Microchip Technology Inc.’s (MCHP) second-quarter earnings beat the Zacks Consensus Estimate by 2 cents. Revenues beat the consensus by 3.8%. Both revenues and EPS were significantly better than the guidance provided by management.
 
Revenues
 
Revenues of $226.7 million was up 17.5% sequentially and down 16% year over year. Revenues came in over the high-end of management’s guidance range of 206-214 million.
 
The microcontroller segment did extremely well in the last quarter, with all the three categories (8-bit, 16-bit and 32-bit) growing very strongly on a sequential basis. Flash microcontrollers made up the bulk of the shipments in the last quarter. Associated application development systems also did extremely well, with 38,806 units sold, a record for the company. The segment generated over 81% of revenues in the last quarter.
 
The memory business (mainly serial EEPROMs that support the microcontroller business) was up double-digits on a sequential basis. The segment generated 9% of revenues.
 
The analog business also grew very strongly, driven by strength in linear, mixed signal, interface, and safety and security product lines. Segment contribution reached 10% in the last quarter.
 
Over 51% of second quarter revenue came from Asia, a sequential increase of 23.8%. The Americas generated 25% (up 13%), while Europe accounted for the remaining 24%, up 10% from the June 2009 quarter. The year-over-year weakness was mainly due to recession-related weakness, as a result of which growth came off a smaller base.
 
Operating Performance
 
The company generated a gross margin of 27.8% in the last quarter, which was a sequential increase of 413 bps, but a year-over-year decline of 613 bps. Higher volumes helped drive utilization rates, which along with cost efficiencies, resulted in the sequential increase in gross margin.
 
The operating expenses of $62.7 million were higher than the previous quarter’s $56.4 million. The operating margin was 27.8%, up 570 bps sequentially and down 765 bps year over year. The sequential improvement in the operating margin was primarily attributable to lower COGS (as a percentage of sales), although lower R&D and SG&A also contributed. COGS as a percentage of sales was down 413 bps, R&D was down 110 bps while SG&A was down 47 bps. The year-over-year decline was mainly due to lower volumes.
 
On a pro forma basis, MCHP generated a net income of $52.2 million, or a 23% net income margin, compared to a $29.8 million, or 15.5% in the previous quarter and $82.7 million, or 30.7% net income margin in the same quarter last year.
 
Pro forma earnings per share was 28 cents, compared to 16 cents in the June quarter and 44 cents in the prior-year quarter. Our pro forma estimate excludes acquisition-related costs, deferred stock compensation, amortization of intangibles and gain on sale of investments in the last quarter. Our pro forma calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
 
On a GAAP basis, the company recorded a net income of $44.5 million (24 cents per share), compared to $27.4 million (15 cents per share) in the previous quarter and $75.7 million (40 cents per share) in the prior-year quarter.
 
Balance Sheet
 
Inventories were down 4.8% to $108.5 million, yielding inventory turns of 3.7X. Days sales outstanding (DSOs) were around 43 days. The company ended with cash and investments balance of $1.36 billion, down $43.4 million during the quarter. In the second quarter, the company generated $96.6 million cash from operations and paid $62.1 million in dividends. Microchip had $337.4 million in long term debt, amounting to a net cash balance of $1.03 billion. Including long term liabilities, the debt-cap ratio was 35.1%.
 
Guidance
 
In the third quarter, management expects revenues of $236-245 million (up 4-8% sequentially).
 
The GAAP gross margin is expected to be 56.2% to 56.7%, operating expenses 30.1% to 30.3%, other income/expense of -$2.7 million to -$2.9 million, a tax rate of 12.1% to 12.5% and a diluted share count of 187.5 million to 188.3 million. This is expected to result in a GAAP EPS of 27-29 cents.
 
The non-GAAP gross margin is expected to be 57.0% to 57.5%, operating expenses 26.8% to 27.0%, other income/expense of -$1.1 million to -$1.3 million, a tax rate of 12.8% to 13.2% and a diluted share count of 185.8 million to 186.6 million. This is expected to result in a non-GAAP EPS of 33-35 cents.
 
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