Analyst Conference Summary

semiconductors

conference date: May 9, 2017 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2017 (Q4, fiscal fourth quarter 2017)

Forward-looking statements

Overview: Continued strong y/y growth bolstered by Atmel acquisition. Record revenue near high end of guidance, with non-GAAP EPS beating guidance. Fiscal year revenue also a record. GAAP profits lifted by a $65 million income tax benefit, so non-GAAP is more reliable in this case.

Basic data (GAAP):

Revenues were $902.7 million, up 8% sequentially from $834.4 million, and up 62% from $557.6 million in the year-earlier quarter.

Net income was $136.9 million, up 28% sequentially from $107.3 million, and up 103% from $67.4 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.57, up 24% sequentially from $0.46, and up 77% from $0.33 year-earlier.

Guidance:

June quarter revenue estimated between $920.7 and $965.9 million. GAAP earnings expected between $0.59 to $0.64, with non-GAAP earnings between $1.17 to $1.27. Capital expenditures $60 million.

Revising the long-term operating model up to 62.5% non-GAAP gross margin, 22.5% non-GAAP operating expense and 40% non-GAAP operating profit.

Reminded that Atmel acquisition closed on April 4, 2016, for sequential comps.

Conference Highlights:

CEO Steve Sanghi said, “Non-GAAP earnings per share was an all-time record and was 10 cents per share better than the mid-point of our February 28, 2017 guidance, and up 64.7% from the March quarter of a year ago due to improving sales, gross margin percentage, operating expense leverage and the successful execution of our core business as well as accretion from our acquisitions. GAAP earnings per share for the March quarter was heavily impacted by acquisition-related expenses and hence, not meaningfully comparable to the March quarter a year ago.”

Ganesh Moorthy, President and COO, said "In March 2017, Gartner Dataquest released their microcontroller market share report for 2016 which showed Microchip had gained market share in each of the 8-bit, 16-bit and 32-bit product lines, and climbed to the number three overall microcontroller ranking in the industry by revenue. We believe we have the new product momentum and customer engagement to continue to gain even more share, as we further build the best performing microcontroller franchise in the industry."

A dividend of $0.3615 to shareholders of record on May 23 will be paid on June 6.

The bookings rate is "extremely strong." Book to bill 1.10. Inventories are below normal, resulting in some lengthening of lead times. Adding capacity at assembly and test facilities. Margin increase was both organic and from fixes at Atmel. Prices have been stable to increasing, helping margins.

Analyzed end markets for fiscal 2017; industrial 35%; automotive 25%; consumer 24%; computing 9%; communications 5%; defense and aerospace 2%. Consumer is not for smartphones.

Non-GAAP numbers: Net income was $276.9 million, up 12% sequentially from $246.5 million and up 81% from $153.0 million year-earlier. EPS was $1.16, up 10% sequentially from $1.05 and up 66% from $0.70 year-earlier. 59.2% gross margin. 35.6% operating margin. Because of the Atmel acquisition there are a lot of differences between GAAP and non-GAAP results; see the Reconciliation in the press release or SEC documents. This quarter GAAP revenue re-aligned with non-GAAP revenue, which had been $881.2 million in the prior quarter.

Microcontroller revenue was $580.5 million, or 64.3% of overall revenue. Up 4.4% sequentially. Had largest market share for 8-bit devices. Gained market share in 16-bit and 32-bit.

Analog chip revenue was $230.5 million or 25.5% of overall revenue. Up 1% sequentially to a new record.

Memory business revenue was not stated, but was down 2.3% sequentially.

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

Microchip is now the 8th largest semiconductor supplier to the automotive segment.

GAAP gross margin was 59.0%.

Cash and investments ended at $1.41 billion, up sequentially from $700 million. Cash flow from operations was $322.6 million, a record. $23 million capital spend in quarter. Long term debt was about $2.9 billion . In the quarter $2.645 billion was raised with convertible bonds, but much of those funds were used to pay down $1.683 in debt and $431.3 million of the 2037 convertible bonds.

GAAP cost of goods sold was $370 million, leaving gross profit of $533 million. Operating expenses of $379 million consisted of: research and development $127 million; selling, general and administrative $111 million; amortization $94 million; and special charge $46 million. Leaving operating income of $154 million. Other expense $82 million. Income tax benefit of $65 million.

For fiscal year 2017 revenue was $3.41 billion, GAAP EPS $0.73 and non-GAAP EPS $3.99.

Q&A:

Increasing cap ex and wafer starts, when might you catch up with demand? Most of the cap ex is at the back end. Atmel's test technology was about a decade behind, so we are converting it to Microchip testing. We can't put a $ number on the extent of the current constraint.

Revenue growth is partly driven by attaching our analog products to our and Atmel's digital products. The number of devices we can supply is accelerating.

Wireless attach rate? We have many connectivity devices, both wireless and wired. There are lots of opportunities to connect systems by various standards.

32-bit? This segment has been growing faster than Microchip as a whole, both the Atmel SAM and our own products, including microprocessors as well as microcontrollers. We have roadmap going forward.

Capital allocation with higher cash flow? Could invest internally, increase dividend, external acquisitions, or maybe stock buy back. Right now we are getting plenty of internal leverage. We are not changing our dividend strategy of very small increments each quarter. We only buy back our stock in extreme situations. We are still digesting Atmel, but we would look at a reasonable acquisition.

Lead time extensions? Lead times are not getting worse. We did not get acceleration of bookings after we informed our customers. Lead times vary by product, and a single large order can send them out as far as 16 weeks, but many products are in stock to ship.

What areas are your products going into in auto? Broad range, but large areas are infotainment, also axis control, touch control, garage door openers. Over 50 chips in some car models. We did the first keyless car entry and also hotel room door locks. 400 car models that have our homelink chip in them. Devices start at the high level and migrate down to lower end models year by year.

Atmel product pricing environment? It has taken to change the prices, some were phased in. Most price increases are not in place. With new designs we have a disciplined pricing model.

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