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Factors Setting the Tone for Microchip's (MCHP) Q2 Earnings

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Microchip Technology Inc. (MCHP - Free Report) is scheduled to release second-quarter fiscal 2019 results on Nov 7.

The company has beaten the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 4.23%.

In the last reported quarter, the company reported non-GAAP earnings of $1.61 per share, surpassing the Zacks Consensus Estimate of $1.49 per share. The figure also improved 22.9% year over year.

Higher net sales which increased 24.7% from the year-ago quarter to $1.213 billion on a GAAP basis drove the year-over-year upside. On a non-GAAP basis revenues came in at $1.216 billion. The Zacks Consensus Estimate for revenues is pegged at $1.208 billion.

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.

What to Expect?

Microchip forecasts second-quarter fiscal 2019 net sales of $1.474-$1.550 billion (mid-point $1.512 billion). The Zacks Consensus Estimate for revenues is pegged at $1.51 billion, reflecting year-over-year growth of almost 49.4%.

For the fiscal second quarter, non-GAAP earnings are anticipated in the range of $1.65-$1.83 per share (mid-point $1.74). The Zacks Consensus Estimate for earnings is pegged at $1.74 per share, reflecting year-over-year growth of 23.4%.

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

Factors Likely to Influence Q2 Results

Microchip’s microcontroller business (60% of first-quarter sales) continues to outperform the industry and has enabled it to gain significant market share. In the first quarter, segment revenues increased 10.8% year over year to $728.6 million.

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 $796 million for the second-quarter compared with the year-ago figure of approximately $656 million.

Further, Microchip is now focusing on improving driving experience to strengthen its position in producing autonomous vehicle controllers. In sync with this, the company recently launched the world’s first-ever three-dimensional (3D) automotive-qualified MGC3140 controllers to enhance the in-car capability of the drivers.

The MGC3140 is supported by Microchip’s new Electromagnetic Compatibility (“EMC”) resistance and is a versatile companion chip to advance multi-touch performance. With such innovative and proprietary products, the company continues to capitalize on its business potential.

The company also completed the acquisition of Microsemi for $10.3 billion.  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.

Collaboration with Amazon Web services (“AWS”) to support AWS offerings and 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 noteworthy 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 #4 (Sell) 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.

Match Group, Inc. (MTCH - Free Report) has an Earnings ESP of +3.59% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Adobe Systems Incorporated (ADBE - Free Report) has an Earnings ESP of +0.19% and a Zacks Rank #2.

Etsy, Inc. (ETSY - Free Report) has an Earnings ESP of +76.27% and a Zacks Rank #2.

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