Microchip is Past "Small Correction"

Microchip Technology Inc. (NASDAQ: MCHP) this week said the “small correction” it experienced earlier this year is in the rear-view mirror as the vendor of microcontroller, mixed-signal, analog and Flash-IP solutions amended its forecast for its fiscal third quarter of 2015.

Microchip now expects net sales to be down between 2 percent and 5 percent sequentially, and non-GAAP earnings per share to be between 60 and 64 cents per share. Microchip previously provided guidance on October 30, 2014 for net sales to be down between 2 percent and 7 percent sequentially and non-GAAP earnings per share to be between 59 and 64 cents per share.

"We have continued to see an improvement in our bookings and billings since our earnings call on October 30, 2014," said Steve Sanghi, Microchip's President and CEO.

"We are now even more confident that the small correction that we experienced in the September quarter is behind us, and we currently expect to provide guidance of a low single digit sequential revenue increase for the March 2015 quarter when we announce our fiscal third quarter of 2015 results in late January," Sanghi added.

Microchip expects GAAP earnings per share to be between 30 to 33 cents per share compared with previous guidance for GAAP earnings per share of 29 to 33 cents per share.

In August, Microchip alerted customers to possible component shortages as demand surged in multiple product segments, resulting in extended lead times and rising capacity constraints. Sanghi warned in a memo to customers that continued misalignment in orders at a time of rising demand and plant capacity constraint could hurt companies that fail to prepare ahead for the back-to-school and year-end holiday seasons.

Microchip said sales to customers in the automotive, consumer electronics, housing, industrial and PC segments had been exceptionally strong in recent months, exceeding its expectations and swamping its ability to raise production capacity. The company said it had in response to the stronger demand jacked up fiscal 2015 capital expenditure 40 percent, to $175 million, from $125 million, “the highest in a decade,” according to Sanghi in the memo, a copy of which was obtained by Electronics Purchasing Strategies.

Sanghi had previously indicated to the investment community that Microchip was experiencing solid demand for its products, adding that the company’s product delivery or lead times have stretched out as a result. In the June quarter, for example, Microchip’s inventory days fell to 108, below the company’s target of 115 days. In a statement to investors released with the company’s fiscal 2015 first quarter results, Sanghi warned inventory days were headed lower despite Microchip’s efforts to crank up production. “We are ramping all of our factories, but we are limited by equipment lead times,” he noted in the statement.

Microchip's revised guidance for Q3 2015:

Microchip Consolidated Guidance
GAAP	Non-GAAP Adjustments	Non-GAAP¹
Net Sales	$511.8 to $528.2 million	$7.1 million	$518.9 to $535.3 million
Gross Margin²	56.5% to 56.7%	$11.8 to $12.1 million	58.0% to 58.2%
Operating Expenses²	39.55% to 40.05%	$62.3 to $64.4 million	27.0% to 27.5%
Other Expense	$9.8 million	$2.5 million	$7.3 million
Income Tax Expense	11.4% to 11.8%	$7.7 to $7.8 million	10.6% to 11.0%
Net Income before noncontrolling interest	$65.6 to $71.6 million	$68.7 to $71.2 million	$134.3 to $142.8 million
Less Net Income (Loss) from noncontrolling interest	($1.5 million)	$1.9 million	$0.3 million
Net Income	$67.2 to $73.1 million	$66.8 to $69.4 million	$134.0 to $142.5 million
Diluted Common Shares Outstanding³	Approximately 223.4 million shares	Approximately 0.7 million shares	Approximately 222.7 million shares
Earnings per Diluted Share	30 to 33 cents	30 to 31 cents	60 to 64 cents
¹	See the "Use of Non-GAAP Financial Measures" section of this release.
²	Earnings per share have been calculated based on the diluted shares outstanding of Microchip on a consolidated basis.
³	See Footnote 3 under the "Use of Non-GAAP Financial Measures" section of this release.