Analyst Conference Summary

conference date: November 3, 2011 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2011 (Q2 fiscal 2012)

Forward-looking statements

Overview: Weak quarter, as previously announced.

Basic data (GAAP):

Revenues were $340.6 million, down 9% sequentially from $374.5 million and down 11% from $382.3 million in the year-earlier quarter.

Net income was $79.3 million, down 20% sequentially from $99.3 million and down 24% from $104.7 million year-earlier.

EPS (earnings per share) were $0.40, down 18% sequentially from $0.49 and down 26% from $0.54 year-earlier.

Guidance:

"We are modeling December quarter revenue to be flat to down seven percent sequentially" or from $316 to $340 million. GAAP net income $66.7 to $75.5 million. Non-GAAP net income $79.9 to $89.6 million. GAAP EPS $0.33 to $0.37, non-GAAP EPS $0.40 to $0.44. We expect our shipments to be less than end consumption.

Conference Highlights:

"Macroeconomic conditions continue to be weak, but we believe that the shipment rates in December will be below the consumption rates of our customers. We expect the inventory burn-off to be largely over by the end of the December quarter and anticipate the December quarter to mark the bottom of this industry cycle... We expect the March 2012 quarter to be sequentially up in revenue, gross margin and earnings."

The revenue decline was due to macroeconomic conditions and is similar to that seen throughout much of the semiconductor industry. "The Christmas build season did not materialize as expected during the quarter." However, licensing revenue set a record of $22.0 million, up 6% sequentially and 27% y/y. 32-bit microcontroller revenue was up 10% sequentially and 158% y/y. The only up segment was automotive.

Non-GAAP numbers: Operating income $110.0 million, net income $92.6 million (down 17% sequentially, 23% y/y), EPS $0.46.

The cash dividend will be continued at $0.348 per share per quarter, payable on December 5 to stockholders of record on November 21.

Microcontroller business down 11.2% sequentially. We continue to see many design wins. Customers in 32-bit volume production increased to 790. 10 billionth microcontroller was shipped.

Analog revenue was down only 0.7% sequentially due to market share gains. Seeing good attachment to non-Microchip based devices.

Memory segment was down 12.6% sequentially.

The cash and investments balance ended at $1.78 billion, up by $58 million in the quarter. $66.3 million was spent on the dividend. $211.2 million inventory, with inventory at distributors up. $25.2 million capital spending, $22 million depreciation.

The Thailand floods are not directly affecting Microchip's two assembly and test facilities there, but they have had sporadic supply chain issues. MCHP factories are inside dikes and have always been equipped with pumps and have fuel to run them if necessary. Some subcontractors are under water, but their production has been shifted.

By geography, revenue decreased 9.4% in the Americas, 8.5% in Europe. and 9.2% Asia.

We are taking some shutdown days at our fabs around the holidays. We have also cut back on some of our foundry orders. Inventory is slightly high, but that gives us short lead times, which is a competitive advantage. We reduced capital expense planning for 2012 to $75 million. Gross margins should start heading pack to 61% non-GAAP in 2012. We plan no layoffs.

Cost of sales was $145.6 leaving gross profit of $195.0 million. Operating expenses of $97.4 million included $45.4 million for research and development and $52.0 million for selling, general and administrative. Operating income wa $97.6 million, other expense $7.3 million, income tax provision $11.0 million.

Q&A:

What type of growth would you expect in the rebound? The 2008-2009 drop was much steeper, so the recovery was steep. The drop is not as steep this time, so the recovery is not likely to be as steep.

Do you have bookings to support the idea that December is the bottom? The books have already bounced off the bottom. Some customers have already depleted their inventories and have resumed buying product.

Linearity in quarter, October? We did not see the usual September Christmas builds. Bookings improved in October.

What do you think this means for the macroeconomy? In June significant issues indicated a recession was already in recession. The U.S. economy since then managed a soft landing. China, however, has weakened, but is still quite healthy. Europe is likely to be the worst in the December quarter.

Analog attach rates to Microchip MCUs? We still want the analog when we don't get the microcontroller, that is what our sales team uses to generate demand.

Utilization rates will increase in March quarter because there won't be the holidays of the December quarter.

Operating expense if March quarter has higher revenue? We will be working to get margins back to our normal model.

Industrial end market outlook? The industrial markets are clearly weak. But we are shipping even less than they are using, so inventory is being reduced. We believe in the March quarter we will ship more product to industrial markets than in the December quarter.

16 bit microcontroller revenues continue to grow. The number of designs continue to grow.

Why are you holding so much cash while generating so much cash? We are not proponents of stock buy backs. Companies often buy their own stock at too high of a price. We prefer to give dividends, which could be used by investors to buy more stock. We buy our stock only when we believe it is clearly undervalued. We have been profitable for 84 quarters, so we don't need cash for operations. We mostly do smaller acquisitions. We are among the highest dividend payers in the industry, and grow it almost every quarter. Cash piling up despite this is a good thing. We don't like the idea of one-time dividends, we would rather grow the dividend.

We don't break down revenue by 8, 16 and 32 bit microcontrollers because we see them as a continuum with customers using a variety to meet their needs.

Source of good October bookings? Broad based, no particular geography or sector. Believes a broadbased downturn would be followed by a broadbased recovery. Some areas of Europe are doing well, like Germany.

Channel inventory is high, but they are shipping more than they are ordering. We don't book revenue when we ship to distributors, only when there is sell-through, unlike most of our competitors.

The 32-bit microcontrollers tend to be more application specific than 8-bit MCUs, so the sales and support people have to be more specialized, and that does increase sales expenses. 8-bit business is still growing, but at a smaller rate than 16-bit or 32-bit. We continue to make new 8-bit products with new features.

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