Analyst Conference Summary

semiconductors

conference date: July 31, 2014 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2014 (Q1, fiscal first quarter 2015)

Forward-looking statements

Overview: Record revenue quarter.

Basic data (GAAP):

Revenues were $528.9 million, up 7% sequentially from $493.4 million, and up 14% from $462.8 million in the year-earlier quarter.

Net income was $88.9 million, down 20% sequentially from $111.5 million and up 13% from $78.6 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.40, down 20% sequentially from $0.50 and up 8% from $0.37 year-earlier.

Guidance:

September quarter (fiscal Q2 2015) non-GAAP revenue is expected to increase between 5.4% and 8.4% sequentially, to $560 to $575.9 million. This includes $18 million in ISSC revenue. Non-GAAP net income expected between $156.2 and $165.3 million. Non-GAAP EPS $0.70 to $0.74.

Conference Highlights:

Supertex acquisition closed on April 1. $17.8 million of revenue was from Supertex.

Record revenue resulted from strengths in multiple end markets including industrial, automotive, housing, consumer electronics and computing. "We are seeing exceptional strength in some of our new products and technologies which are growing revenue at double digit percentages sequentially." Lead times have lengthened as a result, there are some capacity constraints, and inventory is below target. To compensate the fiscal 2015 capital spending plan has been raised to $175 million.

Sales revenue was a record for all segments: 8-bit, 16-bit, and 32-bit microcontrollers as well as analog products.

The tender offer for ISSC shares was completed, so Microchip now owns 83.5% of ISSC shares.

Non-GAAP numbers: Sales were $531.3 million, up 8% sequentially. Net income was $151.6 million, up 7% sequentially from $141.3 million and up 26% from $120 million year-earlier. EPS was $0.68, up 6% sequentially from $0.64 and up 26% from $0.57 year-earlier. 59.8% gross margin. 33.2% operating margin. Excludes share-based compensation of $11.9 million, $42/7 million inventory acquisition valuation costs, a $4.5 million unfavorable tax event, $1.5 million in non-cash interest expense, and other one-time charges.

58.0% GAAP gross margin, down sequentially from 58.9%. GAAP operating margin was 21.9%.

Microcontroller revenue was a record $343.8 million, 5.3% sequentially from $326.4 million and up 14.5% y/y. Microcontrollers represented 64.7% of total revenue.

8-bit microcontroller revenue set a record. Continues to gain significant market share. Introducing new products even as competitors abandon this segment.

16-bit microcontroller revenue was up 0.6% sequentially and 26.5% y/y. Expects strong growth in September quarter.

32-bit microcontroller revenue was up 21.5% sequentially and 59.8% y/y. Continues to expand this product line.

Analog chip revenue of $127.8 million was 19% sequentially from $107.5 million, and was up 24% y/y, largely due to the Supertex acquisition. Analog was 24% of Microchip's overall revenue.

Memory business revenue was $33.4 million, up 1% sequentially from $33.1 million. Represented 6.3% of total revenue.

Licensing revenue was $20.4 million.

Other revenue was $5.9 million.

Cash and investments ended at $2.29 billion, up about $150 million sequentially. $45 million capital spend in quarter. Long term debt was $0.98 billion. $23.3 million depreciation expense. $121.3 million paid in cash dividends.

The quarterly cash dividend payable on September 4, 2014 of 35.6 cents per share to shareholders of record on August 21.

Cost of sales was $222.4 million, leaving gross profit of $306.5 million. Operating expenses of $190.6 million consisted of: research and development $84.4 million; selling, general and administrative $69.3 million; amortization $36.6 million. Special charge $0.3 million. Leaving operating income of $115.9 million. Other expense $9.0 million. Income tax provision $17.1 million.

By geography revenue: $103.3 million Americas, $109.7 million Europe, $318.3 million Asia.

New connectivity, power conversion, and 32-bit microntroller products were introduced. Daimler added automotive infotainment products using Microchip interface controller.

Q&A:

Production constraints, are you missing delivery requests? We are missing some revenue due to supply constraints in the September quarter. We will get a better idea of the details in the next few weeks. We are also working to eliminate the constraints. The constraints are on new products with high growth rates and high demand. It should not impact design wins.

Benefits from low inventories? The inventory will decline further in the current quarter. Core Microchip margins should be nearly flat sequentially; any change would be from the acquisitions, which have slightly lower margins than Microchip.

The bottlenecks are in fabrication and testing.

ISSC stand alone model is 45% gross margin, 26% operating expenses, 19% operating profit. We will improve that substantially, but it will take some time.

Automotive opportunities? We supply a broad range of automotive applications. We tend to be the main microcontroller for networking and audio. We are winning more than our fair share of slots. The number of cars being built is growing as well. If you buy an S class Mercedes it will have 51 of our devices in it.

The conventional wisdom is that 8-bit microcontrollers are declining as everyone converts to 32-bit microcontrollers. The surprise in the quarter was in 8-bit revenue, partly from new products including a new core. They are built on our latest process technology, and the demand has exploded. The competitive threat of trying to insert an ARM core into an 8-bit socket has petered out. Customers did not like them.

Is core sequential growth flat in the guidance? Our core business is growing substantially, so can't see where you come up with flat sequentially. We are guiding core business up 3.5% at the center of the range in the September quarter.

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