Microchip Technology

conference date: January 31, 2007 @ 2 PM Pacific Time
for quarter ending: December 31, 2006 (3rd fiscal quarter 2007)

Overview: Sequentially down, but good revenues and great earnings compared to same quarter year-earlier. Increased cash dividend to $0.265 per share.

Basic data:

Net sales $251 million, down 6.3% sequentially from $267.9 million but up 6.9% from $234.9 million year-earlier.

GAAP net income $72.8 million or $0.33 per share, down 8.4% sequentially but up 81.6% from year-earlier (which had a $30.6 million tax charge). Non-GAAP net income was$78.7 million or $0.36 per share, up 11.3% from the prior year.

Cash and short term investments ended at $728.5 million per press release, but they orally stated $1.3 billion. Short term debt is $29.5 million.


Market conditions for March (Fiscal Q4 2007) continue to be challenging. Revenues expected to be flat sequentially. Gross margins 59.6%. GAAP EPS $0.33, non-GAAP $0.36. Capital expenditures $12 million and $65 million for full fiscal 2007. Cash generated expected at $85 million before the $57 million dividend payment and any stock buy-back.

Expects a strong quarter for Europe but a weak quarter for Asia.

Conference Highlights:

Industry conditions were difficult due to inventory corrections of customers. Revenues were below guidance, but EPS met guidance because they maintained gross margins. In 2006 became the number one supplier by revenue of 8-bit microchip controllers.

Gross margins 60.3% (non-GAAP), 59.6% GAAP. GAAP Operating expenses 27.2% of revenues. Operating margins were 35.65%. Tax rate 24%.

16-bit microcontroller sales flat. Flash-based microcontrollers showed 5.3% decline.

Shipped 21,444 new development tools.

Backlog of orders is up since December, but was down from September (press release was wrong).

All geographic areas were down sequentially. Asia down 8.5%; Americas 4.8%; Europe 4.2%. Asia represents 44% of total sales; Americas 28%; Europe 28%.

R&D $25.6 million or 10.2% of sales. SG&A (sales & administrative) expense were $36.5 million or 14.5% of sales. Capital spending was $60 million. Depreciations $29.1 million.

Inventories increased $4.1 million to $118.5 million. Inventory increased 9 days to 108 days (from prior quarter). Distributor's inventory was flat at 1.9 months. That is the lowest level in historical range.

Receivables were $120.1 million, down $3 million sequentially.

Net cash flow generated was $104.4 million. Dividend payment was $54 million. Short term debt reduced by $51.3 million. Expects to reduce all short term debt in March quarter.

Microcontrollers up 7.4% over year-ago quarter, but declined sequentially by 5.8%. Flash microcontrollers up 24% over year-ago quarter, but declined sequentially by 5.3% and now represent over 65% of microcontroller business.

16 bit microcontrollers was up 143% over year-ago quarter, but flat sequentially. 638 volume customers. 78 products currently in production and expect 90 by end of March.

Analog products up 20% over year-ago quarter, but declined sequentially by 1.3%, which shows market share gain.

Memory sales down 6.3% sequentially, with a moderate pricing decline.

8 and 16 bit microcontroller industry grew only 1.8% in 2006, but Microchip's grew 16%.

Lead times remain in 3 to 5 week range with most products available off the shelf.

Believes December quarter revenue was the bottom in this cycle. Claims average guidance for other semiconductor companies is minus 7.5%. Any remaining inventory correction for Microchip should be balanced by strong new product lines. Less exposed to cell phones and PC market than some competitors.

Book to bill was 0.97, but in January recovered to 1.0. Bookings for January started slow but ended strong. Continuing to gain market share. Expect to return to sequential growth in June quarter.

Expects another increase in the dividend in the next quarter (beyond what was announced today).


June recover and forward? Backlog is higher, book to bill good in January, business just looks good, can't give guidance yet for 2nd half of 2007.

Fiscal 2008 inventories? Running factories flat. Inventory well under control, no need for shutdowns or layoffs. Will rise by 3 days in March quarter, will come back down in June.

How did you get higher backlog? Backlog is for 12 months. Short term visibility is good.

No expectations of having to take inventory write downs because products are long-lived. Vast majority of industry is in die stores.

Competitors customers had weaker demand. Yours? Lower confidence does lead to lower inventory, but consumption was higher than shipments in December quarter.

Gross margin trends? Long term higher, short term flat.

Arrow (distributor) business? About 10% of revenue. Added several new distributors that are creating demand.

8 bit v. 16 bit? Over 400 microcontroller products, not stopping 8-bit development, but percentage of 16 bit will grow. Usually about 24 months from begin design to production. ASPs over time have degraded very little. High-end 8 bit offset declines for lower 8-bit. Expect 8-bit revenues to grow. Not really substituting 16 bit for 8-bit.

Distribution trend of inventory? Yes, they are trying to get it down to have more cycles, but because of large variety of projects, they are already about as low as they can go (without hurting delivery times).

Competition in 16 bits? Competitors are more vigilent because they know how well Microchip did in 8 bits, most competitors are the same, but Microchip is stronger too and has a performance advantage over ARM, for instance.

Analog strategy? Been in business 7 years. Phase 1 was sell attached to microcontrollers. Phase 2 was make compatible with competitors' microcontrollers. Phase 3 (now) sell anywhere and everywhere; have over 500 analog products now.

SG&A increase as percentage of sales? Demand creation does have an expense. Thinks can do September percentage in the long run.

OTP products? Flash growth is making up for gradual decline in OTP. Has not designed a new OTP product in 5 years. These OTP products will be hanging around for a long time.

Number of expedites are four (4) times higher than in past, indicating demand pull.

ARM competition? Heard many times in the past about pricing pressures, now same questions in 16 bit. But Microchip has higher performance products that often compete well with 32 bit products. Don't expect to be very affected by ARM ASP declines. Real cost of ownership is lowest for Microchip products.

Federal R&D tax credit? Took advantage in December, but other factors caused rate to end at 24%, which is likely rate going forward.

Are you surprised you did not get as hit in analog as competitors? It was not an accident. We worked for it. Avoiding high-unit, low-margin markets.

Dividends? Philosophy is to increase every quarter, but does not want big jumps.

Lowering Cap Ex, what does that indicate? Sign of ability to utilize current equipment. Does not have to do the Moore's law thing. Fab 4 is running only at a fraction of potential capacity.

Did not use buy back money? Likes dividends more than buy backs. Would only use appropriated buy back money if price was uniquely low. Don't expect a buy back this quarter.

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Copyright 2007 William P. Meyers