Microchip Technology (MCHP) revealed some unexpected problems at recently acquired Microsemi when it reported June-quarter results, which gave investors jitters on Friday. Microchip stock dropped hard on the news.
XChandler, Ariz.-based Microchip late Thursday said Microsemi had stuffed its sales channel with inventory to inflate its revenue figures ahead of the $10 billion deal closing on May 29. Shares plunged 10.9% to 87.41 on the stock market today.
Microchip blamed its lower sales guidance partly on efforts to reduce the excess chip inventory that Microsemi shipped to distributors and contract manufacturers. On a conference call with analysts, Microchip Chief Executive Steve Sanghi also criticized the prior management at Microsemi.
"While excessive shipments into distribution and contract manufacturers have been the main issue at Microsemi, we also found a culture of excessive extravagance and high spending," Sanghi said.
He added: "The company had millions of dollars of sponsorships and several luxury suites in sports stadiums, luxury private plane travel, and generous sponsorships for many conferences, stadiums, and other venues that are a waste of shareholders' money. We are undoing commitments to all such spending."
Replaced Leadership
Microchip also has replaced all the top leadership at Microsemi since acquiring the company.
It also said trade tensions between the U.S. and China could impact its chip sales to Chinese hardware makers. Those customers are concerned about possible U.S. tariffs on their products.
In the quarter ended June 30, it earned an adjusted $1.61 a share on sales of $1.21 billion. Earnings per share beat views by 13 cents while sales were in line with targets.
For the current quarter, Microchip expects to earn an adjusted $1.74 a share on sales of $1.51 billion. Wall Street had predicted it would earn $1.69 a share on sales of $1.58 billion for the September quarter.
Microchip Stock Gets Price-Target Cuts
At least five Wall Street analysts cut their price targets on Microchip stock after its fiscal first-quarter report.
Morgan Stanley analyst Craig Hettenbach lowered his price target on Microchip stock to 98 from 103. He kept his equal-weight rating.
"There are company-specific elements at play, led by a material inventory correction at Microsemi," he said. "Commentary about tariffs leading to lower business confidence and a reduction in sell-through in distribution in China is a new development, with broader negative implications for the (semiconductor) group."
Microchip is working to reduce about $200 million of excess Microsemi inventory in the sales channel. That will weigh on sales for the next couple of quarters, analysts said.
Fixing The Problems At Microsemi
Rosenblatt Securities analyst Hans Mosesmann said Microchip management should have no problems fixing the problems at Microsemi.
"Microsemi sold the company dishonorably to Microchip with major inventory shenanigan practices that (will) impact Microchip for the next two quarters," Mosesmann said in a report.
He added, "Microchip's management has proven again and again that it executes acquisitions near-flawlessly and with the continued secular market share prospects in MCUs (microcontroller units), analog, and system platforms, Microchip is a high-quality play in semiconductors."
Microchip management has shown an ability to "transform sleepy assets into highly profitable and/or high-growth sales vectors," Mosesmann said. He reiterated his buy rating and price target of 125 on Microchip stock.
RELATED:
