微晶片科技 (MCHP) 2001 Q4 法說會逐字稿

Good day everyone and welcome to the Microchip Technology Conference call. As a remainder, today's call is being recorded. At this time, I would like to turn the call over to Microchip Chief Financial Officer Mr. Gordon W. Parnell. Please go ahead sir.

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 statement or projections, and actual events or results may differ materially. We are returning you to the company recent 10-Q and 10-K and the joint proxy perspectives on Form S4 for the telecom acquisition filed with the SEC, which identify important risk factors which may affect microchips business. In attendance with me today is Steve Sanghi, Microchips President and CEO. I will start with the brief review of the March quarter financial results, update our guidance for the current quarter, and Steve will cover highlights for the quarter and comment on the current business outlook. Steve and I will then be available to respond to specific investor and analyst questions. Net sales for the quarter was $153.4 million and 2% from net sales of a $156.6 million in the prior year's fourth quarter and nearly 19.3% from sales of $190.1 million in the December quarter. Shipments in America and Asia were both done sequentially while Europe was essentially flat to the prior quarter. Total revenue gain for the quarter resulted in sales, for the America representing 34%, Europe 36%, and Asia 30%. Net sales from microcontroller products represented 72% of revenue in the quarter. Analog products represented 8% of revenue, and memory products represented 20% of revenue. Sequentially, microcontroller products were down 8% from the December quarter, and analog products down at 17%, and memory products were down at 45%. Net sales for the fiscal year was $715.7 million, an increase of 29.4% from net sales of $553.1 million in the prior fiscal year.

Diluted earnings per share for the March quarter was $0.19 on $136.8 million average shares outstanding, including a charge of $7 million or $0.4 per share, for inventory writedown associated with serial EE and analog products. In the quarter, we took one-time charges of $17.3 million. These charges were $10.9 million related to acquisition costs and $6.4 million associated with cost capacity and cost reduction actions. Diluted earnings per share including these one-time charges were $0.9. Diluted earnings per share for the 12 months ended March 31, 2001 were $1.14 prior to the one-time charges and $1.4 including the effect of the one-time charges. Gross margins for the March quarter were 49.9%, therein approximately 350 basis points from the December quarter. The reduction in gross margins are as a result of the capacity reductions initiated in the March quarter, pricing pressure on serial EE and analog products, and inventory also had some cost related to analog and serial EE products. The impact of the inventory writedown was approximately 4% on overall gross margins. Operating expenses were 28.5% of sales in the March quarter compared to 24.9% of sales in the previous quarter. Although, total operating expenses were lower in the March quarter by $3.7 million, the overall percent of operating expense increased in the March quarter as a result of sequential decline in sales. The sales and development costs were $20.5 million representing 13.4% of sales and SG&A administrative costs were $23.1 million representing 15.1% of sales. The majority of our cost reductions in operating expenses are related to selling and general administrative costs as we continue to maintain our investment in this direction, research and development activities.

Capital spending was $443 million for the full fiscal year and $36 million for the March quarter. Depreciation expenses for the March quarter were $27 million versus $19.4 million for the same quarter last fiscal year and $25.6 million in the December quarter. We are projecting capital spending to be between $50 and $55 million for the next fiscal year with depreciation projected to be approximately $115 million for the same period. As of March 31, Microchips cash position was $129.9 million and there were no borrowings against our lines of credit. Microchips total inventory position at March 31 was $95.7 million up $10.2 million from the prior quarter level or approximately 12%. Inventory turns are 3.2 compared to the year ago level of 4.6 turns and from 4.1 turns in the December quarter. Microchips shipped 8963 new application development systems to customers during the third quarter. That note allows microchip to have over 200,000 shipments in the industry today, actually over 235,000 systems. This represents one of the largest user bases of development tools in the industry today. Weak times continuing to be short and visibility also be included for the quarter. Our drippings' are very short term oriented and making projections beyond the current quarter is not possible. We do believe that the design activity of the proprietary products is strong and the performance of this product segments in the March quarter while down sequentially, was significantly greater than the overall industry averages. Based on our current understanding of the business, we are anticipating revenue to be down approximately 10% for the June quarter. With the effects of capacity reductions for the full quarter, continued pricing pressure on serial EE products, and the affects of our cost reduction programs in Washington and Hong Kong, we believe that margins will be approximately 50%, which is in line with the March quarter we just announced.

Operating expenses will be between $41 and $42 million for the quarter and based on those factors, we anticipate earnings per share will be approximately 16 cents in the June quarter. With that I would like to turn the call over to Steve for his comments.

Thank you Gordon, and good afternoon everyone. I would like to take a few minutes to run through some key highlights from the quarter and also reflect on Microchips position in this business environment. As you know, the sequential decline of revenue and profits that Microchips saw was experienced by the entire industry. In this environment, it is very important that we step back for a minute and look at how the company is positioned when the industry conditions improve. Towards that I am quite optimistic about our prospects. Here are some of the highlights from the quarter.

1. We closed the acquisition of telecom semi-conductor in January this has more than "quadrupled" our product portfolio of stand alone analog product. Microchips worldwide sales force and our customers have enthusiastically welcomed this business opportunity. We look forward to telling you about all of our successes in this business segment in the future quarters. 2. Microchip has transferred to production its newest 0.5-micron technology based with the new head intake flash sale. We are already shipping volume quantities of 4 flash microcontrollers built on this technology. This technology gives us substantially reduced dye size feature enhancement and lower cost enabling us to be more market share in microcontrollers. 3. This technology also gives us currently the smallest dye size in the industry on the high density serial EEPROM's. Two products are in production and we expect to ship volume quantities both those products this quarter as several designs that have already been won last quarter are starting production this quarter. This technology gives us dramatically lower cost helping us defend our position in the serial EEPROM in the market place. 4. We are dramatically expanding the portfolio of our products built on PIC18-microcontroller architecture with new families featuring controller area network capability for automotive and industrial applications. One such product, PIC18-C 858 introduced just two quarters ago, won a design that could garner up to $25 million over the next five years at a leading automotive electronics customer. This device features the controller area network interphase and pin midst of CPU performance allowing complex controlled algorithm in the network interphases to be executed on the same microcontroller. I would also like to say that this design is a typical demonstration of where Microchip wins designs against the competitive 16-bit microcontrollers. 5. In February we introduced the HCF 473, which is a three-access passive entry key lock end quarter. This device allows handsfree passive entry for automotive, home, and industrial application. 6. Since our announcing of the digital signal controller at our investor today in New York last November, we have received enthusiastic response from customers, trade press, third party tool manufacturers, distributors, and investors. We have on schedule for releasing the development tools fleet. In the summer of this year several large customers have already agreed to become early adaptors for this product family. And finally, we shipped approximately 9000 new development tools during the last quarter bringing our cumulative shipments to over 200,000 truly a significant milestone for Microchip. We also believe that this is now the largest installed base of development tools in the industry. Near record shipments of new tools indicate a very robust design in activity on Microchips products. So, as we look at the overall position of Microchip in the market place we are very comfortable that we are in the right place with microcontrollers, analog products, and digital signal controllers. We have proved the hard task of layoffs in capacity reductions. Looking at the inventory of products at our customers and distributors, we believe that the excess inventory should completely flush out during this quarter. Therefore, we are confident that we can form a bottom in this quarter and look for growth starting the next quarter. With that, Sarah would you please poll for questions.

Thank you, the question, and answer session will be conducted electronically. If you would like to ask a question please press *1 on your telephone keypad. Again that is * 1 to ask a question and we will go first to Chris Stanley with Merrill Lynch.

Hi thanks. If you can just talk about the migration of 0.5-microns again, can you give us a sense of what the percentage of products are at 0.5-micron now and then also how that is excepted to ramp throughout the year.

I do not have the exact count, but they are 4 microcontroller and two serial EEPROM's currently in production and we are putting a whole host of new products as well as shrinks on that technology. You should see almost as many more products as we have going into production this quarter, which will roughly double and then continue from there.

Right. Then if you could just talk about what the linearity of the quarter was like, what the trend is looking throughout?

The bookings were roughly linear all quarter, there was not a trend up or down. What was the other question?

I guess that I will translate it to revenue and revenue was reasonably fairly well in line with our accounting periods, Chris.

Okay, what were the returns presented to you in the quarter?

We started the quarter requiring 42% of the turns to make a number in the early part of the quarter, but as you know the number is got revised during the quarter, Microchip as well as the rest of the industry and I do not know what the final turns percentage was with those revised numbers.

What sort of trends percentage do you need to make this quarter?

In a 40% range.

Last question, if you could just talk about the pricing last quarter specifically for EE micros and also the analog products, what was the trend and then what do you expect going forward?

In the serial EE pricing was down about 10% sequentially as we have been indicating on previous calls. We expected to see pressure on serial EE pricing and that certainly came to a recession. We expect to see continued pricing pressure going forward on our serial EE products. There was really no significant change in the landscape and microcontroller pricing, it typically is relatively benign, and so nothing changed that would alter those dynamics.

And also on the analog part?

The analog products we had two major customers in the past, the Motorola and __ON__ 00:16:38 semi-conductors were the two largest customers of telecom making up as much as 35% or so of the business several quarters ago. Both of those pretty much washed out. Last quarter, the total in Motorola and ON semiconductors together were only about $2 million of business. They were as high as $8-$9 million of business two quarters ago. So we believe that telecom situation today represents really truly the bottom last quarter, as we are already starting to see Motorola coming back and actually expediting certain products lines.

Okay and then actually one last question, and I apologize for being a tough one, but last quarter you said that the inventory correction will cleared up by March and now this quarter, I am just wondering where would you not anticipate the further inventory correction also what is changed and what you see out there in the case you have confidence that is going to done by this quarter?

Well, you know Chris it is really not a tough question at all. The guidance we give is based on how much inventory we saw, the inventory in a months of inventory is always a calculation in the number of dollars in that channel divided by what we think the sales out would be. So, in January when we talked about it, it was based on inventory we sought in that channel and divide by the sales out we expected, and the sales out was down basically in all channels for nearly all companies. So, even though a significant amount of dollar inventory got flushed out in the quarter, when you look at the months of inventory, it did not decline as much as we anticipated because the denominator of that calculation went down. We are doing exactly same calculation again based on the current thinking of what the sales out days and this time we are guiding even lower in the June quarter. So, we believe we have accounted for the lowest sales out and when you divide that into the total inventory that exist, we think it should flush out by the end of the quarter.

Okay thanks a lot.

We will go next to Jeff Rosenberg of William Blair.

Good afternoon. I want to ask first about the gross margin. You said that the writedown account for about 400 basis points and that would take the adjusted gross margins to about 54%, which is higher than it was in Q3 on the lower revenue. Could you talk a little bit about that does not seem square to me and I also thought that you had expected the gross margins to be down a little bit sequentially when you talked to us back in February.

Some element of that inventory right turn is typically in our numbers, anyway. Jeff, there is an element of obsolescence and was there for excess products in a normal financials, that is probably is between 1%-1.25% points typically.

But Jeff, the largest change happened in really the percentage revenue contribution of serial EE. If you go back to the third quarter the revenue contribution of serial EE, I believe was at 35. I do not recall exactly what it was, but it was quite high. The serial EE business last quarter sequentially was down 45%, and in the microcontrollers were down sequentially only 8%. So, the new mix cut of microcontrollers and serial EE, really made a significant difference in gross margin. If our serial EE was the same percentage as it was last quarter, the gross margin would have been lot lower.

And then, could you then talk about why it goes to 15, it is obviously that should continue the swing in favor of microcontrollers that you are guiding us to, I believe at 50% or so in gross margins, so why.

That really relates to the capacity adjustments that we took. Really the capacity adjustments were only in for 3-3.5 weeks of the quarter and we have full 13 weeks at lower capacity levels in the June quarter and that is it the primary change that has taken place between the two periods.

Okay. And then I wanted to go back the 45% down, Steve, you said that you sort of performed in line with the industry, but in some ways you performed better in the core business, but the 45% down is pretty startling and it is complex from the pricing, you are down about 35% in units and I know there is a agent issue with distributors recognizing sales right away, but you had that before Asian crisis and all that. I mean any further color as to why it was so dramatic this quarter and how high are you thinking about that business longer term, now that you are living through this again.

You know, let us start again from the gross margin portion; the gross margin will be down this quarter as Gordon said, primarily driven by the capacity reductions. The second point is that we do not expect serial EE business to go down in another 45% this quarter. We are not expecting that, so the total impact of the health from the mix of the products is not defined this quarter. Now coming to the serial EE question, basically somebody turned the switch off. There was a lot of inventory of products; serial EE is a relatively more commodity product. The inventories in the channels were higher than we expected they would be, with the lower sales out, you know, essential the inventories from a calculation stand point become many more months of inventory than we had anticipated. When we went in the start of the quarter we were expecting they will be some decline in the serial EE business, but that calculation went much more worse when you divide it by the lower sales in the channel. As a result we saw a very massive correction basically on serial EE, we made no net improvement in shipments all quarter. We shipped pretty much what we started with, in the start of the quarter. So, there were no next turns taken. Yes, they were some turns taken, but equal amount of business got pushed out of our cell. So there was absolutely zero improvement in the entire quarter to the number we started with, and that is something we have never seen before, and we did not see it in the 96-98 correction. So this was really related to, use the metaphors you like, you know John Chambers called it a 100 years slog, use it as anything you like, but this was that somebody just turned the switch off and we are seeing improvement in serial EE bookings and the backlogs today so the channel inventories getting somewhat in shape, but it is still high. But we do not expect another very large drop this quarter.

And as you look forward even though it is kind of masking much better fundamentals in terms of not nearly a sharper decline in microcontrollers and obviously much more stable pricing and gross margin, it is still strategically something intend to stay committed to those serial business?

That is right, the serial EE business is a major technology driver. The first products we introduce in every technology comes out of a serial EE business, you know it is a complete sub gate, microcontrollers, analog, and series EE; they all go into a very similar design. Half of our serial EE business actually gets attached, so in a way a single quarter of problems will not change a long-term commitment of this business.

Thanks very much.

Mark Aldestone from Morgan Stanley.

Hi guys, couple of questions, first one Steve, can you just walk through what the adjustments have been through the Fab and what if any, additional steps that needed to be taken here this quarter.

Mark, all the steps pretty much basically have been taken, if I were to read through it, we made approximately 25% or so card in the total wafer sort level, combined over our 6 inch and 8 inch. We made more cuts under 6 inch than 8 inch because obviously 8 inch is more cost effective, driven by that our total 8 inch production today is about 80% or slightly north of that. So we made significant cuts last quarter. In addition, Microchip took one week shutdown earlier this month in April which was complete one week factory shutdown producing no wafer sort and it was unpaid for everybody within Microchip to save the cost. So we believe all the actions we needed to take to right side the capacity have been done and as we look at this quarter, we think the capacity is right side.

Can I just have a followup on that? Can you give a sense as to what the composition of inventory is right now? Is it much different than the composition of revenues were in the quarter and I am speaking specifically at what percentage of inventories might be coming from controllers and what percentage might be coming from analog accounts and EE?

I do not have that dollars, but can you talk about in months of inventory.

No, quantitatively, I think qualitatively, relative to the revenue because of the decline in serial EE, we have relatively speaking, a higher level of inventories on the serial EE, hence the reason we needed to take some inventory writedowns and not particular area based on months of inventory. We are correcting that situation as we go through the June period where most of the starts are being committed to microcontroller product area market.

Okay I guess the final question is, if you look at the inventory shipping this quarter at $95.7 million, what is your best sums if you can give me that revenues are down 10% of the quarter and based on your current factory loading, what is your best guess, during the ending inventory level and then, just to make sure I heard the answer correctly, it sounds like you said, Gordon, that you will ended up roughly with inventory that is in balance with your revenue profile looks like through the quarter.

Our best guess at this point is inventories would be approximately a $100 million.

And again it would be roughly consistent with what the revenue profile will be in the quarter between controllers, EE, and analog.

We have come much closer to that in terms of cost effectively correcting that situation.

Mark, if you look at last quarter the serial EE business was about 20% of the business, which was a dramatic drop. We in fact had about 18-20% of our business at the bottom of the last cycle, so this time we have gone there in a single quarter so the correction is much more quick in a single quarter. If you look at the wafer sorts in the fair today, there are significantly less than 20%, because inventory is high in serial EE. So, as we go at the end of this quarter and the next quarter you will see the adjustment of the inventory much more towards Micro and less than on serial EE.

Understood thanks.

From ING Barings Michael Waisberg.

Hi Steve the sense would be that the serial EE will decline greater than 10% sequentially this quarter.

The sense is yes the serial EE will decline greater than 10%, microcontroller will decline much less than that, and analog as a new business is fairly getting out somewhere around that. You know we think it will behave probably similar to the microcontroller.

So, the microcontroller would be down somewhat, but not dramatically.

It would be down sequentially we think.

Okay by less than 10% you said.

Yes.

Great. In answer to Mark's question, you feel as if, would a $100 million in inventories in June be an acceptable level or somewhat higher than you would want?

Well, you know one of the good question as you know what is an acceptable level for any company and reaching up to this conference call we have analyzed a lot of the numbers that have come out from the industry from many other companies in the last few weeks, and we have compared, some of them and inventory level is high everywhere, I am seeing a fabulous companies today in a larger than us, fabulous companies carrying 160-170 base of inventories, and fabulous continues don't even have basically the way for running the fab as their inventory because they have not taken to see to that. Our inventory is pure inventory because all the wafer is running in fab accounting in our inventory. Our total inventory in days of sales at the end of the last quarter was about 130. So, we have 114 days of inventory relative to like I said, 160-170 days of inventory at many other fabulous company asking. So, our inventory is higher than hysteric, the highest inventory regarding the last cycle, I believe, were 130 days, and right we are 114. So, they are higher than what I would like, but they are not higher than historical high, and they are certainly much lower than many, many other companies. The entire industry is seeing high inventory, and we have to set our expectation right now, so the inventory would be higher than what everybody would like to see, and will take a longer time for it to go down than anybody would like to see.

Where would you say your Asian distributor inventories are right down in terms of weeks?

Gordon, do you have that number?

As I said, three months of inventory in the Asian distributors at this point.

That does not have a line is it ... I believe you normally want to have it.

Well, it all depends on the product mix and financially a lot of these distributors are small local distributors, I think some place 2.5 ones are just may be slight in sense of that would be where we would expect it to be. Hence, hearing Steve's comment we believe that will correct through in the current quarter.

Let me add some color to it. In a normal environment, the three months of inventory would be great, it would be just idea. When the environment, when the lead times are very, very short and the visibility is very low, our distributors have a very low visibility from there end customers. So, therefore you know they do not want to stock a lot of product that they do not know which mix to stock it in. So, that is one reason we, we believe that inventory will collect little bit more to may be 2.5 months ... may be slightly less than that. And the second point I would like to make is, although the inventory on the average is 3 months, there are two problems, one it is not three months at every distributor ... so, there are certain distributors which are 4-4.5 and the other that are closer to 2.5. So, we will see some collection from distributors, which are high. The point number two is the inventories closer to 2.5 on microcontrollers, but exclusive to four and north of four on serial EE. So, there again you are going to see some more reduction in serial EE for the inventory to come in inline.

I hope that is out.

Due to time constraints, we ask you to limit yourself to one question. We will move next to Hans Moses with Prudential Securities.

Just two questions, are you still seeing push out in cancellations so far in April and number two what was telecom as a percentage of your sales. Thanks.

We have continued to see some push out in cancellation in April. So, that activity has not died down, but relative to the last quarter like I had mentioned in serial EE business we received push out and cancellation activity almost completely washing out any more turns for the quarter ... that is not the situation now in push out in terms of continuing or we are adding in our net fill to the quarter, and telecom was about 8% of our sales.

That will be for all our products not just the telecom product. And Hans that would be our intention to report that on an ongoing basis ... the products become somewhat indistinguishable as they go through our channels, and we think as we were consistently going forward on the analog number that it will start to gain some measure of reasonableness in your mind.

So, telecom was about 6 3/4 quarters?

Yeah, maybe like that.

Thanks a lot.

And we will move next to Doug Lee of Banc of America Securities.

Hi, good afternoon, just to clarify Gordon or Steve. So, we should expect that because you are not so as positive that you had roughly build backlog ... I have a positive book to bill in the current quarter as we end June quarter and look into September, do you think it states that you will have a positive book to bill?

What is the definition of product book to bill?

I guess that you did not feel the backlog?

Yes, that is higher than 1.

Greater than 1.0?

It is not greater than 1.0.

Right, but I guess going into the current quarter, do you expect to build backlog?

It is highly possible Doug that in this environment that turns is going to continue to grow. We still have very short lead times, so that going into this quarter where it approximately 40% of turns, we could see something more than that in the September quarter ... there is no reason for our customers to be giving us a stronger visibility at this point in time.

In the last cycle, the turn became as high as 65%, and for many, many quarters we were able to do 65% turns quarter after quarter, and be able to reach and almost hit the numbers within a percent of so. Turns this quarter are slightly more than 40 so, I would have to say no ... we will not create a backlog this quarter ... the turns requirement will be higher next quarter.

Okay then there is hope that it will get high. Okay, and then just a real quick one ... on the $7 million that you wrote down in the quarter, how much of that was EE ... how much was analog?

Four million was EE and three million was analog.

And we should not expect any further marginal going down at this point?

Inventory is very well reserved at this point of time and that should be it.

Thank you very much.

From _____00:36:47 Investments Edward Humegon.

Yeah, I just wanted to get a little bit of clarification just on your last comment regarding turns business ... did you ...you said that in the March quarter your turns were about 40% overall?

No, the march quarter we require 40% turns to meet a much higher number which was the guidance in the start of the quarter. Actually, I did not go and calculate what the real terms were ... usually we do not revise it afterwards.

Okay, so you were less than ... because you did worse than they were substantially less then 40%. For the current quarter than the June quarter what is your expectation for returns?

It is roughly 40%.

We did a higher turns this quarter than we actually did last quarter, but the business is coming in this quarter, you know, basically lot of people that did not place the orders, large customers, automotive accounts, distributors, agents are placing orders. The business run rate is better this quarter in returns than it was last quarter.

I guess yes, if you look at end use consumption for the lot of the sectors that you serve especially with microcontrollers ... did the end use consuming business seem that bad ... you would think is that they would soon need to be the ordering at leads that are comparable to what they were not too long ago.

But, you know the other way to look at ... you are correct in that statement, I mean, let me explain on it. If you look at our microcontroller business, it was down approximately 8% last quarter. In US and Europe, we report the real consumption, the only end purchases, as well as the district sales out, but in Asia at the local nation distributors, we report what we ship to them, and the total micro inventory in dollars went down last quarter. Which means the actual consumption was higher than that. So, if you look at the real consumption bases, our microcontroller business was again much less than 8%.

Okay, while ... if that is the case then somebody is going to be working off and I am assuming that your distributors customers are probably working off inventory too since nobody wants to hold inventory right now and that is detective. You would certainly expect to see a ... if you ordinarily get to about a 65% turns, your normal quarterly pattern ... when people are ordering product ahead of times about 65% returns, you could see a reasonably quick recovery here as you jump from 40% to 65%.

While the answer is yes. As the inventory especially in Asia gets corrected, you should see the start of the normal ordering pattern because people may need inventory in the shelf to ship it. The other issue really has been the distributors have a very large inventory in US and Europe, but there we don't report that ... we only report what the distributors ship out. But, we have also seen a significant inventory correction at the OEM customers, large multinational customers have had a high inventory, and that seems to be getting corrected also. We are seeing only in the last two weeks ... take it for what it is worth ... we are starting to see some preliminary signs of people not only ordering, but even expediting it. It is like getting some e-mail on please help us expedite this and expedite that. On a very scattered basis, we will have two or three examples of that ...I wont name the customers though.

From Sear Capital Fred Campbell.

Hi. In terms of the telecom acquisition ... have you begun to integrate these activities to sell this product and that is one question on the acquisition, and secondly are you taking up marketing and is it beginning to work?

The telecom integration is complete. The telecom has been fully integrated, there is one marketing team, there is one sales team, while the distribution has been consolidated, certain small distributors are giving an extrinsic to link forward having been terminated, the independent representatives sales force of telecom have been terminated. The Hong Kong closure, which we announced a couple of months ago is well on its way ... it will be basically closed by the end of June, but the output there is already down to about 50%, we have transferred lot of its staff to our facility in Thailand. So, telecom integration is well, well on its way from the sales and marketing perspective, which is only one team selling it together. The design and development strategic direction has been consolidated, so everybody is working on a single blue print of a strategic plan for new products.

Actually in the product development area, are you signing the opportunities to incorporate on any particular road to the telecom and analog the digital ... more than in the past?

Absolutely. In fact, as we look at our advanced products and microcontrollers as well as DSC products, we needed significant more advance analog capabilities then we had, and either we needed to hire people ... analog people to develop those modules or we get it from telecom, and a significant amount of microcontroller and DSC (Digital Signal Controller) analog modules are currently actually being developed at telecom. So, that thing is very well integrated and microchip and NASDAQ has dropped the development of number of stand-alone analog products, because we have them now through telecom ... they were already in the market with those products.

Can I take one more question? You have sold about 9000 licenses in the quarter, which has ended and you issued a total of couple of 100,000 outstanding. Historically, do some portion of the outstanding licenses fall on specifically, and therefore the more recently forward licenses are the once that drive the business. So, is it a combination of those outstanding and DROP IN VOICE 00:44:09.

That is really difficult number to go through unless you call a couple of 100,000 people to the distributor ... what does that be and what is not? Secondly, a majority of the developing systems are directly sold by distributors worldwide and not directly by us. So, it is really not in our database, now we could get it from distributors, and call all these people, but most _____00:44:40 and I don't really want to get bothered that way constantly. So, I do not really have a good number, but there is even a third point in there, which is microchip has approximately 138 third party development tool partners, who are independent business people selling development tools for microchips products. They do very large number of development tool sales, which are not in our 9000 system. So, what about the total number of tools sold last quarter, we do not really know ... because the large number were also sold by the third party tool manufacturers for their own businesses and many times we basically get a silicon ordered from the customers, that we never sold a tool because they bought it from the third party.

We will take a followup question from Jim McMahon from Credit Suisse First Boston.

Yeah, it is actually the first question, but I have one for Gordon and two quick ones for Steve. Gordon, can you give us the idea at the inventory at the end of March at a higher percentage or less in the December quarter.

Compared to finished goods?

Yes.

Probably, percentage wise relatively we are seeing relationship between worked and finished goods at full periods.

Okay, a followup Steve. Steve compared to the last down turn ... how much further would ASPs need to decline in say earlier by business to hit like peaked trop by single erosion?

How much ASP's have to drop further to see peak to trop pricing erosion?

Yeah, what is on a percentage basis?

I could be certainly wrong when it gets like this and you have to really look at a few products in average ... so, I really cannot answer that one.

Okay, we will try just one more. In January, on your conference call you had talked about bookings actually being pretty robust up from December, you were kind of on hold waiting for Chinese New Year to see how that was going to come through, and at that this is particular to serial EE business, you are expecting serial EE to be just slightly down in the quarter. I am curious can we assume that the weakness for your serial EE was more related to Asia, when you said you had a pretty robust booking month for the rest of the world?

Yes. A very large portion of the serial EE actually are sold in Asia and the Chinese New Year phenomenon never recovered ... in ordinarily when the people come back towards the middle of February, we see a very substantial uptake in bookings from China, and we make that quarter basically in the last 6-7 weeks of the quarter. It never recovered. It was like I said earlier somebody turned the switch off before the Chinese New Year, and never turned it back on.

Thanks Steve.

We will take our final question from Mark Aldestone with Morgan Stanley.

Hi, I just have a two questions, one on the income statement, there was a net loss in equity investments. One of you could just work through what that was during the call and I have a final followup.

Yes, that really related to our investment that telecom had in a company called SAI and that investment is now fully written off as of the end of March, Mark.

Okay great. When do you expect then the ... sort of going forward other income that to be back to what was before. So, still hanging around that $2.5 million levels or so?

It is expected to be down slightly from that level ... just based on continuing to see some level of cash flow from capital expenditures that you have placing in the fourth quarter ... so, to be down to about $1.5-$1.7 million.

Okay and then just one last question for you Steve. You gave at least some color on demand patterns through the quarter, one of you could just look at the microcontroller business exclusively, and give us a census as to what the demand pattern looks like for orders in the key end market so, looking at through single automotive industrial under the communications into the peripheral, is there any noticeable differences in demand as you run through the quarter in most key end markets?

It is very difficult to take a segment of our business microcontroller first divided by three months and they divide each month by another five, and the each market, and again by geography ... it is like taking a number and dividing it 25 times. I do not really have that, but I can give you a more qualitative picture rather than the quantitative.

Yeah, that is correct.

Qualitative, we saw a significant reduction in our automotive business primarily in America over the last quarter purely driven by plant shutdown. As you know, major automotive consumer electronics, automotive companies have significant shutdown. It was reported high inventory of automobiles so we related to that, it looked like almost the automobile company ran only about two out of three months. Basically, there are back to full production and we are seeing a significant increase in the automotive business this quarter, back to the older numbers, back to full production schedule, so the automotive business is strong. If I look at ... I would say automotive ... then everybody else would be basically in the same boat. That sort of the businesses really did not have any trend, the stage soft all through the quarter January, February, and March, and they should all recover somewhat as the inventory correction is going away. But, the automotive is only one I can call out where there were specifically plant shutdowns and there are in both plant shutdowns this quarter, because the overall automobile inventory now seems okay.

Great thanks a lot.

There are no further questions at this time gentlemen. I will turn the call back over to you for any additional and/or closing comments.

Thank you for attending the conference call. We will be here at the company for the revised; if you have any other questions please call us. Thanks.

That concludes today's Microchips Technologies first quarter earnings conference call. We thank you all for joining us.