Microchip (MCHP) Narrows Sales & Earnings Expectations For Q3

Microchip Technology Incorporated (NASDAQ:MCHP) provided an update on third-quarter fiscal 2020 outlook.

The company now anticipates consolidated net sales in the range of $1.244-$1.298 billion (mid-point $1.271) compared with the earlier forecast of $1.204-$1.311 billion (mid-point $1.257 billion). The revised guidance reflects a sequential fall of 3-7% and a decline from the prior-year quarter’s net sales of $1.416 billion. The Zacks Consensus Estimate for third-quarter fiscal 2020 revenues is currently pegged at $1.26 billion.

Non-GAAP earnings per share are projected in the range of $1.19-$1.30 per share (mid-point $1.24) compared with the previous guidance of $1.12-$1.32 (mid-point $1.22 billion). The revised bottom-line view indicates a decline from $1.66 in the prior-year quarter.

In the past two months, analysts have become cautious regarding Microchip’s financial performance with estimates moving south. In the past 30 days, the Zacks Consensus Estimate for the current quarter earnings has declined 13.2% and is pegged at $1.25.

Nevertheless, at mid-point, the company’s guidance for net sales as well as non-GAAP earnings reflects improvements.

Microchip Technology Incorporated Price and Consensus

Other Notable Points

Management highlighted that bookings during October and November 2019 continued to remain strong.

Also, per the previous guidance, non-GAAP gross margin is anticipated in the range of 61-61.4%. Non-GAAP operating expenses, as percentage of sales, are projected at 26.2-28%. Operating margin is expected in the band of 33-35.2%. Microchip's inventory days in the third quarter are expected between 131 and 144 days. Capital expenditures are estimated in the range of $20-$25 million.

Wrapping Up

Microchip’s strength in 8-bit, 16-bit and 32-bit microcontroller business holds promise in the long term. Markedly, the company’s microcontroller business has continued to outperform the industry. To further capitalize on this burgeoning business, Microchip is developing and introducing a wide range of innovative as well as proprietary products.

However, management is cautious about a few headwinds such as increasing lead time as well as slim demand trends in ZTE (HK:0763) and Bitcoin business domains. Further, significant exposure to Asian markets amid imposition of tariff due to the United States-China trade war is a hurdle. Additionally, Microchip has a highly leveraged balance sheet that adds to its woes.

Zacks Rank & Key Picks

Microchip carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector are Qorvo, Inc (NASDAQ:QRVO) , Fortinet, Inc (NASDAQ:FTNT) and Taiwan Semiconductor Manufacturing Company Ltd. (NYSE:TSM) . Each of the stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Qorvo, Fortinet and Taiwan Semiconductor is currently pegged at 10.1%, 14% and 10.4%, respectively.

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