Analyst Conference Summary

semiconductors

conference date: November 7, 2016 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2016 (Q2, fiscal second quarter 2017)

Forward-looking statements

Overview: Record revenue, but GAAP profits still impacted by Atmel acquisition. Beat high end of prior guidance.

Basic data (GAAP):

Revenues were $871.4 million, up 9% sequentially from $799.4 million, and up 61% from $541.4 million in the year-earlier quarter.

Net income was $33.9 million, up sequentially from negative $113.4 million, but down from $64.9 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.14 , up sequentially from negative $0.53, but down from $0.30 year-earlier.

Guidance:

Can't provide GAAP guidance due to the Atmel acquisition, but for non-GAAP fiscal Q3 2017: sales $821.4 to $873.8 million (flat to down 6% sequentially). Net income $199.3 to $224.5 million, resulting in non-GAAP EPS of $0.85 to $0.95. $170 to 200 million cash generation.

Believes Atmel will be accretive by $0.50 per share in fiscal 2017, up from prior estimate of $0.25. $0.70 for fiscal 2018. Believes stock price is not low enough to be attractive for buy-backs..

Conference Highlights:

CEO Mr. Sanghi said, "Our September quarter results were outstanding, setting many new records for Microchip. Non-GAAP net sales, gross margin percentage, operating profit percentage, and earnings per share were all above the high end of our updated guidance provided on September 6, 2016."

Integration with Atmel was largely completed in the quarter. Demand for 8-bit microcontrollers is limited only by the creativity of engineers.

A major competitor decided to use distributors only for fulfillment, not for demand creation, which gets a higher margin. So distributors are working to create demand for Microchip products. But it takes time to design in chips.

Again went over cultural and structural problems at Atmel, showing how doing things the Microchip way will create profits while helping employees and customers.

A dividend of $0.3605 per share will be paid on December 5, 2016 to shareholders of record on November 21, 2016. The prior dividend was $0.36 cents per share.

Non-GAAP numbers: Sales of $873.8 million up 56% from $559.4 million year-earlier. Net income was $219.6 million, up 13% sequentially from $194.0 million and up 54% from $142.9 million year-earlier. EPS was $0.94, up 12% sequentially from $0.84 and up 42% from $0.66 year-earlier. 57.2% gross margin. 30.5% operating margin. The difference between GAAP and non-GAAP numbers was mainly due to $161 million in acquisition related expenses. Share based compensation of $20 million was also excluded.

Microcontroller revenue was 63.4% of overall revenue. Gaining market share.

Analog chip revenue was up 4.7% sequentially, setting a record. 25.7% of overall revenue. Continues to find new ways to attach analog circuits to microcontrollers.

Memory business revenue was down 2% sequentially. Increased prices for Atmel products.

GAAP gross margin was 47.1%, and operating margin was 7.2%.

Cash and investments ended at $490.8 million, down sequentially from $602 billion. Most of that cash was used to acquire Atmel. Cash generation was $211.2 million. $18.2 million capital spend in quarter. Debt was about $1.678 billion. Not stated $ million paid in cash dividends. $30 million depreciation expense.

In fiscal 2017 dividends will not be counted as return of capital.

Many new products were released in the quarter including AVR ATtiny models, a new Explorer PIC development board, a device for security for connecting to the Amazon cloud, new oscillators, and power controllers.

Cost of goods sold was $460.7 million, leaving gross profit of $410.6 million. Operating expenses of $347.9 million consisted of: research and development $137.8 million; selling, general and administrative $120.1 million; amortization $80.4 million; and special charge $9.5 million. Leaving operating income of $62.8 million. Other expense $37.5 million. Income tax benefit of $10.3 million. Loss from discontinued operations $1.7 million.

Microchip is selling the mobile touch business (of Atmel) to Solomon Systech, closing expected later this week.

Q&A:

Results from organic growth vs. Atmel? We can't break that out. When we win a business we don't know whether it is end demand or a superior product.

Gross margin from price increases? 400 basis point improvement on Atmel, our organic business up too, from better mix and growth. Atmel had a better mix, more disciplined pricing, and changing prices to U.S. dollars. Also Micrel accretion, including after their fab closes in a few weeks.

Could Atmel margins approach your old margins? Yes. It is a matter of timing. They have more consumer products, which have lower margins. New product and contracts should have Microchip-like margins, but it will take a long time. We can't change the older pricing contracts.

We should see some good results from attaching our analog circuits to Atmel microcontrollers.

8-bit revenue increases? All of the above: customer demand expanded, IoT. We never bought the 1994 story that 16 and 32 bit chips would wipe out 8 bit demand. We benefit because others have not invested in 8 bit, since they thought it would go away. It is not necessarily just Bluetooth and Wireless. People want smarter products, and 8-bit is a cost effective way to do that.

We are not shutting down the 6" Atmel Colorado fab, as it turned out to be cost effective. But our testing is more cost effective than Atmel's. We don't have impact on guidance yet.

Building cash for an acquisition? No change in strategy. We wanted to buy stock back at $38 or $40, but not at the current price. We are always looking for acquisitions. Believes made a mistake listening to Street opposition to that buy back.

Q4 (fiscal Q3) seasonality compared to normal? It is hard to compare because of the Atmel acquisition.

In the last 5 years there has been a gradual shift in Christmas builds. Most used to be in the September quarter revenue. But has been getting later in later, with products build in October or even November, and often shipped by air.

Demand by various end markets? Automotive and industrial have been strong. Computing has been strong, but nothing dramatic.

Qualcomm acquisition of NXP? We expect no change from that. We don't expect new companies to enter the market, and do expect more consolidation. The mergers, however, are not changing the competitive landscape.

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