Analyst Conference Summary

semiconductors

conference date: May 6, 2014 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2014 (Q4, fiscal fourth quarter 2014)

Forward-looking statements

Overview: Record quarter.

Basic data (GAAP):

Revenues were $493.4 million, up 2% sequentially from $482.4 million, and up 15% from $430.1 million in the year-earlier quarter.

Net income was $111.5 million, up 6% sequentially from $105.4 million and 87% from $89.7 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.50, up 4% sequentially from $0.48 and up 78% from $ year-earlier.

Guidance:

Non-GAAP fiscal Q1 2015 (June quarter) sales between $519.8 million and $534.6 million, with 59.3% to 59.5% gross margin. Operating expenses 26.6% to 27% of sales. Other expense 6.9 million. Tax rate 10.2% to 10.6%. Net income $143.7 million to $151.7 million. Diluted non-GAAP EPS $0.64 to $0.68. Includes about $16.5 million in revenue from the Supertex acquisition.

GAAP guidance for the quarter is not available due to the complexity of accounting for the Supertex acquisition.

For full fiscal 2015 capital expenditures expected near $125 million.

Conference Highlights:

Supertex acquisition closed on April 1, after the quarter ended.

Beat analyst consensus non-GAAP EPS estimates by 3 cents and set a record high. Sales set a record.

Fiscal 2014 was a record year for Microchip. $2.45 non-GAAP EPS.

Non-GAAP numbers: net income was $141.3 million, up 6% sequentially from $132.9 million and up 29% from $109.3 million year-earlier. EPS was $0.64, up 5% sequentially from $0.61 and up 29% from $0.52 year-earlier. 59.3% gross margin. Excludes share-based compensation of $11.2 million, $0.3 million acquisition related charges, $22.1 million inventory valuation costs, $0.5 million equity impairment, $1.4 million convertible debt interest, and $5.8 million in non-recurring taxes.

58.9% GAAP gross margin, up sequentially from 58.6%.

Microcontroller revenue was a record $326.4 million, up 4% sequentially from $313.3 million and up 18% y/y. Microcontrollers represented 66.2% of total revenue. Microchip continued to gain market share and was #2 in 8-bit and was close to the #1 firm. #5 in 16-bit. #11 in 32-bit.

8-bit microcontroller revenue was up sequentially and continued to gain market share. Fiscal 2014 revenue set a record.

16-bit microcontroller revenue was a record in the quarter and up 16.4% sequentially and 38.3% y/y. Now over 400 16-bit products available.

32-bit microcontroller revenue was a record up 7% sequentially and up 66% y/y. Over 100 products.

Analog chip revenue of $107.5 million was down 1% sequentially from $108.9 million. But up 11% y/y. "Our acquisition of Supertex adds high voltage analog products and process technologies to our portfolio, and we are excited about the long-term opportunities that the combined company can achieve." Supertex integration is proceeding well. Expects $0.01 accretion in Q1 which should grow to $0.02 in Q4 and $0.03 is

Memory business revenue was $33.1 million, up 2% sequentially.

Licensing revenue was $23.3 million.

Other revenue was $3.2 million.

Three new families of 8-bit microcontrollers were introduced in the quarter. Analog device introductions included two families for energy measurement. Other introductions included a sophisticated automotive small motor driver and memory devices.

Cash and investments ended at $2.14 billion, up $112 million sequentially. $35 million capital spend in quarter. Long term debt was $1 billion. $23 million depreciation expense. $71 million paid in cash dividends. A $28.6 million cash refund was received in the quarter.

The quarterly cash dividend payable on June 3, 2014 to stockholders of record on May 21, 2014 will be 35.55 cents per share.

Cost of sales was $202.8 million, leaving gross profit of $290.6 million. Operating expenses of $164.5 million consisted of: research and development $77.4 million; selling, general and administrative $65.3 million; amortization $21.3 million. Leaving operating income of $126.0 million. Other expense $7.8 million. Income tax provision $6.7 million.

By geography revenue: $92.8 million Americas, $115.9 million Europe, $284.6 million Asia.

Long-term non-GAAP effective tax rate expected near 10.5%.

Inventory remains at low levels and is expected to decline in the June quarter.

Q&A:

Operating margin goals for Supertex? Similar to Microchip's 60% range.

End markets in quarter? We don't track business by end markets. We have over 80,000 customers. Home, auto and industrial are strong markets, so we have benefited from them.

Supertex contribution, revenue growth vs. cost improvements? We plan to make progress on both fronts. We can't provide a further breakdown yet. They have a narrower group of customers than Microchip; we think we can expand that.

Analog vs. microcontroller revenue in March? Analog had grown for about 9 quarters, to a record in December, had been growing faster than microcontroller. Analog is historically very strong in fiscal Q1. Any given quarter can see a revenue pause in a specific segment.

Semiconductor cycle? The cycle still seems to be up. Europe was strong in the quarter. Inventory is very reasonable.

Internet of things, getting into? We have been in that business for a long time. Many of these devices have standard microcontrollers and analog products are already designed in.

Cash, onshore vs. offshore? Vast majority of our cash is offshore. We can tap into our line of credit for acquisitions. Supertex will improve overall cash, but mostly offshore. There is no strategy to bring cash onshore at present. Cash generation in the U.S. is sufficient to pay the dividend.

Why is the guidance not as seasonal as last year? We are not seeing June as soft. We did start with a higher base with a strong March quarter.

Customers are ordering further in advance, based on demand experience.

We have only got about half the accretion from SMSC, mostly from shifting assembly and test.

Competitive landscape changes? A competitor bought a business from Japan, but we never competed with the Japanese business, and we are seeing nothing in our customer base. They are a memory company and will likely compete with the Japanese companies.

ARM penetration in microcontoller market? We almost don't care. We are focused on our customer needs, serving them with a 32-bit PIC microcontrollers. We do use an ARM core for a few devices that we got in an acquisition.

No other major microcontroller player grew as much as we did in the fiscal year. Our 32-bit microcontroller business "blew away" the industry growth rate. We provide solutions and PIC32 provides them what they need.

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