Microchip Technology (NASDAQ:MCHP) Reports Q3 In Line With Expectations But Quarterly Guidance Underwhelms

Adam Hejl /
2024/02/01 4:24 pm EST

Analog chipmaker Microchip Technology (NASDAQ:MCHP) reported results in line with analysts' expectations in Q3 FY2024, with revenue down 18.6% year on year to $1.77 billion. On the other hand, next quarter's revenue guidance of $1.33 billion was less impressive, coming in 19.6% below analysts' estimates. It made a non-GAAP profit of $1.08 per share, down from its profit of $1.56 per share in the same quarter last year.

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Microchip Technology (MCHP) Q3 FY2024 Highlights:

  • Revenue: $1.77 billion vs analyst estimates of $1.76 billion (small beat)
  • EPS (non-GAAP): $1.08 vs analyst estimates of $1.04 (3.8% beat)
  • Revenue Guidance for Q4 2024 is $1.33 billion at the midpoint, below analyst estimates of $1.65 billion
  • Free Cash Flow of $793.8 million, up 46.5% from the previous quarter
  • Inventory Days Outstanding: 185, up from 167 in the previous quarter
  • Gross Margin (GAAP): 63.4%, down from 67.8% in the same quarter last year
  • Market Capitalization: $46.09 billion

"Our December quarter performance fell short of our November guidance, primarily due to weaker business conditions," said Ganesh Moorthy, President and Chief Executive Officer.

Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.

Analog Semiconductors

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Microchip Technology's revenue growth over the last three years has been mediocre, averaging 17.8% annually. But as you can see below, its revenue declined from $2.17 billion in the same quarter last year to $1.77 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Microchip Technology Total Revenue

This was a slow quarter for the company as its revenue dropped 18.6% year on year, in line with analysts' estimates.

Microchip Technology's revenue inverted from positive to negative growth this quarter, which was unfortunate to see. Looking ahead to the next quarter, the company's management team forecasts a 40.7% year-on-year revenue decline. Analysts seem to agree that the poor performance will continue, as their estimates for the next 12 months call for a 15.7% drop in revenue.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Microchip Technology Inventory Days Outstanding

This quarter, Microchip Technology's DIO came in at 185, which is 51 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Microchip Technology's Q3 Results

It was good to see Microchip Technology beat analysts' EPS expectations this quarter. That stood out as a positive in these results. On the other hand, its revenue guidance for next quarter missed analysts' expectations and its inventory levels increased. Management noted it is seeing weak demand as customers are overflowing with inventory. To cope with the lower sales outlook, Microchip plans to limit discretionary spending and tightly manage its inventory levels. In March and June, the company intends to have a two-week shutdown of its large wafer fabrication facilities. It will also reduce activity in many other factories, resulting in underutilization charges. Overall, the results could have been better. The company is down 3.3% on the results and currently trades at $82.8 per share.

Microchip Technology may not have had the best quarter, but does that create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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