Analyst Conference Summary

semiconductors

conference date: August 9, 2018 @ 2:00 AM Pacific Time
for quarter ending: June 30, 2018 (Q1, fiscal first quarter 2019)

Forward-looking statements

Overview: record sales, super growth. Non-GAAP EPS a record $1.61.

Basic data (GAAP):

Revenues were $1.21 billion, up 21% sequentially from $1.002 billion, and up 25% from $0.97 billion in the year-earlier quarter.

Net income was $35.7 million, down 76% sequentially from $146.7 million, and down 79% from $170.6 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.14, down 76% sequentially from $0.58, and down 80% from $0.70 year-earlier.

GAAP numbers were adversely impacted by $227 million in charges related to the Microsemi acquisition.

Guidance:

"Based on anticipated end-market demand, we expect our non-GAAP total net sales in the September 2018 quarter to be between $1.474 billion and $1.550 billion. Our non-GAAP earnings per share are expected to be between $1.65 and $1.83." Capital expenditures about $70 million.

Conference Highlights:

Microsemi acquisition was completed May 29, 2018.

CEO Steve Sanghi said, "Our non-GAAP net sales came in above the mid-point of our guidance that we issued on May 31, 2018, resulting in record non-GAAP net income and earnings per share. Since our acquisition of Microsemi Corporation on May 29, 2018, we have been actively engaged in further understanding the opportunities and challenges of this business." However, new GAAP accounting standards required Microchip to recognize revenue a the time products are sold to distributors. Previously it was only recognized when sold to end customers.

Ganesh Moorthy, President and COO, said "Our microcontroller business excluding Microsemi, as well as our analog business excluding Microsemi, both set new records in the June quarter."

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 $0.364, to stockholders of record on August 21, 2018, payable on September 4, 2018.

Non-GAAP numbers: Net income was $405.8 million, up 16% sequentially from $351.3 million and up 27% from $319.1 million year-earlier. EPS was $1.61, up 15% sequentially from $1.40 and up 23% from $1.31 year-earlier. 62.2% gross margin. 38.9% operating margin.

Microcontroller revenue was $728.6 million, or 60.2% of overall revenue. Up 11% sequentially from $657 million. Up % y/y. Record 8-bit and 32-bit sales.

Analog chip revenue was a record $328.5 million or 27.1% of overall revenue, up 35% sequentially from $242 million. Up % y/y.

Memory business revenue was up down 1.8% sequentially, and up % y/y.

0.2% sequential decrease in licensing business, but up 6% y/y. 2.2% of total revenue.

FPGA (new category) 3.4% of total revenue.

Lead times are near normal. Microsemi had excessive inventory at distributors, which will be cut back, affecting revenue for the next two quarters. Microsemi also had luxury expenses that were wasting shareholder money.

Cash and investments ended at $650 million, down sequentially from $2.20 billion, due to the Microsemi acquisition. Cash flow from operations was $302.4 million. $ million capital spend in quarter. Long term debt was about $10 billion. Most cash is currently offshore, but can now be brought back to the U.S. without additional tax expense. Plans to use cash flow to reduce debt.

GAAP cost of goods sold was $570.5 million, leaving gross profit of $642.0 million. Operating expenses of $509.7 million consisted of: research and development $171.9 million; selling, general and administrative $164.0 million; amortization $133.7 million; and special charges $40.1 million. Leaving operating income of $132.3 million. Other expense $94.6 million. Income tax $2.0 million.

Hopes for reduction in expenses as Microsemi is integrated. Also sales synergy.

Seeing some impact from customers becoming conservative due to uncertainty over tariffs.

$8 per share non-GAAP EPS for fiscal year 2021 now seems conservative.

Q&A:

Topline guidance, does it assume a slowdown in organic business? We are not breaking it out. The bitcoin exposure is mainly on the Microchip side. Tariff nervousness could affect both, but most of the correction is from Microsemi.

Microsemi margins were lower than Microchip, partly because they had just acquired a company, Vectron, with even lower margins. We only had one month of Microsemi in the last quarter, will be a full quarter next time.

Might you divest Vectron? We think of it, but we only divested a tiny bit of Atmel. We prefer to fix poorly run assets within acquisitions.

Our core microcontroller business does not have any problems. We have no control over what the effects of a trade war would be. We had a small business with ZTE, Microsemi had more, all toll it is a less than 1% customer. Bitcoin was less that 1% for us, but it is down 70%.

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