Analyst Conference Summary

conference date: January 29, 2008 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2008 (Q3 fiscal 2009)

Forward-looking statements

Overview: Drastically lower chip sales as a result of economic meltdown. Did not cut the $0.339 per share dividend. Profits did held up better.

Basic data (GAAP):

Revenues were $192 million, down 29% sequentially from $270 million and down 24% from $253 million year-earlier.

Net income was $73 million, down 3% from $76.5 million and 8% from $80 million year-earlier.

EPS (earnings per share) were $0.40, down 2% sequentially from $0.41 but up 5% from year-earlier.

Guidance:

Not providing guidance, but for internal planning purposes are using the following:

March quarter (fourth fiscal quarter) revenues of $173 million. 49% GAAP gross margin, 50% non-GAAP. 14% to 16% tax rate. GAAP earnings of $0.09 to $0.11; non-GAAP $0.13 to $0.15. Capital expenditures of only $15 million for the quarter and for full fiscal year 2010.

Conference Highlights:

Most difficult quarter ever in the history of the company. Believe best way to emerge from this period is by introducing new products. Microchip is committed to not lowering the dividend.

Non-GAAP EPS $0.23, down 50% sequentially from $0.45 and down 42% from $0.39 year-earlier. That excludes an IRS settlement, reinstatement of R&D tax credit, a loss on trading securities, share based compensation expense, and acquisition expense.

Revenues from 16 bit microcontrollers continued to grow on a year-over-year basis, but was down 8% sequentially. March order backlog is high for these chips.

Inventory grew to $136.5 million, as much of the downturn was at the end of the quarter, so are lowing production levels to bring it in line. Also cut pay and taking other cost reduction measures. Reduced capital expenditure plan. It will take a couple of quarters to burn off excess inventory. Fabs are running at only 60% of capacity.

Cash and short term investments ended at $1.474 billion. Convertible debentures are a $1.15 billion liability. $16 million reduction in fair value of securities. $24 million in capital spending. $23 million for depreciation.

New products shipped, notably the Inductive Touch-Sensing solution.

Revenue was down in all geographies.

55.2% non-GAAP gross margin. 54.5% GAAP Gross margin.

Cost of sales was $87 million, leaving gross profit of $105 million. Operating expenses of $64 million included $27 million for R&d, $37 million for selling and general. Leaving operating income of $40 million. Other income was negative $19 million.

Total tax benefit was $51 million.

23% microcontroller revenue drop y/y. Shipped 7 billionth microcontroller. 32 bit line makes good progress, with a large number of designs in process.

In general, design activity has not decreased.

23% drop sequentially in analog business, but down just 5% from year-earlier.

Book to bill entering January is 0.7. But orders have been a little bit better in January.

Q&A:

What would cash break even be? We are so profitable, we could go quite low in revenues before going into the red.

Acquisitions and dividend? If we make any acquisitions we will still be able to pay the dividend.

Trends after March if economy recovers gradually? Our operating expense is designed to be highly variable. It went down 20% in one quarter. We are prepared for a long recession, or for a quick recovery, in which case we would ramp op ex.

Your guidance of 10% down in March quarter is better than your rivals? We did the modeling independently based on customer feedback, but of course in December quarter the customers turned out not to know. We realize 10% is better than what we hear from competitors. It may be we are gaining market share, or the specific markets we are in.

Have you maxed out 8 bit microcontroller market share? No, we only have 30% or so, there is much more to be had.

Consumer, computing, industrial comparison? No market is doing well. Housing burnt out early for us. We are not so much in consumer electronics as in consumer industrial type goods like sprinkler or heating controllers. A lot of appliance sales are to existing home owners, so low new home sales does not have that much of an effect.

Gross margins, 8 vs. 16 bits? They are the same across product lines, and should be the same when 32 bit sales ramp.

Touch screen introductions? Hampshire was already shipping to customers in the industrial segment. Revenue is small in size, and targets are in industrial controls, but we have a broader potential range of customers than Hampshire did.

Tax rate next year? Around 15%.

Interest income estimate? We are earning income, but we have $6 million interest on convertible debt on the same line.

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