Microchip (MCHP) Beats on Q3 Earnings; Raises Guidance

Microchip Technology Inc.MCHP reported third-quarter fiscal 2017 adjusted earnings (including stock-based compensation) of $1.00 per share, which beat the Zacks Consensus Estimate by 19 cents.

Adjusted earnings (excluding stock-based compensation) advanced 64.1% year over year and 11.7% sequentially to $1.05 per share in the quarter. Atmel contributed 21 cents much better than management's expectation of 13-17 cents.

The strong growth was also driven by higher net sales, which surged 59.6% from the year-ago quarter to $881.2 million. On a sequential basis, net sales increased almost 1%.

We note that Microchip has outperformed the Zacks Semiconductor - Analog & Mixed industry in the last one-year. While the stock has gained 85.2%, the industry returned 59% over the same period. We believe that the better-than-expected result will help the stock to sustain momentum in the rest of fiscal 2017.

Quarter Details

In terms of product line, microcontroller business (63.1% of net sales) inched up 0.3% sequentially driven by robust performance from 8-bit, 16-bit and 32-bit microcontroller businesses. These benefitted from the addition of Atmel's product portfolio.

Analog sales (25.9% of net sales) increased 1.4% from the previous quarter. Memory sales (5.3% of net sales) remained almost flat on a quarter-over-quarter basis. Licensing (2.7% of net sales) sales increased 0.7% sequentially. MMO (3% of net sales) grew 9.5% from the previous quarter.

Geographically, Asia remained Microchip's largest market, with 58.6% of net sales coming from the region. Europe and Americas contributed 22.7% and 18.7%, respectively.

Microchip posted adjusted gross margin (including stock-based compensation) of 57.5%, which contracted 10 basis points (bps) on a year-over-year basis. Atmel gross margin improved 50 bps sequentially.

Non-GAAP operating expenses declined 400 bps to 27.2%, primarily due to lower research & development (R&D) and selling, general & administrative (SG&A), which declined 260 bps and 130 bps, respectively.

As a result, non-GAAP operating margin expanded 390 bps from the year-ago quarter. Atmel achieved operating margins of more than 26% in the quarter.

Microchip Technology Incorporated Price, Consensus and EPS Surprise

Microchip Technology Incorporated Price, Consensus and EPS Surprise | Microchip Technology Incorporated Quote

Balance Sheet

Cash generated in the reported quarter was $290.8 million as compared with $211.2 million at the end of Sep 30. As of Dec 31, cash and total investment position was $669.6 million as compared with $490.8 million.

Microchip's borrowings under revolving line of credit were $1.683 billion, up $5 million from the prior-quarter level.

Leverage continues to improve with net debt-to-EBITDA at 2.47 down from 2.91 at the end of the September quarter.


Microchip forecasts fourth-quarter fiscal 2017 net sales to be in the range of $872-$908 million, which reflects a range of -1% to 3% growth on a sequential basis.

Gross margin was anticipated to in the range of 58-58.5%, operating expense as percentage of 24-25% and operating margin 33-34.4%. Earnings are expected to be in the range of $1.01-$1.11 per share for the quarter. Atmel is forecasted to contribute 18-22 cents per share.

Capital expenditure is estimated to be approximately $38 million. Net cash generated in the quarter is anticipated to be $230-$250 million.

For fiscal 2017, capital expenditures are expected to be approximately $90 million (down from $110 million). Management expects net debt-to-EBITDA to be under 2.1 by the end of fiscal year 2017.

Microchip now anticipates 64 cents per share accretion from the Atmel acquisition for fiscal 2017. For fiscal 2018 and 2019, the new accretion target is 90 cents and $1, respectively.

Based on strong fourth-quarter results Microchip revised its long-term growth targets to 60% gross margin (up from 59%), 24% operating expenses (down from 26%) and 36% operating margin (up from 33%).

Zacks Rank & Key Picks

Microchip carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include Maxim Integrated MXIM , Silicon Laboratories SLAB and Inphi Corporation IPHI .

While, both Maxim and Inphi carries a Zacks Rank #2 (Buy), Silicon sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Maxim, Silicon and Inphi have a long-term earnings growth rate of 10.3%, 12.5% and 23.3%, respectively. Microchip has a long-term earnings growth rate of 12.5%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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