Analyst Conference Summary

conference date: November 4, 2009 @ 3:00 PM Pacific Time
for quarter ending: September 30, 2009 (Q2 fiscal 2010)

Forward-looking statements

Overview: Surprisingly strong sequential growth, but revenues still below year-earlier quarter. Strong fourth quarter expected.

Basic data (GAAP):

Revenues were $226.7 million, up 17% sequentially from $192.9 million, but down 16% from $269.7 million in the year-earlier quarter.

Net income was $44.5 million, up 62% sequentially from $27.4 million, but down 41% from $75.7 million year-earlier.

EPS (earnings per share) were $0.24, up 60% sequentially from $0.15, but down 40% from $0.40 year-earlier.

Guidance:

December (Q3 fiscal 2010) quarter cash generation expected between $65 and $75 million, before the dividend payment of $62.3 million or any stock repurchasing. Revenue is expected to be up 4% to 8% on a sequential basis, to $236 to $246 million. GAAP EPS $0.27 to $0.29; non-GAAP $0.33 to $0.35. Capital expenditures to grow to around $20 million, to invest in equipment to support revenue growth.

Conference Highlights:

The quarterly cash dividend was increased to $0.34 per share, for stockholders of record on November 18, payable December 2, 2009.

Revenue, margin and EPS guidance were exceeded because of strong sales in all geographies and product lines. GAAP gross margin was 54.4%. "We have aggressively increased our manufacturing output."

Non-GAAP net income was $53.2 million, or $0.29 per share. Operating income was $63.1 million and non-GAAP gross margin was 55.5%. Non-GAAP numbers exclude $8.3 million in share-based compensation, $0.7 million in acquisition-related expense, $1.0 million in non-cash interest expense on convertible debt, and a gain of $1.3 million on securities.

38,086 development tools were shipped, a record.

Microcontroller revenue was up 17% sequentially on the whole. 16-bit microcontroller revenue grew 49% sequentially. 32-bit microcontroller line had 56% sequential growth. Gaining market share against ARM-based designs.

Analog chip revenues grew 25% sequentially. Was over 10% of revenue for the first time ever.

17% EEPROM product revenue growth.

Inventories decreased by $5.4 million in the quarter. They are at their lowest in years. Lead times are still 4 to 6 weeks, while some competitors have been unable to supply product.

Cash and equivalents ended at $1.47 billion, up $34.6 million in the quarter, after paying $62.1 million for cash dividends. Convertible debenture liability is $337.4 million. "We expect our cash generation to remain strong." Capital spending was $6 million in the quarter. $21.7 million depreciation expense.

Book to bill for the quarter was 1.25. The opening backlog was significantly higher for December quarter.

Many new electronic devices were introduced in the quarter.

By geography, the Americas were up 13%, Europe up 10%, and Asia up 24%.

Cost of goods sold was $103.3 million, leaving gross profit of $123.3 million. Operating expenses were $70.6 million, comprising $29.6 million for R&D and $41.0 million for selling, general, and administrative expense. Operating income was $52.7 million. Other expense was $1.4 million. Income tax provision $6.8 million.

A calendar year internal plan was shared with investors. For 2010, revenues are planned at about $1.05 billion, with 57.7% GAAP gross margin and 28.1% operating margin. That would give GAAP EPS of $1.29 per share, non-GAAP $1.50 per share.

Believes success was supported by decision to take broad-based pay cuts, rather than laying off large numbers of employees.

Q&A:

Where are you gaining 16-bit market share? Broadly based applications and markets. It is not concentrated anywhere? Same with 32-bit microcontrollers.

Where is the strength in Asia? Strength was around the world, even in Europe in their vacation quarter. China had the strongest sequential growth.

Automotive? We did well because of cash-for-clunkers. But we also did well in consumer and other areas.

2010, to what extent will new products drive it? The design cycles for our products are for 9 months to 2 years. So 2010 growth will come from current products.

60% of revenue comes through distributors, so it is impossible to know how it might divide up by industry.

Touch controls? Our customers can customize our solutions, and we have the lowest power consumption. Many competitive alternatives require a second microcontroller just for the touch screen; ours work with a broad array of microcontrollers.

How did you get to the 2010 revenue numbers? They are based on the design pipeline and our experience with volumes.

Any detail on growth rates within 2010? We expect growth in each quarter.

Will you be at target inventory at end of 2009? No, we will still need to build in 2010. We were at a 7 year low this quarter; we depleted when we wanted to build.

Why is analog growing faster than microcontrollers? Attach to our microcontrollers, attach to other microcontrollers, attach to anything else. It is not uniquely driven by matching with our microcontrollers.

SIA says 8-bit microcontrollers seem to have grown faster than your 8-bit rate? We have not broken out our 8-bit microcontroller revenues, and SIA numbers need to be taken with a grain of salt [and he explained some defects in SIA estimates].

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