No Surprises In Microchip Technology's (NASDAQ:MCHP) Q1 Sales Numbers

Max Juang /
2023/08/03 4:20 pm EDT

Analog chipmaker Microchip Technology (NASDAQ:MCHP) reported results in line with analysts' expectations in Q1 FY2024, with revenue up 16.6% year on year to $2.29 billion. The company also expects next quarter's revenue to be around $2.27 billion, roughly in line with analysts' estimates. Microchip Technology made a GAAP profit of $666.4 million, improving from its profit of $507.2 million in the same quarter last year.

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Microchip Technology (MCHP) Q1 FY2024 Highlights:

  • Revenue: $2.29 billion vs analyst estimates of $2.29 billion (small miss)
  • EPS (non-GAAP): $1.64 vs analyst expectations of $1.64 (small miss)
  • Revenue Guidance for Q2 2024 is $2.27 billion at the midpoint, below analyst estimates of $2.28 billion
  • Free Cash Flow of $882.1 million, up 47.8% from the previous quarter
  • Inventory Days Outstanding: 167, down from 169 in the previous quarter
  • Gross Margin (GAAP): 68.1%, up from 66.7% in the same quarter last year

"Our June quarter results were in-line with the midpoint of our guidance as revenue grew 2.5% sequentially and 16.6% year over year, amid a weakening macro backdrop and increased business uncertainty," 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. 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 solid, averaging 18.9% annually. As you can see below, this quarter was especially strong, with revenue growing from $1.96 billion in the same quarter last year to $2.29 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

Despite missing analysts' estimates this quarter, Microchip Technology's 16.6% year-on-year revenue growth was still meaningful. However, this was its third consecutive quarter of decelerating growth, potentially indicating a coming cycle downturn.

Although Microchip Technology's revenue growth has decelerated over the past three quarters, its management team thinks it will continue growing next quarter. The company is guiding to 9.3% year-on-year growth, which is relatively in line with Consensus estimates of 1.53% growth over the next 12 months.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

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 167, which is 37 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Key Takeaways from Microchip Technology's Q1 Results

Sporting a market capitalization of $49.1 billion, more than $271.2 million in cash on hand, and positive free cash flow over the last 12 months, we believe that Microchip Technology is attractively positioned to invest in growth.

It was good to see Microchip Technology improve its gross margin this quarter, even if just slightly. That really stood out as a positive in these results, alongside the strong free cash flow. On the other hand, its revenue guidance for next quarter was below analysts' estimates. Overall, the results could have been better. The company is down 3.31% on the results and currently trades at $86.51 per share.

So should you invest in Microchip Technology 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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The author has no position in any of the stocks mentioned in this report.