Analyst Conference Summary

conference date: November 4, 2010 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2010 (Q2 fiscal 2011)

Forward-looking statements

Overview: Solid revenue and profit growth near high end of guidance.

Basic data (GAAP):

Revenues were $382.3 million, up 19% sequentially from $320.8 million and up 69% from $226.7 million year-earlier. [See note below re SST discon

Net income was $103.1 million, up 15% sequentially from $89.6 million and up 132% from $44.5 million year-earlier.

EPS (earnings per share) were $0.54, up 13% sequentially from $0.48 and up 125% from $0.24 year-earlier.

Guidance:

Slowing bookings in Q3 indicates sales down 2% to 8% sequentially in Q4, "which is typically our seasonally weakest quarter of the year." 59.1 to 59.3% non-GAAP gross margin. $0.55 to $0.59 non-GAAP EPS.

Conference Highlights:

Silicon Storage Technology (SST) acquisition (April 8, 2010) strategy changed. Superflash memory and RF business has produced unexpected synergies and margins have been improved. So will no longer classify these segments as discontinued. So in presentations going forward, fiscal Q1 (June quarter) will be presented as if they were not ever discontinued. Expects SST to add about $0.40 non-GAAP EPS to full fiscal 2012.

Non-GAAP gross margin 62.0% due to record factory output. Op ex 24% of sales. Non-GAAP net income was 119.6 million or EPS $0.63.

GAAP gross margin was 58.9%. $7.2 million used for share based compensation. GAAP net income from continuing operations was $104.7 million.

Will pay 34.4 cents on December 2, for $64.1 million in cash. The next quarter's dividend of 34.5 cents will be accelerated to be paid on December 27, using $64.3 million cash.

Cash and equivalents $1.57 billion. $166.6 million inventory, 97 days. $156.9 cash generated before the dividend payment. $31.8 million capital spending for equipment to support revenue growth. Depreciation $23.9 million.

Microcontroller revenue up 4.7 sequentially and 39.4% y/y. 8-bit segment achieved a new record. 16-bit up 22% sequentially and 102% y/y. 32-bit declined 10.9% sequentially, but up by multiples of year-earlier. 48,970 development tools shipped.

Analog segment revenue up 11.6% sequentially and 99.8% y/y.

Memory segment now includes Superflash. Up 12.5% sequentially.

Flash IP licensing $17.3 million revenue, up sequentially.

Increased manufacturing output, lead times are good.

Q3 was the best in Microchip history. 80th consecutive profitable quarter. But book to bill dropped to .87. December quarter is typically seasonally down.

Q&A:

Bookings so far in December quarter? Bookings started to slow down in September due to inventory correction in industry. We rarely have a back-to-back 2 quarter decline in revenue. We believe December will be a one-quarter decline. We do conservative accounting; we don't recognize revenue until a distributor has sold it to an end customer.

Superflash, does it pull down gross margins? We have improved gross margins in the past six months. We expect to continue to improve Superflash gross margin. We don't break out the margins on individual segments.

Base business gross margin, ex Superflash & RF? Was as expected.

With lead times coming in, people don't have to place bookings into the following quarter.

End marketing trends? Consumer electronics has been weak. Industrial and automotive is not as weak. Some of this is inventory correction because there had been shortages and so some customers had pre-ordered farther out than usual.

We believe we reached the bottom of the deceleration several weeks ago. September bookings were for December quarter or even January. Since three weeks ago bookings have normalized, at a lower level.

March quarter normal seasonality? We should see some small growth in March quarter over December quarter. In past was typically flat to up, with Europe stronger and Asia weaker due to Chinese New Year.

Superflash technology? We were using SST's technology as early as 5 years ago. We are able to use the more advanced SST technology that was under development. We are already developing products that will have leading-edge technology. Other Superflash customers are continuing to license Superflash. We have a firewall between licensing business and our microcontroller business. We recently signed a new licensing agreement, and other customers are negotiating.

32-bit future? No expected seasonality. Growth will be based on new design wins. There can be a quarter when growth is below trend due to timing of end users.

When long-term orders drop off due to shorter lead times, you can still grow income in a quarter even if book to bill ratio is below 1.

Asia 58% Americas 21%, Europe 21% of sales. Changed partly due to SST acquisition, which was mainly in Asia.

Business conditions in India and China? China is a bigger business for us, September was a growth quarter there, but perhaps not as much as we would like to see.

We have done six acquisitions in the past two years, and all were very very successful. We continue to look, but continue to be very, very careful in our selection.

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