Analyst Conference Summary

semiconductors

conference date: November 6, 2017 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2017 (Q2, fiscal second quarter 2018)

Forward-looking statements

Overview: Another record quarter, and first with over $1 billion in revenue. Came in over or near high end of guidance.

Basic data (GAAP):

Revenues were $1.012 billion, up 4% sequentially from $972.1 million, and up 16% from $871.4 million in the year-earlier quarter.

Net income was $189.2 million, up 11% sequentially from $170.6 million, and up 431% from $35.6 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.77, up 10% sequentially from $0.70, and up 413% from $0.15 year-earlier.

Guidance:

For the December quarter, "Reflecting better than normal seasonality, we expect total net sales to be flat to down 4% sequentially, which at the midpoint would represent 12.6% growth on a non-GAAP basis year-over-year and 18.9% on a GAAP basis year-over-year." The result is revenue between $971.7 and $1,012.1 million; EPS GAAP $0.73 to $0.81 and non-GAAP $1.30 to $1.40. Capital expenditures about $70 million.

Excluding acuisitions, the average December quarter sequential decline has been 2.5%.

Conference Highlights:

CEO Steve Sanghi said, "In the September 2017 quarter we achieved our first quarter of over one billion dollars in net sales! Our quarterly financial results were very strong and we set new records in net sales, operating income and earnings per diluted share. We are making outstanding progress in moving towards our long-term operating model."

Inventory grew, to 105 days, but was still well below target levels. Microchip continues to expand capacity. The demand environment is strong. Market share has increased.

The capital spend to increase production and build new facilities to get out of leases should lead to stronger results.

Ganesh Moorthy, President and COO, said "Each of our 8-bit, 16-bit and 32-bit microcontroller product families set new revenue records in the quarter and our product portfolio and roadmap have never been stronger." Also, every major geographic region was up.

As usual, many new products were added in the quarter.

A dividend of $0.3625 to shareholders of record on November 21, payable on December 5, 2017.

Non-GAAP numbers: Net income was $344.1 million, up 8% sequentially from $319.1 million and up 57% from $219.6 million year-earlier. EPS was $$1.41, up 8% sequentially from $1.31 and up 50% from $0.94 year-earlier. 61.0% gross margin. 38.6% operating margin.

Microcontroller revenue was $665 million, or 65.7% of overall revenue. Up 5% sequentially from $636 million. Up 20% y/y. All product lines set revenue records.

Analog chip revenue was $239 million or 23.6% of overall revenue, flat sequentially from $239 million to a new record. Up 6.3% y/y. Had capacity constraints on Atmel products. Some revenue shifted to microcontroller segment as analog chips were integrated with microcontrollers.

Memory business revenue was up 5.3% sequentially.

3% sequential increase in licensing business, up 8.9% y/y.

Cash and investments ended at $1.84 billion (about 500 million in the U.S.), up sequentially from $1.65 billion. Cash flow from operations was $350 million. $60 million capital spend in quarter. Long term debt was about $3.0 billion. Inventory was the lowest in 7 years.

GAAP cost of goods sold was $398 million, leaving gross profit of $614 million. Operating expenses of $389 million consisted of: research and development $134 million; selling, general and administrative $114 million; amortization $120 million; and special charges $20 million. Leaving operating income of $225 million. Other expense $39 million. Income tax benefit of $3 million.

Q&A:

How much of the growth is company specific, and how much the macro-environment, sustainability? When we win a design, is it because the industry is doing? We believe growth will moderate from the higher numbers this year.

M&A appetite, vs. stock buybacks? We have not changed our capital allocation strategy. Operations are well funded, but first priority. Second priority is the dividend. Third is M&A. Stock buy backs are a low priority, we would only do opportunistically.

Increase in capital expenditure plans? There is a lot of margin improvement we can get by moving outsourced Atmel expenses in house. We then can get to our margin goals, gradually.

There is no particular end market that is driving our growth.

Moderation of lead times was the cause of our book to bill ratio going sequentially from 1.11 to 1.05. Our customers are more comfortable with our delivery time.

Inventory build timing? It is a continuous phenomena. It grew by 5 days last quarter, will grow by 10 this quarter, should be normal by June quarter 2018. December quarter is the seasonally weakest of the year, so we have a chance to catch up some. Our distributors also have low inventory.

Could book-to-bill go below 1 in March quarter, if lead times drop? Don't see that. There is not a lot of capacity coming in, the equipment suppliers can only produce incrementally.

Which microcontrollers are growing fastest? 32-bit, then 16, then 8 bit. ASPs would shift higher, but so would COGS.

Overseas cash balance and tax proposal? We have not formally evaluated it. It the tax laws actually change we will look to change what we are doing, including with foreign cash.

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