Microchip Expands Markets

August 19, 2010

On August 5, 2010, Microchip reported strong Q2 2010 results. Here I'll discuss forward looking trends. For details on the quarter results, see my Microchip (MCHP) Q2 2010 Analyst Call notes.

Microchip specializes in microcontrollers, which are semiconductor chips that have, at minimum, a computer and the ability to send and receive control signals integrated on a single chip. Microcontroller are a big, if largely invisible to consumers, part of the global semiconductor industry, and Microchip has become the industry leader over this last decade. If something needs to be controlled, whether it is the temperature of a home refrigerator or the intricate chemical manipulations of a gene sequencer, a microcontroller will be present. Modern automobiles typically contain over a dozen microcontrollers.

Basic microcontroller (MCU) technology is less complicated than the CPUs and GPUs of personal computers, but the chips are often specialized for the wide variety of tasks they are required to perform. The most basic division of microcontrollers is into 8-bit, 16-bit, and 32-bit, which reflects the size of the data chunks that are processed by the computer aspect of the chip. Microchip is the market share leader in the 8-bit segment, which is by far the largest segment. Microcontrollers are workhorses for engineers; there is a disadvantage to using a 16-bit controller when an 8-bit controller will get the job done. Once you have picked your data path size, usually the next consideration is memory size. Memory is increasingly on the microcontroller chip itself, but they also integrate easily with external memory. The controller part of the chip, at its simplest, has connections that either see if an input is on or off, or control an output that is either on or off. But increasingly the ability to measure a variable voltage, or convert to a specified output voltage, can be built onto chips when desired.

As a result Microchip has hundreds of standard models of microcontrollers to chose from, as well as being able to make specific configurations to order. In the industry as a whole thousands of types are available. Top competitors include Renesas, Freescale, Infineon, Fujitsu and TI. Architectures of the CPUs of microcontrollers tend to be proprietary, but several companies base them on ARM designs. Microchip's is called PICmicro.

Microchip navigated the economic downturn quite well. While revenues shrank, because it was in a strong cash position, it kept up its research and development efforts, as well as sales. In addition it used cash to make some acquisitions, most recently Silicon Storage Technology (SST). You can see the results in 66% y/y revenue growth, with GAAP net income more than doubling. Microchip has also ventured into areas like analog chips where it can help its microcontroller customers or integrate the analog components into microcontrollers.

The microcontroller industry is likely to continue to consolidate as some small players are unable to operate profitably. While microcontroller designs can linger far longer than PC CPU designs, a healthy R&D budget is necessary to keep up with new market needs. In particular cramming more functionality into a smaller form factor operating at lower voltages and power consumption is a trend that still has a ways to go.

Microchip's profit margins were healthy in Q2, it booked 1.4 times the business that it billed out, and it is adding manufacturing capacity to keep up with demand. With no disruptive technology on the horizon, the best managed companies will continue to forge ahead in the microcontroller space. With Microchip's stellar management record, while it is always possible something could go wrong, the future seems reliably bright. In Microchip's case, it also comes with hefty dividend payments.

See also Microchip.com.

Still, all investments involve risk, so keep diversified!

William P. Meyers

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