Analyst Conference Summary

semiconductors

conference date: August 2, 2022 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2022 (Q1, first fiscal quarter 2023)

Forward-looking statements

Overview: Another record quarter.

Basic data (GAAP):

Revenue was $1.96 billion, up 7% sequentially from $1.84 billion, and up 25% from $1.57 billion in the year-earlier quarter.

Net income was $507 million, up 16% sequentially from $438 million, and up 100% from $253 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.90, up 16% sequentially from $0.77, and up 100% from $0.45 year-earlier.

Guidance:

Expects second fiscal (Sept.) quarter sales to be up 3% to 7% sequentially to $2.023 to $2.101 billion. At midpoint will be up 25% y/y. EPS $0.94 to $0.95 GAAP or $1.42 to $1.46 non-GAAP.

Conference Highlights:

CEO Ganesh Moorthy said "We kicked off our fiscal 2023 on a strong note, delivering record revenue of $1.96 billion which exceeded the mid-point of our guidance range and marked the seventh consecutive quarter of record revenue. Year-over-year revenue growth of 25.1% was driven by robust demand across all of our product categories, which again outpaced the capacity improvements we implemented during the June quarter. We are progressing well toward our long-term profitability targets as non-GAAP gross margins improved to 67.1% and non-GAAP operating margins to 45.6% during the quarter. Non-GAAP diluted earnings per share grew 38.4% from a year ago quarter to $1.37, which was at the high end of our guidance range. We ended the June quarter with our highest unsupported backlog ever, with well over 50% of this backlog being non-cancellable under our Preferred Supply Program (PSP)." Expects to use $247 million for the current quarter stock buy-back.

Demand continues to exceed supply so improving capacity. Some of the backlog will not be fillable in the September quarter. 127 days of inventory at end of quarter, up 2 days sequentially. But distributor inventory is low at 19 days. Input costs are rising.

In Q2 Shanghai shutdowns affected both Microchip and its customers.

Demand is insatiable. Expects to exceed supply well into 2023. Seeing only minor effects from macroeconomic weakness. Has multiple long-term supply agreements with large customers.

Microchip expects to be eligible for benefits of the new Chips and Science bill.

As usual, many new products were added in the quarter. Microchip is aggressively using capital to support new, fast-growing products.

The dividend was declared $0.27.6, to stockholders of record on August 20, payable on September 3, 2022. 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 $767 million, up slightly sequentially from $764 million and up 37% from $559 million year-earlier. EPS was $1.37, up 2% sequentially from $1.35 and up 37% from $0.99 year-earlier.

Microcontrollers represented 54.1% of revenue. Record revenue. Revenue up 1.6% sequentially, and up 17.8% y/y. Record revenue in 8, 16 and and 32-bit markets.

Analog chips represented 29.5% of revenue. Record revenue. Up 12.5% sequentially. Up 34.2% y/y.

Other (Licensing, memory FPGA, and MMO segment) income up strongly, with FPGA and licensing hitting records.

Cash and investments ended at $379 million, up sequentially from $319 million. Cash flow from operations was $840 million. $122 million capital spend in quarter. $719 free cash flow. Long term debt was about $7.56 billion (down sequentially from $7.69 billion). $153 million used for dividends. $195 million used for stock repurchases.

GAAP cost of goods sold was $654 million, leaving gross profit of $1.31 billion. Operating expenses of $608 million consisted of: research and development $269 million; selling, general and administrative $189 million; amortization $168 million; and special income $17 million. Leaving operating income of $701 million. Other expense $55 million. Income tax $139 million.

Q&A summary:

Benefits from Chip Act? Several components benefit us. Investment tax credit of 25%. Grants for manufacturing and R&D. We will share more as we know more.

Unsupported backlog, demand decline scenario? Order volatility we see is small and sporadic, below the unsupported backlog we have. Backlog would have to be cut by more than half to affect it.

Pricing v. units? Hard to breakout. We are shipping more parts. We have made price increases to offset cost increases. Main source of growth is units.

We expect to grow in the December quarter.

Supply situation? We can expand our frontend factories for several quarters. Our external partner capacity improvement has been incremental, much less than we need.

Weakness is in consumer PCs, where we have no exposure, and phones, where we have no exposure. We do have some exposure in enterprise PCs. If there is a macro slowdown we will rebuild a supply chain that has been running on fumes. We need to be able to run more inventory in the long run. We would also lower our capital intensity.

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