Microchip Technology Inc. (NASDAQ:MCHP) Q2 2019 Earnings Conference Call - Final Transcript

Nov 07, 2018 • 05:00 pm ET

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Microchip Technology Inc. (NASDAQ:MCHP) Q2 2019 Earnings Conference Call - Final Transcript

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Presentation
Operator
Operator

Good day, everyone. Welcome to this Microchip Technologies Second Quarter and Fiscal Year 2019 Financial Results Conference. As a reminder, today's conference is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the -- over to Mr. Eric Bjornholt. Please go ahead, sir.

Executive
J. Eric Bjornholt

Thank you, and good afternoon, everyone.

(Forward-Looking Cautionary Statements)

In attendance with me today are Steve Sanghi, Microchip's Chairman and CEO, and Ganesh Moorthy, Microchip's President and COO. I will comment on our second quarter fiscal year 2019 financial performance and Steve and Ganesh will then give their comments on the results, discuss the current business environment as well as our guidance, and provide an update on our integration activities associated with the Microsemi acquisition. We will then be available to respond to specific investor and analyst questions.

I want to remind investors that during the quarter ending June 30, 2018, we adopted a new GAAP revenue recognition standard, which requires revenue to be recognized at the time products are sold to distributors versus our historical revenue recognition policy, where revenue on such transactions were deferred until the product was sold by our distributors to an end customer. We are not able to provide guidance on a GAAP basis, as we are not able to predict whether inventory at our distributors will increase or decrease in relation to end market demand and this is not how we manage our business.

As evidence of this uncertainty, in recent years, we have seen net inventory at our distributors increase or decrease by a significant amount in a single quarter. Our non-GAAP revenue is based on true end market demand in which we measure the revenue based on when the product is sold by our distributors to an end customer. We will continue to manage our business and distributor relationships based on creating and fulfilling end market demand. All of Microchip's bonus programs will continue to work based on the amount of revenue earned from fulfilling market demand. Therefore, along with GAAP results based on sell-in, we will also report our non-GAAP results based on sell-through revenue recognition.

I will now go through some of the operating results, including net sales, gross margin, and operating expenses. I will be referring to these results on a non-GAAP basis, using revenue based on end market demand, and expenses prior to the effects of our acquisition activities and share-based compensation.

Non-GAAP net sales in the September quarter were $1.513 billion, just above the midpoint of our guidance and up 24.4% sequentially from net sales of $1.217 billion in the immediately preceding quarter. We have posted a summary of our revenue by product line and geography on our website for your reference.

On a non-GAAP basis, gross margins were 61.7%, operating expenses were 23.4% of sales, and operating income was a record $579.3 million and 38.3% of sales. Non-GAAP net income was a record $454.6 million. Non-GAAP earnings per diluted share was a record $1.81, which was $0.07 above the