Analyst Conference Summary

semiconductors

conference date: February 7, 2013 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2012 (Q3, fiscal third quarter 2013)

Forward-looking statements

Overview: Record quarter, but GAAP EPS hit by acquisition expenses.

Basic data (GAAP):

Revenues were $416.0 million, up 9% sequentially from $382.3 million and up 26% from $329.2 million in the year-earlier quarter.

Net income was $10.2 million, up sequentially from negative $21.2 million and down 87% from $77.5 million year-earlier.

EPS (earnings per share) were $0.05, up sequentially from negative $0.11, but down 87% from $0.38 year-earlier.

Guidance:

March quarter (fiscal Q4 2013) revenue between $420.2 and $432.7 million. GAAP EPS $0.18 to $0.21, non-GAAP EPS $0.45 to $0.49. Includes a $5.6 million favorable impact from the retroactive reinstatement of the R&D tax credit.

Capital expenditures in the quarter estimated at $24 million. Cash generation between $110 and $130 million.

Conference Highlights:

Record revenue was driven by record sales of microcontrollers and of analog devices. Revenue, margins and earnings were all better than the guidance midpoint.

A dividend of 35.3 cents per share to stockholders of record on February 21, 2013 will be payable on March 7, 2013.

Licensing revenue was $21.3 million, up 6% sequentially.

Gross margin was 48.2% GAAP and 56.0% non-GAAP.

Non-GAAP net income was $84.5 million, EPS was $0.41. Excluded was $14.1 million for share-based compensation, $31.8 million acquisition related expense, $39.7 million amortization of acquired intangible assets, and $2.6 million in special charges. Also excluded was a $3.6 million tax benefit.

Microcontroller revenue was up 1.8% sequentially and 22% y/y to $266 million, led by record sales in both 16-bit and 32-bit chips. 16-bit microcontroller revenue was up 12.6% sequentially. 32-bit microcontrollers were up 17.4% sequentially. MCHP gained market share in all segments during 2012.

Analog chip revenue grew 7.7% sequentially, to a new record, and represented 22.4% of overall revenue.

11.2% sequential drop in memory business, but is now a small part of overall business, mainly to allow for complete solution to microcontroller customers.

Inventory levels were brought down in the quarter and should come down in the March quarter as well. Wafer starts were reduced. Expects 123 to 129 days of inventory at end of March. Long term goal is 115 to 120 days.

Cash and equivalents balance ended at $1.77 billion. Free cash flow was $123.2 million. Dividends paid were $68.7 million. $261.6 million in inventory. $610 million debt. $9.9 million capital spending. Depreciation $23 million.

Normally the March quarter is negatively impacted by the Chinese New Year. But demand is strong driven by design wins. "We believe the December quarter was the bottom of this cycle of Microchip."

Cost of sales was $215.6 million, leaving gross profit of $200.4 million. Operating expenses of $183 million consisted of: research and development $71.4 million; selling, general and administrative $69.4 million; amortization $39.7 million; special charges $2.6 million. Leaving operating income of $17.4 million. Other expense $7.7 million. Income tax benefit $0.5 million.

SMSC integration is going well.

Cut pay, led by executive pay, temporarily in order to avoid layoffs while reducing operating costs.

Q&A:

Lead times and inventories? Customer and distributor inventories are low. We are seeing fairly strong requests for expediting orders. The strength is broad-based by geography, including Europe. It is not specific to a vertical market. We have strong bookings across the board.

Fab utilization and gross margins? Our inventories are higher than we would like, and are mostly in die form. We don't need to increase fab production as long as we can convert the die inventory to finished products. Our rotatating time off system at our fabs means if we do see more demand we can ramp up easily.

We are not quantifying, but we have strong bookings and they will be creating backlong for the June quarter.

We are seeing strong bookings from the large customers that we do direct business with, across industries.

Any specific factor driving analog chip growth? The attach rate has improved with our ramp of 16 and 32 bit microcontrollers.

Competitive pressures on pricing? We hear this every year, every quarter. There are many specialty products in the segment, we are not competing against generic microcontroller products.

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