Microchip (MCHP) Q2 Earnings Surpass Estimates, Rise Y/Y

Microchip Technology Incorporated (NASDAQ:MCHP) delivered second-quarter fiscal 2019 non-GAAP earnings of $1.81 per share, surpassing the Zacks Consensus Estimate by 7 cents. The figure was near the higher end of management’s guided range of $1.65 to $1.83 per share and surged 28.4% from the year-ago quarter.

The year-over-year upside was driven by higher net sales, which increased 49.5% from the year-ago quarter to $1.513 billion on a non-GAAP basis. Both the Zacks Consensus Estimate for revenues and the mid-point of management’s guided range ($1.474-$1.550 billion) was pegged at $1.512 billion.

Quarter in Detail

In terms of product line, microcontroller business (54.2% of non-GAAP net sales) increased 12.6% sequentially to $820.1 million. Analog net sales came in at $328.5 million (29%) and surged 33.6% sequentially. Synergies from Microsemi buyout aided growth across both the domains.

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.

FPGA revenues (6%) came in at $91.3 million. Robust adoption of company’s low power PolarFire solutions was noteworthy.

Licensing segment (2.5%) reported non-GAAP revenues of $37.1 million which increased 40.3% sequentially, primarily owing to a patent license sale and strength in royalty revenues.

Memory business (3%) declined 3.8% sequentially to $47.3 million.

MMO or multi-market and other business unit revenues (5.2%) surged 90.7% from the previous quarter, primarily due to Microsemi contribution.

Geographically, revenues from Americas, Europe and Asia contributed 25.1%, 22.5% and 52.4% of total revenues, respectively.

Notable Developments

Portfolio expansion across majority of the operating domains bode well. Recently, Microchip announced availability of MPLAB X Integrated Development Environment (“IDE”) version 5.05 that supports AVR MCUs.

Microchip unveiled IS2064GM-0L3, a Bluetooth 5-compliant System-on-Chip (SoC) compatible with Sony’s advanced LDAC audio codec technology. Further, the company introduced MCP39F511A, a flexible dual-mode power monitoring IC which provides accuracy for power measurement of both AC and DC modes.

Notably, Microchip is now focusing on improving driving experience to strengthen its position in producing autonomous vehicle controllers. Toward this purpose, the company unveiled cost-effective three-dimensional (3D) gesture recognition controller, MGC3140, which offers a robust single-chip solution for sophisticated automotive HMI designs. The new solution is aimed at reducing driver distractions,in turn enhancing the in-car capability of the drivers.

Microchip also added two new devices, ATtiny3217 and ATtiny3216, with highly developed analog features to its tiny AVR MCU series. These are aimed at developing highly responsive sensor nodes.

Margins

Microchip posted non-GAAP gross margin of 61.7%, expanding 70 basis points (bps) on a year-over-year basis.

Non-GAAP operating expenses, as percentage of revenues, were up 90 bps year over year to 23.4%. The increase was primarily due to higher research & development (R&D) expenses and selling, general & administrative (SG&A) expenses.

Consequently, non-GAAP operating margin contracted 30 bps from the year-ago quarter to 38.3%.

Balance Sheet & Cash Flow

The company exited the reported quarter with $464.2 million of cash and short-term investments as compared to $649.7 million reported in the previous quarter. Total debt (long plus current portion) amounted to $10.9 billion.

During the quarter, Microchip generated $487.6 million of operating cash flow.

The company announced a quarterly cash dividend of 36.45 cents per share, payable on Dec 5, 2018.

Guidance

Microchip forecasts third-quarter fiscal 2019 net sales of $1.362-$1.438 billion (mid-point $1.4 billion). The Zacks Consensus Estimate for the same is pegged at $1.47 billion.

For the fiscal third quarter, non-GAAP earnings are anticipated in the range of $1.49-$1.64 per share. The Zacks Consensus Estimate for the same is pegged at $1.67 per share.

Non-GAAP gross margin is anticipated in the 61-61.5% range. Non-GAAP operating expenses, as percentage of sales, are projected at 24.9-25.4%, and operating margin is expected at 35.6-36.6%.

Microchip's inventory days in the impending quarter are expected between 117 and 127 days. Capital expenditures are estimated in the range of $50 million.

For fiscal 2019, capital expenditures are projected at $230-$250 million.

Conclusion

While Microchip is benefiting from acquisition synergies particularly from Microsemi and Atmel, and a robust microcontroller business, management remains cautious over few emerging concerns.

Increasing lead time and significant exposure to Asian markets, particularly the trade war woes are anticipated to be a headwind.

Slim demand trends in ZTE (HK:0763) and Bitcoin business domains and leveraged balance sheet remain major concerns.

Zacks Rank & Key Picks

Microchip carries a Zacks Rank #4 (Sell).

SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) , Cadence Design Systems, Inc. (NASDAQ:CDNS) and Symantec Corporation (NASDAQ:SYMC) are some stocks worth considering in the broader technology sector. All the three stocks sport 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 SS&C, Cadence Design and Symantec are pegged at 13.5%, 12% and 7.9%, respectively.

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