Microchip cuts guidance citing Iraq, N. Korea
CHANDLER: "Net sales for the fourth quarter are expected to be down between 3% and 4% sequentially from our third fiscal quarter of 2003, and up between 10% and 12% from the fourth quarter of fiscal 2002. Earnings per share for the fourth quarter are expected to be approximately 17 cents, down 1 cent sequentially and up approximately 4 cents, or 34% from the fourth quarter of fiscal 2002," the company announced in an official release.
"The March quarter is seasonally our weakest quarter of the year. This quarter is unusually back-end loaded because of the New Year holidays in early January, and the Chinese New Year starting in early February. The current quarter was made substantially more difficult with the threat of imminent war in Iraq, as well as the escalating tensions on the Korean peninsula," said Steve Sanghi, Microchip's president and CEO.
"This has impacted our Asia sales performance, particularly in Korea, which we anticipate will be down in excess of 20%, leading to a sequential decline in overall Asian sales of approximately 8%. Europe sales are currently exceeding expectations, and are anticipated to be up approximately 11% sequentially. Overall sales performance in the Americas is weak, and is expected to be down by 8% sequentially. While Americas sales are strong in the distribution channel, and are expected to be up about 6% sequentially, sales in the Americas OEM channel are unexpectedly very weak, and are anticipated to be down approximately 17% sequentially. We attribute the Americas OEM sales shortfall to the threat of imminent war, which has led to deteriorating consumer and business confidence.
"It seems as if OEM customers in North America are frozen in their tracks, and are deferring purchasing decisions pending a clearer picture on the geo-political front. With low consumer confidence affecting our consumer, automotive and communications business, and low business confidence affecting our office automation and industrial business, we do not believe that we will achieve the required level of turns orders by the end of March. Therefore, we are lowering our revenue and earnings per share guidance for the fourth quarter," added Sanghi.
Microchip also announced plans to change its revenue recognition policy relating to sales to regional Asian distributors. Microchip will change from recognizing revenue when product is shipped to these distributors (Point of Purchase "POP") to recognizing revenue when these distributors sell the product to their customers (Point of Sale "POS"). Historically, Microchip has recognized revenue from its Americas, European and multinational Asian distributors at POS, but has recognized revenue from regional Asian distributors at POP. This change will make revenue recognition consistent for all of Microchip's distribution channels around the world.
"We believe that a focus on demand creation and sell-through to end customers is in the long-term best interest of Microchip. Revenue recognition at POS as Microchip's sole revenue recognition policy is a more reflective measure of end customer demand. Instituting this change at this point will result in a revenue recognition policy that is uniform throughout the company," said Gordon Parnell, Microchip's chief financial officer.
To implement the change in revenue recognition, Microchip is required to record a cumulative change in accounting adjustment as of April 1, 2002, which was the start of fiscal year 2003. Quarterly operating results for the first three quarters of fiscal 2003 will be adjusted to conform to this change in accounting policy. These changes will be reflected in the company's March quarter and audited fiscal year 2003 results and in the company's Annual Report on Form 10-K for fiscal 2003.
"The change in revenue recognition is not expected to have any material impact on the March 2003 quarter results, as our Asian inventory ending March 31, 2003, is expected to be essentially flat with December levels," added Parnell.
The company also announced plans to delay its ramp-up schedule for Fab 4 in Gresham, Ore., to October 2003, rather than the previously announced July 2003 schedule, in response to current business conditions. "While we will delay production startup to October, we will continue product and customer qualifications," said Sanghi. "This will actually benefit the Fab 4 ramp-up because multiple products will be qualified and receive shipment approval from customers, allowing us to commence volume production at Fab 4 on the most cost-effective basis."
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