Microchip Tech (MCHP) Down 14.1% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Microchip Technology (MCHP). Shares have lost about 14.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Microchip Tech due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Microchip Q3 Earnings & Revenues Beat Estimates

Microchip Technology Incorporated (NASDAQ:MCHP) reported third-quarter fiscal 2020 non-GAAP earnings of $1.32 per share, beating the Zacks Consensus Estimate by 4.8%. Notably, the figure declined 15.4% on a year-over-year basis.

Net sales declined 6.4% from the year-ago quarter to $1.287 billion. However, the figure surpassed the Zacks Consensus Estimate of $1.274 billion.

Management noted sluggish demand across communication and appliance end-markets.

Quarter in Detail

In terms of product line, microcontroller business (53.3% of net sales) declined 1.7% sequentially to $685.8 million.

Analog net sales of $363.3 million (28.2%) declined 7.8% sequentially.

FPGA revenues (7.2%) came in at $92.6 million, down 0.6% on a quarter-over-quarter basis.

Licensing, memory and other, or LMO product line (11.3%) reported revenues of $145.7 million, which declined 4.7% sequentially.

Geographically, revenues from Americas, Europe and Asia contributed 24.1%, 21.5% and 54.4% to net sales, respectively.

Margins

Non-GAAP gross margin contracted 90 basis points (bps) on a year-over-year basis to 61.5%.

Non-GAAP research & development expenses, as a percentage of net sales, expanded 80 bps year over year to 15.2%. Non-GAAP selling, general & administrative (SG&A) expenses, as a percentage of net sales, remained flat year over year at 11.1%. Non-GAAP operating expenses, as a percentage of net sales, expanded 90 bps year over year to 26.4%.

Consequently, non-GAAP operating margin contracted 170 bps on a year-over-year basis to 35.1%.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash and short-term investments came in at $402.3 million, compared with $405.1 million as of Sep 30, 2019.

As of Dec 31, 2019, total debt (long-term plus current portion) amounted to $9.58 billion compared with $9.80 billion as of Sep 30, 2019. Notably, the company paid down $257 million of debt during the quarter.

Cash flow from operating activities was $395.5 million during the quarter.

Notably, on Feb 4, 2020, Microchip’s board of directors announced a cash dividend of 36.70 cents per share, payable Mar 6, 2020, to shareholders as on Feb 21, 2020.

Guidance

Microchip forecasts fourth-quarter fiscal 2020 net sales of $1.313-$1.403 billion (mid-point $1.358 billion).

Non-GAAP earnings are anticipated in the range of $1.35-$1.51 per share (mid-point $1.43 billion).

Non-GAAP gross margin is anticipated in the range of 61.5-61.9%.

For fiscal 2020, capital expenditures are projected between $76 million and $81 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Microchip Tech has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Microchip Tech has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.