Microchip (MCHP) to Report Q3 Earnings: What’s in Store?

Microchip Technology Incorporated MCHP is scheduled to release third-quarter fiscal 2019 results on Feb 5.

The company has outpaced the Zacks Consensus Estimate in the trailing four quarters, recording average positive surprise of 4.13%.

In the last reported quarter, the company delivered non-GAAP earnings of $1.81 per share that surpassed the Zacks Consensus Estimate by 7 cents. The figure also jumped 28.4% on a year-over-year basis.

The year-over-year upside was driven by higher net sales, which increased 49.5% from the year-ago quarter to $1.513 billion on a non-GAAP basis. The figure comfortably beat the Zacks Consensus Estimate of$1.512 billion.

Guidance & Estimates

Microchip forecasts third-quarter fiscal 2019 net sales of $1.362-$1.438 billion (mid-point $1.4 billion). The Zacks Consensus Estimate for the same is pegged at $1.402 billion, reflecting year-over-year growth of almost 41%.

For the fiscal third quarter, non-GAAP earnings are anticipated in the range of $1.49-$1.64 per share. The Zacks Consensus Estimate for earnings is pegged at $1.57 per share, indicating year-over-year growth of 15.4%.

Let's see how things are shaping up for this announcement.

Factors to Consider

Strength in Microcontroller Business & Expanding Portfolio

Microchip’s microcontroller business (54.3% of second-quarter sales) continues to outperform the industry and has enabled it to gain significant market share. In the second quarter, segment revenues (GAAP) increased 17% year over year to $778.4 million.

Portfolio expansion across majority of the operating domains bode well. Notably, Microchip is now focusing on improving driving experience to strengthen its position in producing autonomous vehicle controllers.

In fact, the company unveiled cost-effective three-dimensional (3D) gesture recognition controller, MGC3140, which offers a robust single-chip solution for sophisticated automotive HMI designs. The new solution is aimed at reducing driver distractions, in turn enhancing the in-car capability of the drivers.

Robust adoption of company’s low power PolarFire solutions is a positive. Recently, Microchip also announced availability of MPLAB X Integrated Development Environment (IDE) version 5.05, that support AVR family of the company’s MCUs.

The company added two new devices, ATtiny3217 and ATtiny3216, with highly developed analog features to its tiny AVR MCU series. These are aimed at developing highly responsive sensor nodes.

The new solutions are anticipated to generate incremental revenues, consequently favoring the top line. Notably, the Zacks Consensus Estimate for microcontroller revenues is pegged at $737 million for the third quarter.

Acquisitions & Collaborations: Key Growth Drivers

Acquisitions like Microsemi, SMSC, ISSC, Micrel and Atmel have expanded Microchip’s product portfolio and continue to aid the top line. Additionally, strong demand for Microsemi’s solutions in Data Center, Communications, Defense & Aerospace markets make us optimistic about the company’s prospects.

Further, collaborations with the likes of Amazon’s AMZN and Sony SNE augur well for the company. Notably, the company has collaborated with Amazon Web Services (“AWS”) to support AWS offerings and develop secure cloud systems.

In fact, Microsemi, Microchip’s subsidiary recently announced that AcuEdgeZLK38AVS Development Kit for Amazon Alexa Voice Service (“AVS”) could showcase far-field voice pick up and various mic array configurations.

Additionally, Microchip unveiled IS2064GM-0L3, a Bluetooth 5-compliant System-on-Chip (SoC) compatible with Sony’s advanced LDAC audio codec technology.

Robust collaborations and strategic buyouts are expected to aid the company in expanding business and total addressable market (TAM), consequently favoring top-line growth.

Other Factors

The company continues to capitalize on enhancing its solution range and improving capacity constraints along with design wins. This provides Microchip a competitive edge in the semiconductor industry.

However, increasing lead time, slim demand trends in ZTE and Bitcoin business domains are headwinds. Further, imposition of tariff owing to trade war between the United States and China has been taking a toll on chipmakers for a while now and remains a concern.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Microchip has a Zacks Rank #3 and an Earnings ESP of 0.00%. This makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stock that Warrants a Look

Here is a stock you may consider, as our proven model shows that it has the right combination of elements to post an earnings beat this quarter.

Archer Daniels Midland Company ADM has an Earnings ESP of +2.45% and a Zacks Rank #1. The company is slated to report fourth-quarter 2018 earnings on Feb 5. You can see the complete list of today’s Zacks #1 Rank stocks here.

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