Earnings Preview: Microchip Technology

| About: Microchip Technology (MCHP)

Microchip Technology (NASDAQ:MCHP) is expected to report Q1 earnings after the market close on Thursday, August 6, with a conference call scheduled for 5:00 pm ET.

Guidance

The consensus estimate is 13c for EPS and $189.81M for revenue, according to First Call. On June 9, Microchip raised its Q1 outlook, indicating that net sales are expected to increase 8%-10% sequentially to about $187M -$191M, with non-GAAP EPS of 17c-18c. Non-GAAP gross margins are expected in between 50.3%-50.7% with Opex of 29%-29.5%.

All of these metrics are incrementally positive compared to the company's earlier 'internal' expectations. Recall that Microchip shares were depressed on May 8 following the company's Q4 and FY2008 earnings release, which did not include any specific guidance. The company also indicated that although its total backlog had grown during the current quarter, the direct and distribution business channels have both been performing well. Further, the company is increasing its wafer starts and expects improving trends in gross margins in the upcoming quarters. Microchip expects Q2 gross margins to improve as much as 200 bps sequentially.

Analyst Views

Broadpoint AmTech expects Microchip to report Q1 revenue towards the high-end of its guided range and that it could likely exceed guidance driven by a consumer-driven rebound in Asia, which is 42% of sales, continued 8- and 16-bit share gains, and, to a lesser degree, a better than expected uptick in the Automotive markets. Broadpoint's Q1 estimates are EPS of 15c and $191M in revenue.

The firm notes that its recent checks indicate that orders have started to cross an inflection point as distributors recover to balanced inventory in imminent quarters. The June book-to-bill ratio is likely to be reported well above 1.15, notes Broadpoint. The firm believes strength has begun to broaden into automotive markets and Europe/North America. That said, a multi-market business recovery could increase the risk of large acquisitions as Microchip's equity value increases.

Looking forward: Broadpoint expects Microchip to guide Q2 above consensus of $199.96M. The firm is estimating higher than consensus revenue of $206M, up +8% quarter-over-quarter. The firm's FY10 revenue level is one of the high estimates on the street at $842M, vs. consensus the consensus average at $808.23M.