NEW YORK—Microcontroller, analog and Flash-IP vendor Microchip Technology Inc. completed the $939 million acquisition of fabless ASSP provider Standard Microsystems Corp. (SMSC), giving it a presence in two key vertical markets: wireless audio and computing.
But for Steve Sanghi, president and CEO of Microchip, the process took just a little bit too long.
"The negative surprise largely has been the time it took to get approval from China," said Sanghi, during its quarterly earnings call with analysts Thursday (Aug. 2). "It took us about 30 days longer than we would have liked."
But now that the close of the deal is behind them, the real work begins: integration. Microchip expects the transition phase to be completed during the first calendar quarter of 2013. It will retain and operate all of SMSC's five product groups, which include automotive, wireless audio, USB, industrial and networking, and computing, although products could move from a Microchip to SMSC division (or vice versa) as it looks for "synergies and execution," said Ganesh Moorthy, COO.
Microchip and SMSC use many of the same wafer foundries. Moorthy said he does not expect Microchip to bring any of SMSC's products into its in-house wafer fabs. SMSC subcontracts 100 percent of its assembly and 90 percent of its test, a majority of which will remain that way, he said. Both of the companies' packaging technologies, as well as their test systems are different.
"We will continue to do a make versus buy analysis for newly developed products and expect to ship the mix to Microchip's assembly and test when it is cost effective," Moorthy said.
Microchip will, however, combine the manufacturing systems, which include wafer ordering, assembly and test management, shipments and warehouses. Moorthy expects all of SMSC's products will be shipping from its manufacturing systems by January 2013 or earlier.
While there isn't a lot of overlap between the companies' product line, there is substantial overlap in R&D development, Sanghi said. "As we look three or six months forward, new product design starts, we will try to convert them on similar processes at same foundries so these libraries have synergy," he said.
Microchip plans to retain SMSC's sales force and application-engineers with the intent of deepening its vertical market penetration in the wireless audio and computing sectors.
Over the last decade, Microchip has added vertical market resources in many areas, including automotive, home appliance, medical, smart energy digital power, motor control, lighting and several other market segments.
"The addition of SMSC will add wireless audio and computing as two additional vertical markets for Microchip. The automotive market is already a significant area of focus for Microchip. We have broad automotive penetration and we do business with nearly every Tier One manufacturer," Sanghi said.
Microchip's strong MCU presence in the automotive sector was reflected in its latest financial results. In its first quarter of fiscal 2013, 8-bit, 16-bit and 32-bit microcontroller sales grew 5.1 percent sequentially. On a more granular level, the company broke out revenue growth for its 16-bit MCU line, which was up 23.7 percent sequentially in the June quarter, and up 18.6 percent from the year ago quarter, according to Moorthy. And after a pause in the March quarter, its 32-bit business was up 71.5 percent sequentially in the June quarter.
"Both the 16-bit and 32-bit microcontroller businesses continue to benefit from the many demand creation actions we have taken as more customers who have selected the PIC microcontroller platform have either commenced production or ramped their volumes. Our design-win momentum remains strong, and while we are not immune to macro business conditions, we continue to outgrow the secular growth patterns for these businesses," Moorthy said.
Non-GAAP net sales in Microchip's first quarter of fiscal 2013 were $352.4 million, up 4.0 percent sequentially from net sales of $338.9 million in the immediately preceding quarter, and down 5.9 percent from net sales of $374.5 million in the prior year's first fiscal quarter. Non-GAAP net income for the first quarter of fiscal 2013 was $96.9 million, or 48 cents per diluted share, up 2.7 percent from non-GAAP net income of $94.3 million, or 46 cents per diluted share, in the immediately preceding quarter, and down 13.0 percent from non-GAAP net income of $111.4 million, or 55 cents per diluted share, in the prior year's first fiscal quarter.
Sanghi also provided revenue guidance for its second fiscal 2013 quarter. The company expects net sales to be between $412 million and $430 million, which will include about $65 million to $70 million in revenue from sales of SMSC products. For the combined companies on a non-GAAP basis, it expects gross margins to be 58.5 percent to 59 percent of sales; operating expenses to be 28.5 percent to 29.9 percent of sales; operating profit to be 29 percent to 30 percent of sales; and earnings per share of 50 to 52 cents.
When providing revenue guidance, Sanghi said the company took several economic factors into consideration, including "the U.S. economic recovery has stalled, Europe will continue to be in the doldrums made worse by the holidays, and China which has been the engine of growth, is starting to slow down."
Microchip's licensing business was down 4.8 percent sequentially. Its licensing business tends to trail industry manufacturing output by one quarter and reflects the manufacturing and inventory correction at IDMs over the last two quarters, Sanghi said. Microchip, however, did sign licensing agreements with two major foundry customers, both of which will use SST Flash technology for the first time, helping it expand its penetration of SST flash in the embedded sector.
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