Analyst Conference Summary

semiconductors

conference date: August 3, 2021 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2021 (Q1, first fiscal quarter 2022)

Forward-looking statements

Overview: Very strong quarter on robust demand.

Basic data (GAAP):

Revenue was $1.57 billion, up 7% sequentially from $1.47 billion, and up 20% from $1.31 billion in the year-earlier quarter.

Net income was $253 million, up 118% sequentially from $116 million, and up 104% from $124 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.89, up 117% sequentially from $0.41, and up 85% from $0.48 year-earlier.

Guidance:

"We expect our net sales in the September quarter to be up between 3% and 7% sequentially. At the mid-point of our guidance for the September quarter, net sales will be 25.8% higher than the year-ago quarter." that equates to $1.616 to $1.679 billion. EPS GAAP $0.94 to $0.98, non-GAAP $2.05 to $2.17. There is already backlog for the quarter that will not be able to be filled in the quarter.

Conference Highlights:

CEO Ganesh Moorthy said "June quarter revenue, non-GAAP gross margin, non-GAAP operating margin, and non-GAAP EPS were all records, as every key aspect of our business over-performed our guidance. Our September 2021 quarter guidance essentially completes our journey towards our long-term operating model of 65% non-GAAP gross margin and 42% non-GAAP operating margin. We expect to update our long-term business model later this year. Business conditions remained exceptionally strong through the June quarter with record bookings and backlog for product to be shipped over multiple quarters, accentuated by our Preferred Supply Program which continues to be greater than 50% of our aggregate backlog and 100% of our backlog in the most constrained capacity areas. Demand outpaced the capacity improvements we implemented during the June quarter resulting in our unsupported backlog continuing to climb and our lead times stretching out." Q2 revenue results were above the midpoint of guidance. Expects revenue to continue to grow for at least the next four quarters.

Given the rapid payment of debt, in Q2 both Moody's and Fitch changed their outlook to Positive. Expect investment grade rating by end of fiscal 2022.

Both microcontrollers and analog chip revenue hit records. Record cash flow. Record gross margin, 64.8% non-GAAP. Inventory remained very low.

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 $0.437, to stockholders of record on August 20, payable on September 3, 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 $559 million, up 7% sequentially from $521 million and up 39% from $402 million year-earlier. EPS was $1.98, up 7% sequentially from $1.85 and up 27% from $1.56 year-earlier.

Microcontrollers represented 57.5% of total end market demand. Q2 record quarter. Revenue up 10% sequentially, and up 26% y/y. Record revenue in 8-bit, 16-bit, and 32-bit markets.

Analog chips represented 27% of overall end market demand. Sequentially up 4.1%. Up 16.7% y/y.

Other (Licensing, memory FPGA, and MMO segment) was 15% of total end market demand. Up 5.1% sequentially.

All end markets were strong in the June 2021 quarter. Lead times for many items continue to stretch out.

Cash and investments ended at $280 million, down sequentially from $282 million. Cash flow from operations was $630 million. $86 million capital spend in quarter. Long term debt was about $8.5 billion (up sequentially from $7.6 billion). $113 million used for dividends. $41 million depreciation. $388 million used to pay down debt. In the June quarter, we issued a $1 billion senior secured note maturing on September 1, 2024 and bearing interest at 0.983%. We used the proceeds from this bond offering to repay a $1 billion senior secured note that matured on June 1, 2021 that had an interest rate of 3.922%.

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

GAAP cost of goods sold was $562 million, leaving gross profit of $1.00 billion. Operating expenses of $639 million consisted of: research and development $238 million; selling, general and administrative $174 million; amortization $216 million; and special charges $11 million. Leaving operating income of $369 million. Other expense $72 million. Income tax $44 million.

Q&A summary:

Drivers of high gross margin? Main driver is full utilization of manufacturing capacity. We should have a long-term model for you later this year.

Because we have about 125,000 end customers, we need our distributors. It is up to the customers to choose. We are channel agnostic. We are seeing direct customer enquiries more than usual, but we believe distributors provide value to end customers.

Is the sales growth guidance driven by supply growth guidance? Would it extend beyond the September quarter? All growth is currently constrained by supply. Our own supply chain, for growing capacity, is somewhat uncertain.

PSP (priority) program? PSP backlog over 50% in the quarter, customers continue to enroll over time. It is now part of our normal business practice. It gives us visibility into long term, non-cancelable backlog.

Cash use? Started acquisitions 13 years ago. Scaling was for competitive advantage. Also looking for entire system solutions. Accomplished those goals. No need for a large acquisition now, could consider a small, tuck-in. We are working to pay down debt, as we get investment grade rating we will start a buy back program, and continue to increase dividends.

We are not yet seeing demand and supply come into balance.

Debt target, ratio? No stated target for debt/ebitda. Just investment grade rating. Will continue to pay it down after that, but not all cash then needs to be used for that.

We continue to increase automotive shipments, we are shipping above pre-pandemic levels. But we are short of what they would like to buy.

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