Analyst Conference Summary

semiconductors

conference date: November 2, 2023 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2023 (Q2, second fiscal quarter 2024)

Forward-looking statements

Overview: Likely past cycle peak, but still strong y/y.

Basic data (GAAP):

Revenue was $2.25 billion, down 2% sequentially from $2.29 billion, and up 9% from $2.07 billion in the year-earlier quarter.

Net income was $667 million, up slightly sequentially from $666 million, and up 22% from $546 million in the year-earlier quarter.

EPS (diluted earnings per share) were $1.21, flat sequentially from $1.21, and up 22% from $0.98 year-earlier.

Guidance:

Expects fiscal Q3 (December quarter) sales to be down 15% to 20% sequentially. But longer-term expects growth. GAAP EPS $0.68 to $0.76. Non-GAAP EPS $1.09 to $1.17. Expects March quarter to be sequentially lower than December quarter.

Conference Highlights:

CEO Ganesh Moorthy said "Revenue declined 1.5% sequentially, as all regions of the world and most end markets experienced varying degrees of weakness. This marks a turning point for an extraordinary three-year growth period for Microchip. Throughout this period, we successfully addressed supply chain challenges, invested well over a billion dollars in expanding our capacity, and boosted our investments for high-growth markets and applications, demonstrating our disciplined commitment to supply resilience and product innovation, in the pursuit of above-average long-term growth. As our customers adjust to their evolving demand patterns, we have continued to accommodate customer pushout requests where possible. We have also made considerable progress in further decreasing average lead times and ended the September quarter at roughly 13 weeks. The reduction in lead times is resulting in lower bookings and reduced near-term visibility. The actions we are taking to reduce lead times are designed to enable our customers and us to navigate this uncertain environment with agility and effectiveness." Results about as expected.

In fiscal Q2 2024 refinanced debt with a new $750 million Term Loan and the credit line to retire the $1 billion bond of September 2023. Microchip also issued $1 billion in commercial paper, which resulted in about a 90 basis point lower interest rate than the rate under the line of credit. Also retired $18.2 million of principal amount of convertible bonds due in 2027 with a total cash payment of $42.7 million, effectively mitigating potential share count dilution. In September Moodies upgraded its rating to Baa1.

Microchip targetted returning $562 million to shareholders in the September quarter through dividends and buybacks.

In fiscal Q2 2024 launched a $300 million initiative in India and opened a new R&d facility in Hyderabad.

Revenue by end markets was: 41% industrial, 19% data center or computing, 17% automotive, 11% communications, 12% consumer appliances. By product line: MCUs 57%, analog 28%, other 15%. By geography: Asia 46%, Americas 29%, Europe 25%.

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

167 days of inventory at end of quarter, flat sequentially. Some customers pushed out orders, but Microsoft is building other types of inventory. 35 days of inventory at

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 $0.439, to stockholders of record on Novemmber 22, 2023, payable on December 6, 2023. Expects to contribute more of free cash flow as dividends, and later to stock buy backs. Plans to continue to increase dividends until they reach about 50% of cash flow.

Non-GAAP numbers: Net income was $889 million, down 2% sequentially from $905 million and up 9% from $814 million year-earlier. EPS was $1.62, down 2% sequentially from $1.64 and up 11% from $1.46 year-earlier.

Cash and investments ended at $257 million, down sequentially from $271 million. Cash flow from operations was $616 million. $74 million capital spend in quarter. $542 million free cash flow; $454 million adjusted. Long term debt was about $4.41 billion down sequentially from $4.63 billion. $562 million returned to shareholders: $223 million used for dividends. $340 million used for stock repurchases.

GAAP cost of goods sold was $727 million, leaving gross profit of $1.53 billion. Operating expenses of $642 million consisted of: research and development $293 million; selling, general and administrative $197 million; amortization $151 million; and special expense $2 million. Leaving operating income of $885 million. Other expense $51 million. Income tax $167 million.

Q&A selective summary:

December quarter outlook by endmarkets? Volume v. pricing? All volume driven. Weakness broadbased across regions and markets. The one market that is not weak is aerospace and defense.

Margins and utilization, current? Wafer fabs are no longer running full out, so not as efficiently. Assembly and test work has been reduced, we align it with consumption.

Cancelations color? Orders are cancelable within 90 days. Beyond that we reschedule. Backlog had been based on long lead times. Our customers own market situations have changed, some of them seeing less demand.

We can't predict the cycle precisely, usually it takes 2 or 3 quarters to digest inventory.

We don't expect margins to go below 40%. If necessary we can reduce op ex.

NPNRs? Placing orders further out in time, customers do the best they can. We have done significant amounts of pushouts to help them out now that their conditions have changed.

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