Analyst Conference Summary

semiconductors

conference date: May 6, 2021 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2021 (Q4, fourth fiscal quarter 2021)

Forward-looking statements

Overview: Record sales, came in above guidance midpoint.

Basic data (GAAP):

Revenue was $1.47 billion, up 8.5% sequentially from $1.35 billion, and up 11% from $1.33 billion in the year-earlier quarter.

Net income was $116 million, up 222% sequentially from $36 million, and up 16% from $100 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.41, up 216% sequentially from $0.13, and up 5% from $0.39 year-earlier. [up less % than net income because of stock dilution]

Guidance:

Net sales in the June quarter to be up between 3.5% and 7.5% sequentially, or 1.519 to $1.577 billion. EPS 40.75 to $0.79 GAAP, $1.85 to $1.95 non-GAAP. Will use between $70 and $90 million for capital expense. Backlog for June quarter is very strong, and extends into later quarters.

Conference Highlights:

Ganesh Moorthy became CEO effective March 1, 2021.

CEO Ganesh Moorthy said "Business conditions remained exceptionally strong through the March quarter with record bookings and backlog for product to be shipped over multiple quarters. Demand outpaced the capacity improvements we implemented, resulting in lead times continuing to extend out. In my 40 years in the semiconductor industry, I cannot recall a time when the imbalance between supply and demand has been more acute. In response, we launched our Preferred Supply Program (PSP) to provide customers with supply priority beginning 6 months after their order in exchange for at least 12 months of non-cancellable orders. Customer response to the program has exceeded our expectations with direct customers and distributors alike. About 44% of our backlog is now in the PSP category, although it is almost 100% of our backlog in some of the most constrained capacity areas. This gives us a solid foundation to enable us to prudently acquire constrained raw materials, invest in expanding factory capacity, and hire employees to support our factory ramps."

Revenue, microcontroller revenue, gross margins and EBITDA all set records.

Microchip is ramping factory capacity to attempt to catch up with demand. Also continuing to pay off debt. But experiencing constraints to production.

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 $0.413, to stockholders of record on May 21, payable on June 4, 2021. Expects to contribute more of free cash flow as dividends, and later (after achieving investment grade) as stock buy backs.

Non-GAAP numbers: Net income was $521 million, up 17% sequentially from $445 million and up 39% from $376 million year-earlier. EPS was $1.85, up 14% sequentially from $1.62 and up 27% from $1.46 year-earlier.

Microcontrollers represented 55.6% of total end market demand. Revenue up 12.2% sequentially, and up 12.3% y/y. Gained market share in 8-bit, 16-bit, and 32-bit markets.

Analog chips represented 28.3% of overall end market demand. Sequentially up 11.3%. Up % y/y.

Other (Licensing, memory FPGA, and MMO segment) was 16.1% of total end market demand. Down 6.4% sequentially.

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.

Cash and investments ended at $282 million, down sequentially from $373 million. Cash flow from operations was $449 million. $55 million capital spend in quarter. Long term debt was about $7.6 billion (down sequentially from $7.7 billion). $107 million used for dividends. $40 million depreciation. In the March quarter, exchanged $359.2 million of convertible 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 $540 million, leaving gross profit of $927 million. Operating expenses of $619 million consisted of: research and development $229 million; selling, general and administrative $165 million; amortization $232 million; and special income $7 million. Leaving operating income of $308 million. Other expense $164 million. Income tax $28 million.

Full fiscal year 2021 revenue was $5.44 billion, a record. GAAP net income $349 million, EPS $1.29. Non-GAAP net income $1.78 billion, EPS $6.59.

Q&A summary:

PSP (Preferred Supply) program, will it be permanent? There were severe shortages and constraints. We did this so our key customers could get their planned orders. But the orders would be non-canceable, which benefits us. The results have been tremendous, 44% of total backlog. In some products it is 100% of capacity. Whether it becomes permanent depends on customers and how they see it during a slack cycle.

This could be the end of just-in-time ordering.

When might we get back to normal, hard or soft landing? We can't tell yet, the gap between demand and supply is so great. PSP gives us 12 months of continuous non-canceable backlog, which should help us reach a soft landing. We can taper off capacity additions if we see an approach to equilibrium. After every down cycle there is an up cycle.

Timing of capacity additions? Additions are gradual, including hiring people, dealing with delays in equipment deliveries. We expect capacity to grow each quarter. We continue to grow our packaging capacity as % of production.

Right now our growth is not limited by demand, but by our capacity.

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