No Surprises In Microchip Technology's (NASDAQ:MCHP) Q3 Sales Numbers, Next Quarter Sales Guidance Is Optimistic

Adam Hejl /
2022/02/03 4:36 pm EST

Analog chipmaker Microchip Technology (NASDAQ:MCHP) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 29.9% year on year to $1.75 billion. Guidance for next quarter's revenue was $1.81 billion at the midpoint, which is 2.63% above the analyst consensus. Microchip Technology made a GAAP profit of $352.8 million, improving on its profit of $36.2 million, in the same quarter last year.

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Microchip Technology (MCHP) Q3 FY2022 Highlights:

  • Revenue: $1.75 billion vs analyst estimates of $1.74 billion (small beat)
  • EPS (non-GAAP): $1.20 vs analyst estimates of $1.17 (2.35% beat)
  • Revenue guidance for Q4 2022 is $1.81 billion at the midpoint, above analyst estimates of $1.77 billion
  • Free cash flow of $762.7 million, up 43% from previous quarter
  • Inventory Days Outstanding: 116, up from 112 previous quarter
  • Gross Margin (GAAP): 65.6%, up from 62.5% same quarter last year

"Our December quarter results continued to be strong, with revenue growing 6.5% sequentially and 30.0% year-over-year despite ongoing manufacturing capacity constraints," 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.

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. The biggest secular growth drivers currently are the adoption of electric vehicles, 5G networks and Internet of Things connectivity, and demand for chips that reduce power consumption. 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 unremarkable, averaging 9.73% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.35 billion to $1.75 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 good quarter for Microchip Technology as revenues grew 29.9%, topping analyst estimates by 0.63%. This marks 5 straight quarters of revenue growth, implying we are mid-cycle for Microchip Technology , as a typical upcycle tends to last 8-10 quarters.

Microchip Technology believes the growth is set to continue, and is guiding for revenue to grow 23.9% YoY next quarter, and Wall St analysts are estimating growth 12.8% over the next twelve months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 116, 7 days below the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Key Takeaways from Microchip Technology's Q3 Results

With a market capitalization of $43.8 billion, more than $315.5 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see Microchip Technology improve their operating margin this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, there was an increase in inventory levels. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 1.79% on the results and currently trades at $75.5 per share.

Should you invest in Microchip Technology right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.