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Microchip Misses Again in 2Q

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Microchip Technology Incorporated (MCHP - Free Report) posted a net loss of $21.2 million or 11 cents in the second quarter of 2013 income (ending June 30, 2012) compared to a net income of $78.7 million or 39 cents in the first quarter of 2013 and a net income of $79.3 million or 40 cents in the year-ago quarter.

Excluding one-time items, net income came in at 39 cents per share during the quarter, missing the Zacks Consensus Estimate of 44 cents.
Microchip generated net revenues of $383.8 million, up 8.9% sequentially and 12.5% annually. Including sell-through inventory held by distributors of Roving Networks, net sales of $407.8 million were up 15.7% sequentially and 19.7% year over year. 
The decline in sales was primarily due to weak European markets and uncertain economic environment in the U.S. and China. The results were in line with the preliminary results provided last month. 
Quarter in Detail
On August 2, 2012, Microchip acquired Standard Microsystems in order to expand its smart mixed-signal connectivity solutions for embedded applications in markets such as automotive, industrial, computing, consumer and wireless audio.
Microchip classified Standard Microsystems revenue into microcontrollers and analog products. Standard Microsystems generated revenues of $72.5 million from August 2 to September 30. 46.8% of this revenue or roughly $33.9 million was microcontroller revenue, and 53.2% or roughly $38.5 million came from analog business.
In terms of product mix, revenues from microcontrollers were down 5.5% sequentially. The 16-bit business (excluding Standard Microsystems business) was down 7.8% sequentially but up 28.8% from the year-ago quarter. 32-bit business increased 97% from the year-ago quarter but was down 0.5% sequentially. 
On a consolidated basis, microcontroller revenue came in at $261.3 million with $33.9 million coming from Standard Microsystems. 
Analog business was up 1.9% sequentially and 13.7% from the year-ago quarter.  The combined analog business of Microchip and Standard Microsystems contributed a record 21.1% to the revenue. The company shipped 47,000 tools in the September quarter.
Memory business, comprising Serial E-squared memory products and SuperFlash memory products, were down 10.2% sequentially, contributing 9% to the total. 
Excluding stock-based compensation expense and one-time items, gross margin stood at 57.7% versus 59.0% in the previous quarter and 58.2% in the year-ago quarter. 
Operating margin came in at 29.2%, down from 32.7% in the previous quarter and 32.3% in the year-ago quarter.
Including the above-mentioned items, Microchip generated a gross margin of 50.7%, down from 57.7% in the previous quarter due to sell through of $22.7 million of written up inventory costs associated with acquisitions.  
The company incurred approximately $15 million in capital expenditures. Microchip ended the quarter with cash and cash equivalents of $1.5 billion, down from $1.6 billion at the end of the previous quarter. Inventory came in at $289.5 million, up from $221.5 million at the end of the previous quarter. 
Management expects net sales between $396 million and $426 million in the third quarter of fiscal 2013, including a full quarter contribution of $87 million – $94 million from Standard MicroSystems Corporation products. 
The weak economic environment coupled with a deceleration of worldwide GDP growth continues to plague Microchip, which competes with the likes of Atmel Corporation . All the three product lines of Microchip -- microcontroller, analog and memory along with Standard Microsystems business -- will be weak. 
The integration process is underway and management expects the acquisition to yield significant synergies in the coming quarter. 
For the third quarter of fiscal 2013, gross margin is expected to come between 55.5% and 56.0%. Gross margin will be negatively impacted by a reduction in wafer starts in the company’s fabrication facilities to help curb the growth of excess inventory related to the adverse business environment. EPS is forecasted between 37 cents and 41 cents including a 4 – 5 cent contribution from Standard Microsystems. 
The weak guidance led to a 1.69% reduction in share price to close at $31.37 in afterhours trading. 
As of now, we prefer to be on the sidelines and maintain a Neutral recommendation in the long run. However, we currently have a Zacks #5 Rank on Microchip, which translates into a short-term rating of Strong Sell due to the weak macroeconomic environment.

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