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Microchip's (MCHP) Q2 Earnings Beat Estimates,Sales Up Y/Y

Zacks Equity Research

Microchip Technology Inc. MCHP reported second-quarter fiscal 2018 adjusted earnings of $1.41 per share, which beat the Zacks Consensus Estimate by 6 cents. The figure improved 50% year over year and 7.6% sequentially.

The upside was driven by higher net sales, which increased 15.8% from the year-ago quarter and 4.1% sequentially to $1.01 billion. This marked the first quarter in which the company recorded more than $1 billion in sales.

Book-to-bill ratio was approximately 1.05 compared with 1.11 in the previous quarter, reflecting stable lead times. Management expects to achieve normal lead times by June 2018.

The stock has returned 48% year to date, substantially outperforming the 28.5% rally of the industry.


Quarter Details

In terms of product line, microcontroller business (65.7% of net sales) increased 4.7% sequentially driven by robust demand for 8-bit, 16-bit and 32-bit microcontrollers. On a year-over-year basis, revenues increased 20%.

Microchip is winning market share as reflected by SIA numbers. The company had a market share of 15.84% in the third quarter, which expanded 138 basis points (bps) from the year-ago quarter.

Microchip Technology Incorporated Price, Consensus and EPS Surprise


Microchip Technology Incorporated Price, Consensus and EPS Surprise | Microchip Technology Incorporated Quote


Analog sales (23.6% of net sales) were almost flat on a sequential basis. Revenues were negatively impacted by capacity constraint at Atmel. Moreover, the company’s intent to offer total system solutions that combines microcontroller cores with analog products and connectivity firmware negatively impacted sales. Revenue recognition for these products were shifted from analog business to the microcontroller business.

However, management believes that the higher margin total system solutions will help Microchip retain customers and win new designs in the long haul. Management believes that improving capacity constraints along with design wins will enable the analog business to expand at a higher rate than Microchip.

Memory sales (5.1% of net sales) were up 5.3% on a quarter-over-quarter basis.

Licensing (2.5% of net sales) sales increased 3% sequentially and 8.9% on a year-over-year basis.

MMO (2.9% of net sales) soared 29.4% from the previous quarter.

Geographically, Asia remained Microchip’s largest market, with 58% of net sales coming from the region. Europe and Americas contributed 24.1% and 18%, respectively.

Operating Details

Microchip posted non-GAAP gross margin of 61%, which expanded 380 bps on a year-over-year basis and 60 bps sequentially.

Non-GAAP operating expenses, as percentage of revenues, fell 430 bps year over year and 50 bps sequentially to 22.5%. The decline was primarily due to lower research & development (R&D) expenses and selling, general & administrative (SG&A) expenses, which declined 240 bps and 250 bps, respectively.

Sequentially, R&D expenses and SG&A expenses fell 20 bps and 30 bps, respectively.

As a result, non-GAAP operating margin expanded 810 bps from the year-ago quarter and 110 bps sequentially to 38.6%.

Balance Sheet

Cash generated in the reported quarter was $350.1 million compared with $345 million at the end of Jun 30. As of Sep 30, cash and total investment position was $1.84 billion compared with $1.65 billion.

Management noted that inventory on Sep 30, was at 105 days, up by 5 days from the June quarter level. Distributor inventory at 31 days was on the lower end of the company’s normal range.


Microchip forecasts third-quarter fiscal 2018 net sales in the range of $971.7-$1,012.1 million, which reflects flat to down 4% sequentially but up 12.6% on a year-over-year basis.

Gross margin is anticipated in the range of 61-61.4%. Operating expenses, as percentage of sales, are 22.2-22.6% and operating margin is expected at 38.4-39.2%.

Earnings are anticipated in the range of $1.30-$1.40 per share for the quarter.

Microchip's inventory days in the third-quarter is expected to between 115 and 120 days. Capital expenditure is estimated at approximately $70 million. Net cash generated in the quarter is anticipated tbetween $230million and $250 million.

Management expects net debt-to-EBITDA to be under 1.3 by the end of the second quarter of fiscal 2018.

For fiscal 2018, capital expenditures are now expected in the range of $200-$220 million, up from $180 million in the previous guidance.

The higher capital expenditure reflects aggressive investment to strengthen and expand production capabilities. The company plans to bring in-house more of the assembly and test operations that are currently outsourced, which will ultimately improve gross margin.

The heightened capital expenditure also reflects three new buildings that Microchip is constructing in Arizona, India and Germany. These will help in reducing cost in the long-haul.

Zacks Rank & Key Picks

Microchip carries a Zacks Rank #3 (Hold). Monolithic Power Systems Inc. MPWR, Analog Devices Inc. ADI and Maxim Integrated Products MXIM are some better-ranked stocks in the same sector. All the three companies sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Monolithic, Analog and Maxim have a long-term earnings growth rate of 18%, 10.40% and 10.25%, respectively.

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