Analog chipmaker Microchip Technology (NASDAQ: MCHP) met Wall Street’s revenue expectations in Q3 CY2024, but sales fell 48.4% year on year to $1.16 billion. On the other hand, next quarter’s revenue guidance of $1.06 billion was less impressive, coming in 10% below analysts’ estimates. Its non-GAAP profit of $0.46 per share was 6% above analysts’ consensus estimates.
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Microchip Technology (MCHP) Q3 CY2024 Highlights:
- Revenue: $1.16 billion vs analyst estimates of $1.15 billion (in line)
- Adjusted EPS: $0.46 vs analyst estimates of $0.43 (6% beat)
- Adjusted Operating Income: $340.8 million vs analyst estimates of $328.9 million (3.6% beat)
- Revenue Guidance for Q4 CY2024 is $1.06 billion at the midpoint, below analyst estimates of $1.18 billion
- Adjusted EPS guidance for Q4 CY2024 is $0.30 at the midpoint, below analyst estimates of $0.46
- Gross Margin (GAAP): 57.4%, down from 67.8% in the same quarter last year
- Inventory Days Outstanding: 246, up from 236 in the previous quarter
- Operating Margin: 12.6%, down from 39.3% in the same quarter last year
- Free Cash Flow Margin: 2%, down from 24% in the same quarter last year
- Market Capitalization: $39.95 billion
"Our September quarter results were consistent with our guidance, as we continued to navigate through an inventory correction that’s occurring in the midst of macro weakness for many manufacturing businesses, accentuated by heightened weakness in our European business which is concentrated with Industrial and Automotive customers," said Ganesh Moorthy, President and Chief Executive Officer.
Company Overview
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.
Analog Semiconductors
Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Microchip Technology struggled to generate demand over the last five years as its sales were flat. This is a tough starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Microchip Technology’s recent history shows its demand has stayed suppressed as its revenue has declined by 15.2% annually over the last two years. 
This quarter, Microchip Technology reported a rather uninspiring 48.4% year-on-year revenue decline to $1.16 billion of revenue, in line with Wall Street’s estimates. Management is currently guiding for a 40% year-on-year decline next quarter.
Looking further ahead, sell-side analysts expect revenue to decline 2.8% over the next 12 months. Although this projection is better than its two-year trend it's tough to feel optimistic about a company facing demand difficulties.
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Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity 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 DIO came in at 246, which is 97 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.
Key Takeaways from Microchip Technology’s Q3 Results
We enjoyed seeing Microchip Technology exceed analysts’ EPS expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its revenue guidance for next quarter missed analysts’ expectations and its operating margin shrunk. Overall, this was a weaker quarter. The stock traded down 3.1% to $72.87 immediately after reporting.
Microchip Technology underperformed this quarter, but does that create an opportunity to invest right now? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
