It has been about a month since the last earnings report for Microchip Technology (MCHP). Shares have lost about 2.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Microchip Tech due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Microchip Q1 Earnings Tops Estimates, Revenues Miss
Microchip delivered first-quarter fiscal 2020 non-GAAP earnings of $1.41 per share, surpassing the Zacks Consensus Estimate by $1.38 per share. Further, the figure was toward the higher end of management’s guided range of $1.26-$1.49 per share. However, the figure declined from $1.61 reported in the year-ago quarter.
Net sales improved 9.1% from the year-ago quarter to $1.323 billion on a non-GAAP basis. However, the figure missed the Zacks Consensus Estimate of $1.332 billion. Notably, the top line was below the mid-point of the management’s guided range of $1.26-$1.40 billion (mid-point $1.33 billion).
Notably, the impact of Huawei shipment limitations acted as the primary tailwind during the reported quarter. Sales from Huawei contributed 1% to 2% of total net sales. Further, negative developments pertaining to trade war between the United States and China added to woes.
Nonetheless, strength in microcontroller business and portfolio expansion across majority of the operating domains bode well.
Microcontrollers, analog and FPGA contributes approximately 90% to total revenues during the quarter. Notably, Microcontroller business was up 1.8% on a sequential basis while FPGA business was up 7% quarter over quarter.
Microchip recently launched industry’s first terabit-scale Ethernet Physical-Layer (PHY) — META-DX1 family of Ethernet PHY devices, which offers highest-density 400 GbE and FlexE connectivity.
Recently, Microchip announced availability of the 24-bit MCP356x and 16-bit MCP346x delta-sigma analog-to-digital converter (ADC) families in a bid to provide a simple and effective way to connect embedded applications.
The company announced availability of SiC power devices — the 700 V SiC MOSFETs and 700 V and 1200 V SiC Schottky Barrier Diodes (SBDs).
Microchip also expanded its automotive USB 2.0 Hi-Speed family with latest one-port devices, which provide single-port Integrated Circuits (ICs) consequently reducing total system costs.
Moreover, the company announced the availably of three new maXTouch touchscreen controllers and optimization services.
Further, the company also introduced the latest 20-output “differential clock buffers” that go beyond PCIe Gen 5 jitter standards for next-generation data center applications toaddress the needs across memory, temperature and functional safety.
Microchip announced availability of IEEE 802.3bt-compliant PDS-408G PoE switch, which integrates ultra-low-power MCU, sub-GHz RF LoRa transceiver and software stack that offers long-lasting battery life.
The company partnered with STAR-Dundee to create a platform in order to accelerate the development process and execute SpaceFibre technology for space applications.
Moreover, designs win on PolarFire FPGA imaging and solution primarily for 4K high resolutions in order to support all data types, including audio, video, control and Ethernet, over a single cable is noteworthy.
Notably, we believe Microchip is well poised to capitalize on Microsemi acquisition. Apart from a robust portfolio, the buyout is likely to expand Microchip’s total addressable markets. Strong demand for Microsemi’s solutions in Data Center, Communications, Defense & Aerospace markets is likely to aid Microchip’s long-term growth prospects.
The company is gaining from robust demand for 8-bit, 16-bit and 32-bit microcontrollers. We believe that Microchip's expanding product portfolio driven by new launches will continue to expand customer base.
Microchip reported non-GAAP gross margin of 62% expanding 20 bps on a year-over-year basis.
Non-GAAP operating expenses, as percentage of revenues, were up 250 bps year over year to 25.8%. The increase can primarily be attributed to higher research & development (R&D) and selling, general & administrative (SG&A) expenses.
Consequently, non-GAAP operating margin contracted 270 bps from the year-ago quarter to 36.2%.
Balance Sheet & Cash Flow
The company exited the quarter under review with $437.1 million of cash and short-term investments as compared with $430.9 million reported in the previous quarter. Total debt (long plus current portion) amounted to $10.08 billion as compared with $10.31 billion in the previous quarter
Cash flow from operating activities was $380.6 million during the quarter.
Notably, the company paid $257.5 million of total debt during the quarter.
During the reported quarter, the company paid $87.1 million as dividend to shareholders. The company announced a quarterly cash dividend of 36.6 cents per share.
Microchip forecasts second-quarter fiscal 2020 net sales of $1.323-$1.375 billion (mid-point $1.349 billion).
For the second quarter, non-GAAP earnings are anticipated in the range of $1.37-$1.49 per share (mid-point $1.43 billion).
Non-GAAP gross margin is anticipated in the range of 61.8-62.2%. Non-GAAP operating expenses, as percentage of sales, are projected at 25.3-26.3%, and operating margin is expected at 35.5-36.9%.
Microchip's inventory days in the impending quarter are expected between 127 and 134 days. Capital expenditures are estimated to be $30 million.
For fiscal 2020, capital expenditures are projected to be in the range of $110 million and $130 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -6.32% due to these changes.
At this time, Microchip Tech has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Microchip Tech has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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