Analyst Conference Summary

semiconductors

conference date: May 7, 2015 @ 2:00 PM Pacific Time
for quarter ending: March 31, 2015 (Q4, fiscal fourth quarter 2015)

Forward-looking statements

Overview: Solid results, increased the dividend, and announced would acquire Micrel (MCRL) for $14.00 per share, valuing it at $839 million. Will add about a quarter billion to annual Microchip revenue. Beware of substantial differences between GAAP and non-GAAP numbers, mainly due to acquisitions.

Basic data (GAAP):

Revenues were $543.2 million, up 3% sequentially from $528.7 million, and up 10% from $493.4 million in the year-earlier quarter.

Net income was $99.4 million, up 15% sequentially from $86.1 million, and down 11% from $111.5 million in the year-earlier quarter.

EPS (diluted earnings per share) were $0.45, up 15% sequentially from $0.39 and down 10% from $ year-earlier.

Guidance:

Q1 2016 (June quarter) sales are expected between $547 and $564 million. EPS $0.49 to $0.52 GAAP, or $0.69 to $0.73 non-GAAP.

Full year capital expense of $160 million.

Conference Highlights:

Microchip will acquire Micrel (MCRL) for $14.00 per share, valuing it at $839 million. Will add about a quarter billion to annual Microchip revenue. Microchip will buy back shares to prevent dilution from any that are issued as part of the Micrel purchase.

A dividend of 35.75 cents per share will be paid on June 4 to shareholders of record on May 21. The prior dividend was 35.70 cents per share.

Sales in the March quarter (Q4 fiscal 2015) and for full fiscal year 2015 were both records.

ISSE was integrated into MCHP on December 1, with some shares remaining to be acquired. San Jose has made its last dies and will be closed in April. Hong Kong facility is also being closed.

Full fiscal year 2015 sales were $2.15 billion, with non-GAAP EPS of $2.66.

Non-GAAP numbers: Sales were $547.2 million. Net income was $148.8 million, up 4% sequentially from $143.3 million and up 5% from $141.3 million year-earlier. EPS was $0.68, up 5% sequentially from $0.64 and also up 5% from $0.64 year-earlier. 58.3% gross margin. 32.4% operating margin. Excludes share-based compensation of $15.2 million, $2.3 million inventory acquisition valuation costs, $47.1 million amortization of acquired intangible assets, $31.8 loss on retirement of convertible debentures, a gain of $18.5 million on equity securities, and other non-cash and one-time charges.

57.7% GAAP gross margin, up sequentially from 57.1%. GAAP operating margin was 20.3%.

Microcontroller revenue was $353.6 million, up 2% sequentially from a record $345.5 million and up 8% y/y. Microchip will no longer break out revenue by bit width. Microchip regained the global first place in 8-bit microcontroller revenue. Microchip was the fastest growing 16-bit microcontroller supplier within the top 10, and was 5th. 32-bit microcontroller revenue climbed to number 9.

Analog chip revenue of $127.6 million was up 2% sequentially from $125.5 million, and was up 19% y/y.

Memory business revenue was $33.2 million, flat sequentially from $33.2.

Licensing revenue was $23.6 million.

Other revenue was $9.2 million.

Microchip devices were deployed in infotainment networks by BMW and Audi.

Cash and investments ended at $2.34 billion. Cash generation was $155.5 million. $29.4 million capital spend in quarter. Debt was about $1.8 billion including debentures. $ million paid in cash dividends. $25 million depreciation expense.

In the quarter Microchip issued $1.725 billion in 1.625% convertible senior subordinated notes due in 2015. $1.14 billion of the proceeds were used to repurchase $575 million of the convertible junior subordinated debenture due in 2037.

Cost of goods sold was $229.6 million, leaving gross profit of $ million. Operating expenses of $203.3 million consisted of: research and development $87.7 million; selling, general and administrative $67.8 million; amortization $47.1 million. Special charge $0.8 million. Leaving operating income of $110.3 million. Other expense $48.1 million. Income tax benefit of $36.6 million. $0.8 million net loss attributed to noncontrolling interests.

By geography: Americas $106.2 million, $126.0 million Europe, $314.9 million Asia.

Q&A:

Guidance for June a couple of percentage points below consensus? We believe seasonality is often miscalculated by investors, given our history of acquisitions, which affect quarter numbers. But industry conditions are soft, that what we are seeing.

Foreign exchange effects? We do business world wide in U.S. dollars. Our prices are in dollars, so weak currencies raises our prices in their currencies, and they may try to negotiate a price decrease. But that delays any effect.

Strength in Europe in the quarter? The March quarter is typically seasonally strong for us in Europe. The FX impact on the quarter were minimal.

Inventory target? Our product mix has become very complex. We have found we need between 115 and 120 days, which is higher than in the past. It is currently 111, and we are aiming to grow it 3 to 9 days.

Analog vs. digital growth rates? Our profit margins are good in both. Growth depends on product success. We can invest in both. Analog has been growing faster because that is where we have done the acquisitions. There are much larger analog companies that we can take share from for a long time.

Last year 39% of wafer fab was in house, the rest was outsourced, and it is not likely to change much in fiscal 2016. We do aim to do most of our own testing, including when we make an acquisition.

Bright spots in terms of end markets? It is fashionable to say IoT (laughs).

Despite the weakness the inventory is on the low side. Manufacturing is challenging, we are working hard to build a few days of inventory.

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