Analyst Conference Summary

semiconductors

conference date: May 5, 2023 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2023 (Q4, fourth fiscal quarter 2023)

Forward-looking statements

Overview: Continued strong growth, record revenue again.

Basic data (GAAP):

Revenue was $2.23 billion, up 3% sequentially from $2.17 billion, and up 21% from $ billion in the year-earlier quarter.

Net income was $604 million, up 4% sequentially from $580 million, and up 38% from $438 million in the year-earlier quarter.

EPS (diluted earnings per share) were $1.09, up 5% sequentially from $1.04, and up 42% from $0.77 year-earlier.

Guidance:

For Q1 fiscal 2024, guiding to net sales of $2.255 to $2.322 billion. GAAP EPS $1.15 to $1.16. Non-GAAP EPS $1.63 to $1.65. Cap ex $100 to $125 million.

Conference Highlights:

CEO Ganesh Moorthy said " we continued to deliver on our Microchip 3.0 strategy. We grew revenue by 23.7% year-over-year to a record $8.4 billion, achieved new records across key non-GAAP operating metrics delivering full-year non-GAAP EPS of $6.02, and increased our capital returned to shareholders through dividends and share repurchases by 76.6% during the fiscal year. The March quarter marked our 10th consecutive quarter of growth and higher profitability." Gross margins hit a record. Bookings have slowed down, as expected.

In fiscal Q4 2023 (March quarter) Microchip took further actions to position for a soft landing. Lead times continue to improve for many products. At the request of customers, was able to reschedule significant amounts of backlog to later quarters to help customers with their inventory positions, which resulted in building inventory on the balance sheet. Given the very long product life cycles, Microchip sees very little obsolescence risk with the higher inventory balances and believes it is well-positioned to respond to growth when the macro environment strengthens.

In the March 2023 quarter Microchip announced an $800 million, multi-year initiative aiming to triple semiconductor production at its Oregon facility.

By March quarter of 2025 Microchip plans to return 100% of its free cash flow to shareholders.

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 $0.383, to stockholders of record on May 22, 2023, payable on June 5, 2023. Expects to contribute more of free cash flow as dividends, and later to stock buy backs.

Non-GAAP numbers: Net income was $908 million, up 5% sequentially from $864 million and up 19% from $765 million year-earlier. EPS was $1.64, up 5% sequentially from $1.56 and up 21% from $1.35 year-earlier.

Cash and investments ended at $234 million, down sequentially from $289 million. Cash flow from operations was $710 million. $113 million capital spend in quarter. $597 million free cash flow. Paid down $153 million of debt. Long term debt was about $5.04 billion (sequentially from $6.59 billion). $470 million used for dividends. $274 million used for stock repurchases.

GAAP cost of goods sold was $713 million, leaving gross profit of $1.52 billion. Operating expenses of $671 million consisted of: research and development $298 million; selling, general and administrative $204 million; amortization $167 million; and special expense $2 million. Leaving operating income of $848 million. Other expense $46 million. Income tax $198 million.

Q&A selective summary:

Demand environment? We still have constrained products, but the slackening demand is from a spectrum of customers, geographies and products.

Gross margins? They should remain pretty good even in a trough.

We are pushing out backlog, supporting customers with changing business environments, but not doing cancelations.

End markets with weakening demand? Industrial, automotive, aerospace are relatively strong. Within industrial there are specific parts that may be relatively weak.

Other expense? We do not have much variable rate debt. We do have bonds coming due, which will be financed at a higher interest rate. Interest expense will increase by several million dollars each quarter. 6.35% is our current borrowing rate on our line of credit.

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