Microchip With Near-Term Risk

Microchip Technology, Incorporated (MCHP) reported record revenues of $268.2 million in Q1:FY09, but was lower than our estimate of $271 million. Adjusted EPS (excluding one-time items) came in at $0.44, in line with our estimate. Business was strong across all segments.

Microcontroller sales were up 3% quarter over quarter [q/q] and up 2% year over year [y/y]. Flashbased controllers were up 3.5% q/q and 11.5% y/y. Non-GAAP gross margin came in at 61.6% from 61.5% in the prior quarter and 60.6% in the year-ago quarter. Microchip also announced a quarterly cash dividend of $0.338 on its common stock, a sequential dividend rate increase of 2.4% and up 14.6% y/y/. MCHP dividend rate is roughly 4%, one of the highest distributed in the semiconductor sector.

We maintain our Hold rating on the shares. We believe that MCHP’s consumer exposure remains a risk till Q3:FY09 as early OEM [original equipment manufacturer] factory shut-downs could possibly result in canceled orders if consumer demand fails to materialize. Also, component and commodity costs are strong headwinds for incremental gross margin improvement as some effort over several quarters is required to reach the target model of 62%.

We now expect the company to earn $1.81 per share (pro-forma, excluding stock compensation) for FY 2009. GAAP EPS (E), including stock-based compensation stands at $1.67. Our target price remains at $34, which has been derived by applying a P/E multiple of 18.8x to our fiscal 2009 EPS estimate.

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