微晶片科技 (MCHP) 2004 Q3 法說會逐字稿

Good day, everyone and welcome to this Microchip Technology quarter three fiscal year 2004 conference call.

As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Microchip's Chief Financial Officer, Mr. Gordon Parnell.

Please go ahead, sir.

Thank you very much and good afternoon everyone.

During the course of this conference call, we will be making projections and other forward-looking statements regarding the 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 10-K for the fiscal year ended March 31, 2003, and our 8-K and 10-Q current reports that we have filed with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

In attendance with me today is Steve Sanghi, Microchip's president and CEO.

I will comment on our third quarter fiscal 2004 performance, giving information by geography and product segment, and Steve will then give his comments on the December quarter, discuss product line performance, review the status of Fab 4, and outline our guidance for the March quarter.

We will then both be available to respond to specific investor and analyst questions.

Our net sales for the December quarter were 178 million, up approximately 5.6% sequentially from sales of 168.5 million in the September quarter and up 6.3% from sales of 167.5 million in the prior year's third quarter.

Geographically, all areas grew sequentially.

Asia grew by 7%, Americas grew by 5.9%, and Europe grew by 3.2%.

Total revenue breakdown for the quarter resulted in sales for Asia representing approximately 42% of our business, Americas at 32%, and Europe at 26%.

Net sales from micro controller products represented approximately 80% of revenue in the quarter, analog products represented approximately 7% of revenue, and memory products represented approximately 13% of revenue.

Essentially unchanged from the previous period.

Pro forma net income for the December quarter was 40.4 million or 19 cents per diluted share, an increase of 11.9% from net income of 36.1 million or 17 cents per share in the immediately preceding quarter, and an increase of 11% from net income of 36.4 million or 17 cents per diluted share from the prior year's third quarter.

On a GAAP basis, net income for the December quarter was 40.8 million and this was up 13.1% from the prior quarter and up 12.3% from the third quarter of the previous fiscal year.

Gross margin for the December quarter was 54.5.

Factory utilization levels were 92% in the quarter.

The tax rate for the December quarter was in line with our guidance, and we expect the tax rate to stay at approximately 25.5% for the next several quarters.

Start-up costs for our Gresham facility were approximately 3.6 million in the December quarter, modestly lower than previous periods as we commence production volume at the facility.

Excluding these costs, our product gross margins for the quarter were 56.6%.

Pro forma operating expenses were 24.7% of sales in the December quarter, compared to operating expenses of 25.9% in the previous quarter.

Research and development costs were 20.9 million, representing 11.7% of sales.

Sales and general administrative expenses were 23 million, representing 13% of sales.

Our total inventory position at December 31st was approximately $96.2 million, a decrease of 7.6 million, approximately 7.6 million, from the prior quarter's levels.

Inventory turns are at 3.4 with days of inventory representing 108 days.

The days of inventory at the end of June reached a high for Microchip of 134 days, and we were at 123 days of inventory at the end of the prior quarter, the September period.

We expect to be approximately 101 to 103 days of inventory at the end of the March period.

At December 31st, our receivables were 45 days, compared to receivable days of 47 at the end of the September period, which was comparable to the levels of a year ago.

Our overall receivable balance increased approximately 1.4 million, or 1.5% sequentially, while revenues grew 5.6% as I indicated earlier.

As of December 31st, our cash and short-term investment position was 450 million, with no debt on the balance sheet.

During the quarter, Microchip generated free cash flow from the business after capital costs, working capital costs, dividend payments and treasury activities, which resulted in adding 100 million to our overall treasury balance.

Capital spending was approximately 18 million for the quarter.

Anticipated spending for fiscal 2004 is approximately $60 million.

Depreciation expense for the December quarter was 27 million versus 28 million for the same quarter last fiscal year, and 26 million in the September quarter.

In the December period, Microchip shipped 8,837 new application development systems to our customers, and we have now shipped over 293,000 total development systems to the market at this point.

With that, I will now ask Steve to discuss the performance of our business both last quarter and the current conditions, and outline our guidance for the March period.

Thank you, Gordon, and good afternoon, everyone.

First I would like to reflect on the results of the December quarter, then comment on the product lines and then talk about the Fab 4 start-up and the ramp, and finally discuss the guidance for the March 2004 quarter.

So let's begin.

We executed effectively during the quarter on many fronts.

Our net sales were in the middle of our guidance at 5.6% sequential growth.

This was our best December quarter sequential growth since December of 1999.

Remember that December quarter is our seasonally weaker quarter, so this was the best December quarter sequentially since December of 1999.

EPS were at the high end of our guidance at 19 cents.

Operating profit exceeded 30% and was the highest since September of calendar year 2000.

In the quarter, we achieved a book-to-bill ratio of 1.26, indicating that customers are starting to place backlogs, giving us longer-term visibility.

This was the strongest book-to-bill ratio since September of 1999.

We achieved an all-time record in bookings for the company in the last quarter, and so far in January, the bookings have continued to be very strong.

In the quarter, we also built $100 million in free cash flow, and we also announced that we have increased the dividend to be paid this quarter by about 17%.

So while net sales were in the middle of our guidance and an extra million dollars would have been more pleasing, the difference of $1 million in sales is more cosmetic than of longer-term importance.

Statistically, the difference isn't recognized revenue on a sell-in basis, while Microchip recognizes revenue on a sell-through basis from our distributors.

If Microchip had reflected sales on a sell-in basis, then our net sales would have grown an additional 4% over our reported results.

And when we combine the net sales with our high-end EPS 54.5% gross margin, 1.26 book-to-bill ratio, 15 days reduction in inventory over 30% operating margins and $100 million free cash flow, I believe that the quarter was excellent.

Now I shall talk about the product lines.

Micro controller business grew 6% sequentially in a seasonally weak quarter.

The quarterly micro controller net sales achieved an all-time record, and it had the best sequential growth since December of 1999.

The analog products were up 2% sequentially, and the overall performance on analog products was disappointing, while the overall number of customers continued to grow and design wins are strong, a couple of significant direct customers had problems in their own businesses not related to Microchip's product.

These customers' issues are well towards resolution.

Our business for the distributors represents a broader customer base and our analog business at our distributors grew very nicely at 10% sequential growth.

But the couple of direct customers, which have problems in their own business, have brought the overall analog product to only a 2% sequential growth.

The gross margin continues to be very strong.

We shall stay the course despite the less than stellar overall sequential growth on the analog product line in the last quarter.

Serial EEPROMS business was up 5% sequentially.

The ASP stabilized and moved up in certain cases lead times from our competitors continue to stretch out, and are 6 to 8 weeks in most cases.

We expect this business of lead times in ASPs to continue to firm up in the quarters ahead.

On the digital signal control products, we achieved a milestone by shipping the first DS PIC, our 16 bit micro controller for revenue in the last days of calendar year 2003.

Now let me talk about the Fab 4 start-up and ramp.

Fab 4 started production on October 31st, 2003 on schedule.

It has been a flawless start-up and execution.

Since the October 31st initial start-up, Fab 4 has increased wafer starts three times already in small increments and is planning to increase wafer starts again on March 1.

I am very pleased that Fab 4 is now contributing to Microchip's revenues and margins.

And now I shall discuss our guidance for the March 2004 quarter.

As we look at the March quarter, we took several factors into account.

We entered the March quarter with the best backlog position in three years.

On the other hand, it is Microchip's seasonally weakest quarter due to the New Year holidays as well as the Chinese or lunar new year in several parts of Asia.

Therefore, we expect net sales in the March quarter to grow by 1% to 4% sequentially.

Gross margins are expected to move up by another 50 to 75 basis points, or 55 to 55.25% with the continued ramp up Fab 4.

The inventory is expected to fall further to about 102 days.

We expect to build approximately $85 million of free cash flow and earnings per share are expected to be about 19 to 20 cents.

With a fairly tight range of guidance, Microchip will not be providing a scheduled mid-quarter update.

We will attend a couple of conferences during the quarter, which provide an excellent forum to talk about our business in a fair disclosure-compliant environment.

We shall use these opportunities as appropriate.

With that, Madania (ph) would you please poll for questions?

[OPERATOR INSTRUCTIONS].

And our first question comes from Chris Castle with Sharp Soundview.

Hi, Good afternoon.

I just wonder, if you could clarify I guess two things in terms of utilization rate.

You talked about 92% utilization rate.

If you could put that in the context of the Fab 4 ramp, I guess how much capacity did you consider added by the Fab 4 ramp?

And then if you could talk a little bit about the start-up costs, sounds like you're still expensing some start-up costs, although Fab 4 is still operating.

I wonder if you could just clarify how the accounting works for that as well.

The capacity utilization is still determined on our Tempe facility.

Fab 4 is operating at such low levels even although it is doing well, as Steve has indicated, that it isn't reasonable to play that into the overall capacity utilization.

So it's really predicated on our eight-inch facility in Tempe.

And in terms of the start-up costs, really there's no real change other than the fact the facility is operating in a productive environment.

The last couple of quarters, the start-up costs that have been expensed are in the range of about $4.5 to $4.7 million, and this quarter with the introduction of the productive capability on October 31st, that is reduced to $3.6 million.

Now as we proceed over the next several quarters, as our facility continues to move through its productive and effective ramp and producing the kind of performance that we expect from that facility, that 3.6 million will continue to decline over time.

And we've shown that in many of the conferences we've attended in the shape of improving gross margins, taking us to the range of 57% to 58% over the course of the next five or six quarters.

Ok.

That clarifies.

Thank you.

Moving on to Chris Danely with J.P. Morgan.

Thanks, guys.

A couple of questions.

I guess one would be, you know, if you have a record backlog with book-to-bill at 1.26, why are you only guiding up 1 to 4%?

Well, as we talked at various conferences over the quarter, the bookings were very strong, but the backlog being placed is giving us more visibility for out there in time.

So the turns we achieved last quarter, it does not mean we're going to achieve the same number of turns this quarter because customers gave us those bookings during November and December time frame for this quarter.

So the numbers who are going to do this quarter really is represented by what the end customer consumption would be, and we just started this quarter with a substantially higher backlog.

This is Microchip's weakest quarter.

The Asia essentially is in the middle of the Chinese new year starting this week, and various countries would be gone for about a week to two weeks, and then you lose about a week or so in the start of January because of the overall Christian new year, so this usually driven by those factors, March quarter is our weakest quarter every year, and we believe the 1 to 4% sequential growth is pretty good considering most of the times the March quarter is negative.

Sure.

One other factor there to take into account is the -- and we talked about the distribution inventory.

Obviously it is being at very low levels.

We talked about it during last quarter, Chris, that we were seeing signs that it would start to increase, and obviously we reported that that was the case, although it's still at very low levels compared to the historical levels, but again, that's part of the visibility and the backlog we have, and again, because we have a very conservative basis of revenue recognition entirely on sell-through, none of that is recognized in our revenue until such time as it's actually passed through our distributors stocking and into their customers' hands, and obviously there's different revenue recognition models out there in the industry.

Some companies like Microchip have a full PUS basis of recognition, companies like Intel and Xylinx would be company that is do that type of revenue recognition.

Many others have international piece that they recognize on a sell-through, and then still others have a full sell-in basis that they use, and Companies like that would include Texas Instruments, Motorola, Fairchild and national.

Sure.

Can you tell us what the turn's percentage was for the December quarter, and given the guidance, what it would be for the March quarter?

The direct term is what we've been talking to.

The direct terms for the March quarter is about 45%, and the terms for the December quarter was in the region of low 50's.

Low 50 50's.

Ok.

Great.

And then one quick question on the analog issue.

Steve, was that centered around some cell phone customers or in the cell phone industry or was it two fairly diverse customers?

It was not Motorola, if that's where you're headed.

There were two customers, one was in the consumer market segment, not cell phone-related, and the second one was a cell phone, but it was going to a model change.

Actually the overall volume at that customer was good.

But a particular design didn't materialize.

The customer was late regarding a problem on a different product, not Microchip product, but the end result was on that particular model at that customer, we lost a fair amount of revenue, which the model is now in good shape that.

The customer has resolved problem.

And the other one was a consumer customer, which, you know, got sued by another competitor, so it was really their problem, and that business is coming back too.

So they were really totally unrelated to Microchip, but they happened to be large customers, and if you take these two customers out, then the analog business on the rest of our direct customers was up in the same range of about 8% to 10% as our distribution business was.

Okay, and then last question and then I'll bail out.

What would be your expectations by product line for the March quarter?

We never break it out for the following quarter.

With a 1% to 4% sequential growth, it's pretty hard to break that out in few pieces.

Do you expect any of them to decline?

No, we don't expect any of them to decline.

They should all be in the same range.

They would be in -- yeah.

That's fine.

Thanks, guys.

Harsh Kumar with Morgan Stanley (ph), have our next question.

Hi, guys.

I don't want to follow up on Chris's questions.

Book-to-bill was up very, very nicely.

Would it be fair to say there was equal spend across all your three different product lines?

Oh, yes.

I mean, you know, we're 60%, 65% of our business through distribution and all of our products do well through distribution.

It was evenly distributed.

Okay.

Also with respect to the financial model, your R&D and SG&A came down a little bit as a percentage of sales.

Should this be the new model that we should be looking at as of the December quarter, or would you expect them to go back to kind of where they were in September or June?

We've kind of said the range is for operating expenses is 24% to 25%, and we should be operating in that range over, you know, the March quarter and in fiscal 2005.

Got it.

And one last question.

Guidance gross margin up 50 to 70 to 75 basis points up in March, is that correct a result of just the start-up cost kind of being disseminated into the Fab, or you are actually getting benefit of the Fab 4 as you begin to start to ramp it up nicely?

It is the same thing.

As you ramp, then you get more productive the more the start-up costs are being absorbed into the wafer cost of producing these wafers, and extra expenses that you have in the start-up continue to go down as you ramp.

Got it.

Just a quick follow-up on that.

Steve, would you say -- would it be fair to say that starting then as you really ramp up in March, that's when the big benefit will start to kick in on the margins?

Well, I think the numbers we have shown on margin basically, gross margins go up pretty much every quarter for the next several quarters as we are ramping the Fab, and how fast we ramp it sort of depends on the outlook on revenue quarter-over-quarter, but the models we have shown, and we're pretty much on or ahead of that model, you know, we improved the gross margin about 35, 40 basis points last quarter, and we're saying about another 50 to 75 basis points this quarter, and if you pull out an old graph, we had shown at the conference, the gross margins go up again in the June quarter, September quarter, December quarter, so it should continue to happen.

Got it.

Thank you.

Our next question comes from Michael (inaudible) with Credit Suisse First Boston.

Thanks a lot.

Just a quick follow up on analog first.

Is it fair to say the analog weakness you talked about got pushed into the following quarter or some of it was just lost?

How would you characterize it?

Well, I think we will do better on analog this quarter, but there is not a double take, which means we won't make up for the last quarter.

Ok.

The customers, because of the technical problems they had, not related to Microchip product they did not produce that product, and they won't produce it at twice the rate.

They start producing it, some of that business comes back, but we don't get the recovery of what we lost in the last quarter.

That's what I was looking for.

A couple others real quick.

You're better than seasonal this quarter.

Is this the trend you're starting to get into here, is this sustainable, or is it still too early to tell?

I think it's sustainable.

The way you've got to look at the numbers, look at the December quarter compared to some of the December quarters we have done in the last few years, this was the best December quarter.

If you look at the March quarter even with a 1 to 4% sequential growth, compare that to usually a negative March quarter we have had in many times before, including last year, although last year was particularly bad because of the war and SARS, so you are really, you know, these are much better numbers compared to what these quarters ordinarily do.

And we have not gotten into Microchip's seasonally strong quarters yet, which begin in June and September, which are very, very strong quarters.

Great.

That helps.

I guess the final question is, as we get closer to this more as just there is anything changing, from the customers are saying and what's doing there any impact that you see there?

I think in the past, you said there's not going to be real impact.

Nothing really that's visible.

Nothing - you know, we talked about it on the last conference call a quarter ago.

The prospectus is out there.

We don't know of timing of when it's going to materialize.

You know, and customers are really not doing anything different yet.

Great.

Thanks a lot.

You're welcome.

We'll go now to Edward Similbarn with Shaker Investments.

Hi, Steve.

Could you talk a little bit about your serial EEPROM business?

Historically that's been a pretty volatile business for you, but once it starts ramping up, it tends to ramp up pretty quickly.

In this time I think last quarter, I was looking at your revenues were up about 10% to 12% or something.

Now they backed down to like 5% this quarter or something.

And whereas your micro controller business obviously, you know, is very strong.

Is there anything different about your serial EEPROM business this time than say is in past ramps in the semiconductor cycle?

I think you need to, you know, put the seasonal factor on the top of that.

While the December quarter revenue was -- the sequential growth on that was lower than what we experienced in the prior quarter, this was pretty good considering it was the December quarter.

And March quarter is usually the weakest quarter, serial EEPROM business many times - negative in the March quarter we expect it will not be negative to be low single digit positive, and then we should see a really strong June and a very strong September again.

So the serial EEPROM business is stable, it is growing.

Gross margins are solid.

It's really profitable.

The prices are firm.

All the right things we're seeing in that business, but our business model is such that, you know, we don't really crash like crazy and then go up, you know, like crazy, you know, 20, 25% sequentially.

We just don't do that.

Well, I mean, with serial EEPROM, you have - I mean, there have been quarters when you've gone up like that.

Well, we may have done that in 1999 and 2000, but that was, you know, the industry was going crazy that time, you know, and just -- you know, where the industry was, and I don't think the industry has those kind of wins behind it yet.

Secondly, the serial EE was a much larger portion of our business back then.

Used to be about 35, 40% of our business.

Today it is about 13% of our business.

So really by plan, we have brought the serial EE exposure to Microchip's revenues and earnings much, much lower because of the volatility of it.

Same time back in the last cycle, it was 35% of our business.

Right now it's about 13.

So its impact is muted.

It's not -- you know, that's not the business we always rely on, you know?

Oh, I understand.

Whatever goes up, it has to come down as the prices come down.

So our focus continues to be on micro controllers and analog products and serial comes along.

Okay.

Great.

Thanks.

We'll take our next question from Eric Tomber (ph) with Thomas Weisel Partners.

Hi, guys.

Could you talk about where lead times are among your various product groups right now?

The lead times on Microchip products are in the 3 to 4 weeks time frame in general.

There are specific products in every product group, which could be longer than six weeks, some even seven, eight weeks.

That could be just a narrow product or maybe a specific package or for some reason for a short period of time, lead-time is long.

But other otherwise there are no capacity issues.

Microchip has sufficient capacity in all parts of our business to essentially build all products and keep lead times fairly short, in the three to four weeks time frame.

You've been doing a nice job of keeping your inventory days lower.

What would be optimal days inventory?

Well, what we have said more recently in the last six, eight months, when the inventory was very high at 134 days was that we'll bring it down in the range of 95 to 100 days.

We basically get there in the next quarter or so, and as we get there, then we assess it again to see if she can come down lower.

As far as your very strong bookings this past quarter, were there any regional differences or end market products where you saw greater or lesser strength?

Nothing by end market.

You know, we have such a broad customer base that we can never sort them out by end market.

But regionally, were they much different, Gordon?

I don't think so.

I think, you know, we saw growth in all of the regions in the quarter.

We saw distribution inventory move ahead.

So all those obviously needed to be fueled by bookings, Eric, so I think geographically, there's - you know, they all moved at a reasonable pace together.

If there's a difference I could call out, it would be distribution versus direct to customers.

The book-to-bill ratio overall was 1.26 but for the direct customers was only 1.1.

The distribution book-to-bill was very high.

There was really not any difference we can call out either by end market or by geography.

And distribution changes are really reflective of moving inventory from the very, very low levels to the current kind of levels we've seen.

OK.

Just one last thing.

You talked about the -- with the new year this year coming a little bit early.

Do you think any business has really pulled into the December quarter?

No.

Thanks very much.

[OPERATOR INSTRUCTIONS].

We'll move now to Gail Alexander with Stock and Associates (ph).

Good afternoon, and congratulations.

Just to review for me, could you give me your estimate of start-up costs for this year?

And the second question, we're looking into the future, but when would you hope your gross margins to get towards the 57% area?

Ok, it was the first question total start-up costs this year?

Yes, sir.

This fiscal year for the -- for Fab 4?

Right.

Are you saying fiscal 2004 that we're going to finish this quarter or fiscal 2005 ?

Fiscal 2004.

I don't think they're too heavy next year, are they?

No.

Fiscal 2004, they're figuring it out.

Meanwhile, I'll answer your question on when the gross margins get to 57%.

I believe they get --do you have it in?

About 15.5 million.

Thank you.

We'll take our next question -

We weren't quite finished yet.

Oh, I apologize.

15 million is the start-up costs.

Getting to -

Gross margin gets to 57% basically by the end of the fiscal year.

Or sooner.

You mean by '05?

Yes, was.

Yes, exactly.

Very fine.

Thank you.

And our next question comes from Amrish Srivatsav (ph) with Harris Nesbitt.

Hello guys thanks.

Most of my questions have been answered.

Just a quick one on the 16 bit, Steve.

Should we be expecting like a $5 million run rate exiting this calendar year on the product line?

I don't have that right now.

I mean, we just shipped the first product, and we need a little time to model, so we'll know.

We don't have any numbers on it yet.

And typically a new micro controller product takes about 18 months to be hitting it straight just from the perspective of hitting the market, design and activity, et cetera.

And that's 18 months from the first launch or 18 months from the first production volume?

It can vary. 18 months from now essentially I mean on.

OK.

It's just introduced now.

OK.

Thanks it.

Thanks guys.

Philippe Docca with Bank of America has our next question.

My questions have been asked and answered.

Thank you.

We'll move now to Mark Ettlestone with Morgan Stanley.

Hello.

Good afternoon, guys.

My sense would be that distribution will look to build inventories this year.

I wonder what your sense is on that, and if you think they will, what your best guess is in terms of just what type of increases are likely to be seen here as we go through calendar 2004.

Well, you know, the distribution is building inventory and will build inventory.

We have been talking about it all last quarter, that we see that the distribution inventory will start to get billed from very low levels.

In the quarter we just finished, you know, they build inventory and we kind of give you an estimate of that to represent approximately 4% additional growth if you had counted that in revenue.

We believe that sort of growth will be continuing distribution inventory for the next several quarters.

Great.

Thanks a lot, guys.

Next we'll hear from Paul Lemming with Columbia Management.

Just a trivia question.

Could you tell me what depreciation was for the quarter?

7 million, right,27?

$27 million.

That was it.

Thanks very much.

You're welcome.

We'll take our next question from Jason Sam.

Just a few quick questions.

Gordon, you mentioned that the software -- was it 8800?

Correct.

Now, in terms of the trend for that, is it predictable because, you know, it dropped from the previous quarter.

Is it seasonally -- is there any seasonality to that or is it, you know, just lumpy?

The development kits are highly dependent on new product launches any time we come up with a new version of the development kit, or launch a significant product line within the micro controllers like when you launch an 18F architecture or significant products in any of our product line.

The development kit is best looked at more on a yearly basis or on some sort of rolling four-quarter year-over-year.

In any single quarter, the development kits are also highly sensitive to whether in that quarter we gave seminars around the world whether we had a master's conference, which have it on the summer.

So it's really very event and product events and seminar events-driven.

There's nothing wrong in the development kit number that we just had.

It was an excellent number.

As far as the backlog numbers, are you guys -- you know, can you comment on that?

In terms of, you know, can you quantify that?

Well, you know, we just mentioned that the backlog we started this quarter, we started with the highest backlog in three years, so you have to go back to almost to January of 2000 before we had this kind of backlog, or 2001.

So it's the highest backlog in three years.

And then we told you that on the direct business, we require approximately, what, 45% turns.

45% turns.

Okay.

So three years ago, do you give a backlog number?

No, we don't quantify -- 60, 65% of our business was through distribution.

And the backlog on distribution does not mean much because what we recognize for revenue is what the backlog is from our customers on to the distribution.

So now, is the backlog number primarily MCU product or is it sort of across the product lines?

No, we don't have any detail like that.

We don't break it out by product line.

On the analog business, now just so I have the right idea.

Now, both of the customers you said resolved the issues, right?

Yeah, they're well toward resolution.

You know, some of these -- these are not like event issues.

They had some issues, they resolved the problem and they are starting to ramp the product.

Okay.

And the cell phone customers, is that a Korean customer or is that domestic customer?

It's not Motorola.

That's all I can tell you.

Beyond that, it might be proprietary for the customer.

Okay.

And for the quarter, just so I have an idea, can you quantify the impact that the two customers had on the product?

On the revenues for the product lines?

It was about a million dollars, a little more.

So without that, we were -- we have really double-digit growth on the analog products.

Great.

And last question.

Gordon, can you give me the head count for the quarter?

Oh, I think it's in the range of 3400.

I'd need to check.

I haven't seen an end of period report.

That doesn't quite roll through in our GAAP information, Jason.

If we can email you with the specific information, if that's important.

That's fine.

Approximately.

That's fine.

Thanks, guys.

We'll hear now from Torrey Sandler (ph) with Piper Jaffray.

Yes, good afternoon.

Can you talk a little bit about the linearity of the December quarter and how bookings have been so far in this quarter?

Yeah, I think it was a fairly typical period.

Each of the geographies has behaved a little differently.

As you would expect, in Americas and Europe, there is a tilt to the earlier parts of the quarter because of Christmas.

Asia tends to grow all the way through, and so this quarter -- so it's got more momentum going through the Christmas period as it moves towards the lunar new year, so I would say the linearity was very close to what you would have expected entering the quarter.

As far as the current quarter is concerned, you asked how are the bookings so far in January.

The pace at which we're booking the product in January, it seems like January, we were the largest first month of the quarter ever.

You made a call that October was second best first month of the quarter ever.

The only quarter larger than that was April of 2000, which was the first month of the quarter.

We expect at the rate January is headed with a few days to go, it will exceed that.

Very well.

And if you look at your international distributors, how has their behavior been in the last three, four months?

Specifically so far this year, have they gotten to a halt because of the lunar New Year or are they still pretty active?

Well, some of the Chinese distributors are away right now for a week to two weeks.

They basically closed down everything.

And in many cases, they gave us some bookings prior to leaving, and some of them will come back and place large orders afterwards, but that's not true for all international distributors, because that's not true for Europe, and that's not true for certain countries in Asia, which do not have the Chinese new year.

When you -- despite the effect of the lunar New Year, the January bookings are heading for very, very strong numbers.

However, I want to remind you again that a lot of these bookings are aged out in time.

Some for February, some for March, some even for April and it does not mean, you know, what it really means is that customers are giving us visibility and placing the orders ahead of time, because as the product availability is tightening, they're concerned about lead times going longer, so they're giving us the orders ahead of time, giving us visibility, which is good.

That's right.

And then finally, could you just update us on the company's longer-term strategy in analog?

Is this an area that you keep investing in, you know, both on the R&D side and also potential acquisitions?

The continuous investment in R&D's is yes, acquisition, no.

We don't really have a - you know, we're not an acquisitive company -- once in a while, we may do a small acquisition to really beef up a certain portion of a business or acquire a technology.

Initially three years ago, we needed the acquisition of telecom semiconductors to establish the beachhead in the analog.

It's about a $50, $60 million business today, and we do not need to do any acquisition to beef it grow it further.

We're going to home-grow it internally, and there's substantial R&D going into it.

And in general, we believe we're doing very well despite the results of the last quarter.

Great.

Thanks, and good (inaudible) inventory.

You're welcome.

We'll now hear a follow-up question from Edward Similbarn.

Just a couple quick questions.

I think you talk about that the DS PIC product, you just introduced that now really for shipment to customers, is that right?

Yes.

Okay, so you would expect it to start have any material impact beginning in fiscal 2006?

Yeah, that's correct.

Okay.

And then regarding R&D, what is your normalized rate of R&D spending as a percentage of revenue do you think you want to get to?

You know, somewhere in the region of 12 to 12.5% of revenues.

Okay.

Great.

Thanks.

We'll hear now from Brandy Brandon with Eaton Vance.

Thank you.

You posted a letter on your Web site that you sent out to your customers.

What kind of feedback did you get or what kind of effect could you discern that that had or didn't have?

The effect of the letter has been extremely positive.

The customers and distributors from around the world have responded by giving us the visibility, and that's really what has, you know, driven a stronger backlog today.

We know what we've got to build for January, and we are really building it from backlog rather than, you know, still be taking turns orders for the rest of January.

We have backlog, you know, all booked up for about half of February.

And any new orders that are coming in today, we are scheduling them, you know, three, four weeks out, so, you know, you can almost work from a frozen schedule for the next three weeks, which makes the factories a lot more productive, it makes it easier to ramp, which, you know, is really significantly better than when you're breaking set-ups every day because you don't know what's going to book.

So in general, the response from the customers has been very, very positive.

And in select cases where customers did not place orders, they were not vigilant enough to respond to the letter, and then they came back to buy a product, either they had to buy it from distribution or if they came to us, they had to pay an expedite charge.

Could you put a little more historical perspective on there?

What would have happened, you know, at other points in time or in a cycle or something, would the response have been differed?

How would it have been differed?

Not really very different.

I remember exactly same thing happened in September quarter for 1999 or something or maybe it was -- you know, same point in the last cycle, I remember, you know, having the worldwide sales meeting in Scottsdale, what I told the worldwide sales force that the lead times are stretching out, tell your customers they need to place backlog, we are growing as a company, so this time I sent out a letter today and the web is more permanent today so I posted the letter on the web.

We communicated to the customers same way last time, resulting into significant improvement and visibility, and what you should expect is, you know, at the height of the low point of this cycle, we were taking about 60% turns, and we already are talking about 45% turns, and that's going to come lower and lower and lower.

And at the top of the cycle, we were talking about 20% turns.

I don't know whether we're going to go down that much, but certainly we'll keep getting better, we'll keep getting more and more visibility.

So the cycle is well underway here.

Thank you.

Our next question will come from Maneesh Goyal (ph) from Neuberger-Berman.

I wanted to go back to this same issue.

You have the highest backlog, you have the highest order in three years, yet you are guiding for a sequential growth in revenues.

Why do you expect the terms or bookings to decline or you don't have much confidence in terms of booking?

Well, customers already gave me the order for the requirements last quarter.

Which they need this quarter.

Remember there's a dramatic change in the customer behavior.

In the December quarter, they were giving the orders for November in November, the orders for December in December.

And now for this quarter, what they need in January and February, you gave me those orders in December.

So as I speak, customer does not need to give me any more orders for January and February, and they're not, because they already gave me those orders.

And the orders they're giving me now are scheduling into late February into March and some into April.

All right.

Thank you.

Moving on to Joe Osha with Merrill Lynch.

Hi.

This is Sydney with Joe.

Just a couple clarifications.

For Fab 4, first of all utilization rate is 92% excluding Fab 4, right?

That is correct.

Joe Osha What is the utilization rate of Fab 4 itself?

It's too low to give you a utilization rate.

It only started productive capability on October 31st.

The equipment on the floor could do substantial revenue, so over the course of the next few quarters, once it gets into a reasonably productive state, we will come up with some metrics, which we'll share with the state. it's just too early to give you something that would be meaningful right now.

That's fair.

In terms of the margins, longer-term margins, you mentioned about 50 57 to 58.

Is that the long-term margin or just by the end of fiscal 2005, that's what you're expecting?

You haven't really given any guidance beyond that, so we're basically saying the margins continue to improve and get into that range over the next five quarters, and then we really have not modeled it beyond that.

Great.

Thanks.

Welcome.

Our last question will come from Chris Danely with J.P. Morgan.

Hey, guys, just a quick follow-up on the turns.

Was the 45% turns need needed, was that from the beginning of the quarter or right now

The beginning of the quarter.

So now it's probably a little bit lower than that?

Yes, it's significantly lower than that.

Can you give as you range?

I don't think we have it.

Right.

I don't have it.

January bookings have been strong, you know, January is all booked out, you know, half of February is booked out, so obviously the number will improve because people are concerned about getting product, so they're giving us visibility.

Sure.

Is the March quarter, is that generally front or back-end-loaded or is it more linear?

It's lunar-new-year dependent, and because it doesn't come at the same time, sort of like Thanksgiving, it's kind of hard to say.

You know, this time the lunar new year is at the break point of January and February, so it affects a little bit of both.

And since Asia is 42% of our business, you know, the lunar New Year, Asia becomes very low.

Got it.

OK.

Thanks a lot.

And that is all the time we have today for questions.

At this time, I'd like to turn the conference back over to Mr. Parnell for any additional or closing remarks.

Thank you very much.

I appreciate everyone's attendance on a very busy day in the market.

We will be available for any follow-up questions for the balance of the day.

Thank you.