Analyst Conference Summary

conference date: August 6, 2009 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2009 (Q1 fiscal 2010)

Forward-looking statements

Overview: Exceeded guidance and grew sequentially, but not year/year.

Basic data (GAAP):

Revenues were $192.9 million, up 11% sequentially from $173.3 million, but down 28% from $268.2 million in the year-earlier quarter.

Net income was $27.4 million, up 20% sequentially from $22.8 million, but down 64% from $75.5 million year-earlier.

EPS (earnings per share) were $0.15, up 25% sequentially from $0.12, but down 62.5% from $0.40 year-earlier.

Guidance:

For Q2 2010 expects revenues between $206 and $214 million with GAAP EPS of $0.18 to $0.20 and non-GAAP EPS of $0.23 to $0.26.

Expects cash balance to increase in the September quarter.

Conference Highlights:

Quarterly dividend declared: 33.9 cents per share to stockholders of record on August 20, 2009, payable on September 3.

Business improved steadily during the quarter. Book to bill ratio was 1.18, and the end-of-quarter backlog was significantly higher than at the beginning of the quarter. Sales in the current quarter have been strong so far.

Non-GAAP numbers: gross margin 51.4%; operating income $47.2 million for a operating margin of 22.1%. Net income was $35.0 million or $0.19 per share. Excludes $7.8 million share-based compensation expense, $3.4 million gain on traded securities, $1.1 million patent acquisition charge, $1.1 million for acquisition expense, and $0.9 million non-cash charges for convertible debt interest.

Microcontroller revenue overall was up 11.9% sequentially. All 8-bit segments showed strong growth. 16-bit microcontroller revenue was up 15.7% sequentially an 33.3% from year-earlier. 32-bit microcontroller line making good progress.

Analog business was up 12.2% sequentially.

Inventories decreased by $17.6 million, and are now in good shape.

Cash and equivalents position dropped $2.6 million in the quarter to $1.44 billion. $61.9 million was paid in dividends. Convertible debt and new accounting rules caused some adjustments. Non-cash interest expense of $1.6 million per quarter will be charged for remainder of lifetime of the debt. $4.1 million capital expense in the quarter. $21.7 million depreciation expense.

Many new products were introduced, notably op amps, wireless, touch-sensing, and DSP. Also introduced the industry's lowest power microcontroller line, XLP.

Cost of sales was $96.5 million, leaving gross profit of $96.4 million. Operating expenses of $65.3 million included $27.6 million for R&D, $36.4 million for selling, general and administrative, and a $1.2 million special patent license acquisition charge. Operating income was $31.2 million. Other income was $1.5 million. Income tax provision was $5.3 million.

By geography, revenue was up 4.7% in the Americas, Europe down 7.4%, Asia up 29.5%. 48.7% of sales are in Asia.

SIA (semiconductor industry) numbers indicate Microchip gained significant market share in 8-bit and 16-bit microcontrollers during the past 6 months. Microchip revenue were up in automotive and household appliances segments. Customers have been defecting from out competitors as they have restructured.

Q&A:

SG&A going forward? Range is to be flat to down, on a percentage basis. It depends on how much revenue growth; if there is enough, there should be some leverage.

Automotive by region? About one-third each Asia, U.S., Europe. Dominant product in automotive is microcontrollers.

Industrial market outlook? It has started showing strength, with new designs helping.

When will you increase investments in business? We did no layoffs, we have been investing in the business as appropriate and will continue that. We cut expenses through pay cuts and we are going to give those cuts back to the employees. But revenues are growing faster the operating expenses.

Defections from competitors going forward? I think it will increase. People are really concerned about the financial viability of our competitors, and they are getting lower support from sales and service.

Inventory in September quarter? In terms of number of days it will be flat, in dollar terms up.

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