微晶片科技 (MCHP) 2005 Q2 法說會逐字稿

Good day everyone and welcome to this Microchip Technology second quarter financial 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 Chief Financial Officer, Gordon Parnell.

Please go ahead, sir.

Thanks, Erin, 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, 2004 and our 10-Q and 8-K 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 second-quarter fiscal year 2005 performance, giving information by geography and product segment and Steve will then give his comments on the September quarter, discuss product line performance, review an update on our strategic marketing position in microcontrollers and outline our guidance for the December quarter.

Steve will be incorporating a slide presentation with his discussion.

So if you're not already logged into the webcast, you should do so as soon as possible.

We'll then be available to respond to specific investor and analyst questions.

Net sales for the September quarter were a record 220.7 million, up approximately 31 percent from sales of 168.5 million in the prior year's second quarter and up approximately 3.7 percent from sales of 212.8 million in the immediately preceding quarter.

We also achieved record earnings in the September quarter with GAAP net income for the period of 60.4 million, or 29 cents per diluted share, an increase of 67.4 percent from GAAP net income of 36.1 million, or 17 cents per share from the prior year second quarter and an increase of 6.5 percent from pro forma net income of 56.8 million, or 27 cents per diluted share from the immediately preceding quarter.

Geographically over the three territories, Asia and Americas both sequentially while Europe, as we expected, was down sequentially due to the seasonal factors in Europe in the September quarter.

Asia grew by 7.3 percent, Americas grew by 3 percent and Asia was down modestly 0.9 percent.

The total revenue breakdown for the quarter from these results had Asia representing approximately 44 percent, Americas at 29 percent and Europe at 27 percent.

We have also grown our total customer base to over 44,000 customers, continuing to demonstrate the significant diversification in our overall business model.

Sequentially, microcontrollers were up approximately 6 percent while both and analog and CLE proms (ph) declined sequentially 5 percent and 3 percent, respectively.

Our performance in our analog and CLE squared (ph) business was not particularly different from that of many other areas in the industry.

Net sales for microcontroller products now represent approximately 80 percent of revenue; analog products representing 7 percent of revenue and memory products the balance at 13 percent.

Our gross margins for the September quarter were 57.3 percent, establishing a new record level for gross margins for the Company.

Gross margin increased by approximately 20 basis points sequentially and we expect gross margins to remain at these levels in the December quarter.

The patch rate for the September quarter was in line with our guidance of 24 percent and we are anticipating to continue at this rate for the balance of the fiscal year.

Operating expenses were 23.3 percent of sales in the September quarter compared to operating expenses of 23.7 percent in the previous quarter.

Research and development costs were 23.3 million, representing 10.6 percent of sales.

Sales and general and administrative expenses were $28 million, representing 12.7 percent of sales.

Microchip's total inventory position at September 30, was 89.9 million, a decrease of approximately 0.7 million from the prior quarter level.

Inventory turns are now at 4.2 with says of inventory of 87 days.

These levels compared to peak inventories of 134 days as of June of last year.

We are now really within the target range for the inventory on our balance sheet supporting our business.

Our distribution inventory is at very moderate levels in all geographies.

As of the end of September, we had about 2.5 months of inventory.

When you compare this to the high of 3.3 months of inventory in the last cycle, we feel that the overall total inventory supporting our customers is in excellent shape, reflecting the results of our efforts with the Disk Ease (ph) that have held inventory to much more reasonable levels in this cycle.

The combination of total inventory supporting our customers both on our balance sheet and in the distribution channel established that inventory levels as of the ended September are unchanged from those as of the end of the June quarter.

At September 30, Microchip's receivable days were 45 days, in line with receivable days at the end of the June quarter and two days better than receivable days of 47 from a year ago.

Overall receivable balance increased approximately 8.2 million, or 7.3 percent.

As of September 30th, our cash and short-term investment position was 605.9 million with 42.3 million of short-term debt on the balance sheet.

During the quarter, Microchip generated free cash flow from the business after capital costs, working capital, dividend payments and Treasury activities, which resulted in adding 67 million to Treasury.

During the quarter, we invested 42 million through our stock buyback program using the leverage on our short-term investments to borrow to the debt levels indicated above.

We also settled a patent litigation matter in the quarter, which was a onetime event for $21 million.

Capital spending was approximately 20.4 million for the September quarter.

Depreciation expense for the period was 30.8 million versus 26 million in the same quarter last fiscal year and 29.2 million in the June quarter.

Capital spending for the fiscal year is expected to be approximately $75 million and depreciation for the year will be approximately 123 million.

Microchip shipped 12,330 new application development systems to customers during the quarter.

The continued strength of our development tool sales is an excellent indicator of the robust new product introduction and design cycle we feel is underway.

Our total number of development systems shipped now stands at 332,000.

I will now pass this to Steve, who will discuss the performance of our business, both last quarter and current conditions, our guidance for the December quarter and discuss the strategic market update I indicated earlier.

Thank you quarter, Gordon, and good afternoon everyone.

Today, I will be showing a few slides during my presentation.

You will need to be watching the webcast to view the slides.

So if you're not already logged in, you may want to do so now.

I will be getting to those slides in about three to four minutes time.

First, I would like to reflect on the results of the September quarter, then comment on the product lines with a focus on the 8-bit microcontroller market and finally discuss the guidance for the December 2004 quarter.

So let's begin.

I am especially proud of our execution in the September quarter during a very difficult period for the semiconductor industry.

We met our guidance for operating income percentage and earnings-per-share.

Our net sales achieved another all-time record and came very close to our guidance with approximately 4 percent actual growth sequentially versus our initial guidance of 5 percent.

This was in an environment where a majority of the semiconductor companies missed their initial revenue guidance substantially.

In addition, the majority of the semiconductor companies were sequentially down in the September quarter.

We achieved 3.7 percent sequential growth and approximately 20 basis points improvement in gross margin percentage to a record 57.3 percent, driven by the performance of Fab 4 and Fab 2 facilities.

Earnings per share met our original guidance of 29 cents and operating profit exceeded over 34 percent for the first time in our history.

Now I shall talk about the product line.

The microcontroller business was strong and grew 5.8 percent sequentially after growing 9.3 percent sequentially in the June quarter and by 7.8 percent in the March quarter.

Therefore in the last three quarters, our microcontroller business has grown by a cumulative 25 percent, which is significantly more than the total growth forecasted for the entire year for the 8-bit microcontroller market by many of the analysts.

We are continuing to see a very robust design activity with our 8-bit flash microcontrollers and we're seeing a lot of new applications emerging which are utilizing our products.

We're very well positioned to continue to gain market share in this segment.

By the way, our automotive business hit another all-time record last quarter.

Now how do you reconcile it with the automotive inventories and other news from automotive manufacturers that you hear regularly?

We have repeated many times before that automotive production rates, inventories and production cuts rarely correlate with Microchip's revenue.

We supply to the parts manufacturers of automobile companies.

By the time you hear about production cuts or inventories, the orders are just (indiscernible) to part manufacturers and their orders adjustments to Microchip are already well behind in the review mirror and the investors and analysts reaction has usually been without merit.

The rate of penetration of microcontrollers in the automobiles are substantially higher than the small ripple of production ramps and cuts.

Investors and analysts would be well advised to ignore the news of automotive production ramps and cuts as a proxy for our business.

So how was it possible for our 8-bit microcontroller business to continue to grow in this environment?

Today, I have decided to take the investors and analysts through four slides that will show them our view on this market.

I hope that you can all see the slides which are being webcasted as a present them now, so let's view the first slide titled 8-bit (indiscernible).

This slide should be on the Web.

This slide shows the size of 8-bit microcontroller market from 1990 to 2003.

The red line shows the numbers from Semiconductor Industry Association -- SIA -- and the green line are the numbers which are from Gartner Data Quest.

There are a couple of points to note here.

First, after a significant increase in the size of the market until 1995 and then a brief surge during the tech boom of 2000, the market has grown sideways or dropped.

The second point to note is that there is increasing divergence between the size of the market as given by Data Quest versus SIA.

Interestingly, this increase in divergence is directly proportional to the increasing market share loss by the SIA member companies.

We did not know how SIA accounts for the market share by non-member companies, but it is quite clear that SIA finds it difficult to track the increasing market share of the non-member companies.

Data Quest breaks out the shares by each of the companies.

Their total can be a bit off, but not by nearly $1.4 billion that SIA is missing in these numbers.

We have expressed concerns related to SIA data for sometime and we have compelling evidence that -- particularly on 8-bit microcontrollers -- where there are increasing market share gains by non-member companies, SIA data is suspect.

Therefore for the rest of our analysis, we will only use the Data Quest data.

So let's look at the second slide.

This next slide shows Microchip's estimates for the size of field programmable 8-bit microcontroller market.

There isn't any independent public data available to determine the size of the field programmable 8-bit MCU market, therefore, we have done some bottoms-up analysis to peek into individual companies' market shares and make some assessments about their field programmable percentage.

We have gone through the individual companies' product portfolios, public statements, SEC filings and the like and we have constructed what we think is a best guess for the percentage of field programmable markets for the past decade and a forecast for the future.

We wish to remind investors that we have also looked at some historic data loads (ph).

We have seen how the ROM memory market converted to field programmable E-PROMS and later Flash memory, and we have also studied how the custom gate array market converted to field programmable gate arrays, or SPGAs, that many investors and analysts are aware of.

In each of these markets, the conversion of the market accelerated in the second decade as the field programmable technology became real and cost-effective and then demanded by the customers.

This made many of the traditional ROM memory players join the EEPROM, or flash market, for fear of becoming obsolete.

The same scenario is now being repeated in the 8-bit microcontroller market.

Many of our competitors like Fee Scale, ST Micro, Renaissance and many other Japanese players are all rushing to get field programmable products for fear of becoming obsolete, hence the market conversion is accelerating.

Therefore, 8-bit field programmable market, which was only 6 percent of total 8-bit MCU market in 1993, became 32 percent a decade later in 2003.

It is now expected to become approximately 57 percent by 2008 and we may have been too conservative in our estimates for conversion as we look ahead.

Now this next slide -- so what does it mean to Microchip's market opportunity?

On this slide, we took the Data Quest numbers from the first slide and then using the percentages of field programmable conversion from the second slide and we divided the numbers between ROM-based market and the field programmable market.

So the yellow line on the graph shows the total market, the red line shows the ROM-based market and the green line shows the field programmable market size.

We have also taken the liberty to add our own forecast for the market from 2004 to 2008.

Our forecast shows 8-bit total microcontroller market growing 21 percent this year in 2004 and then growing 10 percent in 2005, declining by 5 percent in 2006 and then growing by 15 percent in 2007 and 10 percent in 2008.

Now some investors, analysts, SIA at watchers and (indiscernible) may disagree with our market size assumption.

But at the end, the point we make makes the growth of the overall market a bit less relevant, so please follow along.

So forgetting the forecast part of this is graph, if you look at the total market line, the yellow graph, that is the investors and analysts have for this market.

It clearly is not a great view over the last eight years.

The investors' view is even worse because they tend to follow the SIA numbers.

Now let us look at the view of some of our ROM-based competition has.

Their view is shown by the red line, which is even worse than the total market view, and that is why every time investors or analysts want to check the data with our competition, they do not get a positive picture of the 8-bit market.

Many of these players have increasingly shifted towards 16-bit and other markets because their view of the opportunities in 8-bit market is dim.

So what is the view Microchip has?

Our view is shown by the size and growth of the field of programmable market, which is shown by the green line.

And clearly, that is a great view.

And that is why we demand so positive about our opportunities and that is why we have continued to grow in the 8-bit market through good times and bad.

And that is why we remain excited about the dramatic growth of this market as shown clearly by the green line in this graph.

On this final chart, I have taken the size of the field of programmable 8-bit microcontroller market from the last slide and put it on a large scale and then the lower blue line shows Microchip's revenue for our 8-bit microcontroller business.

Microchip's numbers are in fiscal year, which is one quarter offset to the calendar year numbers of the total market.

Fiscal year numbers are easily accessible, especially going back many years, the small error created by one quarter offset is negligible compared to the assumptions that we have made and a significant amount of analytical work that we've done.

So this graph is the bottom line of the case we have been sharing with investors consistently over a long time.

Our track record over this significant period has been excellent.

We have shown one of the best performing business models in the semiconductor industry over a 10-year, five-year, three-year and a one-year period.

There are several other dimensions to the market, like RISC versus SISC architectures, low-power portable applications, analog integration, various peripherals and bus configurations, but the breakdown of numbers for those is very to come by and we will attempt those at a future date.

Meanwhile, while some investors and analysts continue to be concerned by looking at the size of the total 8-bit microcontroller market, especially from SIA, our view of the market is that we continue to have unprecedented opportunities for growth in this market and we are very well-positioned to be the Company to capitalize in the significant conversion of the market that has yet to come over the next four to five years.

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

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

First -- (indiscernible) change from that slide.

First, the entire semiconductor industry is experiencing weak market conditions.

We entered the December quarter with lower backlog position than the September quarter.

December is also Microchip's easily weak quarter because of the significant number of holidays in December.

So taking all of these factors into account and after checking and re-checking expectations from our direct as well as distributor channels, we expect our net sales and net earnings in the December quarter to be flat to the September quarter.

Gross margins are expected to be stable at approximately 57.3 percent and operating profit is expected to remain above 34 percent.

I'd like to summarize the presentation today with five points.

Number one, Microchip continues to see substantial opportunity in the 8-bit microcontroller market and gain market share.

Number two, we recognize revenue very conservatively, we recognize distribution revenue only at sell-through worldwide and we managed our distribution inventory very carefully and did not allow it to go up during the third period of the prior nine months or so.

So while the rest of the semiconductor industry saw significant downside last quarter driven by the distribution inventory correction, Microchip's distribution of inventory was sitting quite low and actually went up a bit during last quarter.

Distribution inventory does not present any meaningful risk to Microchip's sales of factory utilization.

Number three, Microchip's on inventory is at 87 days, below the 91 days of June quarter and well below its record high of 134 days.

So no inventory collective actions are required, and therefore, we expect gross margins to be maintained.

In contrast, many of the semiconductor companies have seen their inventories grow significantly and a few are exceeding their prior record highs and as they make adjustments to that inventory, many are expecting significant reductions in their gross margins.

Number four, we believe that we can maintain our financial model over the next couple of quarters as the markets are expected to be choppy.

And finally number five, we continue to generate a very substantial amount of free cash flow after a relatively low CapEx going forward.

We will continue to share this cash flow shareholders with aggressive increases in dividends, as well as share buybacks.

With that, Erin, would you please poll for questions?

(Operator Instructions).

Christopher Danely, JP Morgan Chase.

Steve last quarter, you were good enough to give us the book-to-bill and the percentage booked at the time of the conference call for last quarter.

Can you give us that for this quarter, please?

(technical difficulty) I think in the press release, we indicated that the backlog opening the quarter this quarter was 55 percent.

Last quarter, it was 68 percent.

How much more terms or how have bookings gone and how is backlog as of right now?

We obviously continue to see that move pretty much in the same range as we saw, in terms of movement.

I think we were about 80 percent as of the conference call and we are about 65 percent at this point.

So the rate of bookings has been very similar, but obviously, we're starting from a lower base at this point.

And just as a follow-up, why not get a little more conservative on guidance, given -- sounds like a little bit bigger bump to jump over?

That's kind of hard to answer when you ask it publicly.

We already gave the guidance.

Sure.

As we look at all of the information that we have seen from our associates here and we've looked at it geographically and by channel, and our process does not vary, it just really narrows the information we have available.

And we spend quite a bit of time examining the information.

And certainly, we recognize that the industry conditions are quite challenging and that is in everyone's mind as we look at this situation.

And given all of the factors, we feel that our flat guidance is the correct guidance based on the same information and knowledge we have right now.

Okay, thanks, guys.

I would add to that, we tend to call the things as we see it, and probably 50-plus quarters in the last 12 years it has worked and probably sum total of three or four quarters in the last 14 years when it did not work.

We're not very good at the guidance game.

We tend to call the numbers as we see it.

So, Steve, have you seen I guess business conditions or bookings get a little bit better this month versus last month, or is it about the same?

The bookings were weak last quarter, and I don't think environment has changed.

So, do you expect the book-to-bill to be below 1 again?

I do not really know.

It's early part of the quarter.

The question is -- will the backlog further shrink, which means next quarter, you will require even higher number of turns.

It is hard to say that at this point in time, because we believe the inventory is relatively low outside and partially, the bookings are low because the lead times are shorter and people can get the product.

So I don't really think it's going to be dramatically different next quarter.

Thanks.

Michael Masdea, Credit Suisse First Boston.

Hi, Steve, Hi, Gordon.

This is C.J.

DaSilva (ph) for Michael.

On the gross margins, I believe you guys put out a long-term guidance, 59 percent.

I'm wondering if that is still a target, given what is happening now and where the utilization is, tracking on Fab 4 as you ramp up?

That is still the long-term target.

Obviously, it depends on volume and how we can ramp 4.

And with some moderation and (indiscernible) expectations, it probably pushes that out somewhat.

But there's no doubt in our mind that the inherent margin capability of Gresham will be there for us when we need it.

Obviously, the ramp of Fab 4 is continuing, regardless of the end demand (inaudible)?

No, of course not.

We have the moderate the utilization and the demand on our fabs based on what we see in the marketplace.

We are guiding to flat gross margins at this point, which determines that really from our perspective, that utilization rates will stay pretty much in the same range.

Would you still be moving production to Fab 4 from the other fabs, even in sort of a flat to down environment?

We have really not moved any production from one fab to the other.

Fab 4 has provided the growth we have experienced in the last year.

This quarter is up 31 percent over last quarter, same quarter a year ago.

So Fab 4 here has provided the growth.

So very temporarily, next quarter or the current quarter we're guiding flat.

So there is no ramp, and that is why the gross margin is flat.

But we're not forecasting flat revenues for the next several quarters.

So if you look at the long-term guidance, which was projected out there about six quarters, maybe pushes out a quarter.

But longer-term, there's a ramp of Fab 4 and we get back on the gross margin curve.

Thank you for the clarification.

Adam Parker, Sanford & Bernstein.

What percentage of your backlog would you say, Gordon, gets canceled on a normalized basis?

Very limited.

There's no significant cancellations in our business.

There is always some pushing and movement within a particular period as customers understand their eventual needs, but that is not a significant element in terms of cancellations.

If you remember, our products are proprietary to the largest extent, Adam, and so it may just moderate somewhat based on the customers' end market demand at DC (ph).

We put it in low-single digits, the very low-single digits.

And there was nothing different about that in September?

No.

Again, I guess I'm struggling with the guidance a little bit too.

You normally get more turns in the December quarter?

It always depends on the leadtime.

If the leadtime is 12 weeks, then you can't get any turns in December.

But, if the leadtime is three-week, which it is right now, then you will get turns in December.

And even in that three weeks leadtime, a significant number of products are available in less than that.

If I can look at the terms that we've had in prior periods, they're not completely synonymous with our revenue growth.

And the environment that we are in, it is very natural for customers, as they listen to all of the information and rhetoric and noise in the industry, to be a little bit more conservative.

And so that has resulted in somewhat of a lower backlog entering the quarter.

But as we have always said, our positioning with our microcontroller products enables us to have a much better view, in terms of the longer-term opportunity.

We may not know exactly if a customer's going to ship 350,000 units or 225,000 units with our microcontroller, but we know that it's designed in and we know it's going to move with their products.

The fact that we have tremendous diversification over many customers and segments adds to the kind of stability in our performance we have over time.

One last question.

Looking at the balance sheet, the deferred income on shipments to distributors I guess over the last six months or so, it's up let's just call it 16 or million, while your inventory on your own balance sheet is done a few million.

Should I think about this conceptually as being up kind of 10, 11 million, or what is going on with the deferred income on the shipments to distributors?

Remember, the revenue is up 31 percent year-over-year.

So to remain flat, the deferred income will have to have been up by approximately that level because distribution business has grown to that extent.

And so we do feel that customers need the support of our distribution partners by having the appropriate mix of inventory in place.

As we look at the total inventory on our balance sheet and at our distribution customers, the last several quarters, it is largely unchanged.

One last thing, sorry.

How much revenue did you get from the 16-bit microcontroller during the quarter?

The 16-bit revenue is not meaningful.

As we have said before, the 16-bit products take five to six quarters to production.

We basically started shipping 16-bit in the first quarter of this year, calendar quarter.

So we are still probably a good nine months away from any meaningful 16-bit microcontroller revenue.

Thank you, guys.

(Operator Instructions).

Chris Caso, Soundview.

Just comments, commentary from your customers.

And I know you have a lot of them, so it's difficult to generalize.

But in terms of where their consumption is and perhaps what they're doing with their own internal inventory levels, if you could give us some color on that.

Most of the guys in this space have kind of characterized their customers as trying to trim inventory levels a little bit going into the fourth quarter.

I just wondered what your customers are telling you?

Our customer profile is a lot different than some of the others in the semiconductor industry who gave hundreds of millions of dollars of customers in the wireless space, cellphone and others.

An average customer at Microchip buys $20,000, and we have 44,000 customers.

So these customers don't really have a lot of ability to stock inventory, then de-pack (ph) it and so on and so forth.

So the issue comes down to really a handful of some large customers in the OEM category we have.

A bunch of those larger guys are automotive guys and automotive guys are all on a consignment.

They basically would recognize revenue as they use the product.

So there's really zero inventory for that matter.

And then you're left with some other larger customers in the consumer and other space and there could be -- in pockets of them, there is slightly higher inventory driven by everybody's concern regarding what's happening in the economy and possibly slowing GDP and all of that.

And to the best of our ability, we model that in our guidance.

But we don't really have a monumental inventory problem in our channel like we have been hearing many of the companies report like distribution.

Most companies have reported significant distribution inventory problems.

We really have none.

Our distribution inventory was basically flat.

It went up slightly, just very, very slightly because it was very low level, and partially because we ourselves managed it very aggressively and did not allow it to go up in the prior one year of the surge period.

If I can just follow up on the turns issue briefly.

I apologize to keep hitting on this.

Implied in your revenue guidance I think would be that the turns business would increase sequentially into the December quarter.

Have you actually seen that in absolute dollars increase in the first couple months of October here?

No, we haven't seen anything different in a couple of weeks.

But let me say this.

I think if you look at the history of Microchip, and I have been saying this for years, probably through four cycles, in '96, '98, 2001, 2002, investors and analysts always loved to work the (indiscernible), you know, where was the turns, where was the backlog on the first of the quarter and how much it is now and so on and so forth.

In the case of Microchip, it has really never worked that way.

In the year 2002, Microchip was up 16 percent while the industry was flat, the book-to-bill was one in the entire year and there were 65 percent turns in the entire year.

Our products are largely proprietary.

It has never made any difference whether the backlog on our books happens on the 25th of September, or it comes on 10th of November, as long as the parts needed by the customers are during the quarter and the (indiscernible) in the quarter.

So you really, again, once again, focusing really what the backlog was, what the turns would be, which means it makes a lot of difference to you whether a given an order came in prior to the first of October or came afterwards.

It does not make any difference to us, it never has.

So what you're trying to say is the overall level of consumption is flat, it's just that it becomes a turns order as opposed to a booked order two months in advance?

Exactly.

If you were in the DRAM business or something where you have to compete with four or five other guys and price is the only thing and there is no design win, everybody's product is the same, then it matters a lot whether you have the backlog because maybe someone else got the backlog and you're going to be left out.

We're close to our customers, we know their consumption rate.

If they're using 100,000 parts a week, they're going to use 100,000 parts a week.

Whether they gave us six weeks backlog or eight weeks backlog is not going to make any difference.

It never has and I've been very consistent on it.

If you go back to the fourth quarter of last fiscal year, our turns, our opening backlog was 50 percent.

Our turns were 50 percent.

We have it up 7 percent (multiple speakers).

Up 7 percent.

So it is not always a complete forerunner or complete correlation to the performance.

Thanks, guys.

Randy Brandon (ph), Eaton Vance.

I just wanted to clarify the 2.5 months of distributor inventory?

That is relative to distributor sales?

Right, that's correct.

So it's based on the relative percentage of our business that moves through that channel.

Eric Gomberg, Thomas Weisel Partners.

I was hoping you could provide some color on what you think your mix is going to look like in Q4, what did bookings look like between analog memory and microcontrollers.

On a flat guidance, I don't expect it to change.

It's quite possible that microcontrollers are up a bit.

And you know memory and analog products possibly could be slightly weaker, the sum come out to be about zero.

But, it's really, there's so small numbers, zero plus or minus 2 percent on an individual product line.

I don't think it should change very dramatically.

Is there any regional difference that you're seeing?

And also, any pricing pressure you may be seeing in memory?

Regionally, it's the story of what we've seen over many years, is that business is moving to Asia.

Design win success in Europe and Americas is the moving to Asia.

You can see that demonstrated by the overall statistics in our business, in terms of the percent.

A year ago, we had 41 percent of our business in Asia and it's 44 percent this quarter.

So those phenomena will continue to represent themselves.

It's not indicative of consumption overall obviously and trying to pull that out is quite difficult.

If you look at pricing, and again, our business is a heck of a lot different than most other businesses.

Pricing for Microchip for the September quarter we've just completed was flat in all product lines.

As you look forward, certainly memory is being more commodity-like.

We have a propensity to come under a little bit of pressure more so than our proprietary products.

But they only represent 13 percent of our business and we have moderated that because of the way we have modeled the business over this lifecycle.

Thanks.

Ambrish Srivastava, Harris Nesbitt.

This is (indiscernible) for Ambrish Srivastava.

I have just a question on your Fab 2 and Fab 4 facilities.

And what I understand is they are in different (indiscernible) geometries and hence, will be doing different products actually.

So could you break out the leadtimes between the two fabs and also the utilization that goes to the two fabs?

That's not really true.

We have the same process capabilities in Fab 2 as we have in Fab 4.

So they support or can support -- the same products that run in Fab 4 can run in Fab 2 from an overall perspective.

What we've said in utilization is that Fab 2 is close to 100 percent and Fab 4 is still running at very moderate levels of utilization.

Thank you.

Jeff Rosenberg, William Blair & Company.

You mentioned, Steve, you were talking about consumption and your ability to monitor more what your consumption is in the end markets relative to bookings and turns.

Have you seen any change in the growth in consumption that you could comment on broadly, or any sort of deceleration there?

And how do you feel about the ability for bookings to pick up based upon what you are expecting for growth in consumption?

I think I answered that numerically.

But qualitatively, the economy is getting weaker.

Most companies are guiding down.

The picture of the demand is weaker now than it was six months ago.

And I think that we modeled in our guidance.

We have a lot of new design going to production, lots of new products which are ramping, lots of new applications.

Existing run rate is on the weaker aside, so when we model it together, it sort of comes out flat.

But if you're looking for is anything different in the demand picture, yes, demand is weaker.

Do you feel like bookings have fallen below consumption at this point?

The bookings probably last quarter were slightly below consumption, yes, I would be sure of that, yes.

So who knows how long this takes before it will get into sync.

But when you think about the growth rate that we should be thinking about generally out a few quarters, how much less than what we've seen recently would you think makes sense, in terms of what consumption grows at over the next year or so or whatever timeframe makes sense to speculate?

I can't really give you any guidance beyond the current quarter.

Okay.

I wanted to ask you one question.

There was a lot of interesting information you gave us on the market there, and I want to look at it some more.

But one thing that jumped out at me was the idea that you do have reasonably good share in the programmable market and it seems like you are generally growing.

There's strong growth in the programmable market, you're keeping pace with that and showing strong growth.

Can you talk a little bit about the competitive environment there?

Are you seeing more people as doing a better job in programmable, or what you think is your sustainable advantage there, relative to new people really putting more emphasis on their programmable product lines?

Well, competitively, not a whole lot has changed.

The same number of people, the emphasis of programmable by many of the competitors is really not new.

Free scale and ST and Renaissance and @Mail (ph) and others, they've had their products out for a number of years.

We have our products, they have their products.

And despite all of that, I think even some of the people have reported that Microchip was behind in Flash.

It was a few quarters ago, and that clearly has not been true.

That were absolutely wrong.

We are getting to the point where our flash business is larger than some of the competitors' total business.

So there's really almost no question that we're the leader number one in Flash micro.

This market has always been very competitive.

We have always had competition from Motorola, Free Scale and @Mail and Philips and others and it really continues.

There are really very, very few significant changes in the competitive landscape that happen over a quarter-to-quarter basis.

So from that standpoint, it's not like the memory market where Samsung comes in lower price and something happens.

This market hardly changes and you can see that over years.

So I can't describe to you that the competitive landscape is any different today than it was six months ago or a year ago.

Okay, thank you.

Paul Lemming, (indiscernible) Securities.

Good afternoon.

I just wanted to clarify something in case I missed it.

Did you touch on the rationale for the short-term borrowings in the quarter?

No, I did not specifically.

But as we look at our overall portfolio, it presents us an opportunity to borrow against our portfolio at extremely low interest rates.

And we look at the arbitrage of continuing to invest at the longer side of our maturity curve while taking advantage of this kind of an opportunity that we have with our partners in this area.

And we just feel there is zero debt on the balance sheet or we felt that way and this was certainly an interesting and important change, in terms of how we look at our Treasury function and being able to leverage that element of the business.

The question that I wanted to ask in broader detail is -- could you and/or Steve talk a little bit about how you think about and view share repurchases versus dividends as a way of returning to cash to shareholders?

You've clearly been quite aggressive on the dividend front since you declared one.

But, as you look at over the next three or four or five years and you're clearly going to throw off an enormous amount of cash, longer-term, how do you trade the two off in your mind?

Let me try to answer that.

The large amount of cash generation we have, it has not been happening for five years or so; it has been happening really for the last maybe couple of years.

And we brought Fab 3 or Fab 4 essentially with $180 million in cash, and then it took us about two or three quarters to build that cash back up.

And that meant we only had about 180, 200 million cash.

And now we have $600 million in cash, so we've really built substantial amount of cash.

During that time, we started a dividend.

We have increased it six times already I believe.

We (indiscernible) to aggressively increase it.

We're buying shares every quarter.

Last quarter, we bought $40, $45 million worth of shares and we will continue to do a combination of those vote (ph).

If your question is do we have a map regarding the (indiscernible) $300 million in cash next year, how would it split into among the stock bought, dividend increase and increase in our cash balance?

No, we do not have that map.

Our stock purchase is totally opportunistic.

We have said it before, that every eight to 10 quarters, something happens in the market, something happens on the world scene or something happens where our stock price loses the correlation to really Microchip's performance.

The last time that happened was during SARS where it was Microchip had a one quarter hit and then one quarter was flat, our stock dropped down to $16, $17 and most analysts were calling it sell, even at those low prices and stock has now doubled.

So, our cash is really there to really opportunistically buy stock at those opportunities when the market is not listening.

If such opportunity were to arise, Microchip could invest $300, $400 million in a short period of time in buying back stock and retire almost 15, 20 million shares if that opportunity were to come.

Now that much share buyback is not authorized by the Board in writing, but in discussions they have with the program and will be very quickly be able to get that kind of authorization and execute on it.

The stock, the dividend would be continuous.

We will just continue to really aggressively increase the dividend.

And despite doing both of that, we will probably continue to see cash keep increasing on the balance sheet, again, waiting for a rainy day to spend the $400 million.

Thanks very much.

Simona Jankowski (ph), Goldman Sachs.

I am calling on behalf of Andrew Root.

Just to follow up on that question with a bit of a longer-term view.

Obviously, your utilization is quite low right now in Fab 4.

Just looking out a few years, when do you think would be the next time you might need to spend your capacity again?

I realize it will probably be three years or more?

Beyond Fabs 2 and 4?

Yes.

Between them, they can do between 1.3 and $1.5 billion annually in revenue.

So obviously you need to have some time ahead of that to have a facility in place and to go through the qualification and things of that nature.

So I think with that, you can probably model yourself where you might think that would be.

Okay.

Could you update us on the relative wafer cost between Fab 4 and Fab 2 in this quarter?

We could not give you any information on the wafer costs.

It's proprietary.

But it's still lower for Fab 4?

It is what?

It is lower for Fab 4?

Yes, it is lower for Fab 4, but that is all we can tell you.

Thank you very much.

Jan Mehan, Morgan Keegan.

Good afternoon, gentlemen.

I had a quick question, and I apologize if you already talked about it.

I just wanted to ask -- were there any specific geographies where in-demand was weaker than others?

Obviously, Europe was sequentially down so end demand there seasonally was expected to be down, and that's what we saw.

In the August timeframe, particularly in southern Europe, you can take one week to 10 days out of many of the customers and distribution partners' component of the month which affects the business.

Let me expand on that.

Europe was the only geography which was down.

Asia and U.S. were both up, so one would say Europe was the weakest geography.

However, Europe was the strongest relative to the expectations because Europe is down much more significantly during the summer quarter than it really was.

So actually, America and Asia slightly underperformed to our expectations, while Europe overperformed to the expectations.

So that is really strange.

It was weak, but in a way it was strong relative to the seasonal factors.

Okay, thanks, that was helpful.

What about the December quarter?

Did you see the dynamic changing a little bit, maybe Asia weaker or?

No.

We don't really expect any geography to be -- the (indiscernible) phenomenon for Europe goes away, so December, we expect all geographies to be very similar.

Okay, thanks.

Terance Whalen, Smith Barney.

Thank you for taking my question.

My first question relate to the presentation you spoke on earlier, Steve.

Can you tell us what percentage of your microcontrollers sales are Flash-based?

I know a couple of quarters ago, it was about 40 percent.

Then I have a follow-up, thanks.

We did not calculate that number in preparation for this meeting, but Flash sales have really grown more than double-digit sequentially per quarter.

So I would think that would be much higher.

But I'm sorry, we do now have the number.

Okay, great.

If you have to take a guess, I would say it would be closer to the half.

And if you do that math, then these sales, Flash sales, would be higher than some companies' total sales in microcontrollers.

And such companies claim themselves be the leaders in Flash, which is not correct.

Understood, that is helpful.

My second question relates to Serial E. I know that last quarter on the conference call, you expected that business to grow steadily in the quarters ahead and it came out a little bit under that estimate.

Looking ahead, you said it might decline sequentially slightly.

Now in the history and in your experience of this business, have you been able to predict that business as accurately as microcontrollers?

Or I guess another way of saying it is -- have you been able to predict future quarter pricing changes in that business, or has it sort of -- occurs during the quarter?

Thanks.

Your observation is correct.

We can predict the microcontroller business much more accurately than we can predict the CLE square, because microcontroller business is proprietary and there's a design win tie-in while the CLE square business can really be switched between the suppliers and -- it is a little more of a commodity.

Having said that, we are talking about 30 is small numbers here, a decline of 3 percent to a decline of a couple of percent to flat.

And are fairly very lowest single digit kind of changes.

And that is really not all that bad in estimate, compared to -- I have been watching reports where the companies are off 10, 12 percent in their numbers.

I think it's also key to remember than at the height of the last cycle, E-Squared (ph) was 20 percent of our business.

It's 13 percent of our business now.

So I think we've done a pretty good job in bringing down our exposure to that area that is a lot more unpredictable than our proprietary products.

Thank you very much.

Christopher Danely.

I had a couple of follow-ups.

So are you saying that basically, utilization rates are going to remain flat in the December quarter?

That's correct.

Steve or Gordon, can you just talk about the various levers on gross margins going forward?

How much more room you think there is, because of, let's say, increased utilization rates versus pricing versus whatever else is in there?

The funny thing in our business over a longer period of time, it is relatively flat.

And I think we have talked about that several times.

There is a very, very slight price curve down over years and it's easily overcome by the shrinks (ph) of technology, as well as increasing integration of peripherals and analog or whatever.

So over a 14-year timeframe, microcontroller pricing is probably down less than 30 percent, which would be a 2 or 3 percent change per year.

I was referring more to the E-Squared business.

E-Square pricing goes up and E-Square pricing goes down and you cannot predict what will happen a year from now or two years from now.

What I can say is that with the help of Fab 4, as well as product shrinks on the CLE Square, our CLE Square margins and profitability is very good.

And any pricing decrease that happened in the cycle here is really having no negative impact on our gross margin.

The gross margins are solid.

We expect them to be maintained and over the short-term here until the utilization is flat.

And after that, we start seeing growth returning, then the Fab 4 will ramp further and gross margin will get back accretive.

One more quick follow-up.

Clearly, you guys are doing well on the microcontroller side.

Analog was down a little bit this quarter and you guys expected it to be up.

Is there anything going on there, other than just the normal inventory correction?

Was there any specific customer issue or any market issue, or was it just the general inventory correction going through the semi sector?

Analog was up 15.5 percent sequentially in the June quarter.

So the June quarter was whopping (ph) up and there was obviously some inventory in that and any other companies have announced significantly negative numbers.

I just saw Analog Devices lower their target by 10 to 12 percent this quarter, just this morning.

So our analog business was down 5 percent.

I believe it's still doing among the best of the analog companies.

Among the second-tier analog companies, it's is really performing very, very well.

So if you look accumulative two quarters, three quarters, four quarters or 10 quarters, it's doing excellent.

Yes, it was down this quarter and most others were down and we're seeing the similar weaker conditions.

But there were no specific issues on the products or the business.

Okay, thanks guys.

(indiscernible), Harris Nesbitt.

Just a quick follow-up on your 16-bit products actually.

So you did mention on the last conference call that you were shipping 16-bit.

You will be shipping 16-bit products this quarter.

So if it's going to be nine months away for any meaningful revenue, is it the nature of the business that it takes nine months for the time to revenue in 16-bit?

And also, I have another quick follow-up on that.

It takes 18 months to revenue basically.

We started shipping 16-bit to I believe in the March quarter, but the March quarter was just a very, very small number and instead of rising in the June quarter based on certain early adopters and it goes up further in the September quarter based on some early adopters.

It will be up again in the December quarter.

But these are very small number of early adopters customers who have their design varied.

But we have a large number of design wins.

But, again, thinking, think of this way, that an average customer at Microchip only makes $20 to $50,000.

The larger customers in the automotive and others are two or three years away.

Those are calendar (indiscernible) designs.

We have won some designs, but they won't go to production until then.

So large number of customers in the consumer, industrial and all of those veins, which is really the heart of Microchip's business, started designing in in the last six months.

So technically, they're still a year away from being in volume production.

Although we have been shipping now for nine months.

We shipped last quarter, we will ship again this quarter.

So you introduced about several products actually last quarter.

So if you could just give us some color on time to revenue, in terms of the different end markets.

I understand that auto would be a longer time to revenue.

But in terms of auto and the consumer and the other segments, that would be great.

The mix shift looked very much like Microchip's overall mix, which is 34 percent consumer, it's about 18 percent automotive and the rest of the three segments of computing, industrial and communication is about the same with communication being the smallest, which is about 14 percent.

So these numbers really have not changed over the years and we don't really expect 16-bit market to really be a whole lot different.

We have sold a very large number of tools.

Actually, we showed you a slide in the conference I believe a few months ago and I had a number, I cannot find it right now.

We shipped a record number of tools last quarter.

We're up to about 6, 7000 tools.

And I think that's what is more important right now, looking at tool sales, cumulative tool sales and the designs we're winning and the number of new product versions we're putting out and the feedback we're getting from the customers.

That is much, much more important than th8e revenue, because revenue is so low and looking at the revenue, that's not meaningful.

There are other indicators which are more important and we're internally watching them and they all look very good.

Great, thank you for the explanation.

Ladies and gentlemen, we have reached our time limit for our Q&A session today.

I would like to turn the conference back over to you, gentlemen, for any closing or additional remarks.

I appreciate everyone's attendance today.

I know it's a very busy day on the calendar, so thank you very much for making the time available to listen to the call.

And Steve and I will be available for any follow-up questions as you consider them.

Thank you.

Again, that does conclude today's conference.

We thank you for your participation.

You may now disconnect.