Analyst Conference Summary

semiconductors

conference date: February 3, 2016 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2015 (Q3, fiscal third quarter 2016)

Forward-looking statements

Overview: Solid quarter, near midpoint of guidance. Big news is the Atmel acquisition.

Basic data (GAAP):

Revenues were $540.3 million, down slightly sequentially from $541.4 million, and up 2% from $528.7 million in the year-earlier quarter.

Net income was $61.2 million, down 6% sequentially from $64.9 million, and down 29% from $86.1 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.28, down 7% sequentially from $0.30 and 28% from $0.39 year-earlier.

Guidance:

For March 2016 quarter business has stabilized and inventory shrink is likely over. Non-GAAP net sales flat to up 3% sequentially to $552.0 to $568.5 million. 57.9% to 58.% gross margin. Non-GAAP EPS $0.65 to $0.69. Net income $141.1 to $150.5 million.

Micrel accretion should be $0.30 run rate by end of 2016.

Conference Highlights:

Ganesh Moorthy was promoted to President and COO. Partly that is because of the need to manage an acquisition of the size of Atmel.

CEO Steve Sanghi said, "our December quarter results were strong amidst a very turbulent macro and semiconductor industry backdrop." Believes the December quarter marked the bottom of the inventory correction for Microchip.

On January 19 Microchip signed an agreement to acquire Atmel for $8.14 per share using a combination of cash and MCHP shares. Completed U.S. anti-trust filing. Hopes to close in calendar Q2 2016. Does not see any risk to the dividend from the combination as there will be synergies.

Atmel is a good fit for Microchip. The diverse core chip architectures are not as important as the various capabilities and interfaces of the chip families. Atmel's revenue has been declining the last 5 years, but mainly from exiting low-margin business. We can add our connectivity products to Atmel's microcontrollers. The analog attach opportunities can be a bonanza for our business.

Micrel consolidation continues to go well.

A dividend of 35.9 cents per share will be paid on March 7, 2016 to shareholders of record on February 22. The prior dividend was 35.85 cents per share.

Non-GAAP numbers: Sales were $552.0 million. Net income was $138.4 million, down 3% sequentially from $142.9 million and down 3% from $143.3 million year-earlier. EPS was $0.64, up 3% sequentially from $0.66 and flat from $0.64 year-earlier. 57.9% gross margin. 29.5% operating margin.

Microcontroller revenue was $322.6 million, down 3.5% sequentially from $334.3 million and down % y/y from $ million. Believes gaining market share. 58.5% of overall revenue.

Analog chip revenue was $132.2 million, up about 4.1% sequentially from $127 million, and was up 3.6% y/y. 31.2% of overall revenue.

Memory business revenue was $27.7 million, down 8.3% sequentially from $30.2 million. 5% of overall revenue.

Licensing revenue was not stated.

Other revenue was not stated.

GAAP gross margin was 54.2%, and operating margin was 14.1%.

Cash and investments ended at $2.40 billion, down sequentially from $2.59 billion. Cash generation was $172 million. $18 million capital spend in quarter. Debt was about $1.01 billion. $? million paid in cash dividends (not stated). $27 million depreciation expense. Microchip bought back the entire amount of stock used to purchase Micrel at a cost of $364 million [in which quarter is not clear, probably December].

Cost of goods sold was $247.6 million, leaving gross profit of $292.7 million. Operating expenses of $216.6 million consisted of: research and development $97.0 million; selling, general and administrative $76.3 million; amortization $48.3 million; and special benefit $5.0 million. Leaving operating income of $76.1 million. Other expense $ million. Income tax benefit of $11.1 million.

There were some inventory accounting changes in the December quarter to move Micrel's inventory to a sell-through basis, as is used by Microchip.

Eventually, once the products are shifted to other Fabs, the Micrel San Jose fab will be closed.

Q&A:

March quarter China down Europe down seasonally, is demand normal? The demand environment in the U.S. and Europe is about normal. In China demand has been weaker than normal. That weakness and the New Year weakness is included in the guidance.

Sales down y/y despite share growth? It depends on the total global demand for microcontrollers, which has been down significantly. The SIA numbers indicate we are gaining share.

On the 5 cents more of accretion exiting 2017, what are the factors? Synergies on op ex, on gross margin, and on revenue as Micrel product line has been taken to our broader base of customers.

Automotive in December quarter, March? It was strong in December, and continues to be stronger than some of our other segments.

Are you growing inventory in March due to seasonality or expected greater demand? We had some extended fab shutdowns in December quarter. They won't repeat in March quarter.

Acquisitions are an enormous amount of work. We take under-performing businesses and make them much more profitable. It is not right to take out the improvements we produce in the acquisitions and then say our core business is not doing well.

Look at how we managed SMSC, including product lines, if you want to get a general idea of how we are going to make money from the Atmel acquisition. We can discontinue product lines, but we can also improve gross margins within the lines we keep.

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