Microchip Technology Incorporated has reported results for the three months ended September 30, 2006. Net sales for the second quarter of fiscal 2007 were $267.9 million, up 2.0% sequentially from $262.6 million in the immediately preceding quarter, and up 17.9% from sales of $227.3 million in the prior year’s second fiscal quarter. As such, the Company has included additional information in its disclosures to assist shareholders with appropriate comparative information. Non-GAAP net income for the second quarter of fiscal 2007, which excludes the effect of all share-based compensation expense, was $84.2 million, or 38 cents per diluted share, up 3.4% from non-GAAP net income of $81.4 million, or 37 cents per diluted share, in the immediately preceding quarter; and up 28.2% from GAAP net income of $65.7 million, or 31 cents per diluted share, in the prior year’s second fiscal quarter. GAAP net income for the second quarter of fiscal 2007 was $79.5 million or 36 cents per diluted share.
Microchip has announced that its Board of Directors has declared a quarterly cash dividend on its common stock of 25 cents per share. The quarterly dividend is payable on November 22, 2006 to stockholders of record on November 8, 2006. Microchip initiated quarterly cash dividend payments in the third quarter of fiscal 2003.
Microchip has also announced that its Board of Directors has promoted Mr. Ganesh Moorthy to Executive Vice President of Microchip.
Microchip also said that its Board of Directors has authorized a buy-back of up to 10 million shares of Microchip common stock in the open market or in privately negotiated transactions. The purchases will depend upon market conditions, interest rates and corporate considerations.
“In the face of challenging industry conditions, Microchip delivered record results in net sales, operating profit and net income in the September quarter. Net sales for the quarter ended up at approximately the mid-point of our updated guidance which we provided on September 20, 2006,” said Steve Sanghi, Microchip’s President and CEO. “As we indicated in that update, the Christmas builds in Asia were delayed from our initial expectations, impacting net sales from our original forecasts. Our factory in Thailand is operating at normal levels post the military coup in that country.”
“Sixteen-bit microcontrollers achieved 53% growth sequentially and 210% over the year ago quarter, albeit from a small base,” said Ganesh Moorthy, Microchip’s Executive Vice President. “Two and one-half years since the start of production, we believe our 16-bit microcontollers have now reached the tipping point. A large number of designs are turning to production, and we expect continued strong growth ahead.”
“Flash microcontrollers grew 6.7% sequentially and 42.3% over the year ago quarter, and now represent approximately 64% of total microcontroller revenues,” added Mr. Moorthy.
Mr. Sanghi continued, “Geographically, Asia was our strongest territory in the September quarter, growing approximately 4.5% sequentially, while both Americas and Europe were essentially flat. Europe’s performance, in the summer vacation quarter, delivered results above normal seasonality.”
“We achieved record gross margins of 60.45% and non-GAAP operating margins of 36.4% in the September 2006 quarter,” Mr. Sanghi added.
Sanghi continued, “We are also pleased to be increasing our quarterly dividend payment to our shareholders by 6.4% sequentially, to 25 cents per share. The increase in dividends and the 10 million share buy-back authorization announced continue to evidence Microchip’s commitment to return value to our shareholders.”
Gordon Parnell, Microchip’s Chief Financial Officer, said, “Inventory days on our balance sheet at the end of September, prior to the effects of share-based compensation, were 99 days, down 2 days from the inventory levels at June 30, 2006. Inventory days including the effects of share-based compensation at the end of September were 101 days.”
“Inventory in the distribution channel at the end of September 2006 was 1.9 months, down from 2.0 months as of the end of June 2006,” Mr. Parnell added. “Combined channel inventories in support of our customers at the end of September 2006 are at the lowest levels in our business in the last several years.
Mr. Sanghi said, “The outlook for the December quarter continues to be challenging. We expect distributors to continue to reduce inventories in response to the industry leadtimes and overall conditions. This was certainly reflected in the book-to-bill ratio for the September quarter, which was 0.94. Although this is normally a stronger quarter for Asia, our customers’ response to date has been rather muted. Additionally, it is a seasonally weak quarter in the Americas and Europe because of the Christmas holidays.”
“With all the variables that we are monitoring in our business, we are anticipating revenues to be down approximately 5% in the December quarter. Earnings per share are expected to be about 36 cents on a non-GAAP basis, excluding the effect of share-based compensation. EPS on a GAAP basis is expected to be about 33 cents,” Sanghi concluded.
Microchip’s Recent Highlights:
-Microchip continued its tradition of innovation in the 8-bit microcontroller space with the PIC18F97J60 family, which integrates a full Ethernet controller to provide embedded systems designers with a single-chip remote-communication solution for a wide range of applications. Other recent high-end 8-bit introductions included a family of Controller Area Network microcontrollers with large memory and small package sizes for automotive and industrial applications, and a family with an onboard 12-bit analog-to-digital converter (ADC) that eliminates the cost and complexity of interfacing to an external ADC, while providing the precision required for high-speed, high-resolution sensor measurements in applications such as medical, industrial and utility metering.
-Activity with Microchip’s burgeoning 16-bit microcontrollers was also strong last quarter, with 10 more devices going into volume production, bringing the total number of 16-bit microcontrollers and digital signal controllers in production to 75. Additionally, Microchip became the first 16-bit supplier to offer advanced security features that allow multiple parties in a collaborative system design to share the memory, interrupts and peripherals of a single chip without compromising their intellectual property. Called CodeGuard™ security, this memory segmentation reduces system costs for OEMs and their design partners by eliminating the need to store programs on separate chips.
-Microchip squeezed its Baseline 8-bit PIC® microcontrollers into an even smaller package, the 2x3 DFN, which allows the Company to serve an ever-widening range of low-cost, space-constrained, non-traditional applications for digital intelligence.
-Microchip added debugging capability to its popular and low-cost PICkit™ 2 Flash Starter Kit tool, enabling engineers, students and anyone with an interest to easily begin development and evaluation with PIC microcontrollers for a very low initial investment. The new PICkit 2 Debug Express Kit features a 44-pin demo board populated with a PIC16F917 microcontroller, and connects to any personal computer via USB.
-On the analog front, Microchip broadened its portfolio with three new product families of 1.5 amp low-dropout regulators, battery charge-management controllers and the first amplifiers with a gain-select pin in place of a negative input-pin, enabling digital gain control for better system accuracy and dynamic range.
-Microchip was named a Loyalty Leader in The Walker Loyalty Report for the Semiconductor Industry, conducted by Walker Information in partnership with EE Times magazine. Microchip was one of only eight semiconductor companies, out of the 53 evaluated, to receive this designation of superior customer and brand loyalty.
-To provide additional levels of customer support, Microchip launched a global network of 32 Regional Training Centers to meet engineers' needs for more technical training more often. Additionally, the 10th “Microchip’s Annual Summer Technical Exchange Review” (MASTERs) conference in Arizona experienced another record year for attendance with more than 1,000 worldwide embedded system designers attending the four-day event for intensive hands-on workshops and lecture courses on how to use Microchip’s products.
-During the quarter, Microchip shipped 16,275 new development systems. This brisk pace demonstrates the continued strong acceptance of Microchip’s products. The total cumulative number of development systems shipped now stands at 469,662.
-Demonstrating its ongoing efforts to practice good corporate citizenship through sound environmental practices, Microchip’s Fab 4 facility in Gresham, Oregon received an Oregon Green Permit, a 10-year permit given by the Oregon Department of Environmental Quality to recognize facilities that go beyond compliance to reduce environmental impact.
-On the Microchip website, Really Simple Syndication (RSS) capability was added to provide customers with easy access to the latest technical and product information, and the Intelligent Power Supply Design Center debuted.
Third Quarter Fiscal 2007 Outlook
-Net sales for the quarter ending December 31, 2006 are currently anticipated to be down approximately 5% from the September 2006 quarter.
-Gross margins before the effect of share-based compensation for the quarter ending December 31, 2006 are expected to be approximately 60.25%. Gross margins including the effect of share-based compensation are anticipated to be approximately 59.6%. The quarter ending December 31, 2006 is the first quarter that gross margins will be impacted by the effect of share-based compensation. Generally, gross margins fluctuate over time, driven primarily by the mix of microcontrollers, analog products and memory products sold; variances in manufacturing yields; fixed cost absorption; wafer fab loading levels; pricing pressures in our non-proprietary product lines; and competitive and economic conditions.
-Non-GAAP operating expenses for the quarter ending December 31, 2006 are expected to be approximately 24.5% to 24.75%, prior to the effects of all share-based compensation expense. Operating expenses on a GAAP basis for the quarter ending December 31, 2006 are anticipated to be approximately 27.0% to 27.25%. Operating expenses fluctuate over time, primarily due to revenue and profit levels.
-The tax rate for the quarter ending December 31, 2006 is anticipated to be approximately 24%.
-Earnings per diluted share for the quarter ending December 31, 2006 are anticipated to be about 33 cents on a GAAP basis, and approximately 36 cents on a non-GAAP basis, excluding the effect of all share-based compensation expense.
-The level of inventories fluctuates over time, primarily due to sales volume and overall capacity utilization. Based on our sales guidance, on both a GAAP and non-GAAP basis, inventories at December 31, 2006 are anticipated to be up approximately 7 days compared with the September 2006 quarter.
-Capital expenditures for the quarter ending December 31, 2006 are expected to be approximately $15 million, and capital expenditures for fiscal 2007 are expected to total approximately $70 million. The level of capital expenditures varies from time to time as a result of actual and anticipated business conditions.
-Based on cash projected to be generated from operations and current projected capital expenditure levels, we expect net cash generation during the December quarter of approximately $100 million before the dividend payment of $54 million was announced.
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