Microchip Beats Easily

Microchip Technology Inc. (MCHP - Analyst Report) yesterday reported net sales of $192.9 million for the fiscal first quarter, up 11.4% sequentially, surpassing management’s guidance of an increase of 8% – 10% sequentially. However, revenues were down 28.1% year over year.

Microcontroller businesses increased 11.9% sequentially. In particular, 16-bit microcontroller revenues were up 15.7% sequentially and 33.3% year over year.  Analog business was up 12.2% sequentially.

GAAP net income came in at $27.4 million or 15 cents per share. Non-GAAP net income came in at 19 cents, easily beating the Zacks Consensus Estimate of 14 cents.

Non-GAAP gross margin came in at 51.4%, up from 49.3% in the previous quarter driven by higher production activity in the fabs, continued cost reduction efforts from global manufacturing operations and favorable product mix from the sale of proprietary products. However, gross margin was down from 61.6% reported a year ago.

June quarter was a rebound from the March quarter, which the management believes was the bottom. Inventories came down to $113.9 million, from $131.5 million at the end of the previous quarter.

The company saw a steady improvement in the overall business environment. Management stated that despite the continued weakness in the global economy, it is seeing improving trends in the company’s business and overall visibility. Microchip expects revenues for the September quarter to grow at 7% – 11% sequentially. This implies revenue guidance between $206 million and $214 million.

Non-GAAP gross margin is expected to increase to 54% – 55%. The company right-sized its manufacturing output thereby, allowing factories to increase their production levels in the September quarter leading to an improvement in margins.

Capital expenditures for fiscal 2009 are estimated at $20 million, a reduction of about 80% from fiscal 2008. The global slowdown has adversely affected the company’s business in the past six months. However, the company was able to maintain profitability through effective cost control measures and inventory correction.

Meanwhile, the company continues to pay its quarterly cash dividend of $0.339 per share, which will be paid on Sept. 3 to stockholders of record on Aug. 20.

Microchip is riding on a huge cash balance of $1.4 billion, up from $1.39 billion in the previous quarter. The company had earlier unsuccessfully offered to acquire Atmel Corp. (ATML - Analyst Report), which the latter refuted. The company has adopted an elbow out strategy on the M&A front. This strategy focuses on small, bite-sized acquisitions, trivial in terms of the revenue contribution and the size of Microchip but will expand the company’s product portfolio and footprint in untapped markets. We maintain our HOLD on the stock.