Microchip Technology Earnings Call NUGGETS: Customer Order Rates Outlook, Relying on Synergy to Hit Targets

On Thursday, Microchip Technology, Inc. (NASDAQ:MCHP) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Customer Order Rates Outlook

James Schneider – Goldman Sachs: Steve, I was wondering, if you could give us a little bit of an outlook in terms of what you’re seeing from customer order rates by different geographies? Whether you expect which geography is expected to be up or down in the next quarter?

A Closer Look: Microchip Technology Earnings Cheat Sheet>>

Steve Sanghi – President, CEO and Chairman: Well if you decode the guidance we provided on sales, all the growth is coming from the (indiscernible) added to our numbers. If you take the midpoint of our guidance minus the SMSC revenue of $65 million to $70 million, Microchip is flat to up just 2.2% or 2.3% or so. In terms of geography, Europe geography is very weak, made worse so in summer quarter as we have said. So that will definitely be down and the other geographies also, U.S. and Asia will largely make up for the drop in Europe.

James Schneider – Goldman Sachs: Then as a follow-up. Could you maybe just address the R&D line in terms of absolute dollars? I understand the way you are talking about in terms of long-term percentages, but can you maybe talk about whether you expect R&D to drift up or whether you will try to rein that in over the next two quarters in absolute dollar basis?

Steve Sanghi – President, CEO and Chairman: Well if you add substantial R&D of SMSC together with Microchip then those numbers will trend down as we gain synergies and make some restructuring changes if that’s what your question is. But if you compare it to a Microchip R&D number as we headed last quarter, of course numbers will go up, because there is substantial R&D from SMSC being added.

James Schneider – Goldman Sachs: Of course, but the combined R&D should slow down over time in terms of dollars?

Steve Sanghi – President, CEO and Chairman: Well, it should go down short-term in dollars and long-term in percentages there.

J. Eric Bjornholt – VP and CFO: So, we’re not giving any specifics of the breakout of the operating expenses at this point in time, Jim. So we’ve shared the long-term model on what we expect this quarter, so that shows that operating expenses should trend down, but we haven’t given specifics on any particular line item.

Steve Sanghi – President, CEO and Chairman: We have a partial SMSC this quarter and then will be full SMSC next quarter, so the total operating expenses including R&D or R&D itself are going to rise in September and rise in December because of SMSC.

Relying on Synergy to Hit Targets

Christopher Danely – JPMorgan: Steve, on SMSC to achieve the targets, do you think you’ll have to get rid of any of the businesses or do you think that you can get it to those targets with the current mix of business that they have.

Steve Sanghi – President, CEO and Chairman: So, there is no selling of the business involved in getting to those targets, but there is a definite restructuring within the business itself using the combined energy of the two companies, using synergy in R&D, synergy in sales, synergy in operations, IT, finance and other things.

Christopher Danely – JPMorgan: For my follow-up, would you care to give us any sort of long-term revenue growth target for the combined Company?

Steve Sanghi – President, CEO and Chairman: It’s too early. We just started today.