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Microchip's projection spooks investors, puzzles analysts

Posted: 14 Oct 2014 ?? ?Print Version ?Bookmark and Share

Keywords:semiconductor? Microchip? revenue?

Microchip's warning that the revenue for its September quarter would come in below the projections left is triggering a debate among analysts. The downward revision, issued last week, spooked many investors and drove down stock prices, not only for Microchip, but also for Intel and Texas Instruments.

The announcement appears to have caught semiconductor industry analysts by surprise. In a microcontroller market where Microchip is strong, the market research firm IC Insights is forecasting a 5 per cent increase in 2014 to about $16 billion after no change in 2013.

The company now expects to report about $546.2 million of net sales for its fiscal second quarter, which ended Sept. 30. The company had set a target for "net sales of $560 million to $575.0 million" on July 31.

In a press release, Microchip CEO Steve Sanghi blamed the projected shortfall on weakness in China and inventory buildups at its distributors.

Industry correction coming?

Many investors freaked out because Sanghiwho seems to see his company as a canary in the coal minepredicted that "another industry correction has begun and that this correction will be seen more broadly across the industry in the near future."

This blip in the market poses questions about whether it's a Microchip-specific problem or something much biggeran "industry correction"as the Microchip CEO appears to suggest.

Microchip stock prices

Microchip stock prices in the last five trading days.(Source: Yahoo Finance)

Sanghi said Microchip can spot an industry trend much sooner than other semiconductor companies for two reasons. First, the company reports sales from distribution on a sell-through basis worldwide. Second and more importantly, the company does business with more than 80,000 customers.

"We built a significant amount of inventory in the distribution channel in the September quarter," he said in the release. "If, like many others in the industry, we recognised sales on a sell-in basis to our distributors, our sales would have been significantly higher for the September quarter."

Further, he said, most of those 80,000 customers are "small and nimble and are able to adjust their demand in real time," thus making them a real bellwether of semiconductor market trends.

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