Analyst Conference Summary

semiconductors

conference date: February 4, 2020 @ 2:00 PM Pacific Time
for quarter ending: December 30, 2019 (Q3, fiscal third quarter 2020)

Forward-looking statements

Overview: Met or exceeded midpoint of guidance. Inventories are near record lows, so believes sales will pick up.

Basic data (GAAP):

Revenues were $1.29 billion, down 4% sequentially from $1.34 billion, and down 6% from $1.37 billion in the year-earlier quarter.

Net income was $311 million, up 185% sequentially from $109 million, and way up from $49 million in the year-earlier quarter.

EPS (diluted earnings per share) were $1.20, up 179% sequentially from $0.43, and way up from $0.20 year-earlier.

Guidance:

For the March 2020 quarter (fiscal Q4), revenue is expected between $1.313 and $1.403 billion. GAAP diluted EPS $0.14 to $0.25. Non-GAAP diluted EPS $1.35 to $1.51.

Conference Highlights:

CEO Steve Sanghi said, "We experienced strong bookings activity throughout the December 2019 quarter and upwardly revised our quarterly financial guidance twice after our original guidance on November 5, 2019. End-market demand, which reflects sell-through activities in the distribution channel, was $36.1 million higher than GAAP (sell-in) revenue in the December 2019 quarter, the seventh consecutive quarter that end-market demand has exceeded sell-in revenue. As a result, distribution inventory days declined during the quarter and are at very low levels. Our March quarter backlog is significantly higher than the December quarter backlog was at the same point in the quarter." We are seeing strength in datacenters and recovery in automotive.

Ganesh Moorthy, President and COO, said "The Coronavirus situation is rapidly evolving and most Chinese provinces have extended the Chinese New Year holidays in response to the spread of the virus. We have taken preventive measures to help ensure the safety of our employees and have completed a first pass assessment of our supply chain and currently believe our risk is low. However, it is too early to determine the impact to our customers as many of them are still not back from their holidays. We continue to actively monitor the progression of the Coronavirus events and plan to take additional actions as needed"

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.

An income tax benefit of $300 million was recorded in GAAP, but not in non-GAAP, net income.

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

Identified 5G rollout, Internet of Things (IoT), datacenters, electric vehicles, advanced driver assist and autonomous driving, and AI are driving and will continue to drive explosive growth for Microchip.

A dividend was declared of $0.367, to stockholders of record on February 21, payable on March 6, 2020.

Non-GAAP numbers: Net income was $341 million, down 7% sequentially from $366 million and down 11% from $382 million year-earlier. EPS was $1.32, down 8% sequentially from $1.43 and down 15% from $1.56 year-earlier. 61.5% gross margin. 35.1% operating margin. The main difference between GAAP and non-GAAP results was a $300 million tax benefit. Share based comp was $ million.

Microcontrollers represented 53.6% of total end market demand. Down 1% sequentially.

Analog chips represented 28.1% of overall end market demand. Sequentially down 4%.

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

FPGA 6.9% of total revenue. Flat 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 $402 million, down sequentially from $405 million. Cash flow from operations was $396 million. $14 million capital spend in quarter. Long term debt was about $8.18 billion. $257 million of debt was paid down in the quarter. $88 million used for dividends. $41 million depreciation.

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

GAAP cost of goods sold was $502 million, leaving gross profit of $786 million. Operating expenses of $654 million consisted of: research and development $217 million; selling, general and administrative $171 million; amortization $249 million; and special charge $18 million. Leaving operating income of $131 million. Other expense $121 million. Income tax benefit $301 million.

Q&A summary:

Lead times? We built inventory in our die bank during the down cycle. So we can use that now. Customers are trying to delay orders into the following quarter, or expedite them in if they need to.

Distributors in March quarter? Difference from peers? We don't know if they are still taking down inventory. No guidance on sell-through, just sell in. At some point distributors will start rebuilding, we thought it would happen in December quarter, it did not. We manage our business based on sell-through, peers tend to use sell-in. Our low lead time allow distributors to keep a low inventory.

Microcontroller share, competition? We don't know yet, should by April. Nothing indicates the first half was better than the second half.

Margins going forward? In the quarter we had a $16 million factory utilization charge, higher than prior quarter and probably higher than this quarter. We continue to bring some of what we outsource to in house.

Microsemi restructuring contribution? We think our margin model is conservative. We have confidence in long-term models for 40% operating margin.

Geographic markets? Communication and appliance markets remain weak. We saw strength in China last quarter, but will be weaker this quarter because of the Lunar New Year and perhaps the coronavirus.

Cash use once 3x ratio? We do not know how you concluded we could get to 3x in 4 quarters. We want it below that, then will still be generating substantial free cash flow. We have not decided yet, could increase dividend or start buy backs, or do another M&A, though we don't see a specific opportunity right now. In the March quarter we expect to pay down $225 to $250 million of our debt. If the top line grows that will help with the leverage metrics.

MicroSemi revenue leverage? We did not have the same pricing issues at MicroSemi as we had at Atmel. The products are sticky, the margins should stay high, and revenues should stay high. We are looking at taking MicroSemi products into end markets they were not strong in. We have done a lot of work, we have not seen all the results yet, they should show up as the environment strengthens.

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