Record Q4 Earnings and Revs for Microchip - Analyst Blog

Broad-based growth across all product lines helped Microchip Technology Inc. MCHP deliver record fourth-quarter and fiscal 2014 revenues and earnings. Not only did this leading semiconductor manufacturer beat our estimates, but the company also exceeded the mid-end of its guidance with respect to net sales, gross margin, operating margin and adjusted earnings per share.

Microchip reported GAAP net income of $111.5 million or 50 cents per share in the fourth quarter of fiscal 2014 compared with $59.7 million or 28 cents per share in the year-ago quarter. The stellar 86.8% year-over-year increase in GAAP earnings is primarily attributable to record quarterly sales and lower operating expenses.

Excluding non-recurring items, adjusted net income for the reported quarter was a record high of $141.3 million or 64 cents per share, significantly up from $109.3 million or 52 cents per share in the year-earlier quarter. The quarterly adjusted earnings well exceeded the Zacks Consensus Estimate of 55 cents.

For fiscal 2014, Microchip reported GAAP net income of $395.3 million or $1.82 per share compared with $127.4 million or 62 cents per share in fiscal 2013. The phenomenal 210.3% year-over-year increase in GAAP earnings was largely driven by record fiscal revenues.

Excluding non-recurring items, adjusted net income for the reported fiscal was $531.0 million or $2.45 per share compared with $388.5 million or $1.89 per share in fiscal 2013. The adjusted earnings for fiscal 2014 comfortably beat the Zacks Consensus Estimate of $2.19.

Revenues

Net revenue for the reported quarter came in at $493.4 million, up 14.7% year over year, aided by all-time high sales of microcontrollers. The quarterly revenues were also ahead of the Zacks Consensus Estimate of $491 million. For fiscal 2014, Microchip's net sales were $1.93 billion compared with $1.58 billion in fiscal 2013.  

In terms of product mix, revenues from microcontroller products accounted for 66.2% of the total revenue in the quarter ($326.4 million), while analog revenues, memory chip and licensing business represented 21.8% ($107.5 million), 6.7% ($33.1 million) and 4.7% ($23.2 million) of total revenue, respectively. By geographical regions, the bulk of the revenues came from Asia ($284.6 million), followed by Europe ($115.9 million) and the Americas ($92.8 million).

Net sales of microcontroller products were up 18.3% year over year in the quarter and 20.8%, respectively, driven by robust sales of 8-bit, 16-bit and 32-bit microcontrollers. While the 16-bit microcontroller business climbed 38.3% and 44.2% for the reported quarter and fiscal, respectively, 32-bit microcontroller revenues were up 66% and 73% with new design wins and applications.

The microcontroller business continued to outperform the industry and enabled Microchip to gain significant market share. Microchip expects to continue this momentum to further strengthen its position as the best-performing microcontroller franchise in the industry.

Analog revenues increased 10.6% and 32% in the quarter and fiscal 2014, respectively, on a year-over-year basis. The Analog business has become one of the best performing analog franchises in the industry. In order to further capitalize on this burgeoning business potential, Microchip is developing and introducing a wide range of innovative and proprietary new products.

Microchip recently completed the acquisition of integrated circuits (IC) manufacturer Supertex Inc., which will operate as one the divisions of its analog business. This strategic purchase will enable Microchip to expand in the Medical, Industrial and Lighting verticals. Microchip is also expected to leverage Supertex' strong domain knowledge in high voltage analog and mixed signal technologies to achieve significant operating synergies and create cross-selling opportunities.

Margins

Microchip recorded gross margin (non-GAAP) of 59.3% for the reported quarter, while operating income (non-GAAP) touched a record high at $161.5 million. Non-GAAP operating margin for the quarter was 32.7% and Microchip was confident of achieving its long-term goal of 35% non-GAAP operating margin in the near future. Gross margin (non-GAAP) for fiscal 2014 was 58.8%, while operating income (non-GAAP) was at an all-time high of $613.2 million.

Balance Sheet

With a diligent focus on right-sizing the various components of inventory holdings, Microchip's consolidated inventory at quarter end was $262.7 million or 118 days. Inventory at distributors was at 33 days. The company hiked its quarterly cash dividend from 35.50 cents to 35.55 cents per share, representing the 41st dividend increase since its inception.

Cash and short-term investments improved to $2.14 billion, with $650 million debt under its revolving line of credit. Capital expenditures aggregated $34.7 million for the quarter.

Outlook

Concurrent with the fourth quarter and fiscal 2014 earnings release, management provided guidance for the first quarter of fiscal 2015. Management expects net sales between $519.8 million and $534.6 million, while non-GAAP gross margin is expected in the range of 59.3% to 59.5%. Non-GAAP net income is anticipated in the range of $143.7 million to $151.7 million, with earnings per share of 64 cents to 68 cents.

Microchip expects to increase cash and investments by approximately $140 million to $160 million in the first quarter prior to the dividend payment. The company expects to incur $40 million in capital expenditure in the next quarter, bringing its tally to about $125 million for fiscal 2015.

With better-than-expected bookings and increasing requests on the back of strong demand and robust product designs, we expect Microchip to continue its bull run in the coming quarters as well.

Microchip presently has a Zacks Rank #2 (Buy). Other players in the industry that are worth mentioning include Montage Technology Group Ltd. MONT, MaxLinear, Inc. MXL and ON Semiconductor Corp. ONNN. While Montage currently holds a Zacks Rank #1 (Strong Buy), MaxLinear and On Semiconductor carry a Zacks Rank #2 (Buy) each.