Analyst Conference Summary

semiconductors

conference date: August 8, 2020 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2020 (Q1, fiscal first quarter 2021)

Forward-looking statements

Overview: Slightly above latest guidance, but weak guidance for next quarter.

Basic data (GAAP):

Revenue was $1.31 billion, down 1% sequentially from $1.33 billion, and down 1% from $1.32 billion in the year-earlier quarter.

Net income was $124 million, up 24% sequentially from $100 million, and up 143% from $51 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.48, up 23% sequentially from $0.39, and up 140% from $0.20 year-earlier.

Guidance:

Expects net sales in the September quarter to be flat to down 8% sequentially, or $1.205 to $1.31 billion. GAAP EPS of $0.17 to $0.37, non-GAAP EPS of $1.30 to $1.52. Cap ex about $15 million.

Conference Highlights:

The order backlog entering the September quarter was significantly below the backlog entering the June quarter.

CEO Sanghi said "Our global team all came together in the middle of a global pandemic, while working on a pay cut, and delivered superb performance during the quarter. I am proud of how rapidly the Microchip team adapted to the new constraints we faced so that our employees would be safe, our customers could be well served and our supply chain partners engaged to achieve mutual success despite the challenges we faced. Despite the COVID-19 pandemic, we delivered $1.31 billion of net sales which was down 1.3% on a sequential basis compared to our early June updated guidance which was for net sales to be about flat to down 6%. We also reduced our days of inventory from 122 days to 117 days. We believe our inventory is well-positioned to serve the needs of our customers and is within our publicly-stated inventory target of 115 to 120 days."

Ganesh Moorthy, President and COO, said "Medical devices necessary to treat COVID-19 patients in addition to a host of other hospital equipment needed to support increased patient loads were also strong in the quarter. Our Automotive business was very weak, particularly in April and May due to the widespread factory shutdowns, but we are starting to see some improvement in this portion of our business. As we progressed through May and June, we experienced many short lead time orders from customers due to a variety of factors. "

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 $0.368, to stockholders of record on August 21, payable on September 4, 2020.

Non-GAAP numbers: Net income was $402 million, up 7% sequentially from $376 million and up 12% from $358 million year-earlier. EPS was $1.56, up 7% sequentially from $1.46 and up 11% from $1.41 year-earlier.

Microcontrollers represented 54.9% of total end market demand. Revenue down 1.3% sequentially, but up 1% y/y.

Analog chips represented 28.1% of overall end market demand. Sequentially up 0.7%. Down 4.2% y/y.

Licensing, memory and MMO segment was 10.4% of total end market demand. Flat sequentially from strength in licensing.

FPGA 6.7% of total demand. Down 10.3% sequentially, due to a shut down aerospace customer. Down 12.6% y/y.

Cash and investments ended at $380 million, down sequentially from $403 million. Cash flow from operations was $502 million. $10 million capital spend in quarter. Long term debt was about $7.7 billion (down sequentially from $8.9 billion). $394 million of debt was paid down in the quarter, but also issued $2.2 billion in senior notes to refinance other debt. $90 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 $511 million, leaving gross profit of $798 million. Operating expenses of $580 million consisted of: research and development $198 million; selling, general and administrative $146 million; amortization $235 million; and special charge $0 million. Leaving operating income of $218 million. Other expense $128 million. Income tax benefit $34 million.

Q&A summary:

Bookings improvement in July, what is history for August and September? Past trends just don't apply this year. Effects of pandemic vary by end market. Depends on lead times and visibility, which is low. Usually June is a strong month for bookings, but not this year. July was better. It is good so far in August.

We don't know what seasonality is post acquisition, we need a normal year, at least, to start seeing what it would be.

Visibility remains low, maybe improved from May and June.

China? Stronger than expected last quarter, still doing well, but weakness in EU and US expected to have a negative effect.

Customers flipping on orders? It is all about the pandemic. No one knows the run rates, not distributors, not manufacturers, not end customers. So no one is placing long term orders, they are all short term right now.

We believe automotive demand bottomed in the June quarter.

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