Analyst Conference Summary

semiconductors

conference date: October 30, 2013 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2013 (Q2, fiscal second quarter 2014)

Forward-looking statements

Overview: Record quarter. Strong profit growth.

Basic data (GAAP):

Revenues were $492.7 million, up 6.5% sequentially from $462.8 million, and up 28% from $383.3 million.

Net income was $99.8 million, 27% sequentially from $78.6 million and well up from negative $21.2 million year-earlier.

EPS (diluted earnings per share) were $0.46, up 24% sequentially from $0.37 and well up from negative $0.11 year-earlier.

Guidance:

The December quarter is typically the seasonally weakest quarter of the year for Microchip, with a decline of 3.5%. Sales are expected to range from down 6% to flat sequentially.

December quarter (Third quarter fiscal 2014) net sales are expected to be between $463.1 and $492.7 million. Net income expected between $88.7 and $99.8 million GAAP, or $123.9 million to $137.5 million non-GAAP. EPS $0.40 to $0.46 GAAP or $0.57 to $0.63 non-GAAP.

Capital expenditures are expected around $35 million, with full fiscal 2014 cap ex of $115 million. Cash generation expected between $110 and $130 million.

Conference Highlights:

Record revenue, operating income, net income and EPS, beating the First Call estimate for non-GAAP diluted EPS by 3 cents per share. Record sales for major chip segments and for licensing revenue. Exceeded high end of guidance.

Exposure to industrial, housing and automotive sectors helped in the quarter.

The long term model for non-GAAP operating margin has been revised upward to 34% to 36%. The gross margin model is for 61% to 62%.

Non-GAAP numbers: net income was $136.4 million, up 13% sequentially from $120.4 million and up 39% from $97.7 million year-earlier. EPS was $0.63, up 11% sequentially from $0.57 and up 39% from $0.48 year-earlier. 59.0% gross margin.

58.6% GAAP gross margin.

Microcontroller revenue was a record $321 million, up 7% sequentially from $300.3 million and up 23% y/y. Microcontrollers represented 65.2% of total revenue.

8-bit microcontroller revenue set a record. Continues to gain share from competitors, who cannot make money in this segment.

16-bit microcontroller revenue was up 11% sequentially and 48% y/y. Continues to gain market share in this segment.

32-bit microcontroller revenue was up 24% sequentially and 53% y/y. Plans to announce a number of blockbuster solutions next month.

Analog chip revenue of $108.5, grew 5% sequentially from $103.2 million and 25% y/y. Represents 22% of overall revenue.

Memory business revenue was $35.0, up 3% sequentially from $34 million. Was 7% of overall revenue.

Licensing revenue was $24.8 million up 10% sequentially from $22.5 million and up 23% y/y.

Other revenue was $3.4 million up 21% sequentially from $2.8 million.

48,000 development systems shipped in the quarter.

Cash and investments ended at $1.98 billion. Free cash flow was $126.4 million. Long term debt was $998 million. $23 million depreciation expense.

The quarterly cash dividend payable on December 5, 2013 to stockholders of record on November 21, 2013 will be 35.45 cents per share, up from the 35.4 cent prior payment.

Cost of sales was $203.8 million, leaving gross profit of $288.9 million. Operating expenses of $171.4 million consisted of: research and development $78.3 million; selling, general and administrative $69.4 million; amortization $23.7 million. Leaving operating income of $117.5 million. Other expense $6.3 million. Income tax provision $11.4 million.

Microchip is not concerned about short interest in the stock, and explained its relationship to convertible debt.

There is still margin upside due to the ability to additional factory capacity. Believes there are unrealized sales opportunities in Asia.

Q&A:

Given revised margin targets, what happens during the inventory/revenue cycle? We are not expecting a trough, just a normal December quarter, followed by a seasonally up March quarter. "I do not see a recession in front of us." What would happen to margins in a recession would depend on the nature of the recession.

Inventory build plan for Q4? We don't manage factories so as to have a tight range of inventory. We like to run our factories more constantly and allow inventories to fluctuate up or down, which works for Microchip because of the long life cycles of our products. We historically have not had inventory write-offs. 40% of business now comes from foundries. A month and a half ago we were expediting products, now we are just running at that rate into a seasonally down quarter. As revenue increases, that will adjust the inventory.

Overall bookings environment? Bookings are still good. So is the long-term backlog. Some bookings are aging into the March quarter, which should be a stronger quarter.

Wall Street has had many concerns about our model (end of 8-bit theory, need to use ARM theory, etc.) but we keep growing and getting better utilization and so better margins. We are seeing enormous sales opportunities develop for SMSC products. Licensing business does not have that great of an effect on margins.

M&A activity? We don't put numbers on our smaller acquisitions, nor do we want to give information to our competitors. We will be up 15% y/y at the midpoint of guidance in the December quarter without any acquisitions in the meantime. You are seeing the result of internal code strength in 8, 16 and 32 bit and the results of earlier acquisition. Our appetite for acquisitions is good, but we are very disciplined. We have no target today.

For automotive opportunity, will you continue to use distributors, or go straight to end market? We have always run the automotive business in a vertical market fashion, we do it direct with automotive companies or suppliers, not through distributors. SMSC's automotive sockets really helped our business. We have several other verticals we sell directly to through our sales force.

What applications are getting design traction in 32-bit microcontrollers? Power supplies, motor control, human interfaces, in cars, wherever more performance is needed than our 16-bit chips can provide.

We believe our products (including wireless) along with our cloud partnership with Amazon allows anyone who wants to get into the Internet of things.

China outlook? It approached 29% of revenue in the quarter. We did tremendously well there in the quarter. China business is very solid.

The main change of going from 8 to 16 bits or 32 bits is the complexity of the software and the need to invest in that.

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