Analyst Conference Summary

semiconductors

conference date: October 30, 2014 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2014 (Q2, fiscal second quarter 2015)

Forward-looking statements

Special Note: Microchip Misses Guidance Preliminary announcement

Overview: Record revenue despite missing guidance. GAAP EPS dropped y/y largely on acquisition-related expense. Raised dividend, very slightly, again.

Basic data (GAAP):

Revenues were $546.2 million, up 3% sequentially from $528.9 million, and up 11% from $492.7 million in the year-earlier quarter.

Net income was $93.6 million, up 5% sequentially from $88.9 million, but down 6% from $99.8 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.42, up 5% sequentially from $0.40 but down 9% from $0.46 year-earlier.

Guidance:

Now believes most of the market correction was in the September quarter, so December quarter revenue expected "only slightly below typical seasonal levels." So for fiscal Q3 2015 non-GAAP revenue is expected to drop 2% to 7% sequentially, to $500.9 to $528.2 million. Resulting net income would be $65.5 to $73.1 million GAAP, or $131.1 to $142.5 million non-GAAP. EPS $0.29 to $0.33 GAAP, or $0.59 to $0.64 non-GAAP.

Revenue will have a $7 million negative impact from changing ISSC inventory at distributors from a sell-in to a sell-through basis.

Capital expense is expected around $40 million.

Conference Highlights:

Despite the record income, Microchip was disappointed by the September quarter, which was characterized by a weaker-than-expected September. Excluding the ISSC acquisition, sales were down slightly from the June quarter.

Believes was correct that Microchip's weakness was just ahead of a correction for the semiconductor industry as a whole, as reflected in the weak December quarter guidance of other companies so far.

The ISSC acquisition added $16.9 million to revenue in the quarter. The transition is going well.

Non-GAAP numbers: Sales were $546.2 million, up 3% sequentially. Net income was $150.2 million, down 1% sequentially from $151.6 million and up 10% from $136.4 million year-earlier. EPS was $0.67, down 1% sequentially from $0.68 and up 6% from $0.63 year-earlier. 59.1% gross margin. 32.5% operating margin. Excludes share-based compensation of $15.2 million, $12.7 million inventory acquisition valuation costs, $1.6 million acquisition related expense, a $10.5 million tax benefit, and other non-cash and one-time charges.

56.3% GAAP gross margin, down sequentially from 58.0%. GAAP operating margin was 18.5%.

Microcontroller revenue was a record $361.8 million, up 5% sequentially from $343.8 million and up 13% y/y, driven by the addition of ISSC revenue. Excluding ISSC revenue, up 7% y/y. Microcontrollers represented 66.2% of total revenue. All three categories had record revenue. Believes gained market share.

8-bit microcontroller revenue set a record.

16-bit microcontroller revenue was up 23.3% y/y. Excluding ISSC, revenue was up 8.3% sequentially and 12.7% y/y.

32-bit microcontroller revenue, excluding ISSC, was up 7.6% sequentially and 38.6% y/y.

Combined 16-bit and 32-bit microcontroller revenue is between $400 and $500 million annually, to give an indicator of the size of the businesses.

Analog chip revenue of $122.6 million was down 4% sequentially from $127.8 million, and was up 13% y/y, largely due to the Supertex acquisition. Analog was 22.4% of Microchip's overall revenue. Design win momentum was strong.

Memory business revenue was $32.5 million, down 3% sequentially from $33.4 million. Represented 6% of total revenue.

Licensing revenue was $22.6 million.

Other revenue was $6.8 million.

Cash and investments ended at $2.1 billion, up about $156 million sequentially, excluding the dividend and ISSC payment. Net cash generation was $156.2 million. $38.7 million capital spend in quarter. Debt was $966 million. Inventories climbed to $275.7 million. $24.3 million depreciation expense. $71 million paid in cash dividends.

Microchip is making capital expenditures to increase capacity for rapidly ramping new products and to bring more testing and assembly in house.

The quarterly cash dividend payable on December 5, 2014 of 35.65 cents per share to shareholders of record on November 21.

Cost of goods sold was $238.8 million, leaving gross profit of $307.5 million. Operating expenses of $206.1 million consisted of: research and development $88.8 million; selling, general and administrative $71.1 million; amortization $45.4 million. Special charge $0.8 million. Leaving operating income of $101.3 million. Other expense $10.6 million. Income tax benefit $1.3 million. $1.6 million expense attributed to noncontrolling interests.

Microchip plans to close the Supertex San Jose fab now that production has been moved to Tempe. Also phasing out the Hong Kong facility.

By geography revenue: $108.6 million Americas, $110.8 million Europe, $326.8 million Asia.

Q&A:

What has happened in the time since the pre-announcement? Is it a mild downturn? Nothing has changed since we made the call. Many other companies are singing the same song. We were not able to provide the December quarter guidance back then. The Street over-reacted, it is a relatively mild correction. We expect to grow sequentially in the March quarter.

Is dollar to yen exchange rate affecting you? Microcontroller designs are done two years before shipping, so exchange rates should not affect design-in. We don't sell that much into the Japanese market. The Renaissance results were not that great.

What end markets are you most exposed to in China? Our business is very broad. Our top ten customers don't even make up 10% of our revenue. Microcontrollers are everywhere, in nearly every product, in every little company building stuff. So current information is hard to get. So we are affected by the macroeconomy, and would benefit from a stimulus in China.

Arrow and Avnet had good results, any details on the weakness? Those two companies sell mainly into the U.S. and Europe; our U.S. and Europe businesses were good in the quarter. Our percentage in Asia is much bigger than that of Arrow and Avnet.

Demand is not getting worst since September. Believes based on that and customer feedback March quarter should be seasonally higher as usual.

We don't have any U.S. cash to buy back stock. We will maintain the foreign cash for acquisitions, or when it can be repatriated without a tax penalty. We have a billion dollar line of credit, we could use that for an acquisition, but would not use it to buy back stock.

September slowness, was it an inventory correction or slacking of demand? China's industrial production was slowest in years, China housing was weak, the demand did not materialize. Low demand creates extra inventory that has to be corrected for. The LTE build was slower than expected. The only bright spot was Apple phone manufacturing.

Have you cut back orders to foundries? Yes.

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