Analyst Conference Summary

semiconductors

conference date: August 6, 2019 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2019 (Q1, fiscal first quarter 2020)

Forward-looking statements

Overview: Revenue came in just below the midpoint of the guidance range.

Basic data (GAAP):

Revenues were $1.32 billion, down 1% sequentially from $1.33 billion, and up 9% from $1.21 billion in the year-earlier quarter.

Net income was $51 million, down 71% sequentially from $175 million, but up 42% from $36 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.20, down 71% sequentially from $0.70, and up 43% from $0.14 year-earlier.

Guidance:

For fiscal Q2 2020 (ending in September) Microchip expects revenue between $1.32 and $1.38 billion. On a GAAP basis, diluted EPS of $0.13 to $0.23; non-GAAP $1.37 to $1.49.

Conference Highlights:

CEO Steve Sanghi said, "Our June quarter financial results were better than we expected in spite of a challenging economic environment. Our net sales were 0.5% below the midpoint of our May 7, 2019 guidance and were adversely impacted by the Huawei shipment restrictions that were announced after our guidance was provided to investors. Historically, Huawei has represented between 1% and 2% of our net sales. End-market demand, which reflects sell-through activities in the distribution channel, was $27.1 million higher than GAAP (sell-in) revenue in the June 2019 quarter, and was up 0.7% sequentially compared to the March 2019 quarter. As a result, distribution inventory days declined from 35 to 32 days. Our commentary in our February 2019 earnings conference call that the March 2019 quarter would mark the bottom of the current semiconductor cycle for Microchip on an end-market demand basis is proving to be correct."

Ganesh Moorthy, President and COO, said "The end-market demand for our microcontroller business was up 1.8% and for our FPGA business was up 7% compared to the March 2019 quarter. Our FPGA business set an all-time quarterly record with almost $101 million in end-market demand. Design wins on our new, low power, mid-range PolarFire family continued to grow strongly, and we are optimistic about this product family adding another leg to our future growth."

There is continued uncertainty in the economic environment, specifically as it relates to U.S. and China trade tensions. Microchip is seeing a stabilization in bookings activity and the backlog for the September 2019 quarter is higher than the backlog was for the June 2019 quarter at a similar point in time. Based on the multi-quarter inventory correction seen at distributors and end customers, expects some growth to resume despite a very challenging business environment.

$1.35 billion end market demand in the quarter. Distributors are holding a reasonable inventory level. Business conditions in Europe are weak.

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

Huawie exposure is 1% to 2% of total end-market demand. Stopped all shipments in May. A month later, resumed shipping several products, but in some cases Huawei did not want these products because they could not complete the bill of materials. Without the Huawei ban would have met high end of guidance for the quarter.

A dividend was declared of $0.366, to stockholders of record on August 21, 2019, payable on September 4, 2019.

Non-GAAP numbers: Net income was $357.6 million, down 3% sequentially from $370.4 million and down 12% from $405.8 million year-earlier. EPS was $1.41, down 5% sequentially from $1.48 and down 12% from $1.61 year-earlier. 62.0% gross margin. 36.2% operating margin.

Microcontrollers represented 53.8% of total end market demand. End demand was up 1.8% sequentially. 25 billionth microcontroller shipped.

Analog chips represented 28.5% of overall demand. Demand down 0.7% sequentially. Demand up % y/y.

Licensing, memory and MMO segment demand down 4.9% sequentially due to industry conditions. 10.2% of total end market demand.

FPGA 7.5% of total revenue, to $101 million. Demand up 7% sequentially to a record. Strong design wins.

Cash and investments ended at $437 million, up sequentially from $431 million. Cash flow from operations was $ million. $23 million capital spend in quarter. Long term debt was about $8.71 billion. $257 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 $507 million, leaving gross profit of $815 million. Operating expenses of $644 million consisted of: research and development $219 million; selling, general and administrative $168 million; amortization $249 million; and special income $8 million. Leaving operating income of $172 million. Other expense $131 million. Income tax benefit $10 million.

Q&A summary:

September quarter trends for China and EU? Should be reasonably similar. September quarter is usually strong in China. EU should be weakest.

Reduction of days of inventory at distributors? 27 to 47 is the full range over 10 years. We don't think it will go much lower than we see at present. It could fluctuate by a day or two from here.

Outlook, specific products? We tend to be earlier in the cycles than other companies. We have been reducing inventory for about a year. The backlog is now up, that is what implies optimism.

Receivables up sequentially? There is no reclassification, it is just timing, it should correct over time.

Cap ex lower than in the past? In FY 2019 we put capital in place for an expansion that did not happen. So we could reduce for this year. 3% to 4% is the normal range over time.

Savings remaining for MicroSemi acquisition? First year was $0.75 per share, we exceeded that target. 3 year target was $1.75 from op ex, cogs, and sales growth. We are 5 quarters in, ahead on targets except for revenue, which is because of the environment.

Pricing environment? Pricing has held up better than in previous business cycles. 95% of what we make is proprietary, which protects us. We compete for pricing at the design desk, not the buyer desk.

Variable rate debt? Two pieces $3.197 billion revolving line, $1.724 billion term loan. We are getting a benefit from the lower interest rate, but the main benefit comes from paying down the debt, which we are rapidly doing.

Customer reactions to silicon carbide products has been very positive, including in automotive. Our products are very robust, there is a high interest in the product line, but we are just starting to get designed in.

We had a security incident we are remediating, it was disclosed in our May 10K.

Possible shift because of trade war? We could see competition at the low end, but companies are moving production out of China, so we think it will be a wash. Our industry is innovative and will do well.

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