A month has gone by since the last earnings report for Microchip Technology (MCHP - Free Report) . Shares have lost about 3.2% 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 the most recent earnings report in order to get a better handle on the important catalysts.
Microchip Beats on Q3 Earnings and Revenues Estimates
Microchip Technology delivered third-quarter fiscal 2019 non-GAAP earnings of $1.66 per share, surpassing the Zacks Consensus Estimate by $1.57 per share. The figure was also above the higher end of management’s guided range of $1.49-$1.64 per share and surged from $1.36 per shares reported in the year-ago quarter.
The year-over-year upside was driven by higher net sales, which increased 42.4% from the year-ago quarter to $1.416 billion on a non-GAAP basis. The figure also marginally surpassed the Zacks Consensus Estimate of $1.402 billion and was toward the higher end of management’s guided range of $1.362-$1.438 billion.
Quarter in Detail
In terms of product line, microcontroller business (52.9% of non-GAAP net sales) decreased 8.7% sequentially to $748.4 million. However, revenues from microcontroller went up 13.2% on a year-over-year basis.
Analog net sales came in at $411.8 million (29.1%), down 6.2% sequentially but surged 77.9% on a year-over-year basis. Synergies from Microsemi buyout aided growth across both the domains on a year-over-year basis. Notably, the sequential decline can be attributed to macroeconomic weakness.
We believe Microchip is well poised to capitalize on Microsemi’s growth catalysts. Apart from a robust portfolio, the buyout is likely to expand Microchip’s total addressable markets. Strong demand for Microsemi’s solutions in Data Center, Communications, Defense & Aerospace markets is likely to aid Microchip’s long-term growth prospects.
FPGA revenues (7%) came in at $99.2 million and surged 8.7% sequentially. Robust adoption of company’s low power PolarFire solutions was noteworthy.
Licensing segment (2.8%) reported non-GAAP revenues of $40.1 million, increasing 7.9% sequentially, primarily on account of patent license sale and strength in royalty revenues.
Memory business (2.8%) declined 15% sequentially to $40.1 million.
MMO or multi-market and other business unit revenues (5.4%) were down 3% from the previous quarter.
Geographically, revenues from Americas, Europe and Asia contributed 25.4%, 20.4% and 54.2% of total revenues, respectively.
Portfolio expansion across majority of the operating domains bode well. The company recently partnered Google Cloud to launch the latest AVR-IoT WG Development Board with a fully certified Wi-Fi network controller to provide a simple and effective way to connect embedded applications.
Recently, Microchip announced availability of the SAM R34/35 which integrates ultra-low-power 32-bit MCU, sub-GHz RF LoRa transceiver and software stack.
Microchip unveiled the first RISC-V SoC Field Programmable Gate Array (FPGA) architecture. The company also announced the availability of Intelligent Network Interface Controller networking (INICnet) technology to support all data types, including audio, video, control and Ethernet, over a single cable.
Further, the company introduced the single-chip MXT2912TD-A and MXT2113TD-A for touch screens up to 20 inches in size. Microchip announced availability of MPLAB X Integrated Development Environment (“IDE”) version 5.05 that supports AVR MCUs.
Moreover, the company unveiled the PolarFire FPGA burst mode receiver (“BMR”) solution primarily for 10G passive optical network execution.
The company also introduced new MCP6V51 zero-drift operational amplifier to enhance the high-frequency noise in regular life and work environment.
Microchip reported non-GAAP gross margin of 62.2%, expanding 80 basis points (bps) on a year-over-year basis.
Non-GAAP operating expenses, as percentage of revenues, were up 280 bps year over year to 24.8%. The increase was primarily due to higher research & development (R&D) and selling, general & administrative (SG&A) expenses.
Consequently, non-GAAP operating margin contracted 200 bps from the year-ago quarter to 37.4%.
Balance Sheet & Cash Flow
The company exited the quarter under review with $436.2 million of cash and short-term investments as compared to $464.2 million reported in the previous quarter. Total debt (long plus current portion) amounted to $10.54 billion as compared with $10.9 billion in the previous quarter.
Notably, the company paid $377.5 million of total debt during the quarter.
During the reported quarter, Microchip generated $481.5 million of operating cash flow.
The company announced a quarterly cash dividend of 36.45 cents per share, payable on Mar 7, 2019.
Microchip forecasts fourth-quarter fiscal 2019 net sales of $1.251-$1.403 billion (mid-point $1.327 billion).
For the fourth quarter, non-GAAP earnings are anticipated in the range of $1.26-$1.53 per share (mid-point $1.395 billion).
Non-GAAP gross margin is anticipated in the 61.2-61.8% range. Non-GAAP operating expenses, as percentage of sales, are projected at 25.8-26.5%, and operating margin is expected at 34.7-36%.
Microchip's inventory days in the impending quarter are expected between 123 and 133 days. Capital expenditures are estimated in the range of $50 million.
For fiscal 2019, capital expenditures are projected to be $235 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -11.05% due to these changes.
At this time, Microchip Tech has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
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 #4 (Sell). We expect a below average return from the stock in the next few months.