Some quick thoughts on a not-so-quick subject:
- CEO calls the bottom & claims a perfect cycle-calling track record. Really? Stock would have been flat/down on the revenue / EPS guidance miss but Steve called ‘the bottom’ on bookings in the March quarter. My anecdotal response to his track record comment is: ‘no’. I remember many times how the King CEO bullied analysts who dared to ask about weak results or weak guidance or weak inventory conditions. Calling the bottom has not been his strong suit, historically. Does that make him wrong now? No. However, here is my question. Let’s say he is right – what happens next? What parts of his business are exciting in the next ~24-36 months? For us, we like the military side of the MSCC business. Good. This area has been depressed for a decade and orders are back to boom times in some parts of the supply chain. But it is tougher to get excited about vanilla auto/industrial/data-center exposures, segments that are comping years of strong consumption, inventory accumulation, rising competition for sockets, etc...So if you ask me, is he right that the bottom in MCHP bookings is in the current Q, I might shrug my shoulders and say, ‘so what’? if you believe that, go buy a unit demand story with better demand growth vectors, higher dividend yield, better balance sheet, and more organic growth in the coming years (or all of the above). In terms of estimate corrections, it is hard to complete our view without the 10-Q because we need to know how much of the shortfall is MCHP versus MSCC, but we think there is more estimate carnage ahead, as analysts will have to adjust forward organic revenue growth assumptions for MCHP.
- Steve walks his strategy around like a puppy on a leash. His latest gloss is that he buys good franchises that are mismanaged and makes them world class (by removing OPEX, writing down fab carrying values to drive up utilization and gross margin, taking ASPs higher, cutting inventory in distribution). But each step of buying a secular impaired company that doesn’t grow reduces the blended organic growth of the combined entity. His stated strategy used to be to buy world class analog sockets that can pair with his MCU. That one is gone. We have seen serial acquirers try out strategy themes like borrowed clothes (thinking AVGO). So MCHP is a debt heavy balance sheet with dividend yield at a discount to peers buying crap assets and making changes. If we are right on the timing, he will need another major deal to close by year end 2019 (CY) to create growth in CY20 which means potentially announcing the next deal by June. We have previewed some midsize targets in a previous deck. Get the point? MCHP is on the revolving door of buying crap assets. This path will sustain a lower valuation range and peer group cycle to cycle.
A note on 32-bit comments seemingly directed at us:
They can say what they want on 32-bit but it is very clear that since the MCU market began the strategic pivot from 8-bit to 32-bit in 2008, that MCHP’s share gains in MCU have been largely inorganic. We have proved this in multiple ways. If you want, ask MCHP what % of their 32-bit MCU business came from Atmel or any other acquisition outside of MCHP? How much is ARM based? The point is, MCHP hit a point in 2008-2009 when it stopped being a golden goose layer of incremental bps of organic annual market share in MCU owing to a better mouse trap, and Steve needed to violate his old cardinal rule to own/operate multiple MCU architectures. As a result he needed ‘revenue’ to help carry the R&D load. It didn’t matter ‘what revenue’; just revenue to cover the carrying cost. So now Steve is an MCU company carrying around a bunch of x-growth cat and dog product lines, and he will continue to accumulate them.
Is there a takeout value?
It would have to be a large company that throws strategy out the window but wants the bedrock auto-semiconductor position. We’d guess AVGO and INTC as potentials. And the fact that I can think of acquirers means there is some early shift in my thinking about the direction of value. But it would be a super messy deal. And painful for cash flow. Let the King’s courtiers buy the stock up on his predictions; it will come back to earth by 2H (CY) when they announce the next deal.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
