Analyst Conference Summary

semiconductors

conference date: January 30, 2014 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2013 (Q3, fiscal third quarter 2014)

Forward-looking statements

Overview: Strong y/y growth.

Basic data (GAAP):

Revenues were $482.4 million, down 2% sequentially from $492.7 million, but up 16% from $416.0 million in the year-earlier quarter.

Net income was $105.4 million, up 6% sequentially from $99.8 million and up 933% from $10.2 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.48, up 4% sequentially from $0.46, and up 860% from $0.05 year-earlier.

Guidance:

For fiscal Q4 ending March 31, 2014, sales are estimated at $482.4 to $496.8 million. GAAP gross margin near 58.65%; net income $97.1 to $104.0 million; EPS $0.43 to $0.47. Non-GAAP gross margin near 59%; net income $130.9 million to $139.2 million; EPS $0.59 to $0.63.

Capital expense is expected near $30 million. Cash generation is expected between $135 and $155 million.

Conference Highlights:

Revenue growth reflected continued market share gains in strategic product lines.

Non-GAAP EPS result beat First Call estimate by $0.01 and exceeded the midpoint of prior guidance.

Microchip enters the March quarter with a stronger backlog than for the December quarter. Typically there is a negative seasonal impact in Asia from the New Year holidays, but a positive seasonal impact in Europe.

Non-GAAP numbers: net income was $132.9 million, down 3% sequentially from $136.4 million and up 57% from $84.5 million year-earlier. EPS was $0.61, down 3% sequentially from $0.63 and up 49% from $0.41 year-earlier. 59.0% gross margin. Excludes a favorable tax event of $6.2 million, stock-based compensation, and a $2.4 million one-time gain on the EqcoLogic acquisition.

58.6% GAAP gross margin.

Microcontroller revenue was $313.3 million, down 2.4% sequentially from $321 million and up 18% y/y. Microcontrollers represented 65% of total revenue. Shipped the 13 billionth microcontroller in November.

8-bit microcontrollers continued to gain market share, but was sequentially down.

16-bit microcontroller revenue was down 2.7% sequentially but up 28% y/y. Gained market share.

32-bit microcontroller revenue was down 1% sequentially but up 29% y/y.

Analog chip revenue of $108.9 million set a record for one quarter, up 0.4% sequentially, and up 16.7% y/y. They represented 22.6% of total revenue.

Memory business revenue was $32.5 million, down sequentially 7.1% and was 6.7% of overall revenue.

Licensing revenue was $24.1 million.

Other revenue was $3.6 million.

The MGC3130 Hillstar Development Kit was introduced for 3D gesturing systems.

Important introductions in the quarter were the PIC32MZ microcontroller family and MPLAB Harmony software.

EqcoLogic was acquired for its coaxial equalizer and tranceiver technologies.

Cash and investments ended at $2.03 billion. Free cash flow was $110.3 million. $24.3 million capital spend in quarter. Long term debt was $1 billion. $22.2 million depreciation expense. $70 million paid in cash dividends.

The quarterly cash dividend payable on March 7, 2014 to stockholders of record on February 21, 2014 will be 35.5 cents per share, up from the 35.45 cent prior payment.

Cost of sales was $199.7 million, leaving gross profit of 282.7$ million. Operating expenses of $165.8 million consisted of: research and development $76.3 million; selling, general and administrative $66.9 million; amortization $21.8 million. Leaving operating income of $116.9 million. Other expense $4.5 million. Income tax provision $7.2 million.

By geography revenue: $90.7 million Americas, $90.4 million Europe, $296.3 million Asia.

The long-term effective non-GAAP tax rate is expected between 10.5% and 11.5%.

Inventory was flat in the quarter, is historically low, and is expected to decrease in the March quarter.

Q&A:

Ethernet in automotive market? There are many standards in automotive networking. We have a strong position in the automotive marketplace.

Are there 32-bit microcontroller opportunities in automotive? There are many 32-bit applications. We are starting to make inroads. First revenue for a new product going into automotive is 3 or 4 years away from introduction, so our first 32-bit products were aimed at markets that would ramp up quicker. We began working with 32-bit automotive 3 years ago, we have design wins, we are starting to move in this market, but not a large portion of revenue yet.

New products and introductions at 16 and 32 bit? We bring about 100 new products each year, and they tend to be in those to groups. We now have over 100 products in the 32 bit line.

SMSC and Microchip offered many cross-selling opportunities, but there are design-in times lags.

Cost of goods sold, effect on margins? Fab utilization is an issue; we are not yet back to peak with our internal fabs. Partly because we are at better nodes, so there are more chips per wafer. So as we increase utilization margins can fall. We still are spending on integrating acquisitions, including SMSC.

Asia order environment? This quarter we have 10 days of holidays in Asia. Everything seems normal, including orders. As China emphasizes domestic consumer demand, people buy more things, and our chips are in those things. China is a huge portion of the business now.

Typically margins should improve in the June quarter, which is a seasonally strong quarter for us.

Demand is growing across a wide segment of end products, notably the Internet of Things, medical, and touch. We do acquisitions to enhance on top of our internal growth. Machine to machine communications is the fastest growing segment of the semiconductor business.

Qualitative 8-bit, 16-bit, 32-bit. 8-bit is our largest business, so in dollar terms it took the most market share. We believe there are large share gains across all three.

Analog segment future? For the first few years we mainly attached analog to microcontrollers. Then we positioned to any company's microcontroller. In last few years we added sales that were not connected to microcontrollers at all, which brought us into competition with the big analog companies. We have about 2000 products now and have the best growth rates in the industry. Also, there is a large amount of analog on the same die as some microcontroller products.

Lack of acquisitions recently? In fiscal 2015 we continue to be actively looking for small or occasionally larger acquisitions.

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