Analyst Conference Summary

semiconductors

conference date: May 8, 2018 @ 5:30 AM Pacific Time
for quarter ending: March 31, 2018 (Q4, fiscal fourth quarter 2018)

Forward-looking statements

Overview: Record sales. Microsemi acquisition could complete in June. Below target inventory.

Basic data (GAAP):

Revenues were $1.002 billion, up 1% sequentially from $0.994 billion, and up 11% from $0.903 billion in the year-earlier quarter.

Net income was $146.7 million, up sequentially from negative $251.1 million, and up 7% from $136.9 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.58, up sequentially from negative $1.07, and up 2% from $0.57 year-earlier.

Guidance:

"non-GAAP total net sales in the June 2018 quarter to be sequentially up between 1% and 6%. Our non-GAAP earnings per share are expected to be between $1.39 and $1.49." That's the first quarter of fiscal 2019, net sales between $1.012 and $1.062 billion. Net income $345.9 to $377.4 million (non-GAAP).

Guidance does not include any possible Microsemi revenues or costs.

No GAAP guidance because of a change in accounting rules.

Conference Highlights:

CEO Steve Sanghi said, "Fiscal 2018 was clearly the best year in Microchip's history, in which many new records were made including net sales, gross profit and operating income. I want to thank all of Microchip's worldwide employees for their tireless work to drive Microchip's outstanding performance!" Also "Our total backlog is at an all-time record, and we believe we are well-positioned for continued growth in fiscal 2019 with our total system solutions and Microchip 2.0 initiatives continuing to gain traction."

Ganesh Moorthy, President and COO, said ""Gartner Dataquest recently released their market-share report for calendar year 2017, which indicates that Microchip was the fastest growing microcontroller franchise in 2017, growing at almost 2.5 times the rate of the market."

As usual, many new products were added in the quarter. Microchip is aggressively using capital to support new, fast-growing products.

A dividend was declared of $0.3635, to stockholders of record on May 21, 2018, payable on June 4, 2018. Fiscal year 2018 dividends are taxable (in the past they were treated as return of capital).

Non-GAAP numbers: Net income was $351.3 million, up 3% sequentially from $341 million and up 21% from $276.9 million year-earlier. EPS was $1.40, up 3% sequentially from $1.36 and up 21% from $1.16 year-earlier. 61.7% gross margin. 39.5% operating margin. 8.4% tax rate.

Microcontroller revenue was $657 million, or 65.6% of overall revenue. Down 1% sequentially from $661 million. Up 12% y/y. Continues to lead in 8-bit sales, growing 16-bit and 32-bit faster than competitors.

Analog chip revenue was a record $242 million or 24.2% of overall revenue, up 4% sequentially from $232 million. Up 5% y/y. Some products were shifted to microcontroller segment. "We are experiencing a rapid expansion of our design pipeline for our analog products as our Microchip 2.0 initiatives continue to gain traction."

Memory business revenue was up 4% sequentially, and up 10% y/y.

4% sequential decrease in licensing business, up 15% y/y.

The number of parts that go into a system sold is going up 20% per year.

Book to bill ratio was "extremely healthy." Will no longer provide specific number.

Cash and investments ended at $2.20 billion, up sequentially from $1.99 billion. Cash flow from operations was $360 million. $58 million capital spend in quarter. Long term debt was about $1.76 billion. Most cash is currently offshore, but can now be brought back to the U.S. without additional tax expense. $41 million was used to purchase a building in San Jose.

GAAP cost of goods sold was $387 million, leaving gross profit of $615 million. Operating expenses of $371 million consisted of: research and development $134 million; selling, general and administrative $115 million; amortization $123 million; and special charges $0 million. Leaving operating income of $244 million. Other expense $56 million. Income tax $42 million.

Inventory ended at 112 days, below target range of 115 to 120. $476 million.

Full fiscal year 2018 revenue was $2.42 billion, with $255.4 million in GAAP net income or $1.03 EPS.

Q&A:

Addition of capacity v. lead times? Normal lead times are 4 to 8 weeks. Currently 4 to 10 weeks. We expect lead times to normalize by the end of June. Lead times from our suppliers are normal, just scattered issues here and there. Test equipment we are buying can have longish leads, but are not excessive.

Industry pricing trends? Pricing is mostly normal. No longer seeing a yearly downward price trend. We did some price increases in the past two years, but now prices are stable. We are able to reduce costs on some products and so improve gross margin. Consolidation of the industry is helping. The long lead times in the industry are in parts we don't make like capacitors.

Inventory outlook? Our inventory was lower because our sales were higher. 2 or 3 days don't make that much of a difference. It also varies by product.

Current seasonality thoughts? Last quarter we shipped some in the March quarter that might have been in the June quarter. We are seeing some feedback from customers who have issues with ZTE, delaying some shipments. We are not seeing any impact of trade tensions yet. Nothing really significant by itself, but potentially a 0.5% impact all together. But we believe our guidance is close to seasonal. It will all change again when we acquire Microsemi, which has a different seasonality.

Borrowing for Microsemi? Because of cash generation since the earlier statement, we are now down to $8 billion or so for new debt.

We don't think this situation compares to the situation in 2014, the demand change was a soft landing, not the result of combined high inventories and a real drop in demand.

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