Analyst Conference Summary

semiconductors

conference date: May 7, 2020 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2020 (Q4, fiscal fourth quarter 2020)

Forward-looking statements

Overview: Slightly above latest guidance.

Basic data (GAAP):

Revenue was $1.33 billion, up 3% sequentially from $1.29 billion, and flat from $1.33 billion in the year-earlier quarter.

Net income was $100 million, down 68% sequentially from $311 million, and down 43% from $175 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.39, down 67% sequentially from $1.20, and down 44% from $0.70 year-earlier.

Guidance:

For the June quarter revenue estimated between $1.19 and $1.30 billion. GAAP diluted EPS $0.13 to $0.31. Non-GAAP diluted EPS $1.25 to $1.45. Inventory days expected to be in the range of 116 to 130 days, compared to 122 days at March 31, 2020. Capital expenditures $12 to $18 million.

Conference Highlights:

CEO Steve Sanghi said, "Despite the COVID-19 pandemic challenges, we delivered 3% sequential net sales growth compared to our early March updated guidance which was for net sales to be about flat. We also delivered outstanding non-GAAP gross margin of 62% and operating margin of 36.6%, while reducing our days of inventory from 129 days to 122 days. We believe our inventory is well-positioned to serve the needs of our customers."

Sanghi said "Microchip's book-to-bill ratio in the March quarter was very strong at 1.17. Although our backlog for the June quarter started out much higher than the opening backlog for the March quarter, we have seen a combination of deteriorating bookings, customer pushout of orders and cancellations since the middle of April. We believe our backlog position for the June quarter will continue to deteriorate compared to the March quarter due to the combined effect of supply chain disruptions, customer factory closures and demand destruction. Taking these factors into consideration, we expect our net sales in the June quarter to be down between 2% and 10% sequentially.

Ganesh Moorthy, President and COO, said "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 their respective markets. From an end-market demand standpoint, our 32-bit microcontrollers in the March quarter represented an all-time record of just over $340 million, or about 47% of our microcontroller end market demand. Our microcontroller portfolio and roadmap have never been stronger,"

Data storage segment demands continues to appear insatiable. Medical device segment is also stong. Some specific consumer devices are also strong. But automotive, home appliances, and aerospace have been weak.

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

A dividend was declared of $0.3675, to stockholders of record on May 21, payable on June 4, 2020.

Non-GAAP numbers: Net income was $376 million, up 10% sequentially from $341 million and up 2% from $370.4 million year-earlier. EPS was $1.46, up 11% sequentially from $1.32 and down 1% from $1.48 year-earlier. 62.0% gross margin. 36.6% operating margin. The main difference between GAAP and non-GAAP results was a $249 million in amortization of acquired intangible assets. Share based comp was $41 million.

Microcontrollers represented 55.2% of total end market demand. Revenue up 5.9 % sequentially. 32-bit was record over $340 million, of 47% of demand. For 2019, per Gartner, maintained number 1 position in 8-bit chips. In 16 bit remained at number 5 and gained market share. In 32-bit remained at number 6 and gained market share. Number 3 overall.

Analog chips represented 27.6% of overall end market demand. Sequentially up 1.1%.

Licensing, memory and MMO segment was 10.1% of total end market demand. Down 10.7% sequentially from strength in licensing.

FPGA 7% of total demand. Up 4.6% sequentially.

Cash and investments ended at $403 million, near flat sequentially from $402 million. Cash flow from operations was $372 million. $12 million capital spend in quarter. Long term debt was about $8.9 billion. $236 million of debt was paid down in the quarter. $88 million used for dividends. $42 million depreciation.

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

GAAP cost of goods sold was $513 million, leaving gross profit of $814 million. Operating expenses of $653 million consisted of: research and development $222 million; selling, general and administrative $166 million; amortization $249 million; and special charge $17 million. Leaving operating income of $161 million. Other expense $115 million. Income tax benefit $54 million.

Q&A summary:

Downturn expectations? Total Systems Solutions has helped us gain customers. It is a unique cycle. We have never seen a combined demand and supply shock. We had some factories unable to produce because the workers were out. Auto sector is particularly bad, but is starting to come back. We found that all the ventilator designs around the world use our product, same on digital thermometers, auto soap dispensers. We started the June quarter with a fairly stong backlog, but it is deteriorating, with customers pushing out or canceling.

Gross margisn? They held up well. We have been running factories at under optimal levels. Favorable product mix helped, but we are also cutting what costs we can. They will be down in the current quarter. We are keeping inventory low for now.

We are looking for any products that go into Chinese military products, but do not think that will have a significant impact.

We could lose much more sales and be cash flow positive, so the dividend should not be at risk. We are still increasing the dividend slightly every quarter. We have been acting as if headed for a Category 6 storm. So we think we are ready, including the pay cuts we announced. If it is not that bad, we can reinstate the pay.

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