In my previous write-ups on Micrel Inc (NASDAQ: MCRL) (found here, here and here), comments were left which President and CEO Ray Zinn wished to respond to. He has informed me of his desire not to get into a pissing match online (my words, not his), so I suspect that this will be the last of my coverage. Rather than respond to each comment separately, Ray has isolated the common questions/complaints for response.
I’d like to thank Ray for his willingness to write several lengthy posts about his company and for taking the time to respond to his critics. We should all be able to agree that there are very few executives who are willing to face criticism head-on, and even fewer willing to answer in non-IR marketing language. Without further ado, here’s Ray Zinn’s final response:
1) How competitive is Micrel’s technology and core competency?
Micrel is organized into three business units: Analog, HBW, and Ethernet. The analog business unit represents about 60%-70% of our revenue. This is our core competency. We have been developing analog products for more than 25 years. We produce over 3,500 different analog products for the computing, mobile, industrial, and communications markets.
More than 50% of our revenues are sold through distribution. Distribution tends to serve smaller customers needing products that are general purpose in nature. These are often referred to as industrial applications. To qualify as general purpose, they cannot be highly application specific. This does not mean that they lack superior technology, however since they are more generic, they must be easy to use and very reliable. High quality and high reliability are the hallmarks of Micrel’s success. Another attribute of these products is that they have long product lives. The typical lifetime for an analog product is 5-10 years, therefore yielding a great ROI. Through distribution, Micrel serves over 10,000 customers.
One of Micrel’s major customers is a well-known supplier of communication products. Micrel is designated as a preferred supplier to this customer, which means our products have to have a technology roadmap that meets this customer’s future needs, and the quality and reliability has to be first class. Another large customer that Micrel serves directly is one of the largest handset suppliers in the world. Again, Micrel is considered to be a preferred supplier. We are showcased in almost all of their smartphones and tablets. Here again, you cannot be a supplier to this certain customer unless you have the technology roadmap that meets their requirements as well as the quality and reliability needed for this high-growth market. Since we are a major power management supplier to them, this does showcase the superior technology and competitiveness of our products, or else we wouldn’t be able to service this very difficult and competitive market.
Micrel’s analog products are primarily built in our own wafer fabrication facility in San Jose, CA. This allows the company to highly differentiate its analog products making them best in class for the competitive markets that it serves. Our analog products have a level of sophistication equal to, and in many cases better than, any of our peers. We are well-known for our ability to produce products that are very easy to use, small in physical size, and that have one of the best power densities of any semiconductor manufacturer. This fact again reinforces that we have best in class proprietary technology available to produce our own wafers. Because of this, we are able to attract some of the best analog designers in the world.
The fact that we have our own wafer fabrication facility located in the heart of the Silicon Valley might make one think that we would not be able to compete because of the expense of operating a fab in the Silicon Valley. Here, again, Micrel shows its manufacturing prowess by its ability to produce these wafers in one of the most expensive areas in the world. It’s said that copying is one of the best forms of flattery, and to that end, Micrel’s products are probably some of the most copied products in the industry. This fact alone would indicate that the company has the technology and design prowess that is highly admired by our peers.
2) Our management philosophy has always been to be a highly-profitable but well-managed company. This has been noted by many semiconductor industry analysts. Our philosophy is to be low-risk, and to that end, the company has been profitable for 32 out of 33 years. This record is unmatched in our industry. We are the smallest semiconductor company to pay a dividend. We’ve also returned almost all of our free cash flow back to our investors demonstrating that Micrel is very share-holder friendly. We have repurchased nearly 40% of our outstanding shares.
3) The company believes that its most prized assets are its employees. We believe it’s better to keep a current employee than to try to hire a replacement. To that end, we believe that we have shown good management by having a very low turnover rate; probably one of the lowest turnover rates in the industry.
4) The company’s growth strategy has been to grow organically as opposed to acquiring companies to grow its revenues. This way we compare more favorably with Linear Technology as opposed to some of the other analog companies who have acquired a number of companies, hoping to grow the revenues through their acquisitions.
For the past few years, another factor that has had an impact on Micrel’s growth has been the slow down in the communications and industrial markets. Micrel derives more than 50% of revenues from these two end markets. The advantage of these two markets is that they are the highest margin markets for the semiconductor industry. These two markets were hit particularly hard during the global economic slow down that began in late 2008. Semiconductor analog companies such as Linear Technology also derive more than 50% of their revenue from the communications and industrial markets and have also felt the effects of the slow down in these two end markets. We believe that the communications and industrial markets will rebound as the overall global economic climate recovers.
Micrel, recently, introduced VoIP SoC (which is an entire VoIP semiconductor solution for the fast-growing IP phone market). This new VoIP SoC is the most highly integrated and lowest power solution in the market, today. Again, this points out the technological prowess of Micrel.
Another important market segment that Micrel is pursuing is the automotive market. The automotive market suits well Micrel’s high quality and reliability reputation. As we all know, electronics is growing by leaps and bounds in the automobile. Micrel has recently obtained significant design wins for engine diagnostics, tail light assemblies, back up cameras, and remote keyless entry devices.
For the Green initiative, we have products for the industrial lighting market, solar cells and AMR (automatic meter reading) market.