Analyst Conference Summary

semiconductors

conference date: August 8, 2016 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2016 (Q1, fiscal first quarter 2017)

Forward-looking statements

Overview: Great quarter, but because of the Atmel acquisition accounting, negative GAAP results.

Basic data (GAAP):

Revenues were $799.4 million, up 43% sequentially from $557.6 million, and up 50% from $534.0 million in the year-earlier quarter.

Net income was negative $113.4 million, down sequentially from $67.4 million, and down from $130.7 million in the year-earlier quarter. But see non-GAAP section below.

EPS (diluted earnings per share) were negative $0.53, down sequentially from $0.31 and down from $0.60 year-earlier.

Guidance:

For the September quarter (Fiscal Q2 2017) non-GAAP net sales are expected between $844 and $878 million, with an operating margin between 27.7% and 29.0%. Other expense $22.0 to $22.8 million and income tax expense between 8% and 9%. Resulting in net income of $192.7 to $213.2 million and non-GAAP EPS of $0.83 to $0.91.

Conference Highlights:

CEO Mr. Sanghi said, "We achieved all-time record net sales and non-GAAP earnings per share in the June 2016 quarter. We are tracking well ahead of our guidance for non-GAAP earnings per share for fiscal 2017 which we commented on in our May 4, 2016 earnings conference call." The transition of Atmel to the profitable Microchip model is going well.

Instituted pricing discipline at Atmel, which will help with margins. Atmel has many very good products and personnel, but the business had been poorly run. "Atmel had a culture of poor accountability." Poor teamwork. Operating expenses were high and management was top heavy (33 of 41 Atmel VPs have been removed). Atmel's wireless business had negative margins. Increasing Atmel accretion target to $0.40 for fiscal 2017.

A dividend of 0.36 cents per share will be paid on September 6, 2016 to shareholders of record on August 22, 2016. The prior dividend was 35.95 cents per share.

Non-GAAP numbers: Sales were $844 million were up 48.5% sequentially. Net income was $194.0 million, up 27% sequentially from $153.0 million and up 30% from $148.9 million year-earlier. EPS was $0.84, up 20% sequentially from $0.70 and up 22% from $0.69 year-earlier. 55.8% gross margin. 27.4% operating margin. The difference between GAAP and non-GAAP numbers was mainly due to $228 million in Atmel purchase accounting, restructuring and other charges. Share based compensation of $39 million was also excluded. Non-GAAP results are being presented on a full sell-through basis (which Microchip was on, but not Atmel).

Non-GAAP EPS was $0.05 higher than the high end of prior guidance.

Microcontroller revenue was up sequentially. Both the Microchip and Atmel products showed strong sequential growth in the quarter. 63.7% of revenue in the quarter. Spending more on AVR microcontroller development, particularly 8 bit. Has put up the Atmel wireless business for sale. Microchip is gaining market share.

Analog chip revenue was up sequentially, both Microchip and Atmel. 25.5% of overall revenue.

Memory business revenue made significant progress. Will support Atmel products for customers who do not wish to switch.

Licensing revenue was not stated.

Other revenue was not stated.

GAAP gross margin was 43.6%, and operating margin was negative.

Cash and investments ended at $602 million, down sequentially from $2.57 billion. Most of that cash was used to acquire Atmel. Cash generation was $184 million. $18.5 million capital spend in quarter. Debt was about $3.3 billion. $ million paid in cash dividends not stated. $30.6 million depreciation expense.

Cost of goods sold was $450.9 million, leaving gross profit of $348.5 million. Operating expenses of $407.6 million consisted of: research and development $147.9 million; selling, general and administrative $157.5 million; amortization $80.2 million; and special charge $22.0 million. Leaving operating income of negative $59.1 million. Other expense $31.6 million. Income tax of $18.5 million. Loss from discontinued operations $4.1 million.

Inventory position was "outstanding."

The pricing increases on July 1 of Atmel inventory do not seem to have decreased demand.

Believes that breaking sales into organic and non-organic is not helpful, due to a variety of accounting issues.

Microchip has several offers for the mobile touch business and will have the board review them later this week. Sale could be completed before the end of the calendar year.

Q&A:

Atmel sales visibility? We see no issues. We do not see a decline in Atmel sales. We think we have rapidly turned around Atmel's sales decline. Microchip has a culture of not obsoleting products, of giving long-term service to customers. We are actually expanding the Atmel 8-bit microcontroller line by adding technology we developed.

Atmel wafer manufacturing? Their Colorado Springs fab is very cost effective. We will keep the Colorado fab. We also intend to keep their Philippines facility.

Consolidation in sector? There is no shortage of interesting targets. We don't have cash to do anything short term, nor management bandwidth.

We don't expect a significant change in seasonality as a result of the Atmel acquisition, though they were not in sync in Q1 in the past.

Stock based comp increase and baseline? There is a lot of Atmel-specific activity in there. Q1 is not the ongoing run rate. More like $24 million per quarter going forward.

We have not seen any evidence that revenue in the quarter was boosted by buying before the July 1 price increase. We have not seen sales fall off since July 1.

Cross selling analog product? It is already visible at the design-in level. We are seeing evidence that non-Atmel chips in Atmel based designs are being replace by Microchip analog chips.

Licensing business? It is doing very well. We won the "entire enchilada" at 55 nm and 40 nm. Half have signed up on the 28 nm node. Microcontrollers are built on older technologies than CPUs. We are very positive on the licensing business. We have a decade of royalty stream coming up on the 90 nm to 28 nm range. 28 nm should cover the next decade.

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