Analog chipmaker Microchip Technology (NASDAQ:MCHP) announced better-than-expected results in the Q4 FY2022 quarter, with revenue up 25.7% year on year to $1.84 billion. Guidance for next quarter's revenue was $1.95 billion at the midpoint, 5.34% above the average of analyst estimates. Microchip Technology made a GAAP profit of $437.9 million, improving on its profit of $116 million, in the same quarter last year.
Microchip Technology (MCHP) Q4 FY2022 Highlights:
- Revenue: $1.84 billion vs analyst estimates of $1.82 billion (1.29% beat)
- EPS (non-GAAP): $1.35 vs analyst estimates of $1.25 (7.71% beat)
- Revenue guidance for Q1 2023 is $1.95 billion at the midpoint, above analyst estimates of $1.85 billion
- Free cash flow of $633.1 million, down 16.9% from previous quarter
- Inventory Days Outstanding: 125, up from 116 previous quarter
- Gross Margin (GAAP): 66.1%, up from 63.1% same quarter last year
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.
Microchip is a leading provider of microprocessors (MPUs) which are made up of microcontrollers (MCUs) and Digital Signal Controllers (DSCs). Microcontrollers are effectively mini computers on a chip, they consist of a CPU, some memory, an analog chip, and a simple, application specific software that tells the chip what to do.
Microchip’s microcontrollers are low cost customized chips that are in thousands of products. Examples would be automobile engine control systems, implantable medical devices, remote controls, office machines, appliances, power tools, or toys.
Digital Signal Controllers are a variation of microcontroller that measures, filters and/or compresses digital or analog signals. They are used in motor control, power conversion, and sensor processing applications, often in the same types of systems as a microcontroller.
Microchip has a design ecosystem and library of off-the-shelf components that allows its customers to design any kind of custom microprocessor they can think of.Microchips’ peers and competitors include Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), Marvell Technology (NASDAQ:MRVL), and Analog Devices (NASDAQ:ADI)
Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods.
Microchip Technology's revenue growth over the last three years has been unremarkable, averaging 9.15% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $1.46 billion to $1.84 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).
This was a decent quarter for Microchip Technology as revenues grew 25.7%, topping analyst estimates by 1.29%. This marks 6 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 24.5% YoY next quarter, and Wall St analysts are estimating growth 10.6% over the next twelve months.
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.
This quarter, Microchip Technology’s inventory days came in at 125, one day above the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.
Microchip Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 66.1% in Q4, up 3 percentage points year on year.
Gross margins have been trending up over the last year, averaging 65.1%. Microchip Technology's gross margins remain one of the highest in the semiconductor sector, driven strong pricing power from its differentiated chips.
Microchip Technology reported an operating margin of 44.7% in Q4, up 4 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending up over the last year, averaging 43.3%. Microchip Technology's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.
Earnings & Competitive Moat
Analysts covering the company are expecting earnings per share to be fairly flat over the next twelve months, although estimates are likely to change post earnings.
Microchip Technology has an average return on invested capital (ROIC) of 10.5%, over the last 5 years. That's not bad, and suggests the business can grow profits, but it isn't particularly impressive compared to other semiconductor companies.
Key Takeaways from Microchip Technology's Q4 Results
Sporting a market capitalization of $37.5 billion, more than $319.4 million in cash and with positive free cash flow over the last twelve months, we're confident that Microchip Technology has the resources it needs to pursue a high growth business strategy.
We were impressed by how strongly Microchip Technology outperformed analysts’ earnings expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the inventory levels increase. Overall, we think this was a really good quarter, that should leave shareholders feeling very positive. The company currently trades at $59 per share.
Is Now The Time?
When considering Microchip Technology, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Microchip Technology is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there.
Microchip Technology's price to earnings ratio based on the next twelve months is 12.3x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Microchip Technology doesn't trade at a completely unreasonable price point.
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