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Executives

Steve Sanghi – President and CEO

Eric Bjornholt – VP and CFO

Ganesh Moorthy – COO

Analysts

Doug Freedman – Gleacher & Company

Shawn Boyd – Westcliff Capital Management

Terence Whalen – Citi

James Schneider – Goldman Sachs

Chris Caso – Susquehanna Financial Group

Chris Danley – J.P. Morgan

John Barton – Cowen and Company

Brendan Furlong – Miller Tabak

Ray Rund – Shaker Investments

Steve Elisque [ph] – UBS

Kevin Cassidy – Stifel Nicolaus

John Pitzer – Credit Suisse

Janet Ramkissoon – Quatra Capital

Craig Ellis – Caris & Company

Microchip Technology Inc. (MCHP) F2Q2011 (Qtr End 09/30/10) Earnings Conference Call November 4, 2010 5:00 PM ET

Operator

Good day everyone and welcome to the Microchip Technology second quarter and fiscal year 2011 earnings results conference call. As a reminder, today’s call is being recorded. At this time, I’d like to turn the call over to Microchip’s President and Chief Executive Officer, Mr. Steve Sanghi. Please go ahead sir.

Steve Sanghi

Thank you operator and good afternoon everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press release of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip’s business and results of operations.

In attendance with me today are Ganesh Moorthy, Microchip’s Chief Operating Officer, Eric Bjornholt, Chief Financial Officer and Gordon Parnell, Vice President of Business Development and Investor Relations.

I will first comment on the status of the restructuring and integration of Silicon Storage Technology. All of our financial reserves flow from the understanding of how this acquisition is being accounted for. Eric Bjornholt will then give you the details of our financial performance. Ganesh will give his comments on the results of the product line, and then I will discuss the current business environment and discuss our guidance. We will then be available to respond to specific investor and analyst questions.

Microchip acquired Silicon Storage Technology, SST, on April 8, 2010. At that time we determined that we would hold SST’s super flash memory solid state drive, smart card and RF businesses as assets held for sale.

On May 21, 2010 we consummated and announced a transaction in which we sold solid state drive, smart card and certain older flash memory product lines to Greenline Systems Inc. Then we announced a second transaction on July 8, 2010 in which we exclusively licensed certain flash memory products in certain geographic markets of Asia, mainly Taiwan and China to Professional Computer Technology, or PCT.

After that, we still had remaining super flash memory business and RF business held for sale. After operating the SST business for two quarters, we have found synergy between SST’s RF business and Microchip’s wireless controller and analog business. On the memory side, after selling the low margin end of the business to PCT of Taiwan, we have substantially improved our gross margin for the rest of the super flash memory business.

Additionally, we have found and running from volume on the memory business is critical to proving out the technology before it can be licensed. There are also significant operational synergies with Microchip’s memory business and technology synergies with Microchip’s micro controller business.

As such, we have very substantially eliminated the excess overhead and dramatically reduced the operating expenses of the SST business. With that, we have decided to keep the super flash memory and RF businesses of SST as ongoing businesses of Microchip.

In this press release and in future filings with the SEC, the first quarter of fiscal quarter of 2011 will be presented as if the SST super flash memory and RF divisions were always included in the continuing operations of Microchip.

Microchip’s second quarter of fiscal 2011 guidance provided on August 5, 2010 did not include the super flash memory and RF divisions of SST. Without these divisions, Microchip guided its net sales to be $340 to $343 million for the September quarter, and compared to that, our actual results for these businesses achieved $343.3 million, which is near the high end of our previous guidance.

The super flash memory and RF divisions of SST added approximately $40 million of revenue in the September 2010 quarter. The restructuring and integration of SST is now complete. We have transformed SST into a very profitable entity that is an accretive to Microchip’s non-GAAP earnings per share by about $0.08 for the September quarter.

We expect SST to add approximately $0.32 to Microchip’s non-GAAP earnings for fiscal ‘11 compared to our original of EPS accretion for fiscal year ‘11 of only $0.14 to $0.18. For fiscal year ‘12, we expect the SST business to add about $0.40 to our earnings per share.

We are very pleased to have completed this project and believe that we have delivered on our commitment of providing significant shareholder value through this acquisition.

I will now pass this on to Eric Bjornholt who will cover the financials on a fully consolidated basis including all continuing operations of Microchip on the revised basis including the super flash memory and RF businesses of SST.

Eric Bjornholt

Thanks Steve, and good afternoon everyone. We are including information in our press release and in this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on our investor relations page of our website at www.microchip.com, which we believe you will find useful when comparing GAAP and non-GAAP results.

I will go through some of the operating results on a fully consolidated basis for the September quarter. Any comparisons I make to the June quarter will also be based on a fully consolidated basis, which is revised to include the RF and super flash memory businesses of SST.

I will begin by referring to gross margin and operating expense information on a non-GAAP basis prior to the effect of share based compensation and acquisition related expenses. Net sales in the September quarter were a record $382.3 million, and were up approximately 7% from net sales of $357.1 million in the immediately preceding quarter and were up 68.7% from net sales of $226.7 million in the September 2009 quarter.

Non-GAAP gross margins were 60.2% in the September compared to 60.3% in the June quarter. Our factories produced record output during the quarter and our cost structures remained in excellent condition.

With the increase in revenue in the September quarter, and our continued focus on prudent spending, operating expenses were 24% of sales compared to 24.5% in the June quarter. Non-GAAP operating income was 36.2% of sales. Non-GAAP net income from continuing operations was $119.6 million or a record $0.63 per diluted share, an increase of 8.8% from non-GAAP net income of $109.9 million or $0.58 per diluted share in the immediately preceding quarter.

On a full GAAP basis, gross margins including share based compensation and acquisition related expenses which include the sell through our written up inventory and intangible amortization were 58.9%. Total operating expenses were $101.9 million or 26.6% of sales and include share based compensation of $7.2 million, acquisition related expenses of $2.2 million and $.6 million in severance and office closure charges that are classified as a special charge within operating expenses.

GAAP net income from continuing operations was $104.8 million or $0.55 per diluted share, an increase of 14% from GAAP net income of $91.9 million or $0.48 per diluted share in the immediately preceding quarter.

In the September quarter, the non-GAAP tax rate was 13.2% and the GAAP tax rate was 13.4%. Our tax rate is impacted by the mix of geographical profits and a percentage of our cash that is invested in tax advantage securities. We expect our combined forward-looking effective tax rate to be about 13%.

To summarize the after tax impact that the non-GAAP adjustments had on Microchip’s earnings per share in the September quarter, share based compensation was about $0.041 cents, acquisition related were about $0.031 and non-cash interest expense was about $0.06.

As indicated in our press release today, Microchip will be paying two dividends in the December quarter. The first dividend of $0.344 per share will be paid on December 2, 2010 to shareholders of record on November 18, 2010. The cash payment associated with this dividend will be approximately $64.1 million.

The second dividend is an acceleration of the March 2011 dividend into December 2010 to allow our shareholders to take advantage of the lower tax rate that will apply in 2010 compared to what is expected for 2011. This dividend is $0.345 per share and will be paid on December 27, 2010 to shareholders of record on December 13, 2010. The cash payment associated with this dividend is expected to be $64.3 million.

Moving on to the balance sheet, keeping the super flash memory and RF business of SST, increased the dollar amount of Microchip’s inventory in support of these businesses as we closed the September quarter with $166.6 million of inventory, representing approximately 97 days, which is down one day from the prior quarter levels.

Inventory at our distributors was 34 days, which is up one day from the prior quarter level. At the end of September the combined inventory on Microchip’s balance sheet and at its distributors was 131 days or flat to the prior quarter.

I want to point out that the deferred income on shipment to distributors increased 22.4% sequentially, but this was impacted by the inclusion of the super flash memory and RF divisions of SST and the conversion of certain SST stocking reps into sell through distributors during the September quarter.

I would like to remind you that Microchip recognizes its distribution revenue on a sell through basis in its worldwide distribution channel. During the September quarter, we continue to increase our manufacturing output to allow us to satisfy the needs of our customers.

We forecast inventory days on our balance sheet to increase in the December quarter, but the amount of the increase will be dependent on the levels of inventory our distributors decide to hold for their customers, overall demand for our products and production levels.

Inventory on Microchip’s balance sheet has been too low for the past several quarters and building some inventory this quarter, will help bring our lead times closer to the levels our customers have come to expect.

At September 30, Microchip’s accounts receivable balance was $202.8 million, an increase of 4.8% from the balance as of the end of June. Receivables are in great condition with excellent payment performance continuing from our customers.

As of September 30, Microchip’s cash and total investment position was approximately $1.57 billion. The September quarter set a new record for Microchip with $156.9 million of cash generation prior to the dividend payment of $63.9 million.

Our cash generation continues to be strong and our total cash and investment position is projected to grow by approximately $125 to $135 million in the December quarter prior to the dividend payments.

Capital spending was approximately $31.8 million for the September quarter. We are continuing to invest in equipment to support the revenue growth of our new products and technologies and our capital expenditure forecast for fiscal 2011 is about $120 million.

Depreciation expense in the September quarter was $23.9 million, which was up from depreciation of $22.4 million in the June quarter.

If you have questions related to the financials for the June or September quarters due to the inclusion of the super flash memory and RF businesses of SST, please refer to the supplemental financial information tab on the investor relations page of Microchip’s website. Gordon and I will also be available to answer questions from investors and analysts following today’s call.

I will now ask Ganesh to give his comments on the performance of the business in the September quarter.

Ganesh Moorthy

Thank Eric and good afternoon everyone. Micro controllers, analog and memory products delivered another quarter of strong growth in the September quarter. Let’s now take a closer look at each of our product lines as well as flash IP licensing which starting last quarter, became our fourth reporting segment.

Starting with micro controllers, this business delivered another strong quarter with revenue up 4.7% on a sequential basis and up 39.4% from the year ago quarter, achieving a new record. Micro controller business also broke through $1 billion annualized revenue for the first time ever, reflecting the strong growth in our micro controller business in 2010. We expect to ship our nine billionth cumulative micro controller shipped in the December quarter, having shipped the eight billionth micro controller just in the March quarter of this year.

Our 8-bit micro controller business had another strong quarter, achieving a new record as all segment of our 8-bit product line again experienced very strong growth. Our 16-bit micro controller business also achieved another record for quarterly revenue, with strong sequential growth of 22% and up 102% from the year ago quarter.

New customers and new designs going into production continued to drive significant growth as the number of volume 16-bit customers grew to over 3,200 customers.

Our 32-bit micro controller product line, which had 36% sequential growth in March, and 86% sequential growth in the June quarter, took a pause and declined 10.9% in the September quarter. This is quite normal for a new product line where revenue growth tends to be more lumpy as we saw during similar phases of growth in our 16-bit and analog businesses several years ago.

32-bit micro controller revenue for the first six months of fiscal year ‘11 was 320% higher than the equivalent period in fiscal year ‘10 and I fully expect we will set a new record in the December quarter. The number of customers and volume production for 32-bit micro controller grew by 56% to 417 as we continue to build broad based customers to grow this business.

Moving to development tools, we shipped 48,970 development tools in the September quarter including our one millionth cumulative development tools. Development tool sales remain an excellent leading indicator of continued strong design and activity and acceptance of our solutions by our customers, and the continued trend strong development tools sales bodes well for our future growth.

Now moving to our analog products, this business also delivered outstanding results with strong sequential growth of 11.6% and 99.8% growth versus the year ago quarter to achieve another record high for revenue. The marks the sixth consecutive quarter of double digit growth for our analog business.

In the first six months of fiscal year ‘11, our analog business has grown 110.8% as compared to the same six months of fiscal year ‘10. We’re very pleased with the design win and revenue momentum of our analog business so far, and we continue to introduce a steady stream of innovative new products which we expect will contribute to ongoing strong revenue growth in the coming quarters.

Moving to memory, our memory business is now comprised of our dsPIC memory products as well as our super flash memory products. This business was up 12.5% on a sequential basis and we continue to run our memory business in a disciplined fashion that maintains consistent profitability, enables our licensing business and serves our micro controller customers to complete their solutions.

In regards to flash IP licensing, the revenue for the September quarter was $17.3 million, up 12.5% from the June quarter. We are very optimistic about the potential for this business to add to our ongoing growth and profitability.

Moving to manufacturing and lead times, during the quarter, we continued to increase our manufacturing output at a measured rate to support our growth. Our current lead times are predominately at approximately six weeks and still well below where most of our competitors are at.

We continue to capitalize on this strength to further grow our market share by enabling existing as well as new customers to achieve their business objectives with Microchip solutions.

I will now pass it to Steve for some general comments as well as our guidance going forward.

Steve Sanghi

Thank you Ganesh. As I reflect on the September quarter, it was yet Microchips best quarter ever in our history. I want to thank the entire Microchip team including the employees that joined us from SST for delivering an outstanding quarter in many, many respects.

We made new records in many aspects of our business. We achieved record sales in micro controllers, analog and licensing businesses. We also achieved record non-GAAP operating profit of $138.2 million and record cash flow of $156.9 million in September quarter.

The September quarter also marked our 80’th consecutive profitable quarter. This is 20 years of making profit every quarter in good times and in bad, a record that is unmatched among our peers and is testimony to the resiliency of the business model that we have developed and fine-tuned over time.

I will now provide guidance for December 2010 quarter. Microchip’s book to bill ratio for September was .87. While our own inventory and distributor’s inventories are in check, and were flat in days from June quarter, we are seeing an industry inventory correction. December quarter is historically the weakest quarter of the year for Microchip.

Considering all that, we expect our net sales for the December quarter to be down between 2% to 8% sequentially. We expect our non-GAAP gross margin to be between 59.1% to 59.3% for the December quarter and we expect non-GAAP earnings per share to be between $0.55 and $0.59.

Given all the complications of accounting for a large acquisition including purchased inventory write up, amortization of intangibles and restructuring charges, like many other companies have done, Microchip will continue to provide guidance and track it’s results on non-GAAP basis.

We believe that non-GAAP results will provide more meaningful comparisons to prior quarters and we request that the analysts continue to report the non-GAAP estimates for this call.

With that, operator would you please poll for questions.

Question-and-Answer Session

Operator

(Operator instructions) We’ll go to Doug Freedman with Gleacher & Company.

Doug Freedman – Gleacher & Company

Thank you for taking my question. Steve, you know clearly things are moving pretty quickly in the industry right now. I mean last quarter we were looking at being completely booked and very bullish on the December quarter and clearly bookings reversed course. Can you give us a sense of how things are tracking right now and how long you think we’re going to be in this situation? Do you think we’ll start to see a seasonal Q1? What’s your outlook look like?

Steve Sanghi

Well what changed here was our bookings started to slow down in September as the broad based inventory correction in the industry started to take hold. There was also some backlog that was scheduled for December quarter which got pushed out into March as customers decided to adjust their inventory and the backlog.

We get this question in every cycle. If you look at the history of Microchip, there have been only two or three instances where we have had a back to back two quarter decline in revenue. One was during the global financial crisis in December of ‘08 and then down further in March of ‘09. And the other one was I believe going back to the tech bust of 2000.

In most other cases, I think in every other case almost, we usually see one quarter decline, which we are experiencing here in the December quarter, and then the inventory corrects, and then we usually start the recovery.

As you know, Microchip does accounting very, very conservatively. We do not book any revenue around the world based on a shipment to distributor. We look at sales out 100%. There are many of our competitors who track the results based on sell in and there are some others who are hybrid, who many of them take U.S. at sell out, but Europe and Asia they go sell in. Microchip goes sell out worldwide as we recognize the revenue.

So it’s pretty conservative accounting and therefore, what is in distribution, whether distribution lowers or increases their inventory, does not have effect on our revenue. We only have effect with the end customers that are adjusting their inventory and we expect that to happen this quarter.

Shawn Boyd – Westcliff Capital Management

Thank you for the detailed answer. If I could move on to other thing that’s really changed in the model, and that is rolling in the super flash memory, producing more memory. It is pulling down the corporate wide reported gross margins on a pro forma basis. You guys have had a history of sort of turning lower gross margin businesses into higher gross margin businesses. Can we expect the same type of results here? What is your thoughts on where you can take corporate wide gross margins?

Steve Sanghi

Well in the last six months we have already significantly improved the gross margins of the businesses we’re keeping and the process has just begun. There is a lot more to go, so you’re correct that we’ll continue to improve the gross margin of the super flash memory as well as the other businesses that we have decided to keep.

Now the combined gross margin with the licensing are still very healthy, but these two businesses, gross margin will further increase into the next year under Microchip’s cloak. We expect our overall non-GAAP gross margin to go back to have a 61 or something in front of it as it historically has been. I think our long-term guidance always has been in that 61, 62 range, and we should be able to get back in that range over the next year.

Shawn Boyd – Westcliff Capital Management

Perfect. Thank you, and I’ll jump back in the queue if I have any follow ups.

Steve Sanghi

Thanks.

Operator

We’ll take our next question from Terence Whalen with Citi.

Terence Whalen – Citi

Hi. Great, thanks for fitting me in. This one pertains to some of the additional businesses that you have taken on from SST. I think you made a comment in your prepared remarks that you had greatly improved the gross margin of the business. I just wanted to make sure that I understand correctly. On the additional $40 million of revenue from SST, it looks like the gross margin of that additional business was about $10 million or about 25% gross margin if I assume that you did attain your 62.5% gross margin on your core business. Is that correct?

Steve Sanghi

Your assessment of $10 million on 40 is not correct. We’re not breaking up the margins on individual businesses. We never do, but from what I know off the top of my head, your calculation of 25% is not correct. We would not have kept a 25% gross margin business.

Terence Whalen – Citi

OK.

Steve Sanghi

Somewhere your calculation is wrong, but you are way under.

Terence Whalen – Citi

What I’m calculating is the 62.5% gross margin, so the guided gross margin on the base revenue and then looking at the differential to what actual gross profit you printed on a GAAP basis and I get the $10 million additional on that 40.

Steve Sanghi

I’m telling you, your calculation is somewhere grossly wrong. Eric Bjornholt can walk you offline.

Terence Whalen – Citi

I guess a corollary then would be, so was the base business gross margin within normal expectations or was it slightly below expectations as it came in?

Steve Sanghi

I think you are excluding the licensing. So you know we added the $40 million of super flash memory and RF business, which was previously held as a non-core asset, but there was some micro controller business and there was some licensing business that was previously uncontinued business which we had already added to our numbers, so the gross margin profile had substantially changed before adding those businesses.

Terence Whalen – Citi

I’ll follow up with Eric perhaps. If I could just ask a follow up, I think Steve you had mentioned that the distribution inventory levels were at a fairly reasonably balanced level. I was hoping you could comment perhaps on different regions if you feel certain regions have more inventory or certain regions have less inventory. Thank you.

Steve Sanghi

You want to comment on that Ganesh?

Ganesh Moorthy

I think that the distribution inventory was pretty flat quarter on quarter in days, and there wasn’t any real variations that we saw quarter on quarter by region. It was fairly consistent.

Terence Whalen – Citi

Great. Thank you and I’ll re-queue. Thanks.

Operator

We’ll go next to James Schneider with Goldman Sachs.

James Schneider – Goldman Sachs

Good afternoon. Thanks for taking my question. I think last quarter you talked about given the big backlog that you had, that a large percentage of your bookings were outside the current quarter. Could you maybe – obviously that’s changed a little bit. Could you give us a quantification of at this point what percentage of your backlogs are outside the December quarter?

Steve Sanghi

Well as Ganesh mentioned in his remarks, the lead times now on most of our products is about six weeks, so with that, the large amount of bookings now are really falling in the quarter. Some of them are going outside, but with the lead times coming in, you have the natural correction that people don’t have to place a lot of bookings into the following quarter.

James Schneider – Goldman Sachs

OK. That’s helpful. And then I think there’s been a pretty well publicized correction in the consumer electronics and computing spaces specifically. I know you don’t have a ton of exposure to computing, but can you maybe just comment on the end market trends that you’re seeing overall for your different customer groups?

Ganesh Moorthy

I think it is true that the consumer electronic segment has been one that has been weak. Some of the other ones, industrial, automotive are not as weak as perhaps the consumer and computing, but the correction is not all consumption driven. Some of it is inventory driven, so it may not all reflect end market consumption necessarily.

Steve Sanghi

Like it always happens when the lead times go as long as they had, you always have customers build a little bit of inventory, start to buy a little more than what they really needed, and at the time it never looks like anybody is building inventory because everybody’s expediting and they want more and they’re complaining about lead time.

But when the capacity catches up and the lead times come down, we’ve seen it from time to time, there always been some adjustment because the customers don’t need everything they were planning to buy, because some of that they were trying to buy for safety. So that’s sort of what we’re seeing right now.

James Schneider – Goldman Sachs

Understood. That’s helpful color. Thank you.

Operator

We’ll go next to Chris Caso of Susquehanna Financial Group.

Chris Caso – Susquehanna Financial Group

Thank you. I just wonder if you could give a little color in terms of linearity and I guess you said that the decline in bookings started in September. Could you give a sense of where that’s been in quarter to date in October and sort of what your customers are telling you now? I guess we’ve heard from some others in the space is that the leads times come down that they’re expecting to see a continuing deceleration of bookings through the end of the quarter. Is that your view as well?

Steve Sanghi

Well I think what we have experienced is we’ve reached the bottom of the deceleration several weeks ago. The bookings were quite weak in September. It wasn’t having an effect on the quarter last quarter, because when the booking weakened in September, those bookings were not for September quarter because September quarter was filled.

So the September bookings were really for some for the December quarter, some even for January because the lead times were longer. So as the lead times started to come down, those bookings dried up, so therefore bookings became much smaller, and we experienced really the bottom I would say three weeks ago.

Ganesh Moorthy

Three weeks ago, and it’s been fairly consistent in that time frame since.

Steve Sanghi

And since then, the bookings have been more normalized. Now they’re normalized within our tracking where we’re not booking far out in time like we were before, the bookings have normalized to the point where we are now getting the bookings that we really should be getting for the quarter.

Is it all corrected yet? Probably not. They’re still lower than we would like, but they’re no longer going down. They’re really stable now.

Chris Caso – Susquehanna Financial Group

OK, great. And if you could remind us what you consider to be normal seasonality in your March quarter and I guess you made a comment earlier that you’ve only seen two times where the revenue has declined for two quarters in a row. Is that still your view this time?

Steve Sanghi

Yes, which I mentioned earlier in answer to a prior question, we expect that we should correct in the December quarter and then March quarter will not be down further, so we should see some small growth in the March quarter.

Chris Caso – Susquehanna Financial Group

What’s normal seasonality for the March quarter?

Steve Sanghi

Well I don’t know what normal is these days.

Ganesh Moorthy

I think if you take out any of the major industry events, it’s probably flat to up 3%, kind of in that range. Europe is typically very strong in the March quarter and Asia is a bit weaker due to the Chinese New Year.

Chris Caso – Susquehanna Financial Group

OK, great. That’s helpful. Thanks you.

Operator

We’ll go next to Chris Danley with J.P. Morgan.

Chris Danley – J.P. Morgan

I guess Chris part two. Hey Steve, so if we think of the March quarter being normal seasonality, how would you expect your gross margins and operating expense to trend? Can we expect the gross margins to improve based on further improvements in the acquired gross margin business and do you think you can squeeze a little more percent out of the newly combined entity?

Steve Sanghi

We have squeezed a lot of operating expense out of the entity and you could see the operating expenses on a historic basis are fairly low, in the 24% range. So the idea is really not to squeeze more out of the operating expenses below the critical mass when instead, invest in these growth businesses.

So to really have a further reduction of operating expenses on these levels, if you do an industry comparison, these are very, very low operating expense as a percentage of revenue.

Ganesh Moorthy

I’d add to that, particularly in a quarter where we’re guiding to the down in revenue and operating expenses as a percentage of sales is remaining fairly flat, 24 to 24.25.

Steve Sanghi

So as for the gross margin is concerned, you have seen the story play out so many different times in every cycle where through the cycle we make high high’s and we make higher lows in the gross margin, so if you look at the prior cycle, the gross margin at the bottom were much lower.

This quarter we expect this quarter to mark the bottom and then gross margin to slowly starting to improve. Whether it happens next quarter, I really haven’t figured it out yet, but basically you should see decrease in gross margin this quarter along with a decrease in revenue. Next quarter if the revenue improves, we should really have some follow through and gross margins start to improve. But it takes a quarter or so before they start to improve.

Chris Danley – J.P. Morgan

OK, great. And then for my follow up, on the super flash memory RF, you said that you could get that back to sort of company average margins. Any estimate or revenue level on how long that will take and do you think it will settle in somewhere between (E squared) and Micro’s or will it be closer to one of the other one when you get it going to where you want it to be.

Steve Sanghi

We don’t want to talk about individual product line gross margins because any customer listening buying that product, we don’t want them to think that they’re paying XYZ, so what I basically said is that we should be able to take the overall corporate gross margin, put a six in front of it again.

We were 60.2 last quarter. We’re guiding 59.1 to 59.2 this quarter. We should be able to put a six in front of it and eventually late into next year, we should be able to put a 61 in front of it. By improving the overall utilization and absorption of the factories and improving the products as the overall revenue improves.

There’s a contribution from the improvement of super flash memory and RF, but there’s also contribution from the overall absorption. Remember, super flash memory and RF, the $40 million, the 10% of revenue overall (inaudible) overall can’t make that large a difference. We have to improve the overall utilization to get roughly 2%, 2.5% improvement over time.

Chris Danley – J.P. Morgan

OK. Thanks a lot.

Operator

We’ll go next to John Barton of Cowen and Company.

John Barton – Cowen and Company

Thanks. Could you update us on the progress of integrating super flash IT and the core products and any updated news on the competitive advantages you expect to gain from that going into the future?

Steve Sanghi

Well we were using SST’s technology into our products well before the acquisition, as long as five years ago, and we were basically using that technology as a license, and now we’re the owners. So what it allows us is access to more broader technology of SST and go deeper into (inaudible) and be able to use more advanced technology which is currently under development.

In the past we’ll have access to what really available out on the market which sometimes is many years old, and we’re already starting to develop products. Six months is not a lot of time to develop a micro controller, but we’re already starting to develop products which will be on the advanced leading edge of technology.

John Barton – Cowen and Company

And since the announcement of the acquisition, you were very comfortable that your ownership of that IP would not impact the licensing to competitors, other people playing in the micro controller area. Based upon continued interaction with those customers, are you still very comfortable on that topic?

Steve Sanghi

Yeah, extremely. There was an issue concern by our competitors that how will it work, then licensing the technology from Microchip which was one of their competitors in the micro controller business, but after six months, they have seen that we have operated the licensing business basically with a firewall and almost at arm’s length from the Microchips micro controller business.

The licensing business reports directly to me, and we have several licensing negotiations on the table. Just in the last week or so, we have signed one new one and there are at least four or five new licenses which are on the table being negotiated, and several of them should be signed this quarter and some will spill into next quarter.

So as we speak, there is really absolutely no impact Microchip’s ownership and the licensing business. It did record last quarter. We are confident it will do another record again this quarter.

John Barton – Cowen and Company

Thank you.

Operator

We’ll go next to Brendan Furlong with Miller Tabak.

Brendan Furlong – Miller Tabak

Thank you and good afternoon everyone. Quick question on the $40 million on guidance for next quarter. How does it compare with the $40 million on super flash and RF? Is that down a similar amount sequentially?

Steve Sanghi

We don’t really break out individual product lines. We haven’t in the past and whether it’s micro controllers or analog, we just give a corporate guidance. The memory and RF divisions will be split. The RF will be reported along with our overall analog revenue as it was reported in the last quarter and memory will be combined with Microchip’s memory business and reported as a memory segment.

So we’ll compare the total memory to memory, which will include (inaudible) and super flash, and the analog will include our analog products, the RF products and analog products also include some of the portion of the wireless products division we have that also makes some analog products.

Brendan Furlong – Miller Tabak

That’s helpful. Thank you. I guess what I’m really trying to get at is what’s the apples to apples comparison if you didn’t have – if you weren’t including this business now, as you had originally planned to do.

Steve Sanghi

I don’t think there are many difference. I think they’re all – industry has seen similar stuff. One business could be 2% higher, and one business could be 2% lower, and those are such differences in the Microchip also.

As Ganesh pointed out, our 8-bit micro, 16, 32 analog, they all had different percentage growth, but they are really not huge anomalies of any kind if that’s what you’re trying to get to.

Brendan Furlong – Miller Tabak

OK, great. Thank you very much.

Operator

We’ll go next to Ray Rund with Shaker Investments.

Ray Rund – Shaker Investments

My question has actually been answered. Thank you.

Steve Sanghi

Welcome back Ray. Long time.

Ray Rund – Shaker Investments

Not that long, Steve. We’ve been following you and knowing you since 1996.

Steve Sanghi

Ok. Thank you.

Operator

We’ll go next to Uche Orji with UBS.

Steve Elisque [ph] – UBS

It’s Steve Elisque [ph] for Uche. I have a couple of questions. First of all, on the licensing business, it grew very nicely in Q2, but we only have a couple data points in terms of seeing that business. How should we expect that to grow longer term? Is it going to be lumpy or should we expect some continued type of double digit growth here?

Steve Sanghi

Well I can’t give you any long term guidance because we’ve owned it ourselves for a short period of time, but they did make record last quarter. We expect another record in the December quarter even though all the other results will be down. So the licensing business should model approximately to the industry average growth plus the new licenses, the new technology, the new license we’re able to do.

So these licenses are largely to micro controller and smart card customers and foundries who produce micro controllers and smart cards and some of the Logic products for some of our competitors and other companies, which could include micro controllers, SST kind of product, custom chips, DSP’s, smart cards and some of the Logic chips.

So the royalty stream of that will largely be similar really to what the industry average is doing because that’s the royalty we get. On top of that you have to add the new licenses, because we’re expanding it, getting more foundries, more competitors, more technologies into the fold.

So all that, how we can model it long term, I don’t really know yet (inaudible).

Steve Elisque [ph] – UBS

And switching gears here on wireless technology, you now have RF capability from SST. You have your 802.11 from your ZeroG acquisition and Zigby, how do we think about wireless technology is going for you forward? Is it like analog where initially it’s an enabler, or it’s enabled by your micro controller growth longer term, it becomes a faster growing part of the business overall or is it integrally tied to certain markets that you’re focused on like the smart metering?

Steve Sanghi

I commend you. You’re keeping track of how we are accumulating technologies around, that’s our elbow out strategy and appreciate how we’re doing it, but I’ll let Ganesh answer that questions.

Ganesh Moorthy

I think you’re going to find that there’s several components to it. So the part of the wireless business that ties with the embedded control business is very much connected to our micro controllers. Often, the software that is running the system to enable the wireless communication to take place is running on our micro controllers, and so the solution is not just the wireless product, but it’s the wireless product, the software and the micro controller all sold together as a solution.

We also have the RF business from SST that actually has other areas that it plays in, which are not necessarily all tied to micro controllers. It does also connect to micro controllers, but works with higher speed Wi-Fi systems and solutions and those could be going into market. Traditionally we don’t play as much as for example in cell phones.

So there’s different components of the business. Some of it will grow with the micro controllers. Some of it will grow outside of the micro controllers.

Steve Elisque [ph] – UBS

Great. Thank you.

Operator

We’ll go next to Kevin Cassidy with Stifel Nicolaus.

Kevin Cassidy – Stifel Nicolaus

Thanks for taking my question. On the 32-bit micro controllers, I understand it’s lumpy now as it’s a smaller portion of the business, but as that grows Steve, what kind of seasonality do you expect there just based on some of the design wins you have?

Ganesh Moorthy

I don’t expect seasonality to be a big function for this product line. It’s small. The number of new designs going into production are going to outweigh any kind of seasonality for many, many quarters and years to come, so right now I think it just reflects there are times when any given customer could be farther along in their production in any one quarter, not having to buy every single quarter.

But as you’ve seen in the 16-bit, if you’ve followed us from the days of the analog, there can be one or two quarters where it is not as strong as the rest of the product line, but the long time trend tends to be substantially faster growth than the underlying product lines of Microchip.

Kevin Cassidy – Stifel Nicolaus

OK. Thanks for that. And also, you’re keeping CapEx spending the same for fiscal year 2011 even though you’re bringing in the super flash and the RF businesses. Is there any expected change in the future or is there going to be any moving around of the manufacturing?

Steve Sanghi

Well the super flash and RF businesses are largely run at the sub-contractor. That’s how the SST business was structured. They’re completely fab (inaudible) and they didn’t do any of their own assembly or tests.

So this year, in this fiscal year, it’s really, there is not a lot of capital investment because most of the business continues to run at the sub-contractors.

Kevin Cassidy – Stifel Nicolaus

OK. So plans of bringing that in house?

Steve Sanghi

No, no plan in a large way. I mean there are certain hiring liability requirements around automotive and industrial customers who would require the predictability and quality standards that Microchip factories have, so we’re putting some capability inside to be able to expand that business into higher margin and more stickier targets and stuff like that.

Similar stuff we have done with our memory business to improve margins and create stability and have a higher quality business and complete our micro controller solutions. So we’re doing that. But those are small capacities and some of those we already have because systems are similar to what Microchip uses, and if you need to buy something it doesn’t move the needle.

Kevin Cassidy – Stifel Nicolaus

OK, great. Thanks.

Operator

We’ll go next to John Pitzer with Credit Suisse.

John Pitzer – Credit Suisse

Yeah, thanks guys. Thanks for taking my questions. Steve, given your comments earlier that kind of the booking decline has stopped and March is looking up, I’m kind of curious, do you think that materializes itself in sequential growth in the December quarter and/or book to bill of greater than one or do you think in this kind of environment, if March is up, it’s just on the back of a better turn environment?

Steve Sanghi

That’s a very good question. I would really be speculating what the book to bill would be this quarter. I think as the lead times continue to come in, people have to place longer term backlog less and less. And when we say book to bill ratio, we look at total bookings divided by billings for the quarter.

So your bookings can be lower for several quarters because people are not placing longer term backlog, so therefore, if you look at some of the past cycles, we’ve had less than one book to bill ratio, and yet we had growth for a few quarters.

Kevin Cassidy – Stifel Nicolaus

Perfect. And then I guess, the little bit on the analog business, if you look at sort of the Q3 or the September ‘08 level to today, the business has almost doubled and I’m curious, and I know you don’t like to give product specific guidance for the December quarter, but is analog still on a growth trajectory this quarter and kind of what’s the outlook over the next several quarters?

Steve Sanghi

Well analog is doing very well as you’ve seen. It’s doubled and it should continue to do well next year. How does it do specifically this quarter as a breakdown, I don’t really know. We don’t break it out.

Kevin Cassidy – Stifel Nicolaus

And then I guess guys my last question, I apologize if I missed this, but did you give revenue breakdown for the September by geo?

Eric Bjornholt

No, we didn’t, but Asia was 58% and the America’s and Europe were both about 2% of sales.

Kevin Cassidy – Stifel Nicolaus

OK. Thanks guys.

Steve Sanghi

The geo numbers have changed dramatically as we integrated the $40 million coming from SST, so if you’re comparing it to any prior numbers you have on record, and you see some geo’s change in a step function way, then don’t interpret that as we’re not doing good in America, because it went from 25 to 21, things like that. SST business was very much dominated in Asia, and that’s the impact.

Kevin Cassidy – Stifel Nicolaus

Great. Thanks.

Operator

We’ll go next to Janet Ramkissoon with Quatra Capital.

Steve Sanghi

Hello Janet.

Janet Ramkissoon – Quatra Capital

Hi Steve. Quick question about margins, and this question was asked before, but maybe I could ask it a different way to try to get some clarity. If we were to add back the royalty revenue into the super flash business, would that be giving us any numbers? Could you give us a sense of how close it is to your corporate margins of last quarter, and if it’s below, could you give us some sense as to how many quarters it might be before you’re able to do what you normally do, bring the margins up to the corporate level. And secondly, if you could just comment on the business trends in India and China, I’d appreciate it. Thanks.

Steve Sanghi

Well there were three questions in there. If you take the licensing business and peel it back out of Microchip because we had consolidated that in the prior quarter already, but if you peel it out and combine it together with the super flash and RF business, which was one of your questions, then the margins coming out of SST are very comparable. They’re in the range. They are lower than Microchip, but they’re not – they’re in the range.

Second part of your question was how long will it take for us to gain, get above 61. You tell me what the environment will be next year, how much we’ll be up in revenue.

Janet Ramkissoon – Quatra Capital

Steve, I was specifically talking about the SST business. When would it – you basically answered the question. You said that it was pretty close. So I just wanted to know how long it will take to get to regular corporate margins. So I think you basically said that it was (inaudible).

Steve Sanghi

(Inaudible) but around 35 brackets, it’s close, and it will continue to improve. But there are always two components in improving gross margin. One is time. Another is revenue, because revenue provides the leverage in most things to absorb expenses, to create automation, to do more pilot testing, to have lower prices and materials and assembly and test and all that.

So there’s always a revenue issue. Many times I get that question from the street. They just think it’s kind of time based. It’s time and revenue based. Time obviously allows shrink products to get in and products to succeed which are trying to bring a lower cost. It is also a revenue equation. If the revenue does not grow for any given product line, then it becomes margin challenged.

So here, we believe that into the next year, we’ll have to have all of those things; the market environment would be better than what we’re experiencing in December and with the product shrink assembly and test and all the Microchip infrastructure and our skills to improve margin, you will not be displeased with the margin. You never have been in the past through the cycles and we’ll demonstrate that again.

Janet Ramkissoon – Quatra Capital

OK. And just about any commentary on the business conditions in India and China. I appreciate it.

Steve Sanghi

You want to take a shot at it?

Ganesh Moorthy

China is really the larger business for us and China had a growth quarter in the September quarter, but perhaps not as much growth as we would have liked to see.

Janet Ramkissoon – Quatra Capital

Great. Thank you.

Operator

We’ll go next to Craig Ellis of Caris & Company.

Craig Ellis – Caris & Company

Brett here for Craig. Most of my questions have been answered, but maybe could you just talk a little bit about your acquisition strategy going forward, how soon you’re looking at companies and would you kind of continue with the theme of building out wireless, or how should we look at that?

Steve Sanghi

Well, we never stop looking at any point in time. At any point in time we have an active funnel and companies come in the funnel and we don’t like them, or they don’t check out or they’re not accretive or we don’t find them good, or we don’t like the management or we don’t like the financials or whatever reason.

This is a needle in the haystack kind of thing. We look at a lot of companies and really do very few. But one result of that is, we’ve done six acquisitions in the last two years or so, and we’re pleased with all of them. They’re all successful. There was the Hampshire company, there was (inaudible) International, there was High Tech Software, there was ZeroG, there was SST.

All these companies, they’re all very, very successful. It is because the rigorous methodology we have in figuring out really when we want to buy something. If any of the things don’t check out, then we do not buy them. So we have an active funnel, but beyond that, we can’t say what it would be or what area it could be in.

Many of them tend to be private companies and many of them tend to be public companies, so or that the price goes up and that’s not helpful to the investors or us.

Craig Ellis – Caris & Company

Got you. Thank you.

Operator

It appears there are no further questions at this time. I’d like to turn the conference back over to our speakers for any additional or closing remarks.

Steve Sanghi

OK. We want to thank all the shareholders and analysts. On this call we tried to detail out for you right in the beginning how the SST business was accounted for because otherwise it makes the comparisons more difficult and because of changing the accounting of the SST business, we have restated the fiscal first quarter, which was the June quarter.

And the details of all that is on our website in case you didn’t catch it, and it would be helpful to look at it so you understand the FQ1 to FQ2 June to September finances a little bit better.

There are many conferences we’re going to this quarter, so we’ll see many of you on the road. With that, thank you very much. Bye, bye.

Operator

That concludes today’s conference. Thank you for your participation.

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