Analyst Conference Summary

conference date: August 4, 2011 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2011 (Q1 fiscal 2012)

Forward-looking statements

Overview: Weak quarter, as previously announced.

Basic data (GAAP):

Revenues were $374.5 million, down 1.4% sequentially from $380.0 million, but up 5% from $357.1 million in the year-earlier quarter.

Net income was $99.3 million, down 21% sequentially from $125.5 million, but up 10% from $89.6 million year-earlier.

EPS (earnings per share) were $0.49, down 21% sequentially from $0.62, but up 4% from $0.47 year-earlier.

Guidance:

Q2 2012 ending September, 2011 revenues of $352.0 to $370.8 million. Net income: GAAP $89.4 million to $97.8 million; non-GAAP $100.6 to $109.6 million. EPS: GAAP $0.44 to $0.48, non-GAAP $0.50 to $0.54. Capital expenditures of about $25 million. Cash between $90 and $100 million expected to be generated prior to dividend payment.

Conference Highlights:

Quarterly dividend of $0.347 will be paid on September 1 to shareholders of record on August 18.

Steve Sanghi, CEO, was disappointed by the quarter's results, but "we believe we are well-positioned to grow market share over the long term in our microcontroller, analog and licensing product lines."

Soft demand was broad-based and due to weak global economy.

Overall microcontroller revenues were down 2% sequentially, up 4.3% y/y. 8-bit segment up y/y. 16-bit microcontrollers up 3.1% sequentially and up 43% y/y. 32-bit chip revenue was up 18.7% sequentially and 108% from year-earlier. "Design win momentum in all of our product lines continues to be strong."

Inventory is believed to be appropriate at 119 days. This is likely to expand in the September quarter.

Non-GAAP numbers: gross margin 59.5%, operating margin 34.5%, net income $111.4 million, EPS $0.55

GAAP gross margin was 58.7%. Operating margin 31.2%

Cash and equivalents balance ended at $1.72 billion. Capital expense $27.2 million. Depreciation $22.0 million.

Several new development kits were introduced in the quarter. 43,932 development systems were shipped, about flat sequentially. Many new products were introduced.

Cost of goods sold was $154.8 million, leaving $219.8 million GAAP gross profit. Operating expenses of $102.9 million included $45.3 million for R&D and $57.6 million for selling, general and administrative expense. Leaving operating income of $116.9 million. Other expenses were $3.0 million. Income tax provision was $14.5 million.

Q&A:

Is weakness at end customers, or inventory issues? Recognizes revenue at distributors only on sell through. Many customers keep their inventory low, drawing on distributors on demand. But believes the weakness in final demand reflects the economy.

Comparison to 2008? 2008 was a very quick contraction of the global economy, taking us down 35% over 6 months. I believe we may already be in a recession, and if not it is just around the corner.

Buy backs? We don't really buy back stock that often at this point. We use cash to pay the dividend and to make small acquisitions.

Orders going forward? Inventories are healthy, but orders are down because of shrinking lead times.

Automotive supply chain? Last quarter, after pulling in orders in March, they built less cars both in Japan and globally. But Japanese supply chain is becoming healthier. We are already seeing more bookings in automotive, but may not see full production until Q4.

Capital expenditure? Spent a fair amount in June quarter, and will spend in September quarter because we already ordered the equipment. Then spending would be low in December and March quarters.

Our strategy has always been to keep production stable and let inventory fluctuate. Fabs have high fixed costs, so if you believe your inventory is good, with long life cycle products like Microchip's, it is more efficient to keep up production.

We don't expect to do the kind of drastic measures we did in 2008 like the 10% pay cut. We already expect bonuses to be smaller.

Why do you want to carry so much inventory when your lead times are so short? Lead times are low because we built inventory. We have over 2000 mask types. You could have lower inventory if you had just a few products to keep available.

Note that we reported weakness early, and many people [analysts] said it was a Microchip specific problem, but it was a macroeconomic issue, not specific to Microchip. We cannot predict when there will be a recovery, except in the automotive segment.

China demand? Our China business was up in the quarter, but lower than what we expected. Asia as a whole was down.

If the economy is bad enough, it could also prevent the automotive sector semiconductor recovery, but we don't believe that yet.

Microchip touch business is broad based, but we are not in smartphones. Gaming, settop boxes, audio, auto, kitchen, and industrial, really a very broad variety of end products, much the same as our microcontrollers.

We expect to gain market share, whatever the level of the economy.

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