Analyst Conference Summary

conference date: February 3, 2010 @ 7:00 AM Pacific Time
for quarter ending: December 31, 2009 (Q3 fiscal 2010)

Forward-looking statements

Overview: Another strong quarter as work done during the recession begins to pay off.

Basic data (GAAP):

Revenues were $250.1 million, up 10% sequentially from $226.7 million and up 30% from $192.2 million in the year-earlier quarter.

Net income was 69.4 million, up 56% sequentially from $44.5 million and down 4% from $72.4 million in the year-earlier quarter.

EPS (earnings per share) were $0.37, up 54% sequentially from $0.24, but down 5% from $0.39 year-earlier.

Guidance:

For the March quarter, a record opening backlog my be offset by typical downward seasonality due to Lunar New Year in Asia. Yet "we expect revenue to be up 3% to 7% sequentially." Cash generation is expected to be strong. Revenue $257.5 to $267.5 million. 59% gross margin. $0.34 to $0.36 GAAP EPS; $0.39 to $0.41 non-GAAP EPS. Capital expense of $22 million for quarter.

Calendar year 2010, excluding SST acquisition, previous guidance turns out to be conservative.

Conference Highlights:

Microchip will acquire Silicon Storage Technology, Inc. (SSTI) for $2.85 per share, or about $275 million in cash. SSTI has developed Flash memory technology and a variety of related chip designs. SSTI has about $180 million in cash on books, so net price is around $95 million. Plans to divest memory, NAND drive, and Wi-Fi amplifier businesses. Believes transaction will be accretive in the first full quarter after closing.

The quarter saw "saw strong growth in all geographies and product lines." Gained significant market share.

Non-GAAP numbers: gross margin 59.0%, up 350 basis points sequentially; operating income $82.0 million, margin 32.8%; net income $70.1 million or $0.38/share. Excluded from non-GAAP are share-based compensation of $8.8 million, acquisition-related expenses of $0.6 million, and an $8.5 million tax benefit, and $1 million interest on convertible debt.

Microcontroller sequential growth was 10%, up 30% y/y. Flash 81.3% of total. 8-bit strong growth. 16-bit 10% sequential growth to record. 32-bit saw 44% sequential growth from small base; now 173 volume customers.

Analog revenue sequential growth was 14% sequentially, and 40% y/y, and was over $25 million for the first time. Linear, interface, and security lines showed strongest growth.

EE memory product revenue grew; used to support microcontroller customers.

Record number of development tools shipped (41,492).

Inventory is below internal targets due to strong demand; ended at $113 million.

Book to bill ratio was 1.12. Opening backlog was a record high.

Cash and equivalents ended at $1.08 billion, up $26.9 million. Cash generated was $89.4 million; $62.5 million was paid in dividends. Convertible debenture liability is $339 million, long term investments are $421 million. $18.7 million for capital spending. $21.7 million for depreciation.

New products continue to be developed, released, and to get design wins. In addition to extending low-power and 32-bit microcontroller families, wireless, high-temperature, and inductive touch sensing components are being introduced.

Revenue by geography: Americas up 6.1%, Europe up 10.2%, Asia up 12.4%, and represents 52.3% of sales.

Cost of sales was $104.1 million, leaving $146.0 million gross profit. Research and Development expense was $30.3 million; selling, general, and administrative $43.1 million. Leaving operating income of $72.6 million. Other expense was $2.7 million. Income tax provision was $0.5 million.

Analysts believed there are large operating expenses coming. That is not true. Even with all employee benefits restores in March quarter, op ex should be around 26.2% of sales.

Q&A:

Margin upside? We see continued improvement in fiscal Q4. We should get back to prior peak of 61.6% non-GAAP gross margin by end of fiscal 2011.

Where are you picking up market share? 8, 16, and 32 bit microcontrollers, with 8 bit the most because we have the biggest market share there already.

Asian seasonality? We expect some growth in the quarter in Asia despite lower number of shipping days.

2010 revenue guidance, end demand by segment? Our product strategy is very horizontal. We can't give end market commentary, just broad-based demand from our customers.

Other income is still decreasing as older, higher interest rate investments roll off, but should flatten soon.

How long will design captures last if competitors come back? Usually the chips remain for the product cycle.

Analog growth? Analog attaches to more than just our own microcontrollers. We expect continuing growth.

When might 32-bit microcontrollers become material? Our products have been in production less than 2 years, and the design to production time for 32 bit is typically over 2 years. But in next twelve months you should see this segment become material.

New capacity at fabs? We have plenty of floor space, it is just a matter of adding equipment in areas where bottlenecks occur.

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