Microchip Earnings: Company Should Be Able To Navigate the Looming Slowdown

Wide-moat Microchip Technology MCHP reported solid fiscal first-quarter results but provided investors with a muted outlook for the September and December quarters. We maintain our $90 fair value estimate and view shares as fairly valued. Microchip was long considered by many as a canary in the coal mine regarding broad-based chip demand. However, as its product mix has shifted, and because of the large backlog and long lead times that persist for its products during the global chip shortage, we surmise that Microchip’s looming slowdown isn’t a new downdraft, but rather some headwinds that are on par with peers after several quarters of relative outperformance.

Revenue in the June quarter was $2.29 billion, up 2.5% sequentially, up 17% year over year, and at the midpoint of guidance. Business conditions were relatively steady in April and May but, per management, started to slow a bit in the month of June. Microchip sees significant weakness in China, as there has not been as much of a recovery from prior lockdowns in the region. The firm also called out slowing demand in the auto and industrial end markets, which is on par with commentary from peers as supply/demand is coming back into balance. Microchip also expects weakness in Europe, again, as new orders have slowed and Germany faces negative GDP growth. Nonetheless, adjusted gross margin remained resilient and flat sequentially at a record 68.4%, as did adjusted operating margin at 48.2%.

Microchip expects revenue in the September quarter to be down 1% sequentially at the midpoint of guidance, although this would still represent 9% annual growth. However, revenue in the December quarter will likely be worse than typical seasonal weakness of a 3%-4% sequential decline, as order activity is slowing and some of the non-cancellable orders placed by customers during the global chip shortage are being pushed out into future periods.