Analyst Conference Summary

semiconductors

conference date: February 5, 2019 @ 2:00 PM Pacific Time
for quarter ending: December 31 2018 (Q3, fiscal third quarter 2019)

Forward-looking statements

Overview: Revenue and non-GAAP profits continue rapid y/y ramp.

Basic data (GAAP):

Revenues were $1.38 billion, down 4% sequentially from $1.43 billion, and up 38% from $0.99 billion in the year-earlier quarter.

Net income was $49.2 million, down 49% sequentially from $96.3 million, but up from negative $251 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.20, down 47% sequentially from $0.38, and up from negative $1.07 year-earlier.

Guidance:

For fiscal Q4 2019, ending March 31, revenue is expected between $1.25 and $1.40 billion. Net income GAAP $43.6 to $103.9 million; non-GAAP $311 to $385 million. EPS diluted GAAP $0.18 to $0.41; non-GAAP $1.26 to $1.53.

Conference Highlights:

CEO Steve Sanghi said, "Microchip, the semiconductor industry and the global economy have experienced a soft business environment from a variety of factors including trade tensions between the U.S. and China. We continue to be cautious about the outlook for the March quarter. . . Our guidance for the December quarter turned out to be spot on." Believes the March quarter will be the bottom of this cycle, barring unforseen developments.

Ganesh Moorthy, President and COO, said "The integration of Microsemi with Microchip continues to progress at a rapid pace. We are achieving synergies in the business units, sales, operations and support functions, while we relentlessly march toward the synergy targets we have outlined for our stockholders."

After talks with the SEC will now call End Market Demand what used to be called non-GAAP revenue, which is distribution sell through. GAAP income is sell into distribution. But will use GAAP for revenue when calculating non-GAAP measures like net income, margins, and EPS.

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

Microchip achieved record non-GAAP operating profit percentage for the Microsemi business. The accretion run rate from the Microsemi transaction already exceeds the 75 cents per share annualized run rate which was the initial guidance for one year after the acquisition date.

A dividend was declared of $0.365, to stockholders of record on February 21, 2019, payable on March 7, 2019.

Non-GAAP numbers: Revenue $1.42 billion [now called End Market Demand], up almost 43% from $.99 billion year-earlier. Net income was $405.6 million, down 11% sequentially from $454.6 million and up 19% from $341.2 million year-earlier. EPS was $1.66, down 8% sequentially from $1.81 and up 22% from $1.36 year-earlier. 62.2% gross margin. 37.4% operating margin.

Microcontroller non-GAAP revenue was $748.4 million, or 53% of overall revenue. Down 9% sequentially from $820 million but up 13% y/y. Second full quarter of contribution from Microsemi. Over 2 quarters $1.2 billion annual run rate for the 32-bit segment.

Analog chip revenue was $411.8 million or 29% of overall revenue, down 6% sequentially from $439 million. Revenue up 78% y/y.

Memory business revenue was $(not stated) million down 15% sequentially.

Licensing business revenue $(not stated) million up 8% sequentially. But expects to drop in March quarter; it is a lumpy business.

FPGA revenue $99.2 million, a record and up 9% sequentially. 7% of total revenue.

MMO (multi-market and other) segment revenue $(not stated) million, down 3% sequentially.

Cash and investments ended at $436 million, down sequentially from $464 million. Cash flow from operations was $481 million. $27 million capital spend in quarter. Long term debt was about $10.5 billion. $377 million of debt was paid down in the quarter. 123 days of inventory.

Microchip plans to use most cash flow, above dividend payments, to pay down debt.

GAAP cost of goods sold was $595 million, leaving gross profit of $780 million. Operating expenses of $585 million consisted of: research and development $218 million; selling, general and administrative $175 million; amortization $194 million; and special income $1 million. Leaving operating income of $195 million. Other expense $140 million. Income tax $6 million.

Q&A summary:

Details on why you are calling March the bottom? We look at bookings and billings, distribution, cancellations, etc. We have 120,000 end customers in a variety of industries. We don't see things getting worse unless something negative happens on the trade front.

2019 to date? Business is tracking to the guidance we are giving. Really not enough time to make calls based on it.

Sell in v. sell through? We don't have a good way to predict that. We feel inventory is appropriate for the situation. Our guidance has a very broad range for a reason.

In the reported quarter we did have a good product mix that helped margins.

Reason for FPGA record revenue? We have a variety of new products that are selling well. It is a stable, solid business that we can build on.

We have seen broad based weakness, including automotive, industrial, and datacenter. Aerospace and Defense was okay, but slight effects from the government shutdown, vs. the usual end of the year budget flush.

A settlement of trade issues would be "a bonanza" for Microchip. Our customers are very cautious about their inventories. "We are shipping well below consumption."

The range of guidance is partly demand uncertainty, partly changing to using the new GAAP standard.

Confidence in March bottom is partly based on June quarter orders.

Free cash flow available for debt payment in March? $175 to $225 million, lower than the last 2 quarters. Believes it will get better in future quarters.

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