It has been about a month since the last earnings report for Microchip Technology (MCHP). Shares have lost about 10.1% 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 the most recent earnings report in order to get a better handle on the important drivers.
Microchip Beats on Q4 Earnings, Revenues Miss Estimates
Microchip delivered fourth-quarter fiscal 2019 non-GAAP earnings of $1.48 per share, surpassing the Zacks Consensus Estimate by $1.39 per share. The figure was also toward the higher end of management’s guided range of $1.30-$1.49 per share and surged from $1.40 reported in the year-ago quarter.
The year-over-year upside was driven by higher net sales, which increased 32.7% from the year-ago quarter to $1.329 billion on a non-GAAP basis. However, the figure missed the Zacks Consensus Estimate of $1.337 billion. Notably, revenues were within management’s guided range of $1.279 billion to $1.375 billion.
Portfolio expansion across majority of the operating domains bode well. Microchip recently unveiled the first Arm-based microcontrollers (MCUs) that offer cost effective and large ecosystem based on Commercial Off-the-Shelf (COTS) technology.
The company also announced availability ofAcuEdge ZLK38AVS Development Kit for Amazon Alexa Voice Service (AVS). Moreover, the company unveiled the PolarFire FPGA imaging and solution primarily for 4K high resolutions and to support all data types, including audio, video, control and Ethernet, over a single cable.
Microchip announced availability of IEEE 802.15.4-compliant module, which integrates ultra-low-power MCU, sub-GHz RF LoRa transceiver and software stack that offers long-lasting battery life.
The company recently inked a deal withAcacia Communications Inc.'s AC1200 Coherent Module with its DIGI-G5 Optical Transport Network (OTN) processor to provide a simple and effective way to connect embedded applications.
Further, the company also introduced the latest dual- and single-core dsPIC33C Digital Signal Controllers (DSCs) to address the needs across memory, temperature and functional safety.
The company also introduced SAR ADC family to enhance the high-frequency, high resolution in regular life and work environment.
Recently, Microchip announced availability of the MPLAB Harmony version 3.0 (v3) which integrates ultra-low-power 32-bit MCU, sub-GHz RF LoRa transceiver and software stack.
The company also launched Libero SoC version 12.0 and PolarFire FPGAs.
Notably, we believe Microchip is well poised to capitalize on Microsemi’s growth catalysts. 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 benefiting 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 62.2%, expanding 50 bps on a year-over-year basis.
Non-GAAP operating expenses, as percentage of revenues, were up 360 bps year over year to 25.8%. The increase was primarily due to higher research & development (R&D) and selling, general & administrative (SG&A) expenses.
Consequently, non-GAAP operating margin contracted 310 bps from the year-ago quarter to 36.4%.
Balance Sheet & Cash Flow
The company exited the quarter under review with $430.9 million of cash and short-term investments as compared with $436.2 million reported in the previous quarter.
Total debt (long plus current portion) amounted to $10.31 billion as compared with $10.54 billion in the previous quarter.
Notably, the company paid $277.5 million of total debt during the quarter.
The company announced a quarterly cash dividend of 36.55 cents per share, payable on Jun 4, 2019.
Microchip forecasts first-quarter fiscal 2020 net sales of $1.26-$1.40 billion (mid-point $1.33 billion).
For the first quarter, non-GAAP earnings are anticipated in the range of $1.26-$1.49 per share (mid-point $1.375 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 120 and 139 days. Capital expenditures is estimated to be $35 million.
For fiscal 2020, capital expenditures are projected to be in the range of $130 million and $150 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.8% due to these changes.
At this time, Microchip Tech has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. 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 B. 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. It's no surprise Microchip Tech has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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