Analyst Conference Summary

conference date: November 8, 2012 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2012 (Q2, fiscal second quarter 2013)

Forward-looking statements

Overview: GAAP numbers negatively affected by SMSC acquisition, but otherwise a good quarter, with record revenue.

Basic data (GAAP):

Revenues were $382.3 million, up 9% sequentially from $352.1 million, and up 12% from $340.6 million in the year-earlier quarter.

Net income was negative $21.2 million, way down sequentially from $78.7 and from $79.3 million year-earlier.

EPS (earnings per share) were negative $0.11, down sequentially from $0.31 and down from $0.40 year-earlier.

Guidance:

Balancing weak economy against a full quarter of SMSC sales, revenue should be between $396 million and $426 million in the December quarter (Q3 fiscal 2013). EPS just 0 to $0.02 GAAP, but non-GAAP EPS of $0.37 to $0.41. Capital expenditures $15 million. Cash from operations $80 to $100 million.

Conference Highlights:

GAAP sales were a record. Quarterly dividend will be 35.2 cents/share, to stockholders of record on November 21, 2012, payable December 6.

Macro economy hurt sales in Europe, the U.S. and China, but results were only slightly lower than expected. Continuing to see weak economy in Q4. SMSC integration is going well.

Non-GAAP numbers: revenue $407.8 million, up 20% y/y. 57.7% gross margin. Net income $97.7 million, up 1% sequentially from $96.9 million and up 6% from $92.6 million year-earlier.. EPS $0.48, up 4% from $0.46 year-earlier. The $24.5 million revenue above GAAP was from sell-through of inventory from acquisitions.

Microcontroller segment set a record with non-GAAP revenue of $261.3 million, with SMSC contributing $33 million. 16-bit microcontrollers was down 8% sequentially but up 29% y/y, excluding SMSC. 32-bit segment was down less than 1% sequentially but up 97% y/y on an organic basis, and including SMSC hit a record.

Analog segment set a record with non-GAAP revenue of $86.6 million, and at 21.2% of revenue was highest percentage ever. Analog chip revenue grew 2% sequentially and 14% y/y. Innovative new products are fueling growth, with newer products to be introduced soon.

Memory segment non-GAAP revenue was $36.6 million.

Licensing revenue was $20.1 million. Other revenue was $3.2 million.

Inventory was too high at $295.5 million, so will reduce wafer starts and work hours in fabs, which will in turn reduce gross margin in the December quarter. But inventories at distributors is at a record low 31 days.

Cash balance at end of quarter was $1.71 billion. Debt $600 million. $15.9 million capital expense in quarter. Depreciation $22.3 million.

Revenue by geography: $81.8 million Americas, $85.6 million Europe, $240.4 million Asia.

New SMSC products were introduced in the quarter, as well as the usual array of new Microchip microcontrollers and analog chips.

Cost of sales was $189.1 million. Operating expenses of $186.1 million consisted of: research and development $64.1 million; selling, general and administrative $71.8 million; amortization of intangibles $27.9 million; special charges $22.4 million. Leaving operating income of $8.1 million. Other expense $6.0 million. Income tax provision $23.3 million.

$11.5 million of the special charges related to a lawsuit over SST acquisition in 2010.

Q&A:

How much of hit is from inventory reduction, how much from lower end demand? There is a demand shortage, and also inventories are at a decade low. We have a record number of design wins and lots of new customers, but they are all taking less units per design.

There are too many moving parts right now for there to be a pattern of seasonality in the business.

Can you see a bottom? Everyone is concerned about the fiscal cliff. Nobody knows whether the cliff will be resolved, and if it is it takes a while to work into the system. A lot of our small customers are having problems getting credit. In addition, there is a change of power taking place in China. We plan to cut wafer starts through June, but that is more about inventory than a prediction of demand through June.

Japanese market, difficulty of their analog and microcontroller producers? This has been happening for a while. We find opportunities when their customers are concerned about supplies. It is not a quick transition, but Microchip should benefit.

SMSC in computing market? SMSC is very well positioned for Intel Haswell architecture controllers. Allows for standby connectivity. We believe our content will go up when Haswell is in production.

December gross margins? Biggest impact is from cutting wafer starts, including rotating time offs. If demand picks up, we can increase hours quickly. Second impact is from SMSC revenue being for full quarter rather than just 2 months.

We had not counted on the strong downturn in semiconductor demand two months after SMSC was acquired. We would have produced outstanding results if revenue had held up. We will deliver outstanding SMSC results later next year.

Automotive exposure? We don't break out by end market, but automotive exposure has increased. Not enough to move the needle.

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