Analyst Conference Summary



conference date: August 3, 2017 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2017 (Q1, fiscal first quarter 2018)

Forward-looking statements

Overview: Very strong quarter, well above prior guidance.

Basic data (GAAP):

Revenues were $972.1 million, up 8% sequentially from $902.7 million, and up 22% from $799.4 million in the year-earlier quarter.

Net income was $170.6 million, up 25% sequentially from $136.9 million, and up from negative $109.2 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.70, up 23% sequentially from $0.57, and up from negative $0.51 year-earlier.


For the quarter ending September 30 (fiscal Q2 2018) revenue is expected to break over $1.00 billion, up about 3% sequentially. Net income expected between $179.9 and $191.1 million on a GAAP basis or $325.4 to $335.9 million non-GAAP. So ePS $0.74 to $0.78 GAAP, $1.33 to $1.37 non-GAAP.

Conference Highlights:

CEO Steve Sanghi said, "Microchip 2.0 combines the product, technology, system and employee strength of Microchip and its previous acquisitions and allows us to provide total system solutions to our customers by selling multiple products into the circuit boards that drive their end applications." Mr. Sanghi added, "Our net sales were at record levels and well above the high end of our revised guidance." Atmel contributed a full quarter's revenue in Q2 2016, so the revenue increase y/y is not due to the acquisition.

Also ""We are continuing to see a very strong business environment for our products worldwide and have a number of company specific demand drivers. Our bookings rate in the June quarter was extremely strong. We are continuing to add capacity in our internal fabs, assembly and test plants, foundries and subcontractors. Our lead times are still long, but with the increased output from our recent efforts, we believe we have managed to stabilize lead times to create a soft landing without triggering over ordering in our customer base."

Ganesh Moorthy, President and COO, said "We continue to see customers using microcontrollers that originated from Atmel’s heritage express confidence in Microchip’s stewardship of these product families. As a result we are seeing more designs that are in the pipeline going to production and ramping in volume. We are also seeing continued growth in our design-in funnel which we expect will drive future growth as these designs progress into production over time."

As usual, many new products were added in the quarter.

A dividend of $0.362 to shareholders of record on August 21 will be paid on September 5.

Non-GAAP numbers: Net income was $319.1 million, up 15% sequentially from $276.9 million and up 65% from $194.0 million year-earlier. EPS was $1.31, up 13% sequentially from $1.16 and up 56% from $0.84 year-earlier. 60.4% gross margin. 37.5% operating margin. Because of the Atmel acquisition there are a lot of differences between GAAP and non-GAAP results; see the Reconciliation in the press release or SEC documents.

Microcontroller revenue was $636 million, or 65.4% of overall revenue. Up 9.5% sequentially from $580.5 million. Up 18.1% y/y. Started sampling PIC 32C line. Believes gained market share. 8-bit, 16-bit, and 32-bit devices all went up in the quarter.

Analog chip revenue was $239 million or 24.6% of overall revenue. Up 3.7% sequentially from $230.5 million to a new record. Capacity constraints had a negative impact. Up 11.2% y/y.

Memory business revenue was not stated, but was up sequentially 8.8% sequentially.

8.5% sequential increase in licensing business, exceeding $100 million annualized revenue for the first time.

Automotive end market was strong in the quarter, with sequential growth near Microchip's overall growth. We are gaining market share, and the electronic component of autos is growing. So a slowing auto sales background has not had a negative effect.

Numerous new microcontroller, analog, and mixed products were introduced in the quarter.

GAAP gross margin was 60.1%.

Cash and investments ended at $1.65 billion, up sequentially from $1.41 billion. Cash flow from operations was $345 million. $22 million capital spend in quarter. Long term debt was about $2.98 billion . Inventory was the lowest in 7 years.

GAAP cost of goods sold was $387.7 million, leaving gross profit of $584.4 million. Operating expenses of $362.8 million consisted of: research and development $130.5 million; selling, general and administrative $114.3 million; amortization $120.8 million; and special income $3 million. Leaving operating income of $221.6 million. Other expense $55.3 million. Income tax benefit of $4.4 million.


Pricing discipline factor vs. two larger competitors? It is improving, to a different extent with different manufacturers. Microchip has led this charge, especially after acquiring Atmel.

Attaching analog products? We have a large number of internal indicators showing multiple Microchip devices per customer board. That number is growing, but not something to share with analysts.

Lead times, including different types of products? Most product lead times are 4 to 20 weeks. They stopped getting longer in the quarter. We want 90% of products to be bought in 4 to 8 weeks. We are unable to shorten most lead times due to high demand.

High single growth I talked about is organic. Industry growth had been slow, unit growth was eaten up by pricing pressure. With pricing discipline growth is not being eaten up by price declines. We are not changing our acquisition strategy. But there are few companies left and valuations are high.

Stock buy back appetite? Leverage is not a problem now, but the majority of the cash is still overseas. It would not make sense to buy the stock back, then borrow money.

At some point, don't know when, our current growth rate will go to our long-term growth rate, making a soft landing.

Putting a microcontroller, GPU and memory on the same chip opens up richer graphics applications for devices. These are not designed to do AI.

In the December quarter we are not likely to build inventory, but we might catch up on some unfulfilled demand. So yes, better than normal seasonal for December.

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Copyright 2017 William P. Meyers