Analyst Conference Summary

semiconductors

conference date: February 4, 2021 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2020 (Q3, third fiscal quarter 2021)

Forward-looking statements

Overview: Returned to y/y revenue growth, hit revenue guidance midrange.

Basic data (GAAP):

Revenue was $1.35 billion, up 3% sequentially from $1.31 billion, and up 5% from $1.29 billion in the year-earlier quarter.

Net income was $36 million, down 51% sequentially from $74 million, and down 88% from $311 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.13, down 52% sequentially from $0.27, and down 89% from $1.20 year-earlier.

Guidance:

March quarter 2021 guidance includes revenue between $1.42 and $1.49 billion. GAAP EPS $0.52 to $0.58. Non-GAAP EPS $1.67 to $1.79.

Conference Highlights:

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

CEO Steve Sanghi said "The December quarter represented a shift of the business cycle back to growth as we saw a 3.3% sequential growth in revenue during the December quarter, which typically would be a sequentially down quarter in a normal seasonal environment. Supply constraints in the industry are creating lots of challenges in meeting customer demand and our global operations team is working hard at increasing production at our internal factories and also working with our supply chain partners to get larger allocations of manufacturing capacity and materials." Current environment has "seemingly insatiable demand."

Ganesh Moorthy, President and COO, said "As expected, the end markets that benefited earlier in 2020 from the work from home and medical related demand surge remained at more normal demand patterns. Finally, demand for our products that go into the office environment remained weak as many businesses remain predominantly with work from home policies, thus deferring spending for these items." There were supply constraints in both internal and external factories. We expect restraints to continue in 2021.

Bookings were strong and that continued in January. Backlogs are at record levels. Inventory at distributors was at a record low.

GAAP results were impacted by a $232 million charge for amortization of acquired assets and $142 million loss on debt settlement.

In Q4 2020 acquired LegUp Computing Inc., expanding the Field-Programmable Gate Array (FPGA)-based edge compute solution stack with a high-level synthesis tool for PolarFire FPGA platforms. Also acquired Tekron International a leader in high-precision GPS and atomic clock timekeeping technologies and solutions for the smart grid and other industrial applications.

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 $0.369, to stockholders of record on February 20, payable on March 4, 2020.

Non-GAAP numbers: Net income was $445 million, up 7% sequentially from $416 million and up 30% from $341 million year-earlier. EPS was $1.62, up 4% sequentially from $1.56 and up 23% from $1.32 year-earlier.

Microcontrollers represented 53.7% of total end market demand. Revenue up 3.3% sequentially, and up 5.9% y/y.

Analog chips represented 27.6% of overall end market demand. Sequentially up 3.1%. Up 2.6% y/y.

Licensing, memory and MMO segment was 11.4% of total end market demand. up 13% sequentially from strength in licensing.

FPGA 7.3% of total demand. Down 8.5% sequentially. Up 7.1% y/y.

Cash and investments ended at $373 million, up sequentially from $370 million. Cash flow from operations was $510 million. $21 million capital spend in quarter. Long term debt was about $7.65 billion (down sequentially from $8.2 billion). $96 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 $5.06 million, leaving gross profit of $846 million. Operating expenses of $600 million consisted of: research and development $210 million; selling, general and administrative $154 million; amortization $232 million; and special charge $4 million. Leaving operating income of $246 million. Other expense $229 million. Income tax benefit $19 million.

Q&A summary:

Prefered supplier agreement? This is the first time we have done this. It is a response to the bookings and capacity requirements. This gives us better long term visibility as it minimizes cancelations. So far the response is positive.

Pricing environment? On January 4 we informed customers we would be passing on cost increases. It took some work to implement that for our many SKUs.

Inventory direction? We can't seem to produce enough product to improve the inventory, at present.

We did lose sales because of lack of inventory, for every geography. We can't give you a lost revenue number.

We have achieved our goal for large acquisitions, a scale where we are very competitive. Our strategy going forward is for organic growth. We could do small tuck ins.

Thoughts on seasonality? It has been difficult to define since we acquired MicroSemi, then ran into Covid, and now runaway growth.

The board generally increases the dividend every quarter, and we might continue to do the kind of increases we just did.

I think it will take at least 12 months to bring capacity in balance with demand.

We hope to continue to drive improvements in margins.

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