Analyst Conference Summary

semiconductors

conference date: November 3, 2022 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2022 (Q2, second fiscal quarter 2023)

Forward-looking statements

Overview: Another record quarter.

Basic data (GAAP):

Revenue was $2.07 billion, up 6% sequentially from $1.96 billion, and up 26% from $1.65 billion in the year-earlier quarter.

Net income was $546 million, up 8% sequentially from $507 million, and up 126% from $242 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.98, up 9% sequentially from $0.90, and up 128% from $0.43 year-earlier.

Guidance:

For fiscal Q3 2023 expects revenue between $2.13 and $2.18 billion. GAAP EPS $1.03 to $1.07. Non-GAAP EPS $1.54 to $1.56. Also expects revenue growth to continue in the March quarter.

Conference Highlights:

CEO Ganesh Moorthy said "Record revenue of $2.07 billion grew 5.6% sequentially and 25.7% year over year, driven by broad-based strength in our business. Disciplined execution by our team in combination with our resilient end markets helped to drive record non-GAAP gross margins, operating margins, and earnings per share as we remain focused on executing our Microchip 3.0 strategy, which we believe positions us for long-term success. Amid changing economic conditions and ongoing global supply disruption, our business remains strong as we exited the September quarter with the highest unsupported backlog ever. While we see encouraging signs of the supply chain loosening, many of our technology corridors remain constrained despite the careful capacity ramps we continue to implement. As such, we expect capacity to remain tight for specialized, trailing-edge technologies throughout 2022 and into 2023. Our focus on Total Systems Solutions and semiconductor industry megatrends is creating ample growth opportunities as our design win and new products funnel remains healthy." Profit margins set a record, GAAP net income and EPS set a record. Inventory rose 12 days q/q to 139 days. Distributor inventory days were flat q/q at 19.

The unsupported backlog for the December quarter remains strong, despite more capacity improvements coming into effect. Demand continues to outpace supply. Microchip has considerable backlog requested by customers in the for the December quarter that it currently cannot fill until later quarters. Expects demand to exceed supply well into 2023. Seeing only minor effects from macroeconomic weakness so far. Has multiple long-term supply agreements with large customers.

So far Microchip has been more resiliant than other semiconductor makers because our main sales areas, industrial, automotive, aerospace and defense, datacenter and communications infrastructure have seen continuing demand. Only 14% of our net sales are to the consumer markets, and within that we are mainly in appliances. On the supply side, most of our products use specialized, trailing edge capacity. Add to that our focus on organic growth through total system solutions.

Believes even with a macroeconomic downturn Microchip can achieve a soft landing.

Microchip is considering building a specialized 300 mm fab in the U.S.

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 $0.328, to stockholders of record on November 22, payable on December 6, 2022. Expects to contribute more of free cash flow as dividends, and later (after achieving investment grade) to stock buy backs.

Non-GAAP numbers: Net income was $814 million, up 6% sequentially from $767 million and up 39% from $606 million year-earlier. EPS was $1.46, up 7% sequentially from $1.37 and up 37% from $1.07 year-earlier.

Microcontrollers represented 56.9% of revenue. Record revenue. Revenue up 11% sequentially, and up 32% y/y. Record revenue in 8, 16 and and 32-bit markets.

Analog chips represented 27.6% of revenue. Record revenue. Down 1% sequentially. Up 16.6% y/y.

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

Cash and investments ended at $307 million, down sequentially from $379 million. Cash flow from operations was $793 million. $110 million capital spend in quarter. $683 free cash flow. Paid down $265 million of debt. Long term debt was about $6.30 billion (down sequentially from $7.56 billion). $166 million used for dividends. $248 million used for stock repurchases.

GAAP cost of goods sold was $675 million, leaving gross profit of $1.40 billion. Operating expenses of $643 million consisted of: research and development $269 million; selling, general and administrative $202 million; amortization $168 million; and special expense $4 million. Leaving operating income of $755 million. Other expense $56 million. Income tax $153 million.

Q&A selective summary:

Long lead time versus potential future demand weakness? We have high quality backlog that will continue to sell; much of our is non-cancelable. We are not trying to satisfy all demand, we are being selective. Some of our lead times are decreasing.

Lead times? All over the place for various products. End market growth is keeping pace with what we are shipping in.

300 mm fab decision? Very strategic, looking at a long time frame investment. It is mainly for growth rather than to bring in external production. It would be done over years, so it would not affect the dividend or share buyback programs. If we start on a fab tomorrow it would be four years before we start to ramp.

Customer building of inventory? We think any buffer build is small because we are unable to ship enough product for them to do that.

Many leading-edge technology semi chips are mainly no longer constrained. It is the trailing edge tech that is still constrained. We still see supply constraints for our own expansion.

We do get occassional small cancelations, but they don't amount to enough to affect our projections for December or March.

PSP as % of total revenue? An overwhelming amount of what we ship in a quarter is PSP, as happened in September and will happen in the December quarter. PSP customers do not generally want to over-order because of the financial commitment they have made. When we have a shortage of product, we ship to PSP customers first.

Op ex? It is running lower, it should move towards normal over time.

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