Analyst Conference Summary

semiconductors

conference date: November 7, 2018 @ 2:00 AM Pacific Time
for quarter ending: September 30, 2018 (Q2, fiscal second quarter 2019)

Forward-looking statements

Overview: revenue and non-GAAP profits continue rapid ramp

Basic data (GAAP):

Revenues were $1.43 billion, up 18% sequentially from $1.21 billion, and up 41.5% from $1.01 billion in the year-earlier quarter.

Net income was $96.3 million, up 170% sequentially from $35.7 million, but down 49% from $189.2 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.38, up 171% sequentially from $0.14, and down 51% from $0.77 year-earlier.

Guidance:

"We continue to be cautious about the outlook for the December quarter, and based on anticipated end-market demand, we expect our non-GAAP total net sales in the December 2018 quarter to be between $1.362 billion and $1.438 billion. Our non-GAAP earnings per share are expected to be between $1.49 and $1.64." Non-GAAP net income $358.2 to $404.0 million. Gross margin 61.0% to 61.5%. Cap ex about $50 million. Is not giving GAAP guidance due to difficulties with acquisition accounting.

Conference Highlights:

CEO Steve Sanghi said, "Our September quarter financial results were very good. Our non-GAAP net sales came in above the mid-point of our guidance that we issued on August 9, 2018, resulting in record non-GAAP operating income, net income, and earnings per share. During the September quarter we made significant progress in correcting the excess inventory in the Microsemi distribution channel down to about 2.6 months. We believe that at the current levels distributors are holding the amount of inventory needed to support end market demand and that the inventory levels are in line with the levels maintained by our distributors for our historical business."

Ganesh Moorthy, President and COO, said "In the September 2018 quarter, non-GAAP net sales for each of our microcontroller, analog, licensing and FPGA product lines achieved all-time records." Microsemi integration is progressing rapidly. Synergies are being achieved, but completion may take two more years.

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

Microsemi acquisition was completed May 29, 2018. Per GAAP regulations, revenue is now recorded when shipments are made to distributors, rather than when shipped to final customer. The non-GAAP revenue is based on sell-through, the GAAP on sell-in to distributors.

A dividend was declared of $0.3645, to stockholders of record on November 21, 2018, payable on December 5, 2018.

Non-GAAP numbers: Revenue $1.51 billion, up almost 50% from $1.01 billion year-earlier. Net income was $454.6 million, up 12% sequentially from $405.8 million and up 32% from $344.1 million year-earlier. EPS was $1.81, up 12% sequentially from $1.61 and up 28% from $1.41 year-earlier. 61.7% gross margin. 38.3% operating margin.

Microcontroller non-GAAP revenue was $820 million, or 54% of overall revenue. Up 12% sequentially from $728.6 million. Benefited from a full quarter contribution from Microsemi.

Analog chip revenue was a record $439 million or 29% of overall revenue, up 34% sequentially from $328.5 million. Benefitted from a full quarter contribution from Microsemi.

Memory business revenue was $47 million.

Licensing business revenue $37 million. Monetizing certain patents that were acquired.

FPGA revenue $91 million. 6% of total revenue.

MMO (multi-market and other) segment revenue $79 million

Cash and investments ended at $464 million, down sequentially from $650 million. Cash flow from operations was $487.6 million. $72 million capital spend in quarter. Long term debt was about $10.8 billion. Paid down $501 million of debt in the quarter.

GAAP cost of goods sold was $743 million, leaving gross profit of $689 million. Operating expenses of $587 million consisted of: research and development $222 million; selling, general and administrative $177 million; amortization $170 million; and special charges $18 million. Leaving operating income of $103 million. Other expense $142 million. Income tax benefit $136 million.

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

Saw a significant impact in the quarter due to customer concerns about tariffs, also still some issues with shipments to ZTE, and bitcoin chip demand has gone to near zero.

Q&A summary:

End market details? Autos impacted by new emission standard in Europe. There was a testing bottleneck at end customers. China automotive market has been weak. In the industrial segment the concern is tariffs, customers worry about price competitiveness. Datacenter, communication, and defense are still growing.

We started to see impacts in June, so we guided to weaker September quarter. We tend to talk about the industry about four months earlier than other companies, but we also talk about coming out of a downturn earlier. We are not ready to talk about that yet.

We will continue to use substantially all of our cash generation, after dividends, to pay down debt.

We do not fully understand Microsemi's seasonality yet, so it is hard to predict March 2019 seasonality.

Consumer business? We include that in industrial, house appliances, they were weak.

Any design changes in China to avoid U.S. chips? Talk about it, but have not seen in reality. A lot of our business is proprietary, there are no China parts that can replace ours. The tariff impact on our products directly is small, it is more their concern about the end sales of their products. A Chinese chip in a product would not evaid a tariff coming into the U.S.

March op ex will be down, as we reduce Microsemi expenses.

PRoduction plan? We already cut back production, our inventory is good, production going forward would depend on demand.

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