Analyst Conference Summary


conference date: January 24, 2008 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2007 (Q3 fiscal 2008)

Forward-looking statements

Overview: Microchip continues to tread water as expected, but with great margins and earnings. Guided to better than usual March quarter seasonality.

Basic data:

Revenues were $252.6 million, down 2.3% sequentially from $258.6 million, but up 0.6% from $251.0 million year-earlier (fiscal Q3 2007).

Net income was $80.1 million, up sequentially 32% from $60.7 million and up 10% from $72.8 million year-earlier.

EPS (earnings per share) was $0.38, up 32% sequentially from $0.27, and up 10% from $0.33 year-earlier.


Due to Lunar New Year holidays in Asia, March quarter sales are expected to be down 2% to up 4% from December quarter levels. GAAP EPS expected between $0.35 and $0.38; non-GAAP EPS $0.39 to $0.42. Cash from operations around $105 million.

$65 million in capital expenditures are expected for full fiscal 2008.

Conference Highlights:

Cash dividend was increased to $0.32 per share per quarter.

Margins hit records: gross margin 60.6% GAAP and 61.2% non-GAAP. Operating margin was 31.4% GAAP and 34.7% non-GAAP.

Non-GAAP net income was $81.2 million and EPS was $0.39. A foreign tax benefit of $5.7 million and the stock-based compensation expense of $6.8 million were excluded from the non-GAAP results.

28,722 development systems, a record, were shipped in quarter.

Revenues were a midpoint of prior guidance amidst difficult business conditions. Compensated by increasing margins and so met high-end of EPS guidance.

Asia revenue grew sequentially 1.8%, but Americas and Europe were down. Americas down 5.6% sequentially. Europe down 5.5% sequentially. Asia represents 46% of sales.

Overall microcontroller revenues were down 1% sequentially, but up 1.5% from year-earlier. 16-bit microcontroller revenues were up 28% sequentially and 138% from year-earlier. Flash microcontroller revenues were up 10% y/y and represent 73% of total microcontroller business. There is strong design win momentum, particularly in 16 bits. Even in 8-bit microcontrollers we believe we kept or gained market share.

Analog business down 4% y/y.

Inventory level was flat at $124.8 million. Book to bill ratio was 1.02.

Cash generated by operations was $131 million. Dividend payments to investors were $66.4 million. $814.6 million was used to buy back stock. $1.65 billion cash and equivalents remained at end of quarter. $11.8 million in capital expense spending in quarter.

Finally entered 32 bit microcontroller market. Many new products were introduced in quarter. Potential 32 bit market is about $4 billion. Very good customer interest, but expect a long design cycle.

Authorization to buy back about 12 million shares remains.

Cost of sales was $95.6 million. R&D expense $30.3 million. SG&A $43.5 million, for total operating expense of $73.8 million. Other income was $12.0 million. Tax provision was $11.2 million. Tax rate was 12.2%, but includes one-time adjustment.

Convertible shares for cash for stock buy-back deal was explained ($1.1 billion transaction). There is no dilution until the stock price is over $34.16 per share.

Analyst concerns that there would be pricing pressure and pressure on margins were, as we expected, incorrect. Now have seen some stabilization in the housing appliances section of the microcontroller market. We believe our new designs and their adoption mean we will gain share in this market and are at a floor for sales in this segment. We have lower exposure to cell phones and PCs than most of our competitors.

We are likely to lose $0.01 in EPS in Q1 due to lower interest rates.


Housing index percent of revenue? It is not a set percent of revenue, but we believed when we first created it corresponded to about 8% of our revenue, but is much lower now.

Book to bill and starting backlogs just don't seem to be good indicators of future revenues. We use other data to create guidance.

So far this quarter? Everyone is aware of macroeconomic caution, but our numbers just don't correspond to our competitors because of the differences in our markets.

In the past every time there was a revenue miss we were one to one-and-a-half quarters ahead of everyone else. We will see a recovery ahead of everyone else, partly because we have less PC and cell phone business, more consumer appliance and automotive.

Other indicators of recovering soon is the high rate of sales of development tools and adoption of our new chip designs.

Increased integration of other functions with microcontrollers? We are looking at customer needs. We have a very broad range of products at this point.

Stock buy back? We stopped during the quiet period, could restart in the next couple of days. The entire over allotment of the convertibles was exercised. By the time the over allotment was exercised we were in the quiet period.

Our long term non-GAAP margin guidance is 62%.

EE business? 9% sequential decline, but prior quarter was strong. Prices declining at about the normal rate.

Microchip Direct distribution? Point was not to increase margin, but to create more demand for our newer, more complex products.

Obsolescence of inventory? Our policy has been consistent over the years.

Geographic guidance in March quarter? Biggest growth will come in Europe, Americas flatish, Asia flat to slightly down.

Are you getting increased requests for expedited orders? Yes, because there is little inventory and no one wants the risk of holding inventory. Distributors' inventories have not grown in 5 years. We have to be ready to quickly produce product to meet demand.

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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but it is possible. Before making or terminating an investment you should always verify any factual basis of your decision.

Copyright 2007 William P. Meyers