Analyst Conference Summary

semiconductors

conference date: February 7, 2017 @ 2:00 PM Pacific Time
for quarter ending: December 30, 2016 (Q3, fiscal third quarter 2017)

Forward-looking statements

Overview: Continued strong y/y growth bolstered by Atmel acquisition. Beat prior guidance on revenue and earnings.

Basic data (GAAP):

Revenues were $834.4 million, down 4% sequentially from $871.4 million, and up 54% from $540.3 million in the year-earlier quarter.

Net income was $107.3 million, up 217% sequentially from $33.9 million, and up 75% from $61.2 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.46, up 229% sequentially from $0.14, and up 64% from $0.28 year-earlier.

Guidance:

In the March quarter net sales expected between $872 and $908 million (down 1% to 3% sequentially). GAAP EPS expected between $0.71 and $0.81. Non-GAAP EPS $1.01 to $1.11. Capital expenditures expected near $38 million.

The long-term non-GAAP operating model was revised to: 60% gross margin, 24% operating expenses and 36% non-GAAP operating profit.

Full year 2017 capital expenditures near $90 million.

Conference Highlights:

CEO Mr. Sanghi said, "Microchip’s financial results in the December 2016 quarter were outstanding with cash flow from operations being at record levels." However, believes about 1% of revenue in December quarter was pulled ahead from the March quarter due to customers requesting early shipments, before the business system of Atmel was integrated on January 1..

A dividend of $0.361 per share will be paid on March 7, 2017 to shareholders of record on February 21, 2016. The prior dividend was $0.3605 cents per share.

Non-GAAP numbers: Sales of $881.2 million up 1% from $873.8 million year-earlier. Net income was $246.5 million, up 12% sequentially from $219.6 million and up 78% from $138.4 million year-earlier. EPS was $1.05, up 9% sequentially from $0.94 and up 64% from $0.64 year-earlier. 57.8% gross margin. 32.8% operating margin.

Microcontroller revenue was 63.1% of overall revenue. Gaining market share. 8, 16 and 32-bit devices all showed growth. A new generation of 8-bit AVR microcontrollers with Core Independent Peripherals was released, the first products uniting Microchip and Atmel technology.

Analog chip revenue was 25.9% of overall revenue. up 1.4% sequentially, setting a new record. Continues to find new ways to attach analog circuits to microcontrollers.

Memory business revenue was flat sequentially. Introduced EERAM.

Numerous new microcontroller, analog, and mixed products were introduced in the quarter.

GAAP gross margin was 55.8%, and operating margin was 14.2%.

Cash and investments ended at $700 million, up sequentially from $491 million. Cash flow from operations was $290.8 million. $16 million capital spend in quarter. Debt was about $3.1 billion. $30 million depreciation expense.

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

Cost of goods sold was $369 million, leaving gross profit of $465 million. Operating expenses of $347 million consisted of: research and development $132 million; selling, general and administrative $111 million; amortization $82 million; and special charge $21 million. Leaving operating income of $118 million. Other expense $35 million. Income tax benefit of $24 million.

Atmel merger is going well, believes seeing synergy both on cost savings and sales, and expects those to continue to build for some time. Revised accretion guidance for 2018 to $0.80 and $1.00 in 2019.

Q&A:

December quarter above seasonal even excluding the 1% pull-forward? The overall environment has been good, at least for us. Even excluding the 1%, December quarter was flat to September, better than the usual seasonal 2% drop.

All of our free cash flow created in the U.S. is used to pay the dividend. The rest of the excess cash is held outside the U.S.

Atmel accretion, does it exclude revenue synergies? It includes both cost reduction and revenue synergies.

Cap ex effect on test and packaging? Our cap ex plan looks at bringing in assembly and test. The acquisitions had no in-house test and packaging. We only bring these in house when there is a cost advantage.

Lead time changes? Normal. There are always some variations.

Inventories? Our inventories are light, lower than they have been in the recent past. We have been trying to build inventory, but demand rose faster, so no build. We would like to build in the coming quarters.

R&D in 2018? About the same, 13 to 14% of revenue.

Industrial IoT market thoughts? The industrial market is where IoT fits. We have many designs for that category and are optimistic about its growth.

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