Broad-based growth across all product lines helped Microchip Technology Inc. (MCHP) deliver healthy third-quarter fiscal 2015 results. Microchip reported GAAP net income of $86.1 million or 39 cents per share in the third quarter of fiscal 2015 compared with $105.4 million or 48 cents per share in the year-ago quarter. The year-over-year decrease in GAAP earnings was largely attributable to higher operating expenses and higher number of shares outstanding for the reported quarter.
Excluding non-recurring items, adjusted net income for the reported quarter was $143.3 million or 64 cents per share compared with $132.9 million or 61 cents a share in the year-earlier quarter. Recurring earnings (with stock-based compensation adjustments) were 60 cents per share, which comfortably beat the Zacks Consensus Estimate of 56 cents.
Revenues
Net revenue (GAAP) for the reported quarter was $528.7 million, up 9.6% year over year, aided by strong sales of microcontrollers and analog products. The quarterly revenues beat the Zacks Consensus Estimate of $526 million.
In terms of product mix, revenues from microcontroller products accounted for 64.5% of the total revenue in the quarter ($345.5 million). Microcontroller revenues in calendar year 2014 were up 13.8% year over year, setting an all-time record for each of the three microcontroller segments. The company also registered record sales of 8-bit, 16-bit and 32-bit microcontrollers in calendar year 2014. While the 16-bit microcontroller business climbed 27.7% for the year, 32-bit microcontroller revenues were up 41.3% with new design wins and applications.
The microcontroller business continued to outperform the industry and enabled Microchip to gain significant market share. Microchip expects to continue this momentum to further strengthen its position as the best-performing microcontroller franchise in the industry.
Revenues from the analog products were up 15.3% from the year-ago quarter to $125.5 million, representing 23.4% of the total revenue. With strong design win momentum in a broad range of applications, revenues from the analog business were up 15.7% in calendar year 2014 and set an all-time record.
With revenues of $33.2 million in the reported quarter, memory business was up 2% year over year. It represented 6.2% of Microchip's overall revenue in the quarter. Revenue from the licensing business was $22.9 million in the reported quarter, accounting for 4.3% of the total revenue. By geography, $325 million of total revenue was generated from Asia, followed by $105.9 million from Europe and $104.9 million from the Americas. Bulk of the revenues was generated in Asia as most of the contract manufacturing business takes place in this continent.
Margins
Microchip recorded gross margin (non-GAAP) of 58.2% for the reported quarter, while operating income (non-GAAP) was $169.3 million. Non-GAAP operating margin for the quarter was 31.6% and Microchip was confident of achieving its long-term goal of 35% non-GAAP operating margin in the near future.
Balance Sheet
With a diligent focus on right-sizing the various components of inventory holdings, Microchip’s consolidated inventory at quarter end was $276.1 million or 111 days. The company hiked its quarterly cash dividend from 35.65 cents to 35.70 cents per share, representing the 44th dividend increase since its inception. Microchip has returned over $2.4 billion to shareholders as dividends and $1.4 billion in share repurchases since the inception of its dividend program.
Cash and short-term investments were $1.1 billion at quarter end, with $981.3 million debt under its revolving line of credit. Net cash generation for the quarter (excluding ISSC acquisition, dividend payment, and reduction in borrowings) was $145.7 million.
Outlook
Concurrent with the third quarter earnings release, management provided guidance for the fourth quarter of fiscal 2015. Management expects non-GAAP net sales between $541.2 million and $551.9 million, while non-GAAP gross margin is expected in the range of 58.2% to 58.4%. Non-GAAP net income is anticipated in the range of $144.9 million to $151.7 million, with non-GAAP earnings per share of 65 cents to 67 cents.
Microchip expects to generate approximately $160 million cash in the fourth quarter prior to the dividend payment and acquisitions. The company expects to incur $40 million in capital expenditure in the next quarter, bringing its tally to about $160 million for fiscal 2015.
With solid revenues from microcontroller and analog products, better-than-expected bookings and increasing requests on the back of strong demand and robust product designs, we expect Microchip to continue its bull run in the coming quarters.
Microchip presently has a Zacks Rank #2 (Buy). Other players in the industry that are worth mentioning include Analog Devices, Inc. (ADI), Maxim Integrated Products, Inc. (MXIM) and NXP Semiconductors NV (NXPI), each carrying the same Zacks Rank as Microchip.
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