Analyst Conference Summary

conference date: January 27, 2011 @ 2:00 PM Pacific Time
for quarter ending: December 31, 2010 (Q3 fiscal 2011)

Forward-looking statements

Overview: Revenues down sequentially within guidance range.

Basic data (GAAP):

Revenues were $367.8 million, down 4% sequentially from $382.3 million but up 47% from $250.1 million in the year-earlier quarter.

Net income was $100.8 million, down 2% sequentially from $103.1 million but up 45% from $69.4 million year-earlier.

EPS (earnings per share) were $0.51, down 6% sequentially from $0.54 but up 38% from $0.37 year-earlier.

Guidance:

Q4 Fiscal 2011 expectations: Revenue between $367.8 and $378.9 million. GAAP net income $99.4 to $104.6 million; non-GAAP net income $112.2 to $117.8 million. GAAP EPS $0.49 to $0.52; non-GAAP $0.56 to $0.58.

Quarter will be impacted by Lunar New Year holidays in Asia.

Capital expense $30 million for the quarter, for total of $130 million in fiscal 2011.

Conference Highlights:

Exceeded expectations. Slightly down as expected from fiscal Q3, but record 32-bit microcontroller sales. Gross margins above expectations due to cost reductions and favorable product mix.

"The SST acquisition has done exceptionally well for Microchip." As a result technology licensing revenue hit a record of $19.1 million. Signed 6 new licensing agreements in the quarter. Signed another deal after January 1. SST contributed about $0.09 to EPS in quarter.

Because what would have been the March 2011 dividend was accelerated into December 2010, the next dividend payment will be in June.

Non-GAAP net income was $113.8 million; EPS $0.58. The higher share count due to the higher stock price negatively impacted diluted EPS by over $0.01.

Overall microcontroller sales were down on 2.2% sequentially, and were up 24% y/y. Shipped 1.3 billion microcontrollers in calendar 2011. Gained significant market share in each of the segments, 8-bit, 16-bit, and 32-bit. Number of volume 16-bit customers is growing. 8-bit only slightly down sequentially.

Analog business down 4.7% sequentially. Design win momentum and new product introductions remained good.

Memory business down 13.5% sequentially.

Inventories had been too low. Were able to increase to $178 million in the quarter, but is still below internal targets.

$133.5 million cash was generated, but $129.4 million was used to make the two dividend payments in the quarter. Cash balance ended at $1.57 billion and "we expect our cash generation in the March 2011 quarter to continue to be strong," between $125 and $135 million. $34.2 million capital spending in quarter. Depreciation expense $23.6 million.

Gross margin was 58.8% GAAP, 59.8% non-GAAP, down slightly sequentially.

Microchip introduced RF Energy Harvesting Kits to allow its low power microcontrollers to operate battery free.

MIPS32 M14K cores were licensed for Microchips next generation 32-bit microcontrollers.

40,303 development systems were shipped in the quarter.

Cost of sales was $151.4 million, leaving gross profit of $216.4 million. Operating expenses of $98.9 million included $42.2 million for research and development, $56.1 million for selling, general and administrative, and a special severance charge of $0.6 million. Operating income was $117.5 million. Other expense $3 million. Income tax provision $12.5 million.

Note a year ago Microchip's guidance for 2010 was thought to be too optimistic, but in fact it widely under-predicted revenue and EPS gains.

December quarter book to bill was .77. But that won't affect March quarter much, as inventory correction in December quarter appears to be over.

Q&A:

Color on guidance? Currently have 4 to 6 week lead times, which are down, so people don't backorder as early as in 2010. But the orders are healthy considering lead times. So it seems like a normal, seasonal quarter.

32-bit microcontrollers were introduced 2 1/2 years ago. After 10 quarters, they are doing what 16-bit did in the same period.

Gross margin long term guidance is 61% to 62%, so we are near that. There would be lots of small drivers to get the remaining efficiency. Ramping up plants for increased production. SuperFlash memory is ramping very rapidly.

Linearity in quarter? Normal. In December usually has a slower finish, which it did this year.

We are adding employees rapidly for strategic product lines.

Licensing business long term outlook? It is a strategic growth area. Royalties take a while to build up once an agreement is signed. We are confident March quarter will be another record for license revenue.

June and September quarters are usually seasonally strong, and we would expect that in 2011 across our product lines.

Lunar New Year came early this year. People will be back to work on February 8. Early is better for seasonality.

Explained in detail why book-to-bill does not equate to revenue when lead times are shrinking.

Materials prices increased in 2010, but our cost reduction efforts compensated.

Touch sensor market? Microchip's focus is applications other than tablets and cell phones. Devices with microcontrollers often need touch, and doing well in that segment. We get high volume at good margins by serving a large number of customers and applications.

Believes dividends hit right level, now growing it slowly, by $0.001 per quarter. But generating cash rapidly, which could be used for acquisitions. We have the highest dividend among comparable companies, so no impetus to grow it rapidly at present.

Stock buy backs will continue to be very opportunistic, only when the stock is very undervalued, as in 2008 when the stock was $16, and we got a good return on our investment.

December quarter was strong for Europe, which is usually seasonally weak in the quarter. Other regions were normal.

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