Microchip takes vow of profitability

History is already being kind to Steve Sanghi. On Oct. 8, investors dumped his company's shares, driving down the price more than 5 percent in a single day. Less than two weeks later, they were back, bidding up Microchip Technology Inc.'s stock price after several technology companies echoed Sanghi's earlier claim that the growing weakness in the real estate and consumer markets had impacted sales in the September quarter.

The quick vindication was sweet, as Sanghi, chairman, president and CEO of Microchip, noted during a conference call to discuss the company's results for the fiscal second quarter, ended Sept. 30. The skeptical investors and analysts who thought Microchip's revenue and profits declined during the quarter because of operational problems or lost market share were equally gracious in conceding that their initial assessments had likely been wrong.

"We took some flak when we preannounced our results, but now we [have been] vindicated," Sanghi said in an interview. "My feeling is that the impact of the credit crunch filtered from housing to consumer and is now catching up with the rest of the economy."

While Sanghi might have successfully judged the direction of the high-tech sector, it could be a bit more challenging for him to translate that knowledge into strength by helping Microchip navigate its way through a weakening market without losing market share or slipping into net losses.

For the first time in five years, the microcontroller and analog IC supplier is forecasting flat to slightly lower revenue growth for the quarter ending Dec. 31. EE Times estimates the company's revenue for the fiscal year ending March 31 could decrease a tad or at best remain unchanged from the $1 billion reported for fiscal 2007.

At the height of the last industry downturn, Microchip's revenue decreased 20 percent in its fiscal 2002 period. The company bounced back the next year with a 14 percent revenue growth spurt, and every year since then has racked up steady single- to double-digit sales increases.

As in the past, Microchip will again have to convince its shareholders and suppliers that it won't lose market share and will sustain the enviably high upper-50 to 60 percent gross profit margins that have helped it maintain its profitability even in the face of dwindling sales. Sanghi said Microchip has confronted this type of skepticism before and is even better positioned to maintain its position this time around.

"One of the main questions in investors' minds is: 'Is Microchip losing market share?' " Sanghi said. "That question is not any different than the one we have fielded on other occasions in the past when we missed a quarter because of a significant disruption in the marketplace.

"We are facing one of those events again," he said. "In the past, investors also felt that Microchip's gross margin was not sustainable. As we have shown, our gross margin has continued to hit new highs after each of these events."