Microchip Beats on Q1 Earnings Estimate with Record Revenues

Broad-based growth across all product lines helped Microchip Technology Inc. (MCHP) deliver record first-quarter fiscal 2015 revenues and adjusted earnings. Not only did this leading semiconductor manufacturer beat our estimates, but the company also reported at the high-end of its guidance with respect to sales, non-GAAP gross margin and adjusted earnings.

Microchip reported GAAP net income of $89.9 million or 40 cents per share in the first quarter of fiscal 2015 compared with $78.6 million or 37 cents per share in the year-ago quarter. The healthy 14.4% year-over-year increase in GAAP earnings is primarily attributable to record quarterly sales.

Excluding non-recurring items, adjusted net income for the reported quarter was a record high of $151.6 million or 68 cents per share, significantly up from $120.4 million or 57 cents per share in the year-earlier quarter. The quarterly adjusted earnings well exceeded the Zacks Consensus Estimate of 62 cents.

Revenues

Net revenue (non-GAAP) for the reported quarter came in at an all-time high of $531.3 million, up 14.8% year over year, aided by record sales of microcontrollers and analog products. The quarterly revenues were also ahead of the Zacks Consensus Estimate of $527 million.

In terms of product mix, revenues from microcontroller products accounted for 64.7% of the total revenue in the quarter ($343.8 million), while analog revenues, memory chip and licensing business represented 24.1% ($127.8 million), 6.3% ($33.4 million) and 3.8% ($20.4 million) of total revenue, respectively. By geographical regions, the bulk of the revenues came from Asia ($318.3 million), followed by Europe ($109.7 million) and the Americas ($103.3 million).

Net sales of microcontroller products were up 14.5% year over year in the quarter driven by record sales of 8-bit, 16-bit and 32-bit microcontrollers. While the 16-bit microcontroller business climbed 26.5% for the reported quarter, 32-bit microcontroller revenues were up 59.8% with new design wins and applications.

The microcontroller business continued to outperform the industry and enabled Microchip to gain significant market share. Microchip expects to continue this momentum to further strengthen its position as the best-performing microcontroller franchise in the industry.

Analog revenues, including the contribution from Supertex, increased 23.8% in the reported quarter on a year-over-year basis. The Analog business has evolved as one of the best performing analog franchises in the industry. In order to further capitalize on this burgeoning business potential, Microchip is developing and introducing a wide range of innovative and proprietary new products.

During the quarter, Microchip acquired 83.5% of ISSC Technologies Corporation, a low power Bluetooth and advanced wireless solutions provider for the Internet of Things, to supplement its presence in these niche markets. The company expects to complete the acquisition by December this year. The transaction is expected to be accretive to Microchip’s non-GAAP earnings from the very first quarter of its operation. The strategic purchase complements Microchip’s initiatives in the wireless market, by leveraging ISSC’s deep domain knowledge in Bluetooth and wireless technologies to enable significant cross-selling opportunities.

Margins

Microchip recorded gross margin (non-GAAP) of 59.8% for the reported quarter, while operating income (non-GAAP) was $176.3 million. Non-GAAP operating margin for the quarter was 33.2% and Microchip was confident of achieving its long-term goal of 35% non-GAAP operating margin in the near future.

Balance Sheet

With a diligent focus on right-sizing the various components of inventory holdings, Microchip’s consolidated inventory (including Supertex) at quarter end was $264.5 million or 109 days. Inventory at distributors was at 31 days. The company hiked its quarterly cash dividend from 35.55 cents to 35.60 cents per share, representing the 42nd dividend increase since its inception.

Cash and short-term investments improved to $2.29 billion, with $980 million debt under its revolving line of credit. Capital expenditures aggregated $44.6 million for the quarter.

Outlook

Concurrent with the first quarter earnings release, management provided guidance for the second quarter of fiscal 2015. Management expects net sales between $560.0 million and $575.9 million, while non-GAAP gross margin is expected in the range of 59.2% to 59.6%. Non-GAAP net income is anticipated in the range of $155.7 million to $164.8 million, with earnings per share of 70 cents to 74 cents.

Microchip expects to increase cash and investments by approximately $160 million to $180 million in the second quarter prior to the dividend payment. The company expects to incur $50 million in capital expenditure in the next quarter, bringing its tally to about $175 million for fiscal 2015.

With record revenues, better-than-expected bookings and increasing requests on the back of strong demand and robust product designs, we expect Microchip to continue its bull run in the coming quarters as well.

Microchip presently has a Zacks Rank #3 (Hold). Other players in the industry that are worth mentioning include ON Semiconductor Corp. (ONNN), Fairchild Semiconductor International Inc. (FCS) and Analog Devices, Inc. (ADI), each carrying a Zacks Rank #2 (Buy).

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