Analyst Conference Summary

semiconductors

conference date: February 6, 2018 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2017 (Q3, fiscal third quarter 2018)

Forward-looking statements

Overview: Results near midpoint of guidance, revenue up 19% y/y. GAAP profits negatively affected by the new tax law resulting in a $447 million income tax provision.

Basic data (GAAP):

Revenues were $0.994 billion, down 2% sequentially from $1.012 billion, and up 19% from $0.834 billion in the year-earlier quarter.

Net income was negative $251.1 million, down sequentially from $189.2 million, and down from $107.2 million in the year-earlier quarter.

EPS (diluted earnings per share) were negative $1.07, down sequentially from $0.77, and down from $0.46 year-earlier.

Guidance:

For the March 31, 2018 fourth quarter fiscal 2018:

Revenue expected between $964.4 and $1,004.1 million. Net income $179.5 to $203.5 million GAAP. GAAP EPS $0.72 to $0.80. Non-GAAP net income $326.1 to $353.1 million, with EPS of $1.30 to $1.39.

Capital expense expected between $50 and $60 million.

Revenue up 9% y/y, less than last few quarters, as Atmel addition smoothes out.

Conference Highlights:

CEO Steve Sanghi said, "Our net sales were slightly above the midpoint of our guidance. Our gross margin was at the high end of our guidance range, our operating expenses as a percentage of sales were below the low end of our guidance range, and our non-GAAP operating profit was a record at 39.4% of sales."

Ganesh Moorthy, President and COO, said "Our Microcontroller portfolio and roadmap have never been stronger and we are seeing continued growth in our design-in funnel which we expect will drive future growth as these designs progress into production over time."

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

A dividend was declared of $0.363, to stockholders of record on February 21, 2018, payable on March 6, 2018. Fiscal year 2018 dividends are taxable (in the past they were treated as return of capital).

Expects the cash taxes to be paid because of the Tax Cuts and Jobs Act to be about $300 million paid over 8 years, increasing over time. Expects the cash tax rate to be below 9% going forward.

Microchip is aggressively using capital to support new, fast-growing products.

Non-GAAP numbers: Net income was $341 million, down 1% sequentially from $344.1 million and up 38% from $247 million year-earlier. EPS was $1.36, down 3% sequentially from $1.41 and up 30% from $1.05 year-earlier. 61.4% gross margin. 39.4% operating margin. Share-based compensation excluded was $17.4 million.

Microcontroller revenue was $661 million, or 66.5% of overall revenue. Down 0.6% sequentially from $665 million. Up 19% y/y. 8-bit revenue set a new record.

Analog chip revenue was $232 million or 23.3% of overall revenue, down 3.2% sequentially from $239 million. Up 1.5% y/y. Some products were shifted to microcontroller segment.

Memory business revenue was down 7.6% sequentially, but up 3.4% y/y.

6.8% sequential increase in licensing business, up 15.5% y/y.

Cash and investments ended at $1.99 billion, down sequentially from $1.84 billion. Cash flow from operations was $365 million. $66 million capital spend in quarter. Long term debt was about $3.04 billion.

GAAP cost of goods sold was $387 million, leaving gross profit of $607 million. Operating expenses of $362 million consisted of: research and development $132 million; selling, general and administrative $109 million; amortization $121 million; and special charges $0.2 million. Leaving operating income of $245 million. Other expense $49 million. Income tax $448 million.

Inventories are now on target. Book to bill has moderated to 1.0 as we improved lead times due to increased manufacturing capacity.

Q&A:

New June quarter seasonality? June was strong for both Microchip and Atmel. So better than March quarter.

Gross margin should continue to improve over time towards the target model.

Was inventory build expected at the start of the quarter, or from weak demand? It was right on target, what we guided to and achieved.

Remaining supply constraints on Atmel portfolio? Atmel had many business units with broadbased challenges. Expect to take until June of 2018 for all Atmel business units to get healthy. These units were using obsolete testers that were not easily replaced, but we are modernizing them.

Strongest markets for March quarter? Consumer is weak in March, which drives the downward seasonality. Automotive and industrial should do well. Asia is a challenge because of the Chinese New Year vacation.

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