Microchip (MCHP) Beats Q2 Earnings, Sales Estimates

Microchip Technology Inc. (NASDAQ:MCHP) reported second-quarter fiscal 2017 non-GAAP earnings of 90 cents per share, which beat the Zacks Consensus Estimate by 14 cents and jumped 52.5% from the year-ago quarter.

Net Sales on a non-GAAP basis were $873.8 million, which exceeded the Zacks Consensus Estimate of $861 million and surged 56.2% from the year-ago quarter. This was also better than the management’s guided range of $852.4 to $869.3 million.

In terms of product line, microcontroller business (63.4% of net sales) was up 3% sequentially driven by robust performance from 8-bit, 16-bit and 32-bit microcontroller businesses. These benefitted from the addition of Atmel’s product portfolio.

Analog sales increased 4.7% from the year-ago quarter. Combined Microchip and Atmel memory businesses were down 2% in the reported quarter. Management expects the wireless business restructuring to be completed by the end of third quarter of fiscal 2017.

Most recently, the company announced the divestiture of its Mobile Touch business unit.

Operating Details

Microchip posted non-GAAP gross margin of 56.7%, which contracted 70 basis points (bps) on a year-over-year basis.

Non-GAAP operating expenses declined 210 bps to 29.1%, primarily due to lower research & development (R&D) and selling, general & administrative (SG&A), which declined 130 bps and 80 bps, respectively.

As a result, non-GAAP operating margin expanded 140 bps from the year-ago quarter.

Balance Sheet

Cash generated in the reported quarter was $211.2 million as compared with $184 million at the end of Jun 30. As of Sep 30, cash and total investment position was $490.8 million as compared with $601.8 million.

Microchip’s borrowings under revolving line of credit were $1.678 billion and will result in a 25 bps reduction in borrowing rate post the filing of the company’s 10Q.

Leverage continues to improve with net debt-to-EBITDA at 2.91 down from 3.22 at the end of the June quarter and better than the company’s projection of 3.02.

Outlook

Microchip forecasts third-quarter fiscal 2017 net sales to be in the range of $821.4 to $873.8 million. Gross margin was anticipated to in the range of 56.6% to 57.2%, operating expense as percentage of 26.5–27% and operating margin 29.6% to 30.7%. Earnings are expected to be in the range of 85–95 cents for the quarter.

Capital expenditure is estimated to be approximately $30 million. Net cash generated in the quarter is anticipated to be $170–$200 million.

For fiscal 2017, capital expenditures are expected to be approximately $110 million. Management expects net debt-to-EBITDA to be about 2.35 by the end of fiscal year 2017.

Microchip expects 50 cents per share accretion from the Atmel acquisition for fiscal 2017.

For fiscal 2018 and 2019, the new accretion target is 70 cents and 90 cents, respectively.

Management believes that the successful integration of Atmel and higher accretion will help Microchip to achieve its long-term growth targets of 59% gross margin, 26% operating expense and 33% operating margins.

Zacks Rank & Key Picks

Microchip has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include Analog Devices (NASDAQ:ADI) , Silicon Laboratories (NASDAQ:SLAB) and NVIDIA (NASDAQ:NVDA) .

While, both Analog and Silicon has a Zacks Rank #2 (Buy), NVIDIA sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Analog, Silicon and NVIDIA has a long-term earnings growth rate of 10.4%, 12.5% and 10.3%, respectively. Microchip has a long-term earnings growth rate of 11.3%.

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