Earnings Scorecard: Microchip Tech

Following the announcement of Microchip Technology Incorporated’s (MCHP) second quarter results, revision of estimates among analysts depict a mixed trend for fiscal 2011. Microchip reported solid results for the second quarter which beat expectations. However, guidance for the third quarter was a bit subdued.

Second Quarter Flashback

Microchip reported net revenues of $382.2 million in the second quarter of fiscal 2011, up 7.0% sequentially and 68.7% year-over-year, beating the Zacks Consensus Estimate of $341 million. Strength in the Microcontroller business continued to drive revenue growth.

Excluding one-time items but including stock-based compensation expense, net income came in at 57 cents per share beating the Zacks Consensus Estimate of 54 cents.

Agreement of Estimate Revisions

For fiscal 2011, the overall trend in estimate revisions remains mixed. Three out of the eight analysts covering the stock upped their estimates while two analysts moved in the opposite direction in the last thirty days. The same number holds true in the last seven days.

Microchip expects net sales for the December quarter to be down between 2% to 8% sequentially due to an industry-wide inventory correction which will probably offset the accretive impact of the Silicon Storage Technology (SST) acquisition, which Microchip completed earlier this year.

Bookings slowed down in the September quarter and backlog that was scheduled for the December quarter got pushed into the March quarter as customers’ adjusted inventories and backlog. However, Microchip expects normal seasonality and some growth in the March quarter as Europe is expected to be strong but Asia will be weak due to the Chinese New Year.

Consequently, six of the eight analysts lowered their estimates for the upcoming quarter in the last thirty days and last seven days as well.

Nevertheless, estimate revision trends for 2011 lean more on the positive side with four out of the eight analysts increasing their estimates while one analyst moved in the opposite direction in the last thirty days. In the last seven days as well, four analysts increased their estimates while only one lowered his estimate.

Magnitude of Estimate Revisions

Due to the lack of any directional consensus among the estimate revisions, the magnitude of estimate revisions has been modest for fiscal 2011. The current Zacks Consensus Estimate for fiscal 2011 is $2.13, down one cent in the last seven days but on par with the consensus estimate thirty days ago.

However, the Zacks Consensus Estimate for the third quarter is down by three cents in the last seven days due to downward pressure of the estimate revisions.

On a positive note, the Zacks Consensus Estimate for fiscal 2012 is up by two cents in the last seven days and up by eight cents in the last thirty days, reflecting a strong positive sentiment among analysts covering the stock. Excluding one-time items and stock-based compensation expense, SST business is expected to add about 40 cents to the bottom-line in fiscal 2012.

Our Take

After operating the super flash memory business and RF business (held for sale) for two quarters, Microchip found synergy between SST’s RF business and Microchip’s wireless controller and analog business. Hence, Microchip decided to keep the super flash memory and RF businesses of SST as ongoing businesses of Microchip.

Microchip substantially eliminated the excess overhead and reduced the operating expenses of the SST business. The super flash memory and RF divisions of SST added approximately $40 million of revenue in the September 2010 quarter. The restructuring and integration of SST is now complete.

Microchip expects significant operational synergies from its memory business and technology synergies with Microchip’s micro controller business. Meanwhile, Microchip is well positioned in its core microcontroller market which continues to propel growth for the company. Microchip continues to be a leading player in the 8-bit and 16-bit microcontroller space. Design activities for 8-bit flash microcontrollers continue to be strong.

We maintain our long-term recommendation of Outperform on Microchip. However, in the short-term, the stock carries a Zacks #3 Rank which translates into a Hold rating. This is primarily due to near-term pressure on the stock stemming from inventory issues leading to a decline in growth.

MICROCHIP TECH (MCHP): Free Stock Analysis Report

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