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Will Microsemi Synergies Aid Microchip's (MCHP) Q1 Earnings?

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Microchip Technology Inc. (MCHP - Free Report) is scheduled to release first-quarter fiscal 2019 results on Aug 9.

The company has beaten the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 3.85%.

In the last reported quarter, the company delivered earnings of $1.40 that surpassedthe Zacks Consensus Estimate by 5 cents. The figure also jumped 20.7% on a year-over-year basis.

The year-over-year upside was driven by higher net sales, which increased 11% from the year-ago quarter to $1 billion, comfortably outpacing the Zacks Consensus Estimate of $987 million. Notably, net sales have also outpaced the consensus mark in the trailing four quarters.

What to Expect?

Microchip recently completed the acquisition of Microsemi for $10.3 billion. The deal worth $10.15 billion in total enterprise value was announced on Mar 1, 2018. The deal is anticipated to be immediately accretive for Microchip’s earnings on a non-GAAP basis.

On the heels of Microsemi synergies, management recently revised first-quarter fiscal 2019 outlook.

The company envisions Microsemi acquisition to raise non-GAAP net sales by $160 million-$180 million. Consequently, total non-GAAP net sales are now projected in the range of $1.172-$1.242 billion, up from the previously guided range of $1.012-$1.062 billion.

The Zacks Consensus Estimate for revenues is pegged at $1.21 billion, reflecting year-over-year growth of almost 24.3%.

Microchip also raised guidance for earnings as it anticipates Microsemi buyout to be accretive immediately and contribute around 2-6 cents. Management now projects earnings to range between $1.41 per share and $1.55 per share. The previously anticipated range was $1.39-$1.49 per share.

The Zacks Consensus Estimate for first-quarter earnings has remained steady at $1.49 per share, reflecting year-over-year growth of 13.7%.

Share Price Performance

Shares of Microchip have gained 14.8% in the past year, outperforming the industry’s rally of 10.5%.

This outperformance can primarily be attributed to solid demand witnessed by the company’s product portfolio and synergies from accretive acquisitions. End-market diversification and operational efficiencies are also catalysts.

Let's see how things are shaping up for this announcement.

Factors Likely to Influence Q1 Results

Strength in Microcontroller Business & Expanding Portfolio

Microchip’s microcontroller business (65.6% of fourth-quarter sales) continues to outperform the industry and has enabled it to gain significant market share. In the fourth quarter, segment revenues increased 12.2% year over year to $657.3 million.

In the quarter under review, the company introduced new 32-bit SAM L10 and SAM L11 microcontrollers families based on Arm Cortex-M23 core. With the new products, Microchip intends to enhance security of Internet of Things (“IoT”) endpoints.

Microchip also announced dsPIC33CH Digital Signal Controller (“DSC”) family, featuring two dsPIC DSC cores on a single chip. The new DSC enables the software developers to integrate code from multiple design teams.

We believe that newly launched products will continue to expand customer base. Notably, the Zacks Consensus Estimate for microcontroller revenues is pegged at $706 million for the first quarter compared with the year-ago figure of approximately $636 million.

Accretive Acquisitions & Collaborations

Microchip is well poised to capitalize on Microsemi’s growth catalysts. Apart from a robust portfolio, the buyout is expected to expand Microchip’s total addressable markets. Strong demand for Microsemi’s solutions in Data Center, Communications, Defense & Aerospace markets make us optimistic about Microchip’s prospects in the near-term.

Accretive acquisitions like that of Atmel, in the recent past, have also expanded Microchip’s product portfolio and continue to aid top-line growth.

Collaboration with Amazon Web services (“AWS”) to support AWS offerings as well as develop secure cloud systems augurs well for the company.

Microchip continues to capitalize on enhancing its solution range and improving capacity constraints along with new design wins. This enables the company to gain a competitive edge in the semiconductor industry. The company also maintains a strong balance sheet, which is a notable positive.

What the Zacks Model Unveils

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP.

The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Microchip has a Zacks Rank #3 and an Earnings ESP of 0.00%, which makes surprise prediction difficult.

Stocks That Warrant a Look

Here are some stocks that you may want to consider as our model shows these have the right combination of elements to deliver an earnings beat in its upcoming release.

CONVERGEONE HLD has an Earnings ESP of +9.47% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Acxiom Corporation has an Earnings ESP of +11.11% and a Zacks Rank #3.

ChannelAdvisor (ECOM - Free Report) has an Earnings ESP of +8.86% and a Zacks Rank #3.

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