Analyst Conference Summary

semiconductors

conference date: May 2, 2013 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2013 (Q4, fiscal fourth quarter 2013)

Forward-looking statements

Overview: Another record quarter. Strong June quarter guidance.

Basic data (GAAP):

Revenues were $430.1 million, up 3% sequentially from $416.0 million, and up 27% from $338.9 million in the year-earlier quarter.

Net income was $59.7 million, well sequentially from $10.2 million, but down 26% from $80.6 million year-earlier.

EPS (earnings per share) were $0.28, up sequentially from $0.05, but down 28% from $0.39 year-earlier.

Guidance:

For the first quarter fiscal 2014 ending June 30, 2013 sales are expected between $438.7 and $456 million. Gross margins 56.0 to 56.5% GAAP; 56.5% to %7.0% non-GAAP. Net income $64.2 to $71.5 million GAAP; $104.6 to $114.2 million non-GAAP. EPS $0.30 to $0.34 GAAP, $0.50 to $0.54 non-GAAP. Capital expenditures about $35 million. Net cash generation $100 to $120 million prior to dividend payment.

Full fiscal year 2014 capital expenditure estimate is $80 million.

Conference Highlights:

Sales were above mid-point of guidance while margins and EPS exceeded high end of guidance. "We more than delivered on our expectations that December would mark the bottom for this cycle." Sales growth was broad across product lines.

Bookings continue exceptionally strong, as was the ending backlog, to the extent that "many new bookings will be scheduled beyond the end of the quarter.

Non-GAAP numbers: net income was $109.3 million, up 29% sequentially from $84.5 million. EPS was $0.52, up 27% sequentially from $0.41. 56.4% gross margin. Excluding share-based compensation contributed 5.6 cents to non-GAAP EPS.

Microcontroller revenue was a record $275.8 million, up 4% sequentially from $266 million, and up 20% y/y. 16-bit microcontroller revenue was up 8% sequentially and up 93% from year-earlier. 32-bit microcontroller slipped 17% sequentially but was up 520% y/y. Shipped 12 billionth cumulative microcontroller in April. Microchip was 2nd globally in 8-bit microcontroller market share (the number 1 slot is from 3 merged Japanese companies). In 16-bit moved up from #8 in 2011 to #7 in 2012. In 32-bit moved from #17 to #12.

Analog chip revenue of $97.2 million grew 4% sequentially and 124% y/y to a new record and represented 22.6% of overall revenue, also a record.

Memory business revenue was $32.8 million. This was down to 7.6% of overall revenue.

Licensing revenue was $22.1 million. Other revenue was $2.3 million.

Reduced inventory to be in line with target.

Cash and equivalents ended at $1.84 billion. Fee cash flow was $123.3 million. $69.2 million was paid in dividends. Debt was $620 million. $15.5 million capital spending in quarter.

New products and design wins included expanded wireless Bluetooth, Wi-Fi and ZigBee offerings; further analog integration with PIC microcontrollers; Graphics Display Designer development too; a chip that integrates a coax transceiver with a USB 2.0 port; and BodyCom technology.

Cost of sales was $191.1 million, leaving gross profit of $239 million. Operating expenses of $182.2 million consisted of: research and development $70.4 million; selling, general and administrative $64.7 million; amortization $39.9 million; special charges $7.2 million. Leaving operating income of $56.7 million. Other expense $7.1 million. Income tax benefit $10.2 million.

Retroactive reinstatement of the R&D tax credit resulted in about $6.5 million or $0.03 contribution to EPS. Expects basic long-term effective non-GAAP tax rate to be around 10.5% to 11%.

SMSC product sales declined 1% due to weakness in the PC market. Yet it produced $0.085 accretion, higher than guidance.

Voluntary pay cuts of 5% will be reduced to 2.5% starting in the next pay cycle, then to zero on July 1st, and a bonus, all of which is included in guidance.

Q&A:

Industry's concern of potential downturn, like last 2 years? Both years Fed stimilus ended in late spring. They do not seem to be doing that this year. This year GDP seems to be accelerating. Microchip is seeing very strong data for the June quarter.

Lead times? Today 40% of business is from wafers made in outside foundries. That means we have very different lead times by product. We make 6,000 products. Some are in stock for immediate delivery, some you would have to wait weeks. Leads averaged much longer than in the second half of last year. The demand for some new products exploded upward.

SG&A below guidance? Resulted just from great expense control by the entire team.

32-bit PIC, lack of ARM, competitiveness? We sell based on customer needs and our solutions. Customers don't care much about cores, they care about developer tools and service.

Are you ready for another acquisition? We have been ready, but we don't have an attractive deal at this time.

Internal vs. external foundries? For major products it is worthwhile for us to develop foundry capabilities. For specialties that require special technologies to implement, it is more likely to be cost-effective to go to outside foundries that already have those capabilities. Lithography is getting to be very, very expensive for 12 inch wafers. We are making 8 inch wafers, so we go outside for 12 inch.

BodyCom? We are working with a set of customers to get it adopted and in production. But it will take time, but over time we will help customers to be successful and then ramp products.

If the Chinese government provides a lot of stimilus it typically pumps up physical devices that include Microchip controllers, and so could help us. But the March quarter in China was slow.

Touch business? We have over 1000 customers in production. The uses are very diverse, but we are not pursuing cellphones and pads. Instead we do automotive, appliances, equipment, etc. Volumes are small compared to smartphones, but margins are higher.

Part of the SMSC success is from their products going into slots where Microchip products could accompany them, replacing competitors. They have an automotive products and work on designs with OEMs, but these are long design cycles to add Microchip's other products into.

See also: Microchip Ups Guidance [June 4, 2013]

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