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Standard Microsystems Corporation (SMSC)

F1Q10 Earnings Call

June 25, 2009 5:00 pm ET

Executives

Chris King - President, Chief Executive Officer

Kris Sennesael - Vice President and Chief Financial Officer

Carolynne Borders - Director of Corporate Communications

Analysts

Christopher Longiaru - Sidoti & Company

Vernon Essi - Needham & Company

Unidentified Analyst

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the SMSC first quarter fiscal 2010 conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. Following managements discussion, we will open the conference up for questions and answers, and instructions will follow at that time.

I’d now like to turn the conference over to your host, Ms. Carolynne Borders of SMSC.

Carolynne Borders

Good afternoon, and thank you for joining us today for SMSC’s first quarter fiscal 2010 conference call. You should have all received the copy of our press release issued this afternoon. Please note there is also a slide presentation that accompanies today’s call.

The press release, slide presentation, and a replay of today’s call will be available in the Investor Relations section of our website. Representing management today are Chris King, President and CEO, and Kris Sennesael, Vice President and Chief Financial Officer. Following management’s discussion, we will open the call to a Q&A session. If you are participating in our online webcast, please move on to slide two for a quick note on our Safe Harbor statement.

Certain matters discussed in this teleconference are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected or forecasted. Such risks and uncertainties include, but are not limited to, those discussed in this teleconference and those found in the company’s Form 10-K, 10-Q, and other filings with the Securities and Exchange Commission. I’d also refer you to the forward-looking statement language contained in today’s press release regarding risks and uncertainties.

Today’s presentation also includes non-GAAP financial measures, which should not be considered in isolation or as an alternative to results of operations data or any other measure of performance derived in accordance with US GAAP. However, these non-GAAP financial measures are presented because the SMSC believes they provide useful supplemental information for management and investors and allow them to perform meaningful comparisons to the company’s past and present results.

With that, I’ll ask you to advance to slide three in a presentation, and I’ll turn the call over to Chris King.

Chris King

Thank you all for joining us today. We are very pleased once again to have an opportunity to provide a business update in a climate that is showing continued signs of recovery. Customer forecasts have become stronger since the last time we spoke, and we’ll walk through the reasons that we’re feeling increasingly confident in the success of our business objectives.

PC inventories are back to normal levels at about 2 weeks, and while consumer product inventory had been slow to work down, we expect that to normalize this current quarter. We see some improvements in automotive orders with sales up approximately 16% from the fourth quarter of FY09. While we’re not back at historic automotive run rates, we expect sequential quarterly improvements to continue. The industrial market remains sluggish, particularly in Europe. Asia has led the recovery followed by North America. Europe and Japan have lagged primarily due to their exposure to the automotive and consumer markets; however, we are seeing positive trends in both geographies and expect Q2 sequential sales increases worldwide.

From a product standpoint, we continue to see improving end-customer demand for commercial and low-end notebooks as well as smartphones. The net book space has become very interesting with a new CULV being identified and the cellphone contingent calling their products smart books. For us at SMSC, these labels don’t matter mach as we sell the same components into all categories.

During Q1, we received a fair number of rush orders, particularly for our analog products. We believe this order activity supports the view that true demand is improving since this is not consistent with inventory restocking. We have heard some concern about the market becoming overheated, especially in Asia. While we are watching the situation carefully, we do not believe there is any double ordering occurring.

Let’s proceed to slide 4. Our Q1 financial results were better than we originally anticipated. Revenue was $62.5 million, a 22% sequential increase but down 33% year over year. The primary growth driver was the PC segment which was up over 60% sequentially. We’re seeing this growth in both North America and Asia. Our channel checks indicate that our revenue run rate in Q1 was driven by true demand after inventory levels were driven down in Q4. We also improvement in automotive sales of approximately 16%, off the low level in Q4. Consumer sales were flat while some inventory positions remained, and industrial revenue was down as the correction in this segment lagged behind the rest of the market.

Non-GAAP gross margins were 47%, which was a 150 basis point improvement over Q4. While product mix was unfavorable due to shipping more of our analog products which have gross margins slightly below the corporate average, we gained the benefit of more activity and the cost reductions we have completed. It’s still our expectation to deliver over 50% non-GAAP gross margins in the second half of our fiscal year.

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