Analyst Conference Summary

conference date: August 5, 2010 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2010 (Q1 fiscal 2011)

Forward-looking statements

Overview: Microchip continues to blow away the competition with rapid growth. Silicon Storage Technology (SST) aquired April 8, 2010.

Basic data (GAAP):

Revenues were $320.8 million, up 15% sequentially from $278 million and up 66% from $192.9 million in the year-earlier quarter.

Net income was $89.6 million, up 18% sequentially from $75.7 million and up 227% from $27.4 million year-earlier.

EPS (earnings per share) were $0.48, up 20% sequentially from $0.40 and up 220% from $0.15 year-earlier.

Guidance:

Revenues for September (fiscal Q2 2011) quarter expected up 6 to 7% sequentially to $340 to $343 million. GAAP net income from continuing operations $98.3 to $99.8 million; non-GAAP $109.5 to $111.1 million. EPS $0.52 GAAP, $0.58 non-GAAP. Capital expenditures $42 million. Cash generation $115 to $135 million. Dividend payment $63.7 million.

December quarter is typically the seasonally weakest for Microchip. But expects to be up 3% over September quarter.

Capital expenditures for fiscal 2011 wil be about $120 million.

Conference Highlights:

An exceptional quarter, with high gross margin and exceeding prior guidance.

Dividend raised to 34.3 cents per share per quarter (up from 34.2).

Organic growth was strong as shown by results excluding SST acquisition: revenues $302.4 million, up 9% sequentially and 57% from year-earlier quarter.

SST was profitable both on a GAAP and non-GAAP basis.

Consolidated non-GAAP results were operating income $121.7 million, net income $110.1 million, and EPS $0.58. This excludes $4.9 million acquisition related expenses and other non-cash items, including $8.3 million stock-based compensation.

Non-GAAP gross margin excluding SST was 62%, a record. Operating margin 37.0%. Including SST non-GAAP: 63.6% gross margin, 37.9% operating margin, records for Microchip.

"Microchip's factories are running at higher levels of production output than they have ever produced in the history of the company, maintaining the high efficiency, quality and yields for which we are known."

Several non-core SST assets were sold, helping SST become accretive to earnings quicker than expected. More asset sales are being negotiated. SST was acquired for $353.8 million.

Microcontroller segment revenues were up 9.8% sequentially and 55.3% y/y. Flash microcontrollers represented 84% of segment.

8-bit microcontrollers had record revenues.

16-bit microcontrollers up 26% sequentially and 154% y/y. Integration with USB was introduced. 295 new volume 16-bit customers in quarter.

32-bit microcontrollers up 86% seqeuentially on small base. 268 customers in volume production, with new designs being rapidly developed.

Analog segment revenues up 17.8% sequentially and 101% y/y. Run rate is now near $150 million annual revenue.

Serial EE business was flat, is maintained to serve microcontroller customers.

Record development tools sales.

Inventory was slightly down at $128.1 million and is well below internal targets, so continuing to ramp production.

Cash and equivalents balance was $1.47 billion. Cash generated was $95.3 million, but $63.7 million was paid out as dividends. Cash generation is expected to remain strong for the remainder of fiscal 2011. $31.2 capital expenditures. $22.5 million depreciation.

Book to bill ratio was 1.41 with a record ending backlog.

Increasing manufacturing capacity to meet demand. Lead times are longer than optimum, but better than competitors.

New interface technologies for touch sensing and integrated graphics acceleration were introduced. Wireless solutions for embedded applications were added. Many other new chip designs and improvements were introduced.

49,710 development systems were shipped.

There is still a stock buy-back program in effect with 2.5 million further shares authorized.

GAAP Cost of sales was $131.4 million. Gross profit $199.4 million. Operating expenses of $92.8 million include: R&D $38.7 million, selling, general and administrative $53.7 million, special charges $0.5 million. Leaving operating income of $106.6 million. Other expense was $3.9 million. Income tax provision $13.1 million.

Revenue by geography grew 8.6% in Americas, 2.7% in Europe, and 25.4% in Asia; all growth was above typical seasonality. 53.9% of revenues were from Asia.

Visibility for the new quarter is essentially 100% as order book is full due to strong bookings in July.

Q&A:

What percentage of current booking fall into December quarter? A large percent are beyond this quarter. Lead times guidance is for 8 to 15 weeks, depending on products, but are basically stable.

Regional guidance? Typically it is a weak quarter in Europe due to August holidays.

If revenues are up 3% in December, gross margins? They are already at a record high, essentially in the range you can expect with factories running at full capacity. Operating expenses could see a small increase, are near our long term model.

Why not guide to higher revenues with such a high backlog and book to bill? We are seeing people placing orders all the way into November in December already. We are creating additional capacity, which allows us to grow revenue.

We are paying premiums for new equipment and overtime in order to serve our customers.

In the last decade Microchip has never had to write off significant inventory. Not worried about advanced bookings by customers.

8-bit growth was outstanding; we don't give a percentage for that.

There was product demand that was not shipped in the June quarter and the same will happen in September quarter; customers are not building inventory because they cannot.

We expanded our sales and marketing team years ago, then kept them through the downturn, enabling design wins that are keeping us busy now.

The Street's estimates for Microchip have often been low because they don't take into sufficient account design wins for new products.

We don't raise our prices when their are shortages because when there is a design win a customer is trapped. Raising prices could cause them to look to competitors. So pricing has not been a factor in our performance.

Fab capital spent now would not give a significant capacity gain until March quarter. Testing capacity ramps somewhat faster.

You can't gain market share by just having better lead times than competitors. Most sales require design-in, which is a multi-year process. You can't just pop in a different microcontroller into a design.

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