Microchip Tech Ups Outlook

Microchip Technology Ups Q1 Outlook

Shares of Microchip Technology (MCHP - Analyst Report) are up over 4% in early trading today following the company’s Q1 update this morning. The company indicated that net sales are expected to increase 8 and 10 percent sequentially, with non-GAAP EPS of $0.17 - $0.18. Non-GAAP gross margins are now 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 and our current estimates.

Investors may recall that MCHP shares were depressed on May 8th following the company’s Q4 and FY2008 earnings release, which did not include any specific guidance. We had observed in our blog post on May 8th that the company is beginning to see improvements in overall business conditions, but it was clear that MCHP is bearing the brunt of the global economic slowdown, and the lack of specific forward guidance implied that revenues may remain at depressed levels near-term.

The latest update from the company neutralizes the earlier negative sentiment associated with the lack of specific guidance for Q1, and clearly indicates revenues and EPS should come in ahead of our and consensus views.

MCHP’s earlier plans for "internal" purposes were for Q1 revenues of $182 million with non-GAAP EPS of $0.16. This compares to our current estimates of $177 million in revenues and non-GAAP EPS of $0.16. The guidance update from this morning implies revenues in the $186.8 million - $190.3 million range, a significant improvement from our current estimates.

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. MCHP currently expects Q2 (September) gross margins to improve as much as 200 basis points sequentially.