Analyst Conference Summary


conference date: October 23, 2008 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2008 (Q2 fiscal 2009)

Forward-looking statements

Overview: Good margins, but growth has halted for the moment, with the December quarter guided to reduced revenues. Great dividends.

Basic data (GAAP):

Revenues were $269.7 million, up less than 1% sequentially from $268 million and up 4% from $258.6 million year-earlier.

Net income was $76.5 million, about flat sequentially from $76.3 million and up 26% from $60.7 million year-earlier.

EPS (earnings per share) were $0.41 per share, up 2% sequentially from $0.40 and up 52% from $0.27 year-earlier.


Visibility is challenging. Revenues in December quarter expected down 8 to 16%. 59% to 60% gross margin. GAAP EPS approximately $0.31 to $0.37, non-GAAP EPS $0.35 to $0.41. Net cash generation before dividends of $85 to $95 million. Inventory will grow substantially. We remain committed to paying dividends.

Conference Highlights:

Sales were a record. Also record sales of 16-bit microcontrollers, analog products and development tools. Business conditions were "extremely challenging" in the quarter. Sales in China were up despite Olympics.

Gross margins were 60.9% GAAP, 61.6% non-GAAP.

Generated $129.4 million in cash before dividend payment of $62.2 million and $100.3 million in stock-buy backs.

Dividend increased to $0.339 per share.

Non-GAAP numbers: EPS $0.45, up 19% from year-earlier. Excludes stock-based compensation expense.

By geography, Asia revenues grew 6.3% sequentially, America (2.3%) and Europe (6.2%)were down sequentially. Asia represents 49% of sales.

Overall microcontroller business was flat sequentially and up 5% from year-earlier. 16-bit microcontroller sales grew 17% sequentially and 76% from year-earlier. Analog chip sales grew 12% sequentially and 21% from year-earlier. Flash microcontroller sales grew 2% sequentially and 14% y/y. Memory business was down with a moderate decline in prices.

35,282 development tools were shipped, a record. 32 bit microcontroller line continues to make good progress; revenue shipments have commenced to some customers.

Inventory was flat sequentially on a days of basis, ending at $126.8 million. $1.519 billion cash. $129.4 million cash flow. $46.3 million capital expense. Interest payouts $62 million. Stock buy backs were $100 million. $23.9 million depreciation expense.

"Based on current business conditions, we will be taking actions in the current quarter to relating to expenses and inventory levels including a two-week wafer fab shutdown and reductions in discretionary and variable costs." Also 1 week unpaid vacation in December quarter for all employees. Bonuses will be cut, new hires reduced.

Still awaiting a response from Atmel on Microchip's $5.00 per share tender offer. "Microchip is very committed to completing this acquisition." Hampshire Company will be acquired subject to approval.

Capital expenditures for full fiscal 2009 should be around $115 million, including $35 million for new buildings in Thailand and India.

Under the current stock buy-back program about 2.5 million more shares could be repurchased. In the September quarter bought 3.3 million shares at average price of $30.55 per share.

Cost of sales was $105 million, leaving gross profit of $164 million. Operating expenses of $77 million included $31 million in R&D and $46 million for selling and administrative. Operating income was $87 million, other income $16 million. Income taxes were $17 million.

0.93 book to bill ratio at beginning of Q4, weak bookings so far in October.


Turns? Pockets of inventory? This is more demand destruction than inventory correction. We have described the steps we are taking to manage it.

How comfortable are you with Atmel valuation? We have tracked Atmel for a long time and understand their business. We have not been provided any due diligence so far to confirm our assumptions. We believe Atmel acquisition is a long-term proposition to provide value for our shareholders. I believe the short term demand reduction does not change the value of this acquisition. We have several parties interested in Atmel's ASIC business.

How would you address continued weakness? We have seen these environments before. We had short term impact which we managed through. But in the long run we are a growth company, so we always have bounced back and there is no doubt we will do that again.

We would not expect the March quarter to be down, there is always a bounce, but if not we would do another shutdown or take whatever draconian actions are necessary to maintain margins.

End markets? We have over 63,000 customers and don't give end market breakdowns any more.

Why don't you buy Atmel at market price? Just normal issues on how much you can buy, anti-trust, poison pill.

Harpshire acquisition? Revenue contribution will be less than $1 million in this quarter. They have technologies we don't have in our portfolio.

We have two or three other possible acquisitions, of smaller companies than Atmel.

Book to bill is not a very good guide. 65% of revenue is on a sell-through basis, we don't take shipment to distributors as revenue, but it goes into the book to bill ratio.

8-bit business? It did quite well in the quarter.

Why not reduce capital budget? We are keeping that budget steady, would have expanded it if not for the turndown.

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Copyright 2008 William P. Meyers