Analyst Conference Summary

semiconductors

conference date: May 8, 2019 @ 5:30 AM Pacific Time
for quarter ending: March 31, 2019 (Q4, fiscal fourth quarter 2019)

Forward-looking statements

Overview: Middling quarter, in guidance range.

Basic data (GAAP):

Revenues were $1.33 billion, down 4% sequentially from $1.38 billion, and up 33% from $1.00 billion in the year-earlier quarter.

Net income was $175 million, up 257% sequentially from $49 million, but up 19% from $147 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.70, up 250% sequentially from $0.20, and up 21% from $0.58 year-earlier.

Guidance:

Due to uncertainty over tariffs, Microchip expects weaker than seasonal business conditions for the June quarter (Q1 fiscal 2020). Believes that end market demand will continue to be stronger that GAAP sell-in revenue in the June quarter, and the channel and customer inventory will continue to decrease. Still, expects net sales for our products to be about flat sequentially plus or minus five percent in the June 2019 quarter.

For Q1 fiscal 2020 revenue could range from $1.26 to $1.40 billion. Dilutes EPS range is GAAP $0.07 to $0.27; non-GAAP $1.26 to $1.49.

Conference Highlights:

CEO Steve Sanghi said, "Our net sales came in above the mid-point of our narrowed guidance range that we issued on March 5, 2019. Our operating margins were well above the high-end of our guidance, reflecting the strength of our business model. End-market demand, which reflects sell-through activities in the distribution channel, was $10.4 million higher than GAAP (sell-in) revenue in the March 2019 quarter. As a result, distribution inventory declined from 36 days to 35 days. We believe that barring any negative development on the U.S. China trade front, our distributors are carrying a reasonable level of inventory to support end-market demand." Expects to pay down another $250 million in debt in the June quarter. Negative trade talk rhetoric has increased uncertainty and undermined demand.

Ganesh Moorthy, President and COO, said "Last month Gartner reported their microcontroller market share data for calendar year 2018. We are pleased to report that we expanded our market share in 8-bit, 16-bit and 32-bit microcontrollers and grew faster in all three product categories when compared to our large competitors in these markets. Microchip maintained its number one position in 8-bit segment."

Integration of Microsemi continues to go well.

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

Operating expenses were at the low end of guidance, so operating margin was at the high end of guidance. Accounts receivable increased due to an accounting classification adjustment. 128 days of inventory.

A dividend was declared of $0.3655, to stockholders of record on May 21, 2019, payable on June 4, 2019.

Non-GAAP numbers: Net income was $370.4 million, down 9% sequentially from $405.6 million and up 5% from $351 million year-earlier. EPS was $1.48, down 11% sequentially from $1.66 and up 6% from $1.40 year-earlier. 62.2% gross margin. 36.4% operating margin.

Microcontrollers represented 53.3% of total end market demand. End demand was down 4.6% sequentially. But up 8.6% y/y.

Analog chips represented 29% of overall demand. Demand down 5.8% sequentially. Demand up 60.2% y/y.

Memory business demand was up 3.8% sequentially.

Licensing business demand down 43% sequentially due to industry conditions and lack of patent license revenue in the quarter.

FPGA demand down 5% sequentially. 7% of total revenue.

MMO (multi-market and other) segment demand up 3.5% sequentially.

Cash and investments ended at $431 million, down sequentially from $436 million. Cash flow from operations was $404 million. $40 million capital spend in quarter. Long term debt was about $8.95 billion. $278 million of debt was paid down in the quarter. $87 million used for dividends.

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

GAAP cost of goods sold was $509 million, leaving gross profit of $821 million. Operating expenses of $536 million consisted of: research and development $215 million; selling, general and administrative $168 million; amortization $177 million; and special income $23 million. Leaving operating income of $285 million. Other expense $133 million. Income tax benefit $24 million.

For the full fiscal year 2019 sales were $5.35 billion. GAAP net income $356 million, EPS diluted $1.42. Non-GAAP net income $1.64 billion, EPS $6.55 per diluted share.

Q&A summary:

Seasonality by quarter, given the new businesses? We have not had enough experience since acquiring Microsemi, plus the trade fight, so history is not a good guide, and we are not predicting future seasonality.

Lower cap ex spending in current fiscal year? $130 to $150 million for fiscal 20, down from 2019 largely because we had some building projects then. Long term, 3% to 4% of sales, with some peaks and valleys.

Pessimistic tone compared to 3 months ago? What changed was the tone on the US - China trade front. Our guidance would be narrower and more positive at the midpoint if not for that. Last quarter the trade resolution was supposed to be done by March 1, then delayed to May 1, now delayed again.

Backlog trends? Uncertainty in our 2 largest markets, US and China, means just looking at the backlog is not enough. Our April 1 backlog was below January 1. However, bookings turned stronger since the beginning of this quarter. Suppliers do not know if their customers will accept a 25% tariff increase. Lead times have decreased significantly, giving customers more flexibility.

Drivers of outperforming on market share? We did better selling Atmel microprocessors.

Negative sentiment based on such a recent Trump statement? It is hard to predict, it leads to a large range in guidance. It is difficult to predict negative customer behavior. The world economy largely runs on building to forecast. If customers don't know end demand for products, they build less, only for hard orders. You have heard washers and dryer prices went up 20%, it is hard to know how much to stock, and almost everything contains microprocessors now.

No, we have seen no impact to orders in the last two days. But we did see impacts from the trade negotiation delays going back to March 1.

We do not break out the MicroSemi contribution, but we are ahead of schedule.

Our gross margin is very good, particularly for the bottom of a cycle.

Still looking for a pickup in the back half of the year? Three possibilities. Worst is trade talks break down and tariffs go up. Best case is issues are resolved and tariffs come down. Middle is a settlement, but not as good as the US wants. Finality is positive for the business.

How are you taking 8-bit share? I don't want to tell my competitors how I am taking share. But continuing to innovate is important even in 8-bit market.

If we look at China overall we are seeing stronger bookings. That may be helped by the lower VAT tax that went into effect on April 1, but it may not be enough time yet for us to measure.

Longer term we would like to see the inventory down to 120 days, but we believe inventories and customers and distributors is thin, so we are not looking to lower our inventory at the moment.

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