Microchip Ups Guidance

| About: Microchip Technology (MCHP)

On June 3rd Microchip (NASDAQ:MCHP) revised guidance upward for this June quarter. Revenue is expected to be up 4% to 7% sequentially; prior guidance was up 2% to 6%. GAAP EPS is expected between $0.32 and $0.36; prior guidance was $0.30 to $0.34. Non-GAAP EPS range is $0.52 to $0.56, up from $0.50 to $0.54.

When last wrote about MCHP in February (Microchip Record Revenue Should Be Topped in March Quarter), guidance for March was based on belief that the December quarter marked a bottom for inventory draw-down and that new design wins would propel revenue and earnings through 2013. So far the upward trend is in even better shape than expected.

For the March quarter, fiscal Q4 2013, Microchip reported revenue of $430.1 million, up 3% sequentially from $416.0 million, and up 27% from $338.9 million in the year-earlier quarter. GAAP net income was $59.7 million, well sequentially from $10.2 million, but down 26% from $80.6 million year-earlier. GAAP EPS (earnings per share) were $0.28, up sequentially from $0.05, but down 28% from $0.39 year-earlier.

Non-GAAP net income was $109.3 million, up 29% sequentially from $84.5 million. EPS was $0.52, up 27% sequentially from $0.41 and up 13% from $0.46 year-earlier. GAAP gross margin was 56.4%.

The new guidance acts as confirmation to the Microchip story. Unlike some of the larger and better-known semiconductor stocks, Microchip seldom competes in high-volume consumer plays like smartphones. Instead it sells thousands of SKUs that are used by engineers to enable tens if not hundreds of thousands of products ranging from kitchen appliances to industrial controls. Fifteen years ago microcontrollers typically had a small CPU and memory connected to input and output control lines. Now Microchip can add all sorts of other IP, including USB, Ethernet and other ports, RF transponders (Bluetooth, Wi-Fi), digital-to-analog and analog-to-digital converters, and touch-pad interfaces.

There has always been a great deal of competition in the microcontroller market. Microchip's strategy has been to know what engineers want and give it to them. This includes reference kits that make prototyping easy, and (usually) royalty-free software stacks and programming tools.

Microchip microcontrollers are not based on ARM or x86 architectures. Microchip uses its own proprietary PIC, which is an architecture better suited to microcontrollers. Some buy-side analysts have questioned Microchip's not joining the ARM camp. They don't understand that ARM is designed as a low-power general purpose CPU, not as a micro-power controller CPU.

The main difficulty in predicting long term trends and profitability for Microchip is that no particular design win moves the needle much. Because they are in so many varied products, the macroeconomy plays a large role in demand. For instance, when housing construction slowed to a crawl in 2007, that did impact Microchip for a time because new houses have new appliances, and those appliances now have microcontrollers in them. But Microchip easily replaced that demand by winning sockets in other devices. In addition the microcontroller TAM has consistently grown faster than the economy.

Microsoft ended last quarter with $1.84 billion in cash and equivalents and $620 million in debt. Free cash flow was $123.3 million and $69.2 million was paid in dividends. The dividend is currently $0.3535 per quarter, giving a yield near 3.8%.

Microchip has proven to be a reliable producer of dividends over the years, continuing to pay the dividend even during the recession.

At the mid-range of the new guidance revenue will be $454 million, up 29% from $352 million in the year-earlier quarter. For me that is rapid growth, justifying a relatively high P/E ratio. But at this moment's price of $37.70 (up $0.45 Since the new guidance announcement) with trailing non-GAAP earnings of $1.89, P/E is 19.9.

Although some investors are rotating out of dividend stocks, I believe Microchip is a growth plus dividends stock. If revenue and earnings continue to grow, which they would normally just based on the season strength of the September and December quarters, a higher stock price seems justified.

Disclosure: I am long MCHP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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