Broad-based growth across all product lines helped Microchip Technology Inc. (MCHP) deliver stellar second-quarter fiscal 2014 revenues and adjusted earnings. Not only did this leading semiconductor manufacturer beat our estimates, but the company even exceeded the high-end of its guidance with respect to net sales, non-GAAP gross margin percentage and adjusted earnings per share.
Microchip reported GAAP net income of $99.8 million or 46 cents per share in the second quarter of fiscal 2014 compared to a GAAP loss of $21.2 million or 11 cents per share in the year-ago quarter.
Excluding non-recurring items, adjusted net income for the reported quarter was a record high of $136.4 million or 63 cents per share, up 39.5% from $97.7 million or 48 cents per share in the year-earlier quarter. The year-over-increase in non-GAAP earnings was primarily attributable to solid top-line growth. The quarterly adjusted earnings well exceeded the Zacks Consensus Estimate of 55 cents.
Revenues
Net revenue for the reported quarter came in at $492.7 million in second quarter fiscal 2014, up 28.5% year over year, aided by a healthy microcontroller business. The quarterly revenues were also ahead of the Zacks Consensus Estimate of $482 million.
In terms of product mix, revenues from microcontroller products accounted for 65.2% of the total revenue in the quarter, while analog revenues, memory chip and licensing business represented 22.0%, 7.1% and 5.0% of total revenues, respectively. By geographical regions, bulk of the revenues came from Asia ($298.6 million), followed by Europe ($98.9 million) and the Americas ($95.2 million).
Net sales of microcontroller products recorded an all-time high of $321 million, up 22.9% year over year, driven by robust sales of 8-bit, 16-bit and 32-bit microcontrollers. While 16-bit microcontroller business climbed 48.1% year over year, 32-bit microcontroller revenues were up a staggering 53.4% in the reported quarter compared with the year-ago quarter, driven by new design wins and applications.
Microchip expects to ship its 13 billionth cumulative microcontroller in November – a milestone reached just seven months after shipping its 12 billionth microcontroller in April this year. The company is gaining significant market share with continued new product innovations and customer engagements. Microchip expects to continue this momentum to further strengthen its position as the best performing microcontroller franchise in the industry.
Analog revenues increased 25.2% year over year to achieve record sales of $108.5 million in the reported quarter. With annual sales of about $434.0 million, the Analog business has become one of the best performing analog franchises in the industry. In order to further capitalize on this burgeoning business potential, Microchip is developing and introducing a wide range of innovative and proprietary new products.
Revenues from memory business totaled $35.0 million, while licensing revenues were $24.8 million in second quarter fiscal 2014. Gross margin (non-GAAP) for the reported quarter was 59.0%, while operating income (non-GAAP) was a record high at $156.6 million.
Balance Sheet
With a diligent focus on right-sizing the various components of inventory holdings, Microchip’s consolidated inventory at quarter-end was $275.1 million or 123 days. Inventory at distributors was at 33 days with a healthy book-to-bill ratio. The company hiked its quarterly cash dividend from 35.40 cents to 35.45 cents per share, representing the 39th dividend increase since its inception.
Cash and short-term investments at quarter-end were $1.2 billion, with $640 million debt under its revolving line of credit. Capital expenditures aggregated $27.4 million for the quarter. Free cash flow at quarter-end was $126.4 million prior to the dividend payment.
Outlook
Concurrent with the second quarter earnings release, management provided guidance for the third quarter of fiscal 2014. Management expects net sales between $463.1 million and $492.7 million, while GAAP gross margin is expected to be in the range of 58.3% to 58.7%. GAAP net income is anticipated to be in the range of $88.7 million to $99.8 million, with earnings per share of 40 to 46 cents.
Microchip expects to increase cash and investments by approximately $110 million to $130 million in the third quarter prior to dividend payment. The company expects to incur $35 million in capital expenditure in the next quarter, bringing its tally to about $115 million for fiscal 2014.
With better-than-expected bookings and increasing requests driven by strong demand and robust product designs, Microchip is expected to continue its bull run in the coming quarters as well. We also remain encouraged by the strong results of the company and its bullish guidance.
Microchip presently has a Zacks Rank #1 (Strong Buy). Other players in the industry that are worth mentioning include Alpha & Omega Semiconductor, Ltd. (AOSL), Amkor Technology, Inc. (AMKR) and Cavium, Inc. (CAVM), each carrying Zacks Rank #2 (Buy).
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