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Microchip (MCHP) Q2 Earnings In Line, Revenues Miss Estimates

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Microchip Technology Incorporated (MCHP - Free Report) reported second-quarter fiscal 2020 non-GAAP earnings of $1.43 per share, in line with the Zacks Consensus Estimate. The figure was within management’s guided range of $1.37-$1.49 per share. Notably, the figure declined from $1.81 reported in the year-ago quarter.

Net sales declined 6.6% from the year-ago quarter to $1.338 billion on a non-GAAP basis. The figure also missed the Zacks Consensus Estimate of $1.353 billion. Notably, the top line was lower than the mid-point of management’s guided range of $1.323-$1.375 billion (mid-point $1.349 billion).

Notably, the impact of Huawei shipment limitations acted as the primary tailwind during the reported quarter. Further, negative developments pertaining to the U.S.-China trade war added to woes.

Nonetheless, strength in microcontroller business and portfolio expansion across majority of the operating domains drove the results.

Microcontrollers and analog contributes approximately 53.3% and 28.7%, respectively, to total revenues in the second quarter. Notably, Microcontroller business was down 1.3% on a sequential basis, while analog business was up 0.2% quarter over quarter.

The company is gaining from robust demand for 8-bit, 16-bit and 32-bit microcontrollers. We believe that Microchip's expanding product portfolio driven by new launches will continue to expand customer base.

Margins

Microchip reported non-GAAP gross margin of 62.2% expanding 90 bps on a year-over-year basis.

Non-GAAP operating expenses, as percentage of revenues, were up 90 bps year over year to 25.6%. The increase can primarily be attributed to higher research & development (R&D) and selling, general & administrative (SG&A) expenses.

Consequently, non-GAAP operating margin contracted 20 bps from the year-ago quarter to 36.7%.

Balance Sheet & Cash Flow

The company exited the quarter under review with $405.1 million of cash and short-term investments compared with $437.1 million reported in the previous quarter. Total debt (long plus current portion) amounted to $9.8 billion compared with $10.08 billion in the previous quarter.

Cash flow from operating activities was $396 million during the quarter.

Notably, the company paid $315.5 million of total debt during the quarter.

During the reported quarter, the company announced a quarterly cash dividend of 36.65 cents per share.

Guidance

Microchip forecasts third-quarter fiscal 2020 net sales of $1.204-$1.311 billion (mid-point $1.257 billion). The Zacks Consensus Estimate for the same is pegged at $1.35 billion.

For the third-quarter, non-GAAP earnings are anticipated in the range of $1.12-$1.32 per share (mid-point $1.22 billion). The Zacks Consensus Estimate for the same is pegged at $1.44 per share.

Non-GAAP gross margin is anticipated in the range of 61-61.4%. Non-GAAP operating expenses, as percentage of sales, are projected at 26.2-28%, while operating margin is expected at 33-35.2%.

Microchip's inventory days in the third quarter are expected between 131 and 144 days. Capital expenditures are estimated to be in the range of $20-$25 million.

For fiscal 2020, capital expenditures are projected to be in the range of $90 million and $100 million.

Zacks Rank & Key Picks

Microchip carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector are Universal Display Corporation (OLED - Free Report) , Fortinet, Inc. (FTNT - Free Report) and Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) . Each of the stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Universal Display, Fortinet and Taiwan Semiconductor is currently pegged at 30%, 14% and 10.4%, respectively.

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