Microchip (MCHP) Beats On Q4 Earnings, Raises Guidance

Microchip Technology Inc. (NASDAQ:MCHP) reported fourth-quarter fiscal 2017 adjusted earnings (including stock-based compensation) of $1.10 per share, which beat the Zacks Consensus Estimate by 11 cents.

Adjusted earnings (excluding stock-based compensation) advanced 65.7% year over year and 10.5% sequentially to $1.16 per share in the quarter. Atmel contributed 25 cents better than management’s expectation of 18–22 cents.

The strong growth was also driven by higher net sales, which surged 58.8% from the year-ago quarter to $902.7 million. On a sequential basis, net sales increased almost 2.4%. The figure was within management’s guided range of $872–$908 million. Book-to-bill ratio was approximately 1.10.

We note that Microchip has outperformed the S&P 500 on a year-to-date basis. While the stock has returned 23.9%, the index gained 7.5%. We believe that the impressive result will aid the stock to sustain momentum in fiscal 2018.

Quarter Details

In terms of product line, microcontroller business (64.3% of net sales) increased 0.3% sequentially driven by robust performance from 8-bit, 16-bit and 32-bit microcontroller businesses. These benefited from the addition of Atmel’s product portfolio.

Analog sales (25.5% of net sales) increased 1.1% from the previous quarter. Memory sales (5% of net sales) declined 2.3% on a quarter-over-quarter basis. Licensing (2.6% of net sales) sales decreased 3.2% sequentially. MMO (2.6% of net sales) slumped 12.8% from the previous quarter.

Geographically, Asia remained Microchip’s largest market, with 55.8% of net sales coming from the region. Europe and Americas contributed 25.1% and 19.1%, respectively.

Microchip posted adjusted gross margin (including stock-based compensation) of 58.9%, which expanded 180 basis points (bps) on a year-over-year basis and 140 bps sequentially.

Non-GAAP operating expenses declined from 46.6% to 25.7% in the reported quarter, primarily due to lower research & development (R&D) and selling, general & administrative (SG&A), which declined 280 bps and 110 bps, respectively.

As a result, non-GAAP operating margin expanded 480 bps from the year-ago quarter and 280 bps sequentially. Atmel achieved operating margins of more than 30% in the quarter.

Balance Sheet

Cash generated in the reported quarter was $322.6 million as compared with $290.8 million at the end of Dec 31. As of Mar 31, cash and total investment position was $1.30 billion as compared with $669.6 million.

Microchip had no borrowings under its revolving line of credit at the end of March. As part of the refinancing activities, the company exchanged some of the 2.125% 2037 bonds issued in 2007 for newly issued 2.25% 2037 bonds during the quarter.

Leverage continues to improve with net debt-to-EBITDA at 1.94 down from 2.47 at the end of the December quarter.

Outlook

Microchip forecasts first-quarter fiscal 2018 net sales to be in the range of $920.7–$965.9 million, which reflects a range of 2–7% growth on a sequential basis.

Gross margin was anticipated to in the range of 59.5–60%, operating expense as percentage of 23–25% and operating margin 36–37%. Earnings are anticipated to be in the range of $1.17–$1.27 per share for the quarter. Atmel is forecasted to contribute 18–22 cents per share.

Capital expenditure is estimated to be approximately $60 million. Net cash generated in the quarter is anticipated to be $230–$250 million.

Management expects net debt-to-EBITDA to be about 1.65 by the end of the first quarter.

For fiscal 2018, capital expenditures are expected to be approximately $170 million. Based on strong fourth-quarter results, Microchip revised long-term growth targets to 62.5% gross margin (up from 60%), 22.5% operating expenses (down from 24%) and 40% operating margin (up from 36%).

Zacks Rank & Key Picks

Microchip carries a Zacks Rank #2 (Buy). Analog Devices (NASDAQ:ADI) , Applied Optoelectronics, (NASDAQ:AAOI) and Micron Technology (NASDAQ:MU) are other top ranked stocks in the broader technology sector. All the three companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Analog Devices, Applied Optoelectronics and Micron Technology have a long-term earnings growth rate of 10.4%, 20% and 10%, respectively. Microchip has a long-term earnings growth rate of 14.5%.

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