Microchip Technology is a leading provider of smart, connected and secure embedded control solutions. Its development tools and comprehensive product portfolio enable customers to create optimal designs which reduce risk while lowering total system cost and time to market. TimesTech interacted with Ganesh Moorthy, President & Chief Executive Officer Microchip Technology Inc. to learn about the Progress of Semiconductor industry in 2022, supply chain, Microchip business outlook and much more.
Read the full interview here:
TimesTech: Looking back on 2022, what are your thoughts on how Microchip and the overall semiconductor industry has performed? What are the main achievements and progress made by the company?
Ganesh: Microchip continued to perform very well despite a very constrained supply-chain. Our revenue through the first three quarters of the year grew ~25% over the same period of calendar 2021. In the September quarter, we crossed the $8 billion annualized net sales run-rate mark for the first time, and we have reaffirmed guidance for consolidated net sales in the December 2022 quarter that would result in sequential growth of between 3.0% and 5.0%, or 22.7% year-over-year growth. We expect to deliver our 9th consecutive quarter of record revenue in the December 2022 quarter. We expect this momentum to carry through in the new year and we are also calling for sequential growth in the March quarter.
TimesTech: What are Microchip’s business outlook/plans and areas of focus in 2023, and what are your key strategies and approach to drive growth?
Ganesh: Business conditions continue to be strong as viewed through our internal indicators. We believe that our relentless focus on organic growth opportunities through total systems solutions and key market megatrends (5G infrastructure, IoT, data center, e-Mobility, sustainability, and Advanced Driver Assistance Systems [ADAS]) are positioning us as one of the most diversified, defensible, high-growth, high-margin, high-cash-generating businesses in the semiconductor industry.
We also have added a calibrated increase in capital spending to respond to growth opportunities in our business, serve our customers better, increase our market share, improve our gross margins and give us more control over our destiny especially as it pertains to filling gaps in the level of investments being made by our outsourced manufacturing partners in the specialized capacity required for our products.
TimesTech: Chip inventories are high due to declining demand, what do you think will happen to the supply of chips in 2023? When do you expect supply to level off? Additionally, how long do you anticipate the supply/demand imbalance issues to continue?
Ganesh: There is some inventory build at our customers as can be seen in their balance sheets, some of which we believe is due to strategic buffer inventory builds and some of which is due to incomplete kits or the infamous golden screw effect. While we have seen sporadic requests to push out backlog, these requests are a small fraction of the very large unsupported backlog we have over multiple quarters (i.e. the backlog customers wanted shipped to them in the September quarter but which we could not deliver in the September quarter), and hence have not had a material impact on our business. At the same time, the level of expedites and customer escalations we are experiencing remains high, indicating that demand and supply remain imbalanced for many customer situations. In order to best utilize the available supply and reduce customer inventory builds, we continue to thoughtfully re-allocate future supply from customers who self-identify inventory positions to customers in distress with imminent lines down situations. Also, given our 90-day non-cancellable terms for standard backlog and a minimum of 12 months of non-cancellable terms for Preferred Supplier Program (PSP) backlog, we believe there are significant disincentives for our customers to order meaningfully more than what they need. We expect to remain supply constrained through the rest of 2022 and well into 2023.
TimesTech: Tell us more about PSP – Microchip launched the Preferred Supply Program (PSP) last year to address supply/demand imbalance issues. How would you evaluate this program and how has it turned out?
Ganesh: PSP is a mutual commitment between Microchip and our customers. Customers commit to 12 continuous months of non-cancellable backlog, and in return receive supply priority from Microchip. It allows us to prudently allocate resources by investing in raw materials, capacity growth and workforce expansion in a disciplined manner. Customers value the program as much as we do because it gives them priority of supply during a time of industry wide constraints. Support for the program has exceeded our expectations with many customers providing us 18 – 24 months of PSP backlog. Since launching the program in March 2021, this backlog has grown to and remains well over 50% of total backlog in the September quarter.
Illustrating the magnitude of the demand-supply imbalance, our unsupported backlog (which represents backlog customers wanted shipped to them in a given quarter but which we could not deliver in that quarter) climbed again and we exited the September quarter with our highest unsupported backlog level ever. Despite increasing capacity significantly, Microchip continues to experience constraints in all internal and external factories and their related supply chains.
TimesTech: Smart application innovation will continue to drive the sustained and rapid growth of the industry. In 2022, 5G+ smart Internet of Things swept the world. What sort of advanced technologies do you think will be implemented and applied on a large scale?
Ganesh: We are not as concerned about short term trends in 2023, but rather remain focused on the six megatrends mentioned above. These are durable five to ten-year market growth trends, and while any of them may not be as strong in a given year, over the long run, they will provide above average growth prospects.
TimesTech: As the global economy slows down, how will the semiconductor industry be affected by the global recession and how will Microchip respond to this issue?
Ganesh: We are cognizant of the weakening macro conditions resulting from rising inflation and interest rates and are monitoring such conditions closely. Given the crosscurrents of strong internal business indicators and some uncertainty in the macro environment, we have modeled a range of potential scenarios and are closely monitoring various indicators which should enable us to take deliberate action when we feel it’s appropriate. Our goal is to deliver a soft landing for our business, if or when there is a softer macro environment catches up with it, through our combination of 1) strong PSP backlog; 2) significant demand cushion from near-term unsupported backog; 3) the need to replenish a historically low internal and distribution inventory; 4) the above average secular growth trend; 5) normally much lower capital needs; and 6) high variable compensation that will buffer operating expenses.
We also believe that our business is demonstrating more resilience in the midst of the weakness seen by some of the other semiconductor companies. First, our organic growth strategy described earlier has, over multiple years, given us increased design win momentum and a resultant revenue tailwind. Second, the industrial, automotive, aerospace and defense, data center and communications infrastructure end markets that make up 86% of our net sales remain strong and our only consumer market exposure is in the highly resilient home appliance sector. And third, a vast majority of our products are built on specialized technologies requiring a type of capacity that continues to be the most constrained with the least opportunity to overship consumption.
