Analyst Conference Summary

semiconductors

conference date: January 29, 2015 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2014 (Q3, fiscal third quarter 2015)

Forward-looking statements

Overview: Numbers came in a bit better than expected, seasonally down sequentially, but strong y/y revenue growth.

Basic data (GAAP):

Revenues were $528.7 million, down 3% sequentially from $546.2 million, and up 10% from $482.4 million in the year-earlier quarter.

Net income was $86.1 million, down 8% sequentially from $93.6 million, and down 18% from $105.4 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.39, down 7% sequentially from $0.42 and down 19% from $ year-earlier.

Guidance:

Revenue expected between $537.2 and $547.9 million. Resulting GAAP EPS $0.39 to $0.41; non-GAAP EPS $0.65 to $0.67. Cash generation expected between $140 to $160 million.

Conference Highlights:

Microchip was able to better its prior guidance. Seasonal decrease was less that normal. Calendar year 2014 was the first year Microchip had over $2 billion in revenue.

ISSE was integrated into MCHP on December 1, with some shares remaining to be acquired. San Jose has made its last dies and will be closed in April. Hong Kong facility is also being closed.

The miss in the September quarter was closely examined and found to be an inventory correction and brief softness in China. We continue to gain share and are confident about our future prospects.

Non-GAAP numbers: Sales were $535.8 million, down 1.9% sequentially. Net income was $143.3 million, down 5% sequentially from $150.2 million and up 8% from $132.9 million year-earlier. EPS was $0.64, down 4% sequentially from $0.67 and up 5% from $0.61 year-earlier. 58.2% gross margin. 31.6% operating margin. Excludes share-based compensation of $11.2 million, $46.5 million inventory acquisition valuation costs, a $3.9 million tax benefit (R&D tax credit), and other non-cash and one-time charges.

57.1% GAAP gross margin, up sequentially from 56.3%. GAAP operating margin was %.

Microcontroller revenue was $345.5 million, down 5% sequentially from a record $361.8 million and up 10.3% y/y. 64.5% of total revenue in the quarter. Our competitors were surprised by the size of our 16/32 bit sales announced last quarter & have been digging for information, so we won't announce that again and will no longer break out growth rates. Believes gained market share in 2014.

8-bit microcontroller revenue set a record for full 2014.

16-bit microcontroller revenue set a record for full 2014, up 27.7% for the full year.

32-bit microcontroller revenue set a record for full 2014, up 41.3% for the full year.

Analog chip revenue of $125.5 million was up 2% sequentially from $122.6 million, and was up 15.3% y/y, largely due to the Supertex acquisition. Analog was 23.4% of Microchip's overall revenue. Design win momentum was strong.

Memory business revenue was $33.2 million, up 2% sequentially from $32.5 million and up 2% y/y. Represented 6.2% of total revenue.

Licensing revenue was $22.9 million.

Other revenue was $8.7 million.

Cash and investments ended at $2.23 billion. Cash generation was $145.7 million. $36.6 million capital spend in quarter. Debt was about $981 million. $72 million paid in cash dividends. $24.7 million depreciatin expense.

The quarterly cash dividend was raised to 35.7 cents per share will be paid to stockholders of record on February 23, 2015 on March 9.

Cost of goods sold was $226.8 million, leaving gross profit of $302.0 million. Operating expenses of $204.0 million consisted of: research and development $88.7 million; selling, general and administrative $66.7 million; amortization $47.6 million. Special charge $1.0 million. Leaving operating income of $98.0 million. Other expense $11.8 million. Income taxes $1.4 million. $1.3 million net loss attributed to noncontrolling interests.

By geography: Americas $104.9 million, $105.9 million Europe, $325 million Asia.

The March quarter is typically strong in Europe but weak in Asia, and is expected to show a sequential revenue increase of 1% to 3% for Microchip.

Q&A:

ISSC, Supertex deals, sales? We are not breaking out the revenue. We are well along in integrating their lines and are getting good feedback from end users.

IoT (internet of things)? It depends on what you include in IoT. We are excited by the opportunity and have all the pieces needed for this market.

Did your analog grow slower organically than microchips in 2014? When we buy a company we integrate it in pretty quickly, and may discount our own products if the acquired products are superior. Our job is to maximize returns by presenting the best solution to customers.

Capital spending plans? Our microcontrollers are loaded with analog functionality at the high end. The technologies are common for our analog and digital; capital spend is common to both categories.

Are you seeing anything unusual in demand, geography or seasonality? No. Everything is normal at this time.

Foreign exchange rate effect on competition, particularly Japanese? If yen goes down, products produced in Japan are cheaper, but Japan has moved to Chinese foundries. But given the entire ecosystem around products, substitution into a design is not likely. However, market share reports are calculated in dollars, which will make the Japanese market share appear lower.

How do you see the economy? Everything is seaonally normal. Everyone is aware of the state of the economy in Europe and China.

FX had a minimal impact on margins.

Our inventory got too low, resulting in longer lead times, so we have been growing our capacity to bring inventory more in line with demand. We plan to increase inventory. We used 38% to 40% external foundries. Our internal fabs are working at record loading.

Automotive, MOST vs. Ethernet? We do both. We dominate the space around infotainment networking. We have many new products planned. We will have solutions for market requirements. But we sell general solutions for multiple customers, not SoCs for single customers.

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