Back in 2021, when the semiconductor shortages forced car-makers to halt a huge line of production, the semiconductor industry witnessed its importance and found the spotlight. Everywhere people were discussing the tiny product that helps in various car functions from interior lighting to seat control to blind-spot detection. Now, when the IT hardware and consumer electronic firms started witnessing chip shortages from 2020 and supply chain imbalance, the attention increased. Scores of challenges then surrounded the semiconductor industry and the shortage. Apart from the previous problems that are still associated with the sector, the pandemic unleashed immense impediments. During the second half of 2020, when the demand for automobile and electronic items escalated, the chip industry already shifted its production lines to fulfill the demand of other industries and applications. In this regard, we spoke to Ganesh Moorthy, President & Chief Executive Officer of Microchip Technology Inc about the current growth and the challenges of the semiconductor ecosystem, Microchip’s business plans for 2022, and the strategies required to increase the production of chips.
Q. What would be Microchip's business policy for the year 2022 and the key strategies that you are looking to deploy this year?
Microchip does not provide full-year guidance, however, expects that 2022 will also be a strong growth year, in all end markets and all regions of the world, with demand continuing to outpace supply. We expect these supply constraints will persist through much of 2022 and likely into 2023 despite us bringing on more supply to try and satisfy demand. The mid-point of our March quarter guidance implies year-over-year growth of 24% and based on the strength of our backlog we expect multiple quarters of sequential growth ahead. Over the longer term, our team remains focused on designing total system solutions for our customers which take advantage of our broad portfolio of devices. Our design win funnel remains very strong and our total system solutions approach helps to drive higher attach rates as customers take advantage of innovative products and solutions. In addition, we are engaged in and focused on major market megatrends to give us even faster growth. The major megatrends for Microchip are 5G infrastructure, IoT/edge computing, data center, electric vehicles, Advanced Driver Assistance Systems (ADAS), and Artificial Intelligence (AI)/Machine Learning (ML).
Q. Amid the COVID-19 pandemic, there are various challenges and hurdles that are crippling the semiconductor industry. Can you please highlight the challenges companies are facing and how they can solve them to create new opportunities?
Microchip continues to experience high demand simultaneously with constraints in all internal and external factories and their related manufacturing supply chains. Our Preferred Supplier Program (PSP) which we introduced in March of 2021 has been extremely popular with our clients and equally beneficial to us as we navigate through this demand/supply imbalance. The program provides customers with supply priority beginning six months after their order in exchange for at least 12 months of non-cancelable orders. We believe the PSP program gives customers an opportunity to prioritize and strategically plan their product needs and allows us prudently acquire constrained raw materials, invest in expanding factory (wafer foundry, assembly/test and materials) capacity, and hire employees to support our factory ramps as we strive to meet the strong demand we already see in the form of customer orders.
Q. From the second half of 2020, the semiconductor industry was under immense pressure to meet the demand of the electronics and automobile sector. The production of chips was reduced to a huge extent. In this regard, what are your thoughts on how semiconductor firms have performed last year?
Microchip recorded a massive growth in 2021 and it was one of the strongest years. In the face of significant supply constraints, Microchip took various strategic actions geared toward ramping production to meet the growing demand. Our December quarter results continued the string of strong growth quarters, and financial metrics all hit records resulting in very strong cash generation. Revenue grew 6.5% sequentially to achieve another all-time record at $1.76B – breaking through the $7B annualized revenue milestone. On a year-over-year basis, our December quarter revenue was up 30%, registering the 5th consecutive quarter of rising year-over-year revenue growth rate. Demand grew even faster and Microchip and the industry remain supply-constrained as we move through 2022. Our unsupported backlog grew throughout the year and our PSP program remains well above 50% of our aggregated backlog and 100% of our backlog in the most constrained capacity product areas.
Q. According to some experts, the PSP is having some impact on Microchip’s demand-supply imbalance? Do you agree with that?
The PSP contributed to the 30 percent revenue growth we achieved in the December quarter as compared to the year-ago quarter. PSP backlog continues to grow and remains over 50% of the aggregate backlog in the December quarter. Illustrating the magnitude of the demand-supply imbalance, however, despite our PSP success our unsupported backlog (which represents backlog customers wanted shipped to them in the December quarter but which we failed to provide in the December quarter). It reached its highest level ever, with Microchip continuing to experience constraints in all internal and external factories. Also, our supply in the March quarter is expected to be adversely impacted by the COVID-19 Omicron variant which has increased the level of factory workforce absentees. We also have challenges in staffing several of our factories at the rate we would like to.
Q. Microchip products are basically available everywhere because the product portfolio is diversified. What are your differentiating aspects and decisions that help you stay ahead of the competition curve?
Microchip’s purpose is empowering innovation which enhances the human experience by delivering smart, connected, and secure technology solutions. We have done this for many years by creating innovative solutions, delivering tools, software, and reference designs at competitive pricing to make it easy to design with our devices and to assure that we can assist customers via numerous stages of manufacturing, design, and development. The commitment to have an amalgamation of vertical market and broad-based solutions has helped us to lead many end markets. Now, the determination to include sophisticated channel distribution partners has played a pivotal role in which we have helped MSME customers internationally.
Q. What will be your prospects and roadmap for the year 2022 and beyond?
Our opportunity in the mid to longer-term is to capitalize on our broad product portfolio to provide total system solutions for all applications and markets, and to ensure we are well-positioned to take advantage of the six megatrends we focus on: 5G infrastructure, IoT/edge computing, data center, electric vehicles, Advanced Driver Assistance Systems (ADAS) and Artificial Intelligence (AI)/Machine Learning (ML). Microchip’s culture of shared risk and shared reward is one that sets us apart from our customers and is a key ingredient behind the resilience of our model. As a company, will continue to adapt quickly as we see how COVID-19 evolves in 2022.