A month has gone by since the last earnings report for Microchip Technology (MCHP Quick QuoteMCHP - Free Report) . Shares have lost about 16.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Microchip Tech due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Microchip Earnings Surpass Estimates in Q2, Sales Decrease Y/Y

Microchip Technology reported second-quarter fiscal 2025 non-GAAP earnings of 46 cents per share, which beat the Zacks Consensus Estimate by 6.98% but plunged 71.6% year over year.

Net sales of $1.164 billion decreased 48.4% year over year, which surpassed the Zacks Consensus Estimate by 1.09%.

The decline in sales was due to ongoing customer destocking and weak demand across end markets, particularly in the consumer and automotive sectors, with a sequential drop of nearly 22%.

Microchip’s Segmental Details

Mixed-signal Microcontroller, Analog and Other accounted for 51.1%, 25.1% and 23.8% of net sales, respectively.

Semiconductor Products and Technology Licensing contributed 96.7% and 3.3% to net sales.

Sales from the Americas, Europe and Asia contributed 31.8%, 18.3% and 49.9% to net sales, respectively.

MCHP’s Operating Results

The non-GAAP gross margin contracted 850 basis points (bps) on a year-over-year basis to 59.5%.

Non-GAAP research and development expenses, as a percentage of net sales, increased 650 bps year over year to 18.4%. Non-GAAP selling, general and administrative expenses, as a percentage of net sales, jumped 380 bps to 11.9%.

Non-GAAP operating expenses, as a percentage of net sales, were 30.3% compared with 20% in the year-ago quarter.

Consequently, the non-GAAP operating margin declined to 29.3% compared with 48.1% in the year-ago quarter.

Microchip’s Balance Sheet & Cash Flow

As of Sept. 30, 2024, cash and short-term investments totaled $286.1 million compared with $315.1 million as of June 30, 2024.

As of Sept. 30, 2024, total debt (long-term plus current portion) was $6.42 billion compared with $6.17 billion as of June 30, 2024.    

For the fiscal second quarter, cash flow from operating activities was $43.6 million compared with $377.1 million in the previous quarter.

The free cash flow was $22.8 million compared with $304.2 million in the previous quarter.
Microchip returned roughly $261 million to shareholders in the fiscal second quarter through dividends of $243.7 million and share repurchases of $17.3 million.

The company announced a quarterly dividend of 45.5 cents per share, up 3.6% from the year-ago quarter.

MCHP’s Cautious Q3 Guidance

Microchip expects net sales of $1.03-$1.10 billion for the third quarter of fiscal 2025.

Non-GAAP earnings are anticipated between 25 cents and 35 cents per share.

The non-GAAP gross margin is anticipated between 57% and 59%. 

Non-GAAP operating expenses are projected to be 33.2-34.8%.

The non-GAAP operating margin is anticipated to be 22.2-25.8%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

The consensus estimate has shifted -46.43% due to these changes.

VGM Scores

At this time, Microchip Tech has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Microchip Tech has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.