Analyst Conference Summary

semiconductors

conference date: November 5, 2019 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2019 (Q2, fiscal second quarter 2020)

Forward-looking statements

Overview: Revenue below midpoint of guidance. Non-GAAP EPS at midpoint of guidance. December quarter guidance is weak.

Basic data (GAAP):

Revenues were $1.34 billion, up 1% sequentially from $1.32 billion, but down 7% from $1.43 billion in the year-earlier quarter.

Net income was $109 million, up 114% sequentially from $51 million, but up 14% from $96 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.43, up 115% sequentially from $0.20, and up 13% from $0.38 year-earlier.

Guidance:

Q3 fiscal 2020 guidance: sales $1.204 to $1.311 billion. Gross margins 40.5% to 60.9% GAAP, 61.0% to 62.4% non-GAAP. Non-GAAP net income $286.7 to $348.3 million. EPS (diluted): GAAP ($0.11) to $0.17; non-GAAP $1.12 to $1.32.

Conference Highlights:

CEO Steve Sanghi said, "There is continued uncertainty in the economic environment, specifically as it relates to the U.S. and China trade dispute and hence we had limited backlog visibility from our customers and distributors to start the quarter. However, although we started the December quarter with much lower backlog than the September quarter, October bookings were the highest since June 2018, and the backlog for the quarter is filling at a much steeper rate. While we estimate our net sales in the December 2019 quarter to be down between 2% and 10% sequentially, there are early signs that we may be at a positive inflexion point." Inventory at disributors declined to 30 days, which is very low.

Ganesh Moorthy, President and COO, said ""The integration of Microsemi with Microchip continues to progress well. On the business systems front, we went live with a few more systems on November 1, 2019. We are pleased with the synergies we have achieved since we closed the acquisition despite the weaker macro-economic environment over the past several quarters."

Microchip will continue to use substantially all of its excess cash generation after dividends to reduce the amount of debt on our balance sheet as quickly as possible.

$1.346 billion end market demand in the quarter. Uncertainty has spread from US v. China to global. September was particularly weak. Industrial, automotive and consumer markets have been down. But bookings for the month of October were strong.

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 dividend was declared of $0.3665, to stockholders of record on November 21, 2019, payable on December 5, 2019.

Non-GAAP numbers: Net income was $366 million, up 2% sequentially from $358 million and down 8% from $399 million year-earlier. EPS was $1.43, up 1% sequentially from $1.41 and down 9% from $1.58 year-earlier. 62.2% gross margin. 36.7% operating margin. The main difference between GAAP and non-GAAP results was $248 million amortization of acquired assets excluded. Share based comp was $45 million.

Microcontrollers represented 53.3% of total end market demand. Down 1.3% sequentially.

Analog chips represented 28.7% of overall end market demand. Sequentially up 0.2%.

Licensing, memory and MMO segment was 11.2 of total end market demand. Up 10.5% sequentially from strength in licensing.

FPGA 6.8% of total revenue. Down 8.9% sequentially.

In September completed acquisition of two small companies, one FPGA, the other digital gate driver solutions. Total cash used was under $6 million.

Cash and investments ended at $405 million, down sequentially from $437 million. Cash flow from operations was $396 million. $18 million capital spend in quarter. Long term debt was about $8.4 billion. $316 million of debt was paid down in the quarter. $87 million used for dividends. $40 million depreciation.

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

GAAP cost of goods sold was $510 million, leaving gross profit of $828 million. Operating expenses of $644 million consisted of: research and development $220 million; selling, general and administrative $172 million; amortization $248 million; and special income $4 million. Leaving operating income of $184 million. Other expense $130 million. Income tax benefit $55 million.

Q&A summary:

December sell-in, sell-through expectations? End demand is declining. Automotive end demand is declining as less units are produced. Similar in home appliances.

Inflection point giving declining end demand? The starting backlog was weak. We have closed some of that since the quarter began. If that continues, we will hit guidance, but still be below last quarter. October 2019 bookings were strongest since June 2018. There is the issue of timing from booking to revenue recognition.

What is normal in the March quarter? It is changing because our end market mix has changed, notably from MicroSemi customers, and the environment has not been normal.

It is just a very confusing environment, largely due to tariffs destroying demand. Plus you have the Hauwei and other company bans. It is hard to make quarter by quarter predictions.

Feedback from distributors? Demand destruction is more severe than longer term trends. One would think inventory would not go down further, but distributors do not have confidence. Our lead times are generally short, so they have room.

November so far looks like strong bookings.

We are about half way through getting savings from the MicroSemi acquisition.

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