Malaysia. Malaysia at this point effectively has turned on 100%. They don't have -- it's running at 100% but there are no restriction and they are as fast as they can bring their direct labor workforce how they would catch up on the quarter.
Philippines has done operating under restriction. We have been able to improve from March to the June quarter by having more people residing in our factories. So this is we got 500, 600 employees living full-time inside the factory to be able to get the utilization to be higher. We expect that that will get turned -- those restrictions will come off as we go into the latter part of May, the middle of May as part of our control and as that happens, we will have more output that come out of it.
So I believe the constraint -- manufacturing constraints are coming off and coming off rapidly, but there's catch up to what was left from where the constraints were there plus ongoing support there.
And for my follow-up, so Steve you call this weakness after a little bit of strength last quarter. What is your spider sense tell you on how long this weakness could last? Do you think that some of these end markets that are very strong right now like data center, did they start getting weaker in the second half of the year. Any guesses to how long this weakness could last because it last in the next quarter.
I don’t currently expect the data center to weaken and I think 90% of the world data has been created in the last two years and any company that's related together I just got off the Board of Mellanox, you've got finally the deal closed and they're video on April 27 and then announced the prior quarter their March quarter just couple of days before the deal closed. It was a very, very strong quarter. You’ve seen it in the results and video also.
So I just think data center market is very, very strong and I think how we've designed in our print position and the customers board. So that one looks very, very good. But I think as the automotive factories go back to work and people start buying cars again, that market is the most destroyed today. That market will show huge potential for getting back to normal and industrial will be the same way.
The next question comes from the line of Vivek Arya from Bank of America Securities. Go ahead. Your line is open.
I had two as well. Steve when I look at your peak to trough share decline say from September last year to hopefully the tough in June or if I just take the midpoint of what you're guiding to in June or even take the low end of that, it's a introduction of 7% to 11% that's actually much better than what we have seen at some of your analogue and microcontroller peers that are down 25% in that same period.
So the question to you is what is helping you stay more resilient and I appreciate the visibility is not there but if let's say those competitors start to come in September, is there anything that prevents Microchip sales to also rebound in September?
I think I little bit answered that question earlier that we think what we're seeing is you referred and building is stronger same position and customer's boards with total system solutions and also acquiring product lines with synergy products what we have gotten from Atmel and Micrel and Microsemi with all the discrete product line with various steps that can grow into similar border microcontroller and much stronger distributor relationships I think some others have been tweaking their distribution policies maybe to the detriment, maybe not now. Time will tell but I think we are seeing a stronger effect of a stronger distributor relationships and the effect of end markets like we discussed.
So I don't really know why anybody else is doing better or worse than us. I am sure there are other companies doing better than us and rather more closer competitors that are doing worst than us. So we're happy to be gaining share but I don’t know we can totally allocate percentage how much is because of what reason.
And for my follow-up, gross margin say you're guiding down about 120 basis points or so down to 61%. I understand that there are supply chain disruptions etcetera, but the last time your gross margins were under or around these 61%-ish or below levels, your revenues were 20% lower right. They were closer to $1 billion or so over two years ago and at that time you did not even have Microsemi which has been accretive to margin since then.
So I am curious why this conservatism and gross margin as with utilization is there anything else right and then how should gross margins behave assuming that sales start to rebound in September? Thank you.
So the midpoint of our guidance this quarter is 60.8%. Our long-term model is 63%. So quite honestly I think margins have held up extraordinarily well. If you look at the fall we had in gross margins back in 2008, 2009 that margins went down significantly. Now we've got a little more balance between what we do internally versus what we do externally from a production standpoint.
Bottom line is with revenue being down as you mentioned 7% to 11% from people trough we have to run our factories at low level and I think we've done a very good job of controlling inventory levels and in this last quarter 122 days that's a very good position to be in with what's in front of us. So I think this comes down to utilization of our factory footprint that we have as we go back into it, we can be very cost effective.
It's just a trough though.
I think the question revenue is so much higher than last time our revenue was -- last time our margin was just kind of number. So why is margin not higher I think that's your question. Going back two years ago was a different company. We didn’t have Microsemi all of their factories around the world they're probably a different cost structure. Some of those factories have lower demand. Some of those are okay and it's not the same company. Combined with Microsemi now, Microsemi was about between 40% to 50% of our revenue and company has totally changed.
The next question comes from the line of William Stein from SunTrust. Sir please go ahead.
Steve I apologize if you’ve answered this already. It seems clear you are expecting some further order cancels or push out or downsizing, so I totally understand that but when we think about the pace of cancellations, have you commented on that yet? Is that starting to slow down where the reduction in backlog is getting to point where those changes are smaller and smaller?
I don’t know if I can definitely say that. I think end market by end market and it's geography by geography, but overall it may have slowed down somewhat but in some other geographies and in some other markets its continuing. So I don't think, if the calculations were over and the push outs were over, our revenue would be higher than March quarter. That's not what we're guiding and that's not where we're attempting.
Next one if I can, perhaps for Eric but whoever wants to take it, most semi companies in the past few months has couple of months have taken to try to term out debt and either protect themselves on the balance sheet. Microchip's moves here have been a little bit more I don’t know it looks like opportunistic or aggressive you might characterize by pulling down the revolver to pay off part of the convert. I am wondering if you can walk us what the thinking was the company the courage to do that in this environment.
Let me take that. So we begin the effort by some of our convert debt when the stock to hit about $60 like low $60 and that was down about a peak of $110. The amount of dilution we get from these converts when the stock goes from let's say $65 to $110 is so large because it has a hyper future where the stock competes at 1.5 times that it will be $1 increase in stock price and was just very, very dilutive.
So when the stock price because of the recession went down from $110 into low $60, we decided not to waste that recession and to try to pushing up our convert, but to do so we needed the money and this year we took the money out of the line, we did not. We didn’t take any money out of the line of credit. We first wanted to raise the money in the public market through a debt but with extreme volatility the debt market is closed for a period of time and so we went to the action of getting a 364 day bridge. So we got $615 million of bridge at very, very low interest rates, same interest rate as the line of credit and with that we bought $615 million worth of face value convertible and by the time we executed those convertible stock had already been rebounded to about $70.70 where we average where we bought them and where the stock is now at $85.50 you could just imagine how much dilution we have saved that we would have incurred.
So we think it was very, very opportunistic good move and we didn't stress the credit line to do that. We got a separate bridge, so it was a venue money separate bridge that we've prepared within a year.
Got it. I didn't maybe I didn't appreciate the distinction, thank you.
I just would say I wish I was able to raise more money than I would have brought even more but it was a very, very difficult time. There were companies there was a run on the banks, people were drawing their credit line completely and banks were under lot of stress and that environment I was able to raise $615 million in new money something like miracle at that time.
The next question comes from the line of Christopher Rolland from Susquehanna. Sir please go ahead.
I guess first maybe talk about cycle times and lead times some of our data suggest that your leads are up a little bit. I think you did talk about the Philippine, Malaysia. Maybe just talk about lead times from that perspective. I know they're low historically, but talk about where you are there with any increases and then I guess balance that with inventory it looks like you're not increasing any inventory. So I guess you guys are super worried, but maybe talk about that lead times and the balance of inventory as well.
Ganesh let me have you take lead time question.
So lead time for most of our products from relatively are stable. Lead times in these factory that have been constrained by shelves in place have gone out and they've gone out by I would say on average about a couple of weeks and so whatever you are hearing or seeing is on certain product lines I think a little ones that go to Philippines or Malaysia where we've seen it. But for the most part lead times outside of that are remaining stable and we expect that lead times will catch back to normal by probably closer to the end of the quarter as we catch up stock will usually open and we're able to both ship normal but also do any catch-up shipments.
Steve you're the big picture guy and you touched on this a bit already, but looking forward what do you think that the biggest risks are to your business here and if you have to start pulling some contingencies to lessen the blow, what are you thinking you can -- what's in your control from here that you plan on doing. Thank you.
Well the biggest risk to the business is that COVID19 is not contained as we are talking about from state to state and you're internationally – nationally and internationally from Washington and other places as people go back to work here in the coming month, the question is do we see it way for COVID19 cases starting to go back up as people are willing to go back to work. I think as people go back to work, there will be all the precautions of NASH and cleaning and others. And hopefully, we will not have a second wave but it's tucking away requiring to go back to sheltering place and that would be the largest risk that we're seeing because that would have prove on the time spend during which the factories will be shut down, the demand would be low. People will be buying cars and other stuff. That I see as the biggest risk.
Now in terms of what levers do we have, I think we've already implemented those levers that are while our business in March quarter was not even last stressed we sequentially grew but we implemented these measures to essentially finite categories six times and those are the levers that already have implemented and we'll just continue with those and look for even occurring more discretion and the expenses and see if that could go down further and any other discretion of the expense to go down further.
Ganesh and I and others are willing to take a larger pick but usually it's a volume up to predict pick up that helps and I don’t think we can ask the word while incurring larger pick up, but you're also have policies to play with and capital and other things. But like I mentioned I think in an answer to an earlier question we try to model a scenario to try to see how much of revenue has to go down before we become cash flow negative or dividend comes through a questionable it's way too low and when I get there I think it's just -- our business is too strong today. The formation of the business is so good that we're not going to burn cash and the dividend is not at risk and I think we're in a pretty good place.
Thank you and congrats on buying that convert bonds, nice price.
The next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.
Just sort of geographical question back in March when we saw the team downshifted that time the downshift was driven by shortfall in China rights, it's a country starting to open back up but at a slower pace but you also did point out at that time that orders in business activity at that time in China was starting to pick back up and since then we've seen more cleanup of activity in China leasing auto production picking up this order, factories are starting to open up, consumer starting to spend. So have you seen follow through of that China improvement trend as maybe versus the world demand is weakening into the June quarter or are you also seeing degradation and deterioration in China orders and bookings as well?
So I think depending on when you look at monthly or you look at it by quarter when you look at it by quarter China was very weak for the March quarter because Chinese New Year first of all was extended to two to three weeks from one week and then all these factories were closed. So the China business was horrible. if you really look at for the quarter but if you look at it on a monthly basis as the COVID19 situation got contained and people went back to work, China business almost seems like it's back to normal.
However, the concern is that it may look like back to normal because it's really making up for some of the shortfall and all that it had and once that demand is met is a steady state demand in China back to normal or not. I think that needs to be answered in the month of May and June, but April China was very strong and late product margin in China was very strong as if it would be normal or even better.
Okay. I appreciate the insights there Steve and then just on the backend operation you talked about Malaysia, you talked about Philippines but you guys actually have a pretty large in Thailand they are locked down to the end of this month. So how is the team been able to manage quite nicely to the movement control in Thailand and is Thailand running at full run rate?
Yeah so Thailand did not have any strong ordinance, let me have Ganesh comment on that. Ganesh?
So the time of the lockdown are really a curfew at night from about 10 PM and 8 AM. It doesn't affect our shifts, our ability to operate our plans and so under the new logistic or other issues that we run into. So thankfully kind of the entire episode has been running full steam no issues.
The next question comes from the line of Ari Shusterman from…
So I first wanted to talk about automotive. So in auto which products have shown the greatest strength and can you talk about traction you've been seeing in silicon carbide?
Let me have Ganesh for that.
So I think when you have such a large demand reduction in automotive there is no segment I can pull out and say this is strong and so automotive across the board when we look at our many different product lines, they are going to automatic drill down in this. Now to your question of silicon carbide it's early days, and silicon carbide predominantly a new technology that is aimed at electric cars from a high-volume standpoint. Electric cars as a percentage of the total automobiles produced are sold and it's 1% to 2% and so it's still a small percentage.
We're making good inroads with our products to be new designs and new activity that are taking place. So it's really not a factor in any revenue that is taking place for automotive today, but we're making very good progress because the silicon carbide solution for Microchip are extremely robust and in an automotive environment which is very harsh, the voltage and temperature standpoint we're about as one of the most important factors that take into account for using silicon carbide products.
And as a quick follow-up with regards to FPGA business, what are trends that you’ve been seeing in and how would you say your FPGA is compared to ionic Altera. Thank you.
Go ahead Ganesh.
So our FPGA business continues to be reasonably strong. It had a nice growth as we showed during the March quarter results that we announced. Our FPGA also has a reasonably good exposure into defense and space applications. Those end markets are not as badly affected as some of the other end markets that we have and to be quite honest we don’t really see lot of it in some of the other names that frequently and what we run up into the market.
We play predominantly into the mid range and missed the lower end of the FPGA market, we have some unique positioning relative to security, low power, robustness and in those areas, we do extremely well.
Yes, the next question comes from the line of Craig Ellis from B. Riley FBR. Sir, go ahead.
Team, thanks for all of the detailed information so far. Steve I wanted to go back to a couple comments that you made about how unique this environment is and the fact that we got multiple dynamic and capacity had to content with those and the question for you is given how dynamic things are, what's Microchip doing, what are you doing to kind of assess where we are as demand compresses overall and then potentially reaccelerates and orders in backlog or have you expanded the things that you look at see when we'll get the turn and you have a view on when turn whether it be June or September some of the time?
Management team Ganesh and I and the other members of the management team really keep a very, very strong finger on the pulse of the business. We watch a very large number of indicators internal and external on a weekly basis and more often than that if needed on specific indicators. So through that large stack up for indicators and graphs that we constantly monitor, we have added a few to really further assess that situation frequently and some of the things we're looking at it much more frequently are things like dollars or push outs and cancellation number of coronavirus cases and various geographies where factories are and customer are.
Whether they're peaking, they're stable, they're growing, they're coming down. We're also just watching a number of other indicators employment related, first-time unemployment claims and all that. So there is really a large amount of data that we're absorbing and this certainly will include the data we get from our own customers to salespeople regularly with monthly bookings and design wins and our customers, customers comments on whether the business is growing or falling, where would it go and what's happening. So there is so much more intelligence that goes into really before we continue and we're even more focused on getting all that intelligence today.
And that give me any sense for when we could be at the bottom?
No, I think that is too early to really have that kind of confidence at the bottom. The numbers are so broad just have a guidance of minus two to minus 10 it's just so broad that we cannot yet say what September will bring. It will largely depend on whether as the people go back to work there is the coronavirus that kind of dies down or there is a second wave if coronavirus coming back and we're dealing with it with our factory shut down even in August and September. If that happens then the bottom isn’t here yet.
Certainly, if I could ask a follow-up just relating to some of the things that are happening inside of the business given how dynamic things are one, because it cause the team to think any differently will be the inventory that should be stocked to properly to pull customers and two given, Ganesh's characterization of what's wrong and squeezed does it cause the team to think any differently about where it's emphasizing incremental R&D on products and that kind of thing. Thank you very much.
So long-term target for inventory level is 115 to 120 and we finished the March quarter and 122. I don’t know you get any more precise than that. So inventory is really like that. So inventory is right exactly where we want the inventory to be I really tell you it got a little bit high earlier during the US China trade related and then we have been bringing it down. So March quarter inventory was nearly perfect and because of this coronavirus situation now, we didn't want inventory to substantially grow. So therefore we put our factories on reduced workload rotating time off or reduced hours of work or whatever.
And to call it so that as the revenue in the June quarter is declining, we don't want the inventories to grow very substantially. So I think our inventories are in the right range and we're comfortable with it. In terms of R&D Ganesh will comment on that.
So I think no one should take short term positive and negative that's the way in which we're investing from an R&D perspective and that's what we're seeing in this cycle at this point in time. R&D is really a longer-term view of where are the markets going, where are the opportunity and we're guided by the six megatrends that we have shared with you.
We believe over the next 5 to 10 years growth is going to be available at a faster level or higher level in 5G data centers, autonomous driving, IOT, electric vehicle and artificial intelligence and machine learning and so the main product lines at Microchip are working on how can they create complete solutions total system solutions for these megatrends and what maybe strong today and maybe not so strong in six months or 12 month is how we do our R&D spend.
I am showing no further questions at this time.
Okay. Thank you, operator and thanks all the investors and analyst who were on this call. The travel is really totally banned. So we'll be attending some of the conferences this quarter but they will all be virtual conferences. We'll do it out of our home. So we'll talk to some of you more at those conferences. So thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.