Analyst Conference Summary

semiconductors

conference date: February 2, 2023 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2023 (Q3, third fiscal quarter 2023)

Forward-looking statements

Overview: Continued strong growth, results above guidance midpoint.

Basic data (GAAP):

Revenue was $2.17 billion, up 5% sequentially from $2.07 billion, and up 23% from $1.76 billion in the year-earlier quarter.

Net income was $580 million, up 6% sequentially from $546 million, and up 64% from $353 million in the year-earlier quarter.

EPS (diluted earnings per share) were $1.04, up 6% sequentially from $0.98, and up 68% from $0.62 year-earlier.

Guidance:

For the March quarter, Q4 FY 2023, Microchip expects sales between $2.19 and $2.26 billion. GAAP net income 4596 to $603 million or EPS $1.07 to $1.09. Non-GAAP net income $891 to $905 million, EPS $1.61 to $1.63. Microchip's inventory days in the March 2023 quarter are expected to be in the range of 157 to 164 days, compared to 152 days on December 31, 2022.

Conference Highlights:

CEO Ganesh Moorthy said "We are pleased to report our 9th consecutive revenue growth quarter and another quarter of record operating profit and net income. Our fiscal third quarter revenue grew 4.6% sequentially and 23.4% year-over-year to $2.17 billion. Non-GAAP operating margins came in at 47.5%, which was ahead of our guidance range and above the high-end of our long-term operating model. Our consistent results demonstrate our team's relentless focus on operational excellence, which we believe positions us well to capture market share gains over the business cycle."

Supply to Microchip improved in December quarter. Made a slight reduction in unsupported backlog; improved lead times.

"Under this program, starting with the June quarter, we expect to increase the percentage of adjusted free cash flow we return to shareholders every quarter by 500 basis points, until we reach 100% of adjusted free cash flow returned which is targeted to occur in approximately eight quarters. Therefore in the June 2023 quarter we now expect to return 67.5% of our adjusted free cash flow from the March quarter to shareholders."

For fiscal year 2022 end market as share of revenue were: industrial 40%, data center and computing 18%, automotive 17%, consumer appliances 14%, and communications 11%.

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 increased to $0.358, to stockholders of record on February 21, 2023, payable on March 7, 2023. Expects to contribute more of free cash flow as dividends, and later (after achieving investment grade debt) to stock buy backs.

Non-GAAP numbers: Net income was $864 million, up 6% sequentially from $814 million and up 27% from $682 million year-earlier. EPS was $1.56, up 7% sequentially from $1.46 and up 30% from $1.20 year-earlier.

Cash and investments ended at $289 million, down sequentially from $307 million. Cash flow from operations was $1.28 billion. $141 million capital spend in quarter. $1.14 billion free cash flow. Paid down $719 million of debt. Long term debt was about $6.59 billion (up sequentially from $6.30 billion). $410 million used for dividends. $230 million used for stock repurchases.

GAAP cost of goods sold was $698 million, leaving gross profit of $1.47 billion. Operating expenses of $659 million consisted of: research and development $282 million; selling, general and administrative $203 million; amortization $167 million; and special expense $7 million. Leaving operating income of $659 million. Other expense $49 million. Income tax $182 million.

Q&A selective summary:

Pricing environment, 25% revenue growth in 2022, how much was pricing? 2022 price increases were to cover cost increases. Cost increases so far in 2023 are less intense, we will cover any with price increases.

Market share gains, given competitors have guided March share down? It is about organic growth, worked on over years. Focussed on higher growth opportunities.

Capital return program, decision to do gradually? The board decided with $6.2 billion, some at low rates that would be renewed at higher rates, we decided to go to 100% cash return over 8 quarters and rest is to pay down debt.

Investment in trailing edge capacity? Looking out 3 to 5 years, we have a high confidence to meet the 300mm requirements of our partners.

Lead times? Long lead times are not good for us or our customers. Expects in 2H we will see better lead times, but depends on the demand side.

Op ex tracking below target right now? Over time expect percent to increase into long-term model range.

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