Analyst Conference Summary

semiconductors

conference date: July 31, 2013 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2013 (Q1, fiscal first quarter 2014)

Forward-looking statements

Overview: Record quarter.

Basic data (GAAP):

Revenues were $462.8 million, up 8% sequentially from $430.1 million and up 31% from $352.1 million in the year-earlier quarter.

Net income was $78.6 million, up 32% sequentially from $59.7 million, and nearly flat from $78.7 million year-earlier.

EPS (diluted earnings per share) were $0.37, up 32% sequentially from $0.28, but down 5% from $0.39 year-earlier.

Guidance:

For the September quarter (Q2 fiscal 2014) net sales are expected between $472.0 and $490.6 million. Gross margins 57.6% to 58.2% GAAP, 58.1% to 58.7% non-GAAP. net income $86.7 to $95.5 million GAAP, $123.7 to $134.1 million non-GAAP. Diluted EPS $0.40 to $0.44 GAAP, $0.58 to $0.62 non-GAAP. Capital expenditures near $27 million. Cash generation $110 to $130 million.

Conference Highlights:

Sales were a record and exceeded the high end of upwardly revised guidance. GAAP net income and EPS were near flat y/y despite the large increase in revenue because of a $27.7 million charge for amortization of acquired intangible assets.

$0.354 dividend declared to be paid on September 4, 2013 to shareholders of record on August 21, 2013. That will use about $70 million in cash.

Non-GAAP numbers: net income was $120.4 million, up 10% sequentially from $109.3 million. EPS was $0.57, up 10% sequentially from $0.52. 58% gross margin. Excluded from non-GAAP figures are a special charge of $1.7 million, $11.3 million in share-based compensation, $28.1 million in acquisition-related amortization, $1.4 million convertible debt interest expense, and tax effects thereon.

57.6% GAAP gross margin.

Microcontroller revenue was a record $300.3 million, up 8.9% sequentially from $275.8 million, and up 24.8% y/y. Numerous new microcontroller SoCs were introduced. 64.9% of overall revenue.

8-bit microcontroller revenue came within 3% of its all time high and is expected to set a new record in September quarter.

16-bit microcontroller revenue was up 10.1% sequentially to a record. Up 71.7% y/y.

32-bit microcontroller revenue was up 26.3% sequentially to a record. Up 362% y/y. This demonstrates that our choice of core [WM: i.e., not ARM] is not what drives the business.

Analog chip revenue of $103.2 million, up 6.2% sequentially from $97.2 million. Up 119% y/y. Was 22.3% of overall revenue.

Memory business revenue was $34 million, up 3.7% sequentially.

Licensing revenue was $22.5 million. Other was $2.8 million.

A record number, 50,534, of development systems shipped in the quarter.

Cash and investments ended at $1.9 billion. Inventories increased by $14 million in the quarter to $256 million. Debt was $974 million. $138.9 million free cash flow. $27.8 million capital spending. $21.4 million depreciation expense.

Inventory at distributors is below the historic norm.

Cost of sales was $196.2 million, leaving gross profit of $266.6 million. Operating expenses of $168.2 million consisted of: research and development $73.1 million; selling, general and administrative $65.7 million; amortization $27.7 million; special charges $1.7 million. Leaving operating income of $98.4 million. Other expense $8.1 million. Income tax provision $11.8 million.

SMSC division delivered $0.10 accretion. It is very well integrated and intertwined, so this is the last breakout of the numbers. But there is more to come from the synergies of combination.

In June recalled all factory employees and also reinstated full pay.

Bookings are strong, the backlog for the new quarter is high, all driven by design wins. Lead times, however, are longer than optimal. Partly the success of MCHP vs. competitors is because housing, industrial, and automotive sectors are strong and are key sectors for Microchip, which is not as well represented in smartphones and tablets.

Q&A:

What makes you confident orders are real end demand? Our expedite activity is very high, in multiple products, sectors, and geography. There is very little inventory at end customers. "We are actually struggling to meet all the demand we have in the current quarter."

Increased production impact on gross margins? 60% margin model is based on a revenue target, but we won't give that out. We are up from a 56% gross margin at the bottom of the cycle. We are increasing wafer starts, so we are guiding to higher margins in the September quarter.

Longer dated backlog? Bookings have been strong for a couple of quarters. There is no substantial change. More important is customers want to take product in September, some of which we can get out in September and some not.

Factory utilization? We had taken it down with rotating time off, we are cranking out a lot of product now, but won't share numeric figures. We had some inventory in die form that was ready to go to the assembly plant. 40% of die production now comes from outside foundries, so we have to deal with their lead times.

Revenue mix in September quarter, margins? We got an increase in the back end from expediting, we won't get that kind of gain this quarter.

Share gains vs. inventory was lower than was realized? End customers don't hold a lot of inventory these days. It dried up in the slow times, and lead times were short. As demand grows lead times grow and the customers make longer term orders. We have increased visibility of our pipeline. We had 10% growth in the first half, obviously we had to have grown market share.

SMSC revenue ramp is still in the design win stage.

What drives Microchip's ability to take share when industry comes off down cycles? We take care of our customers and employees during the down times, continuing to invest in new products and operational improvements.

Biggest factor getting to margin goal? Just getting production higher in our own factories.

Lead times vary greatly by product, from a few weeks, or even sitting on the shelf, to about 12 weeks. We talk about average lead times. We continue to work on improving them for our customers. Products produced by outside foundries and for special uses have the longest lead times because it is only built when there is an order. Worst case scenario is 18 weeks. We sell over 100,000 SKUs.

Cash, dividends? We remain very committed to the dividend program. We have a lot of cash offshore, so we are not considering a stock buy back.

New credit facility? Now up to $2 billion, it is for any expansion or acquisition opportunities.

For dilution for September we pegged it to a $40 stock price. A higher price would result in more dilution.

Our China business is very strong, not reflecting a China slowdown, but it could be a market share gain or the segments we are in. We sell a lot of 8-bit and 16-bit into China. For us Europe activity is on the mend.

32 bit products with multiple cores? We have a 32-bit microcontroller roadmap for performance, features, and cost.

Onshore cash is between $50 million and $100 million, the rest is offshore. 80% of our business is offshore, so that's where are profits are.

We have advanced the processes in our own foundries so we have been able to shift some complex devices from outside foundries into our own. The use of outside foundries resulted mainly from acquisitions.

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