Microchip Technology (NASDAQ:MCHP) Reports Weak Q1

Max Juang /
2024/05/06 4:20 pm EDT

Analog chipmaker Microchip Technology (NASDAQ:MCHP) missed analysts' expectations in Q1 CY2024, with revenue down 40.6% year on year to $1.33 billion. Next quarter's revenue guidance of $1.24 billion also underwhelmed, coming in 8.7% below analysts' estimates. It made a non-GAAP profit of $0.57 per share, down from its profit of $1.64 per share in the same quarter last year.

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Microchip Technology (MCHP) Q1 CY2024 Highlights:

  • Revenue: $1.33 billion vs analyst estimates of $1.34 billion (1.2% miss)
  • EPS (non-GAAP): $0.57 vs analyst expectations of $0.57 (in line)
  • Revenue Guidance for Q2 CY2024 is $1.24 billion at the midpoint, below analyst estimates of $1.36 billion
  • Gross Margin (GAAP): 59.6%, down from 68% in the same quarter last year
  • Inventory Days Outstanding: 223, up from 185 in the previous quarter
  • Free Cash Flow of $389.9 million, down 50.9% from the previous quarter
  • Market Capitalization: $49.37 billion

"We experienced a major inventory correction in fiscal 2024, leading to a 9.5% decline in revenue to $7.6 billion. Despite this, our resilient operating model and rapid adjustment to the adverse business environment enabled us to navigate these challenges to achieve a non-GAAP operating margin of 43.9%," 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 13.6% annually. This quarter, its revenue declined from $2.23 billion in the same quarter last year to $1.33 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

Microchip Technology had a difficult quarter as revenue dropped 40.6% year on year, missing analysts' estimates by 1.2%. This could mean that the current downcycle is deepening.

Microchip Technology's revenue growth has decelerated over the last three quarters and its management team projects revenue to fall next quarter. As such, the company is guiding for a 45.8% year-on-year revenue decline while analysts are expecting a 15.9% drop over the next 12 months.

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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 223, which is 85 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 Q1 Results

We struggled to find many strong positives in these results. Its revenue missed as its customers continued reducing their inventories. Its guidance for next quarter also fell short of analysts' expectations - management noted it's seeing "signs of demand stabilization but [is] experiencing low business visibility due to short lead times and the continued macro uncertainty". 

On the bright side, the company announced a quarterly dividend of $0.45 per share, up 18% year on year. The dividend will be payable to investors as of May 22, 2024 on June 5, 2024.

Overall, this was a bad quarter for Microchip Technology. The company is down 4.7% on the results and currently trades at $89.4 per share.

Microchip Technology may have had a tough quarter, but does that actually 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.