Analyst Conference Summary

semiconductors

conference date: August 3, 2015 @ 3:00 PM Pacific Time
for quarter ending: June 30, 2015 (Q1, fiscal first quarter 2016)

Forward-looking statements

Overview: Revenue growth weak, but earnings growth strong, with record non-GAAP EPS.

Basic data (GAAP):

Revenues were $534.0 million, down 2% sequentially from $543.2 million, and up 1% from $528.9 million in the year-earlier quarter.

Net income was $130.7 million, up 31% sequentially from $99.4 million, and up 45% from $89.9 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.60, up 33% sequentially from $0.45 and up 50% from $0.40 year-earlier.

Guidance:

Non-GAAP guidance, including Micrel (which will affect GAAP through purchase accounting):

Revenue $532 to $569 million. Gross margin 57.6% to 57.8%. Operating expenses 27.7% to 28.9%. Other expense $7.9 million. Income taxes 11.1% to 12.1%.

Net income $127.3 to $145.4 million. EPS $0.58 to 0.66.

Without Micrel revenue would be down flat to 7% sequentially. Micrel will cause $0.015 EPS loss in the quarter due to share dilution.

Conference Highlights:

Microchip acquired Micrel (MCRL) for $14.00 per share, valuing it at $744 million enterprise value. Microchip paid with $430 million in cash and 8.6 million shares of Microchip. Most Micrel revenue will be in the analog segment of Microchip.

Revenue was below guidance midpoint "but was consistent with industry conditions as evidenced by what others in the semiconductor industry have reported." Particularly a weak China. The weak Euro also hurt revenue.

A dividend of 35.8 cents per share will be paid on September 25 to shareholders of record on September 11. The prior dividend was 35.75 cents per share.

Non-GAAP numbers: Sales were $534.0 million. Net income was $148.9 million, up 0% sequentially from $148.8 million and down 1% from $151.6 million year-earlier. EPS was $0.69, up 1% sequentially from $0.68 and also up 1% from $0.68 year-earlier. 58.3% gross margin. 32.4% operating margin.

% GAAP gross margin, up sequentially from 57.7%. GAAP operating margin was %.

Microcontroller revenue was $348.2 million, up % sequentially from a record $353.6 million and up 1.3% y/y. 65.2% of overall revenue. Microchip reclaimed the #1 market share position for 8-bit microcontrollers.

Analog chip revenue of $127.1 million was up % sequentially from $127.6 million, and was down 0.6% y/y. 23.8% of overall revenue.

Memory business revenue was $31.8 million, sequentially from $33.2. Was 6% of overall revenue.

Licensing revenue was $ million.

Other revenue was $3.7 million.

Cash and investments ended at $2.43 billion. Cash generation was $143.8 million. $33.6 million capital spend in quarter. Debt was about $497 million. $ million paid in cash dividends. $24.7 million depreciation expense.

Cost of goods sold was $224.9 million, leaving gross profit of $309.0 million. Operating expenses of $187.7 million consisted of: research and development $84.7 million; selling, general and administrative $66.8 million; amortization $34.6 million. Special charge $1.6 million. Leaving operating income of $121.3 million. Other expense $1.6 million. Income tax benefit of $10.9 million. $0.2 million net loss attributed to noncontrolling interests.

Eventually, once the products are shifted to other Fabs, the Micrel San Jose fab will be closed. Believes on the whole Micrel will be neutral to the September quarter, put accretive in calendar 2016, and significant once the fab is closed.

Q&A:

Industry environment today vs. last fall? We believe we say the first signs of a China slowdown last fall. June quarter is usually strong in China, but not this year. Inventories had grown too high. The slow climate now is a continuation of what we first announced last October. We are not through the inventory correction yet, particularly in China.

When do you think demand might normalize? I resigned from the forecasting business for the industry. We gave September guidance. December is typically seasonally weak.

Acquisition appetite? We have a substantial credit line in place. We talk to a number of companies. "We still have appetite for the next acquisition."

We are planning normal fab shutdowns in Q4, so we will build inventory some in Q3 to prepare.

Is 8-bit more cyclical that 16-bit or 32-bit? We see growth opportunities in all 3.

This quarter's booking looked better than last quarter, which is in the guidance, but people make adjustments within quarters.

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