Good morning. It's now 9 am the 2017 annual meeting of the stockholders of Microchip Technology Incorporated will please come to order. I am Steve Sanghi, CEO and Chairman of the Board of Microchip Technology, I would also like to introduce additional members of the audience. First, I will introduce the other members of the Board of Directors. Matt Chapman, CEO of Northwest Evaluation Association, Elbit Day President of L.
B. Day And Company Esther Johnson, retired executive of Carrier Electronics, and Wade Milcourt, President of Milcourt And Associates. Next, I will introduce the company's corporate officers that are in attendance today Ganesh Moorthy, President and Chief Operating Officer Eric Beonhold, vice president and chief financial officer, Steve Drihobel, Vice President, MCU A division And Technology Development division, Mitch Little, vice president worldwide sales and applications, Ritz Simonsec, not present his vice president, Analog And Interface Product Division, Matthew Bunker, Vice President, Back End Operations, Steve Caldwell, Vice President, Wireless Solutions Group. Lauren Carr, Vice President of Global Human Resources, Rod Drake, vice president of MCU32 Division Randy DuINGA, vice president of Memory Products Division, Fani Duvern Hayes, vice president, human machine interface division Mike Findlay, vice president of fab operations, Patrick Johnson, Vice President of Mixed Signal And Linear Division Brian Lidier, Vice President of MSLD And Marketing Communications, Shumeet Mithra, vice president of Wireless Solutions Group And MCU Thirty 2 Division Mitchibalski, vice president, USB, and networking group, and MCU 16. I always say you need a new title.
Mark Lyton, Vice President Licensing. Dan Turner, Vice President, Automotive. Joe Thompson, Vice President, MCU16 Division Kim Van Hook, Vice President, General Counsel And Corporate Secretary, Robert Williams, vice president, Global Information Services. Several other appointed officers who are not present are either located at other domestic or international sites all are traveling today. 2 partners of the firm of Ernst And Young, the company's independent registered Public Accounting firm are also here today.
They are Ron Butler and Eric Lewis. I would also like to introduce Rob Sefletta. He's in the back, a partner with the law firm of Filson's on Sini Goodrich and Resati. Who serves as the company's outside general legal counsel. Now pursuant to the company's bylaws, I have been appointed by the board of directors to serve as chairman of the meeting.
Rob Sefletta will serve as secretary of the meeting. Notice of this meeting stating the time, place and purposes was mailed on or about July 13, 2017, postage prepaid to each stockholder of record at the close of business on June 28, 2017. Epidivates of mailing have been received by the company and are available for inspection at this meeting. $232,723,905 shares of common stock were outstanding at the close of business on June 28, 2017 and are entitled to vote at this meeting. Now just some matters with respect to the voting of your shares.
If you have already mailed in your proxy, and you do not want to change your vote, then you do not need to do anything at this time. If you did not turn in your proxy yet or if you wish to change a proxy, you previously submitted or if you hold a proxy to the vote, to vote the shares of another stockholder, please submit those proxies to us at this time. Anyone that needs to submit a proxy. Cheryl will collect those proxies now. No one?
Lastly, if there's anyone here who did not submit a proxy and who wishes to work their shares in person, Please raise your hand and Cheryl will distribute a ballot to you. Anybody needs a ballot? We will collect those ballots when we open the polls for voting in a few moments. In accordance with the provisions of Delaware law, The Board of Directors has appointed Rob Zafletta to serve as the Inspector of Election at this meeting, and he subscribed the oath of his office prior to the meeting. Rob has informed me that a courtroom is present, and I declared the meeting open for business.
If there are any questions that relate directly to one of the proposals, I would like to receive that question at the time we consider each of the proposals. Otherwise, we have reserved time after we complete the business matters of the meeting for a presentation of the company, followed by a question and answer period. So please hold all questions not related to the proposals until the question and answer period. The first proposal is to elect 5 directors to serve the ensuing year until their successes are elected and qualified. The nominee for director shall be elected if the votes cast for such nominees election exceed the votes cast against such nominees election.
Nominations for directors will now be received. I recognize Rod Drake.
My name is Rod Drake. I nominate Steve Sangey, Matthew W Chapman, L. B. Day, Esther L. Johnson, Wade F.
Marricourt, for election as directors of the company.
Mitch Little. II second denominations.
Since no other nominations were received, the nominations are now closed. The second proposal is to consider and work to approve the amendment and restatement of Microchip's 2004 equity incentive plan. To increase the number of shares of common stock authorized for issuance there under by 6,000,000 shares. To reapprove the equity incentive plan for purposes of Section 162M of the internal revenue code and makes certain Other changes as set forth in the amended and restated plan. The affirmative vote of the holders of the majority of the shares of common stock as represented at the meeting is required to adopt the proposal.
Emotion calling for a vote on this proposal will now be received. I recognize Mike Findlay.
My name is Mike Findlay. I move for the adoption of the following resolution, resolved that the proposal to approve the amendment and restatement of Microchip's 2000 and 4 equity incentive plan to increase the number of shares of common stock authorized for issuance by $6,000,000. Reapproved Microchip's 2004 equity and equity incentive plan for purposes of Section 162M of the internal revenue code and make certain other changes as set forth in the amended and restated plan, as more fully described in the company's proxy statement dated July 13, 2017, be approved.
Joe Thompson? I second the motion.
The 3rd proposal is to ratify the appointment of Ernst and Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018, affirmative vote of the holders of the majority of the shares of common stock represented at the meeting is required to adopt the proposal. Emotion calling for a vote on this proposal will now be received. I recognize Dan Turmer.
My name is Dan Turmer. I moved for the adoption of the following resolution, resolved that the proposal to ratify the appointment of Ernst And Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018, as more fully described in the company's proxy statement dated July 13, 2017, be approved. Denesh Murthy?
I second the motion. The 4th proposal is to hold an advisory non binding vote regarding the compensation of our named executives, the affirmative vote of the holders of the majority of the shares of common stock represented at the meeting is required to approve this proposal. Emotion calling for a vote on this proposal will now be received I recognize Mark Ryton.
My name is Mark Ryton. I move for the adoption of the following resolution. Resolved that the compensation of our named executives, as more fully described in the company's proxy statement, dated July 13, 2017 be approved on an advisory non binding basis.
I second the motion.
The 5th proposal is to hold an advisory non binding vote on the frequency of voting On the compensation of our named executives, the frequency period receiving the most votes will be approved on an advisory non binding basis. Is there any discussion from any stockholder on this? Emotion calling for a vote on this proposal will now be received I recognize Matthew Bunker.
My name is Matthew Bunker. I move for the adoption of the following resolution resolved that an advisory vote on the compensation of our named executives be held every 1 year as more fully described in the company's proxy statement dated July 13, 2017, be taken.
Robert William?
I'd second to motion.
The polls are now open for working on the proposals before the meeting. The time and date of opening up the polls is 9:11 am today, August 22, 2017. Cheryl, please collect the ballots of those stockholders who wish to vote in person. If you have a ballot, please raise your hand so that we can collect them. We'll wait for everybody to turn in their proxy if anybody has 1 and for the results to be tabulated.
Anybody?
The polls are now closed. The time and date of closing of the polls is 9:12 am today, August to 2017, will the Inspector of Election please announce the vote?
With respect to proposal 1, I hereby declare that the nominees have been duly elected as directors of the company to serve for the ensuing year and until their successors are elected and qualified. With respect to proposal, chip's 2004 equity incentive plan, increasing number of shares of common stock authorized for issuance they're under by 6,000,000 reapproving the 2004 equity incentive plan for purposes of Section 162 M of the internal revenue code and making certain other changes as set forth in the amended and stated plan has been adopted. With respect to proposal number 3, I hereby declare that proposal to ratify the appointment of Ernst And Young, LLP, as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018 has been adopted. With respect to proposal 4, I hereby declare that the compensation of the company's named executives has been approved on an advisory non binding basis. With respect to proposal 5, I hereby declare that a frequency period of 1 year company's named executives has been approved on an advisory non binding basis.
This concludes the formal portion of our meeting. I remember there's a presentation soon after I adjourned the formal portion of this meeting. But before I adjourn the meeting, is there any further business? If not, I will entertain a motion towards John. Eric Beonhole?
I moved that the meeting be adjourned.
Steve Dear Herbert?
I second the nomination.
All in favor, say I. I. I opposed to say no. The eyes have it. The meeting is adjourned.
Please stay seated. Okay. Before I begin this presentation, I wish to remind you that during this presentation, I'll be making projections and other forward looking statements regarding the future financial performance of Microchip. These statements always involve predictions and the actual results may vary materially. So I refer you to Microchip's filings with the SEC regarding some very important risk factors about the company.
So with that, in today's presentation, I'll be introducing you to Microchip 2.0. The company you have known for the last 27 years or so, is the company, Microchip 1.0, and I'll go through several slides to recap the highlights and accomplishments we have had during the Microchip 1.0, and then I'll lead you to really what the new company Microchip 2.0 is and we'll do coming going forward. And we thank the support of, shareholders during the entire Microchip 1.0 and, look forward to your support during the Microchip 2.0. So this was a June quarter financial result. I won't read every bullet on slide 2 for the phone audience.
Everything was a record sale, sales of various strategic product lines, income in all categories, operating or record earnings. It was a 107th consecutively profitable quarter. These are the following things I will cover a little bit in Microchip 1.0, a consistent growth perennial market share gains, high margin business model, very shareholder friendly with consistently increasing dividends, and free cash flow and a very successful M and A strategy. So let's first look at the consistent growth. This is the revenue slide for Microchip since, fiscal year 93 when we went public.
So almost over a 25 year period, we have posted 107 consecutive quarters of profitability The sales are also shown divided by MCU, analog memory, licensing, and, multi market, and others. This is on slide 4. Going to slide 5 shows the growth of our analog yearly revenue. We break this out. And as you can see, based on the last quarter run rate, this was about a $950,000,000 annualized business, and, you know, heading higher.
Slide 6 shows the, total microcontroller market share. This is microchip's revenue in microcontrollers. As a percentage of the MCU 816, 32 bit revenue reported by the Semiconductor Industry Association. The first to many points on this slide are by year. And then after some time, I change them to quarter so you can see the granularity.
The large spike you see about 4, 5 quarters ago was the acquisition of Atmel, which brought in significant additional microcontroller business. So for very beginning, you see a large amount of market share growth, a big jump by addition of Atmel And since then, we have gained further market share with Microchip and Atmel combined, last quarter's shares standing at about 16%. This shows a little bit differently. This shows, our market share ranking against all of their competitors. I could go back on this chart to 1990.
Microchip will be bottom of this chart behind everybody in U. S, Europe, Asia, and Japan. And then our share continued to rise. We were in the top 10 by 2003, and then the share continued to increase becoming a number 3 in 2016. The two above us also have done significant acquisitions, Renasas was a merger of Hitachi Mitsubishi in NEC, the 3 large Japanese giants.
And, NXP is, a merger of, NXP and 3 scale. So, their market share also increased through acquisition and, Microchip market share also shows Atmel in the very last month, 20 16. Now I'll show you several slides that are just all the slides going up into the right, you know, that's kind of one of the things. If the graphs go up into the right, unless you're measuring defects, If you're mentioning revenue, earnings, profits, percentages, graph, which go up into the right, are good graph. So I'm on slide 8 that shows a non GAAP net sales.
You saw a slide for the last 25 years. This kind of zooms in in the last 8 or 9 years. Can see a little more granularity here, 17.6 percent compounded annual growth rate. Slide 9 shows a non GAAP gross profit over the same period. 18.2 percent compounded annual growth rate.
Slide 10 shows the non GAAP operating income, income in dollars, which shows 20.4 percent compounded annual growth rate. Slide 11 shows the non GAAP net income and diluted EPS growth. The EPS is in the line and the net income is in the bars. That's, again, another chart up and to the right. And slide 12 shows the free cash flow as a percentage of revenue.
The bars are free cash flow in dollars. And the line is free cash flow in a percentage of revenue. Again, another chart up into the right, EBITDA EBITDA has grown at 17.6 percent compounded annual growth rate. EBITDA and net leverage The bars are EBITDA in dollars, and the line is essentially net leverage. It's the total amount of, loans microchip have divided by the EBITDA.
And when we acquired Atmel, we borrowed a large amount of money and our leverage was quite high and several stockholders were concerned about you know, taking on such a high leverage and with a tremendous growth in EBITDA, and paying down some of the loans we had, you can see that the line EBITDA leverage has come down very substantially and kind of no longer considered very high. I'm on Slide 15. This shows $4,700,000,000 of return to shareholders. The blue line is, you know, the, the dividend per quarter and the scale is to the right, and the bars, the total amount of dollars delivered back to the shareholders with a scale on the left. $3,300,000,000 have been paid in dividends and $1,400,000,000 have been returned to shareholders with a buyback.
So this has been very shareholder friendly company that has constantly shared its profits through share buybacks as well as dividends. Okay. So This was largely, Microchip 1.0. And as I make a transition to Microchip 2.0 and what has made it in a way possible, is in, 2008, we started to do a series of acquisitions. And since then, We have bought about 17, 18 different companies.
Each company here has brought an additional technology to Microchip which we are able to sell along with the microcontrollers either on that chip or around that chip. And by successfully building a large portfolio through various acquisitions, we now all of a sudden find ourselves to be able to and, and I'll show you how that works. But that has made it possible through all these successful acquisitions to now make a transition and I introduced to you Microchip 2.0 with a vision to be the very best embedded controlled solutions company ever. I'm on slide 17. And, this company builds products and applications and solutions.
That are smart, connected, and secure. So Microchip 2.0 7 elements of it, 1, providing total system solution and embedded control. Second, we have leading customer preference to design with our MCUs, and I'll show you that survey done by E times. 3rd is multiple growth drivers, which will drive our business going forward. 4th, record gross margin target, again, with multiple drivers 5th record low operating expense target as a percentage of revenue with, again, multiple drivers that are providing leverage on OpEx.
Number 6, our end market mix is now skewed to industrial and automotive. During much of Microchip 1.0, our end market mix was more dominated by, consumer, household appliances and and stuff like that. And the industrial and automotive tends to be more sticky sockets and considered higher, you know, better business. Number 7, the new long term model with industry leading operating profits. So let's look at some of them.
1st is the total system solution in embedded control. So here is an example. We got 100 of these pages, and I'll show you 5 today. First is an automotive water pump. A Microchip 1.0 will largely sell a microcontroller in it, which is shown in the middle a DSP 33 It may also sell, some of the analog parts shown in green, but in Microchip 2.0, will add many additional chips coming from our acquisitions.
So the 3 red and one blue at the bottom came with the Atmel acquisition. So you could see that the total amount of value we can add to the customer nearly doubled on this slide in the microchip 2.0. Here's an example of an alarm panel uplink where a microchip, 1.0 would have sold 3 chips. Now they're all analog, a battery charger, an op amp, and an IO standard, but in Microchip 2.0, is adding large number of additional analog chips from my cloud. Has a third example, a router, this application came to us from Atmel and Atmel would sell a a microcontroller in the center MPU, but as part of Microchip now, a Microchip 2.0 will add 5 other chips from Microw.
I'm on Slide 23. Hello. SOS. Doesn't like the router. Control and delete.
Escape doesn't work. Nothing works.
I wanted Bill Gates in the audience. Well, you know, they have to get a new laptop and set it up and load it. So meanwhile, Let me just take some questions. Let's let's have a conversation. Any questions I can handle right now?
I see, some of the ex employees in the audience. Welcome back. I see some people that came to us from acquisitions and employees who are in the audience. I also see some local shareholders that have shown shown up. Any questions?
I can just use it here. This definitely has a competitor's microcontroller in it. Okay. So The next example is a PC doc. And here, you can see that a microchip 1.0 We'll only have one chip in it PIC 32, which is a 32 bit microcontroller shown in green, but in Microchip 2.0, All the red ones are from micro.
All the brown color is all the parts from our SMSE acquisition. There's a USB have been pulled. There are a number of other parts. The blue one is a authentication chip from Atmel. So you could see a Microchip 2.0 has substantially larger content in the customer's board, where in many cases, the entire board can be made up of microchip content.
So that's the gist of providing the total system solution to the customer. And the last example on page 24 is a display module. Here again, the center green chip is a 32 bit microcontroller from Microchip, but a Microchip 2.0 adds other chips from, micro one from SST and the blue one from Aetna. And like I said, we have hundreds of these examples and going forward in various presentations, I'm going to change them around and have different examples over time so the shareholders can see. Second is the leading customer preference to design with our MCUs.
So not only around our MCU, we're adding many, many other chips like you in the prior slides. But even when it comes to MCU, in service, customers have shown a preference to design with microchip's microcontroller. So these are slides from, EE times as is a parent company of E times, and they ask the readers, the embedded engineers, which of the following 8 bit chip families would you consider for your next embedded project? And you can see that, microchip pick and mail ABR, which are both ours now, is almost all of it and has a 5 to 1 or 6 to 1 advantage over the next nearest competitor. When the same question was asked, for the 16 bit chip family, then the Microchip DSPIC and PIC24 were again on the top.
First time ever we crossed Texas Instruments. They went down year over year. We went up So again, we have the leading preference to design with our chip. And the next slide is, which of the following 32 bit chip families would you consider for your next embedded project. So on 32 bit, while on this slide, STMicro shows on the top, Microchip pick 32 as a number 2.
But as you go down and maybe I should have colored those slides, there's an atmel, Sam, there's ABR 30 2. There's Arduino. When you add all of those together, then Microchip again is the, number 1 trends for embedded designers to design with one of our solutions. The next question E times asked is, what's most important when choosing a microprocessor? Some people would expect that answer to be a given company, a given chip, a given architecture, a given microcontroller that may be popular, The answer was really none of those.
The embedded developer's answer was it is a ecosystem. And the ecosystem is really whatever you want to put in it, software, hardware, tool support, debugging support, technical support, websites, availability of the product, no end of life policy on and on and on. Ecosystem is really whatever percentings is a part of the ecosystem. When the question was asked, which company? Okay.
Hello.
Let's see what we can do here.
But there was 2 unattractive alternatives. So when the question was changed here to which vendor has the best ecosystem for your needs, then, customers believe that Microchip ecosystem was one of the best, most preferred and kinda tied with TI, but it's rounding down or rounding up. And by the slide they gave us, we were number 1. Multiple growth drivers. So these are multiple growth drivers, which will be driving our business going forward in Microchip 2.0.
The first is the microcontroller market growth and share gains. I shared with you how we have gained shares so far. And with such preference to design with our products, we should continue to gain further share. Second is the analog growth and attach opportunity. That is all the attach of analog and various products that will go around our microcontroller.
Wired as well as wireless connectivity, the entire internet of things thrust, and all the chips we have in that area that we can attach with the microcontrollers. 4th is security. Security is becoming extremely important anytime You want to connect to the internet. You are subject to hacking risk and all that. People can hack into your cars, your homes, your data.
And we have significant security offerings. So, you have to authenticate through that chip before you can get on to the internet bus. And that would be driving our business. In the automotive area, we have many different solutions in networking, human machine interface, access control, lighting and body electronics, and, finally, a technology licensing business, which was acquired when we acquired Silicon Storage Technology Back Bennett was a $40,000,000 business It's had a $100,000,000 run rate today and will grow further. Gross margin drivers Our gross margin last quarter was already over 60% and our long term guidance is 62.5 header some of the elements that will get us there, increasing fab utilization.
All our three fabs are ramping capacity. To grow further utilization. Savings from micro fab closure, micro fab was closed back in November, And, much of the micro product is still coming from inventory we built prior to the closure. So as more and more product shifts towards building it from our 8 inch fabs, the cost is substantially lower and those savings will continue to to accrue. Third is increasing back end plant utilization.
So some of our large acquisitions, both Atmel and Microw, did most of their testing, at the subcontractors. So Atmel had 90% of its testing at subcontractors. Microchip had 90% of its testing in house. So after these acquisitions, our overall percentage of product we tested ourself went down quite a bit. Total, amount of testing we did in house went to about 55%.
We have a goal to take it back up to, over 80. And as we are doing that, it will dramatically increase the back end plant utilization at a much lower cost. 4th is porting Atmel products to microchip assembly test technology, Some of the initial products we have done are giving very, very good results. In one case, we replaced 17 test systems by 1 test system giving equivalent output of the 17 test systems. And in factor of 5 or factor of 6 is really all over the place, a lot of these porting and transfers are going on.
Which are all adding to the gross margin, stable to rising pricing environment and, richening product mix as we go forward. Operating expense leverage drivers. So here, basically prior to the Atmel's acquisition, and Microw and some other companies, you know, Atmel would be developing peripherals developing the technology, qualifying the technology, EFT structures, pad structures, packaging qualification, on microcontroller, on analog and wireless, and microchip would be doing the same. Today, as we have combined them together, We are porting them to common process technology, common AST structures, common packaging calls, common marketing communications, common conferences, come on this, come on that. So we are just experiencing enormous synergy.
We've already dramatically beaten the numbers at we gave a year ago, as a guidance to the marketplace. So this synergy coming from the common roadmap on microcontroller analog, wireless, and memory, from being on a common process technology, common IP libraries, common ecosystem, synergy in marketing is just all tremendous. And we're seeing we're able to grow this revenue with a significantly lower incremental OpEx for sales growth. And that's why already, last quarter, we had the lowest operating expense as a percentage of revenue. And we're guiding to even go lower this quarter.
Next is the revenue mix by end markets. Like I said earlier, for most of Microchip 1.0, our largest segment was consumer, Today, our largest segment is industrial with 35% of our business, automotive with 25% of the business. And then consumers and others are after that. So 60% of the business is in these two markets with high margins, sticky sockets, and really kind of our kind of marketplace. Finally, financial results, guidance and long term model.
There's a lot of data on this slide. Let me highlight a couple of them. So starting with the net sales, I'm showing it for the last five quarters actual. Net sales have been record every quarter for the last five quarters. Gross profit has gone up in dollars, record gross profits, and gross margin has incrementally increased every quarter.
Starting from 55.8 percent going up to 60.4 percent last quarter. Operating income, started from 27.4 percent 5 quarters ago, and now it's 37.5. So 1000 basis points improvement in operating income, operating margin over these last five quarters. And finally, the diluted EPS starting from $0.84, 5 quarters ago to $1.31 last quarter. Current quarter guidance, is our first quarter ever to be over $1,000,000,000 quarter, $4,000,000,000 run rate.
The actual guidance is 101 point $3,000,000. Gross margin goes higher again, a little bit, 60.5to60.75 operating expense percentage goes a little lower again and operating margin to be another all time record between 37.5to38.25. And the long term model shown on the bottom right, we're looking forward going forward with a 7% to 9% revenue growth expectation Gross margin to be 62.5 percent, operating expense to be 22.5% and operating margin to be 40%, which puts us in the range of only a couple other companies that can talk about making 40% operating margin in this industry. So we'll be in the top club of about 3 companies, I think. Summarizing the presentation today, we are a consistent revenue grower and market share gainer with multiple growth drivers, high margin business model and shareholder friendly, currently strong business conditions with June quarter revenue that was above the high end of guidance.
We're guiding the September quarter to be our first $1,000,000,000 revenue quarter. We're experiencing significant capacity challenges And from quarter to quarter, we are rolling forward significant amount of revenue that's delinquent to customers' needs because the growth has picked up so much. And, capacity is a little bit behind, and we think it's will take us to take us up to 1 year to catch up before lead times are normal. We have revised our long term financial model up to a non GAAP gross margin of 62.5 percent, operating expense of 22.5% and 40% operating income. And, finally, as I showed today, we're launching Microchip 2.0.
Some of these slides I showed about couple of months ago to the investors. So it's still a launch in process as we take that message around the world. To our customers, to our investors, to our employees, providing total system solutions that are smart, connected, and secure. Thank you very much So I'll open it up for questions. Anybody has a question on any part of it.
If there are no questions, then, this meeting is done. Thank you for attending. Thank you.