Investor's Business Daily, June 21st, 2007
If showing a profit in each of the past 66 quarters wasn't enough to establish its bona fides, Microchip Technology recently capped the accomplishment with a couple of company firsts: It topped $1 billion in yearly sales and took the lead in 8-bit microcontrollers.
In its fiscal 2007 that ended March 31, Microchip MCHP posted sales of $1.04 billion, up 12% from 2006. According to market research firm Dataquest, it has become the sales leader for 8-bit microcontrollers, the most popular kind. The term 8-bit refers to the number of bits of data it can handle at one time.
Microcontrollers are a type of highly specialized integrated circuit used in thousands of everyday electronics.
They're like the microprocessors from Intel INTC, IBM IBM and others that run computers, only smaller and dedicated to focused tasks. They power thousands of products -- everything from home appliances to autos to medical devices.
Microchip specializes in programmable MCUs. Device makers can change the function of the chips in their factories, right up to the day they ship their devices.
Buying Microchip's off-the-shelf parts, rather than custom chips, saves money. It means gadget makers don't have to keep track of lots of different parts.
On Monday, however, the company lowered its outlook for this quarter. It now sees per-share profit of 36 cents instead of 37 cents, blaming weak sales in Europe.
In an interview, Chief Executive Steve Sanghi talked about the reasons for lowering guidance for this quarter. He also talked about the significance of the milestones and where he sees the company headed.
IBD: On Monday, you lowered sales and earnings guidance for this quarter. What's causing growth to slow?
Sanghi: We lowered sequential revenue guidance from 5% growth to 2%, and that translates into a penny lower earnings. We still see growth going forward, but earnings will be a penny less than we thought this quarter.
The first reason is Europe. We had torrid 19% sequential growth in Europe last quarter. Europe is showing signs of an inventory correction and will be sequentially down this quarter.
The second reason is serial e-squared memories (an older type of memory chip), which are 12% of our business. We saw some aggressive pricing from competitors there. It's not a core area for us, so we let a small portion of that business go.
Third is the U.S. housing market. Several customers that buy chips for things like air conditioners for houses said things are slower.
Those were the three reasons for the new guidance.
IBD: How did Microchip become No. 1 in 8-bit microcontroller sales?
Sanghi: Microchip became No. 1 in number of units of 8-bit microcontrollers shipped back in 2002. But we've remained No. 3 in revenue behind Freescale and Renesas. Every year we've been growing sales and gaining market share. The distance between us and them had been shrinking.
Last year, Microchip had a whopping year and was up more than 12% in sales. Freescale was down 12% and Renesas was only up 4%. With such a large gap, we crossed both of them.
IBD: What was your strategy?
Sanghi: The strategy has been consistent. We were No. 23 in (8-bit microcontroller) dollar sales in 1990. We've crossed over one or two players every year since then.
Our strategy is to focus on programmable microcontrollers. We have broad-based market acceptance. Also, we're not focused on a single application, but focused on 60,000 customers. Our largest customer is only 2% of our business. Those factors have contributed to our success.
IBD: What's the appeal of programmable controllers?
Sanghi: One customer example I can give you is a company that used to build remote controls with custom chips. In a given month they would build 300 different kinds of remote controllers for audio, TV, stereo and karaoke, for every major TV and audio maker.
Every remote control looks different and needs to do different things. If each has a different microcontroller in it, you have to order 300 different kinds of microcontrollers in an exact model mix, and forecast them 14 or 15 weeks ahead of time. It's hard to (do) that.
They converted to us. All their remote controls now have the same microcontroller. The only thing that changes is the code. The customer programs it the day before he ships. Now he orders one microcontroller in large quantities. That saves all the headache of obsolete codes.
IBD: Are there other benefits?
Sanghi: Another is time to market. A custom microcontroller has a lead time before shipping. A field-programmable one like ours can be shipped off the shelf and programmed in the field. With a custom microcontroller if the customer cancels the order, it's wasted. So with us, there's no obsolete inventory.
IBD: Microchip reached another milestone recently, its first billion-dollar year. Does that change your strategy?
Sanghi: We have an internal strategy. We always look five years ahead. As we were approaching $1billion, we put together the strategy for achieving $2 billion. Basically there's no change, except we expect we'll be firing on more cylinders. We had substantial sales of our 16-bit (larger, more powerful) microcontrollers last year. Sales of those was up 150%. It's growing rapidly from a small base. That will play a significant role.
Then we have the analog products. Those were up 24% last year, more growth than anyone in the industry. And there are other things helping us grow that we can't talk about.
IBD: What the general outlook in the chip industry?
Sanghi: The industry has a short term challenge and a long term challenge.
The short term one results from higher-than-desirable inventory that the industry built last year. We're managing the decline of that inventory and factory capacity. I think the industry is working through it. The industry is capable of getting out of the inventory correction. This current quarter should be good for everybody.
IBD: And the long-term challenge?
Sanghi: There is also a long-term challenge that I think industry leadership has yet to recognize. Semiconductors are a $350 billion a year industry.
Some people have built into their forecasts meteoric growth forever. Some semiconductor companies are built on the principle build it and they will come. But the industry is now slowing down. Most analysts forecast average growth no higher than 7% to 8% a year. The challenge is to adjust to new growth rates.
An archive of past tech Q&As can be found at investors.com/tech.
