Analyst Conference Summary

semiconductors

conference date: November 5, 2020 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2020 (Q2, second quarter 2021)

Forward-looking statements

Overview: Not bad for a pandemic. GAAP numbers negatively affected by acquisition-related purchase accounting adjustments.

Basic data (GAAP):

Revenue was $1.31 billion, flat sequentially from $1.31 billion, and down 2% from $1.34 billion in the year-earlier quarter.

Net income was $74 million, down 40% sequentially from $124 million, and down 32% from $109 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.27, down 44% sequentially from $0.48, and down 37% from $0.43 year-earlier.

Guidance:

For the December quarter (fiscal Q3), revenue is expected between $1.31 and $1.38 bilion. EPS $0.38 to $0.45 GAAP; $1.51 to $1.63 non-GAAP. Believes past bottom of cycle, sees substantial gains in 2021.

Conference Highlights:

Steve Sanghi will transition to executive chair. Ganesh Morthy will become CEO. Effective March 1, 2021.

CEO Steve Sanghi said "Our global team all came together in the middle of a global pandemic, while working with a pay cut, and delivered superb performance during the quarter." Beat guidance. Margins were strong.

Ganesh Moorthy, President and COO, said "In the September quarter, we saw the automotive, industrial and consumer home appliance markets start their recovery. Medical devices for elective procedures which experienced a slow-down in the June quarter as individuals and hospitals delayed elective procedures, also started their recovery in the September quarter. As expected, we saw the work from home related markets of computing and data center, as well as medical devices for hospitals, revert to more normal demand patterns as the surge we saw in the June quarter dissipated. In general, enterprise demand remains weak as most businesses remain predominantly with work from home policies, thus deferring enterprise spending for the office environment."

Supply chain constraints impacted the quarter and continued into the December quarter. September quarter bookings were strong and have continued that way through October. Seeing good recovery in many markets despite stopping shipments to Huawei. Increasing internal capacity. Microchip made two small acquisitions in the quarter, each in the mid single digits $ millions. Huawei was 1% of sales in September quarter, will be 0% in December quarter.

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 $0.3685, to stockholders of record on November 20, payable on December 4, 2020.

Non-GAAP numbers: Net income was $416 million, up 3% sequentially from $402 million and up 14% from $366 million year-earlier. EPS was $1.56, flat sequentially from $1.56 and up 9% from $1.43 year-earlier.

Microcontrollers represented 53.7% of total end market demand. Revenue down 2% sequentially, but up 1% y/y.

Analog chips represented 27.6% of overall end market demand. Sequentially down 2%. Down 8% y/y.

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

FPGA 8.3% of total demand. Record quarter. Down 25% sequentially. Up 16% y/y.

Cash and investments ended at $370 million, down sequentially from $380 million. Cash flow from operations was $456 million. $6 million capital spend in quarter. Long term debt was about $8.2 billion (up sequentially from $7.7 billion). $331 million of debt was paid down in the quarter. $95 million used for dividends. $39 million depreciation. In fiscal Q2 exchanged $796.1 million of 2025 and 2027 convertible senior subordinated notes for cash and shares of common stock.

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 $808 million. Operating expenses of $582 million consisted of: research and development $200 million; selling, general and administrative $145 million; amortization $233 million; and special charge $4 million. Leaving operating income of $226 million. Other expense $137 million. Income tax $15 million.

Q&A summary:

Constraint effect on lead times? Most line items have 4 to 8 week lead times. Conditions are eating into multiple layers of the supply chain, not huge issues, but spot issues. So most products have normal lead times.

Investing in wafer fab, assembly, and test. The investments are for incremental adds, will help with margins. Wafer fab % will stay about flat despite new investment. Longer term, north of 60% for assembly, north of 70% for test is where we would like to be. We were higher before we bought Atmel and MicroSemi, they outsourced more.

Significant 2021 growth, specific? We are seeing substantial backlog building up, in what is normally a seasonally down quarter. There are some concerns about the supply change, so some people are ordering earlier. So a much better March quarter. More than 7% growth.

FPGA advantage, outlook? We are in the mid-range market. We focus on low-power applications, security, and robustness for defense and aerospace, automotive and industrial.

Book to bill? Was very good for Q2, we do not give specifics.

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