微晶片科技 (MCHP) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology first quarter and fiscal year 2007 financial results conference call. [OPERATOR INSTRUCTIONS]

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

Please go ahead.

Thank you, and welcome everybody to our first quarter of 2007 conference call.

During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the Company.

We wish to caution you that such statements are predictions and that actual events or results may differ materially.

We refer you to our press release of today, as well as our 10-K for the fiscal year ended March 31, 2006, and our 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 are Steve Sanghi, Microchip's President and CEO, and Ganesh Moorthy, Vice President, Advanced Microcontroller and Memory Division .

I will comment on our first quarter performance, reviewing geographic data and discussing balance sheet and cash information.

And Steve will then give his comments on the results, outline our guidance for the September quarter, and update other pertinent matters regarding our business.

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

Let's begin with net sales.

Our net sales for the June quarter were at record levels of $262.6 million, up approximately 6.2% from net sales of $247.2 million in the immediately proceeding quarter, and up approximately 20.2% from net sales of $218.5 million in the prior year's first quarter.

In our earnings per share, this is the first period that Microchip has adopted FAS 123(R).

We've included additional information in our press release, and will continue to furnish additional data to assist investors during this transition period.

Non-GAAP income excludes the effect of the adoption of this accounting standard, providing comparability to prior GAAP results.

Our non-GAAP net income for the June quarter was at record levels of $81.4 million, or $0.37 per diluted share, an increase of 7.7% from GAAP net income of $75.6 million or $0.35 per diluted share from the immediately proceeding quarter.

And an increase of 33.4% from GAAP net income of $61 million, or $0.29 per share from the prior year's first quarter.

GAAP net income for the June quarter was $77 million, or $0.35 per diluted share, inclusive of all share-based compensation expenses.

In fact, net income in this period exceeded the March reported levels of $75.6 million, establishing record levels inclusive of the share-based compensation cost.

The impact on earnings related to the adoption of share-based compensation in the June quarter was 5.6%.

Looking ahead, after the full effects of this adoption is reflected on our results, we expect that the impact will be approximately 7% to 8% on net income.

Clearly, the impact from share-based compensation for Microchip is in the lowest quartile for technology companies, based on the results reported from our peers.

Geographically, sales grew in all territories.

Sales in Asia grew by approximately 11%, Europe grew by about 3.8%, and the Americas grew by approximately 1.8%.

Asia continues to be our largest geography, representing approximately 44% of total sales, while Americas and Europe were both at approximately 28%.

This measurement is based on where the product is delivered for manufacturing purposes for our customers, but doesn't represent [where the] design activity has taken place.

Looking at some of the operating parameters of our business, our gross margins continue to improve, reaching 60.36% in the June quarter.

Our longer term gross margin target that we have indicated to the Street continues to be 62%, this being prior to the effects of share-based compensation.

In looking at the operating expenses for comparative purposes, I'm using operating expenses prior to the effects of share-based compensation.

Operating expenses were 24% of sales in the June quarter compared to operating expenses of 23.9% in the previous quarter.

Research and development costs were $25.7 million, representing 9.8% of sales.

Sales and general administrative expenses were $37.3 million, representing 14.2% of sales.

Total operating expenses on a GAAP basis, after the effects of share-based compensation, were 28.2%.

Our tax rate for the June quarter was in-line with our guidance of 24%, and we also declared a dividend today of $0.235 per share and this was an increase of approximately 9.3% sequentially and an increase of 88% over the same quarter in fiscal 2006.

The dividend payment to be made in the September quarter will be approximately $50.5 million.

Let's go turn our attention to the balance sheet, initially looking at our inventory.

In this balance sheet category, we have a change of inventory levels related to the adoption of share-based compensation, as we're measuring against last quarter on a comparable basis when inventories were $115 million and 106 days.

Our June-ending inventories were essentially flat at $114.9 million, representing 101 days of inventory, a decline of five days.

Including the adoption of share-based compensation, inventories were $116.6 million or 102 days of inventory.

Our distribution inventory continues to be at very moderate levels in all geographies.

As of the end of June, our distributors held about two months of inventory, and this has been essentially flat over the last six months.

Given the concerns from investors we have had related to growing inventory levels on Company's balance sheet and in channel inventories, our overall reductions in inventory levels reflects not only the strength of our business performance, but the manner in which we are managing our inventory levels.

During September, we anticipate that inventories will continue to degline -- to decline on our balance sheet, reaching approximately 95 days, a further reduction of six days from levels exiting the June period.

We expect distributor inventories to remain essentially flat in the September quarter.

Taking a look at our receivables at June 30, they were $137.2 million.

This was lower than the levels at the end of March by about $2.1 million, with improvement -- shipment linearity in the period and strong collection performance, which offset the net sales growth in period of 6.2%.

This [theory] of our working capital contributed to the record cash flows that we experienced in the period.

And our cash position as of June 30, Microchip's cash and total investment position was approximately $1.2 billion, with $137.5 million of short-term debt on the balance sheet.

This is related to the repatriation of $500 million under the American Jobs Creation Act that we discussed on our March earnings call.

During the quarter, Microchip generated net cash flow from the business of $136.5 million, establishing record cash generation levels for our business.

Payments related to our cash dividend of $0.215 was approximately $46.1 million, and we also reduced our short-term borrowing by $131.5 million from the $269 million reported at the end of March.

This reduction was predicated on both the new cash generation and our offshore locations, as well as the maturity of investment positions in those locations during the quarter.

We anticipate being down to short-term borrowings over the next three quarters.

In capital spending and depreciation, our capital spending in the June period was approximately $16 million.

Depreciation expense for the June quarter was $28 million versus $27.8 million for the same quarter last fiscal year, and $26.9 million in the March quarter.

We are maintaining our capital expenditures forecast of $80 million and the depreciation forecast of approximately $115 million for our fiscal 2007.

With that, I'll ask Steve to discuss the performance of our business, our guidance for September quarter, and update other business matters.

Steve?

Thank you, Gordon, and good afternoon, everyone.

Today I would like to reflect on the results of the June quarter, comment on the product lines, update you on our distribution strategy, and, finally, discuss the guidance for the September 2006 quarter.

All of the figures in my comments will be prior to share-based compensation expense, in order to do a fair comparison to prior quarters.

The figures with share-based compensation expense are all available in the press release.

I'm extremely proud of our continuing excellent execution in delivering yet another record quarter in every respect.

Microchip has passed an extremely important milestone.

With net sales of a record $262.6 million, Microchip for the first time is above a $1 billion run rate.

This also concludes a year-long internal program at Microchip called Touchdown 2006.

The primary goal of Touchdown 2006 was to drive Microchip past the $1 billion mark.

Net sales also exceeded the high end of our prior guidance.

Our gross margin of 60.36% was also a record and was up 26 basis points sequentially, but operating profit was another record of 36.4%.

Earnings per share was $0.37 and set another all-time record and we also generated a free cash flow of $136.5 million in the June quarter.

So now I shall talk about the product lines.

First, microcontrollers.

Microcontroller business grew a very robust 8.2% sequentially and was up 21% over a year-ago quarter.

Our Flash microcontroller business was even stronger, and grew by 12.2% sequentially and up over 46% over a year-ago quarter.

Flash microcontrollers now represent over 60% of our microcontroller business.

Another interesting fact is that OTP microcontrollers, which is the majority of our non-Flash microcontroller business, was also up 2.6% sequentially, and it was down only 4.5% over a year-ago quarter.

We stopped the development of OTP-based microcontrollers more than four years ago and moved all of our development to Flash-based microcontrollers.

The resiliency of OTP-based microcontrollers revenue reveals the long product life cycle of our products that we often talk about.

The bulk of our growth in Flash microcontrollers is incremental business gaining market share over competitors and not from converting our own business to Flash.

We shipped another record 20,921 development tools last quarter.

We are continuing to experience strong design activity with our 8-bit as well as 16-bit Flash microcontrollers, and we're seeing a significant number of new applications emerging, which are utilizing our products.

We are very well-positioned to continue to gain market share.

Now 16-bit microcontrollers.

Our 16-bit microcontroller business was up 10% sequentially in June quarter and up 85% over a year-ago quarter.

The growth of our 16-bit microcontroller business continues to be similar to that of high-end 8-bit microcontroller architecture PIC18 at the similar stage of market ramp.

The number of customers grew to 349 in the June quarter from 324 in the March quarter.

We shipped 2,951 new development tools last quarter versus 1,284 shipped in the March quarter, an increase of 129% sequentially in development tool sales.

This represents significant momentum in the acceptance of our 16-bit products in architecture.

There are now 15,622 cumulative development tools shipped in supporting of our 16-bit products.

In terms of total number of products, we now have 65 16-bit microcontrollers in production.

Ten more are sampling and these ten will be in production by the end of this quarter.

I would like to point out one more fact on our 16-bit microcontrollers.

We have significantly larger backlog for the quarter than the 10% sequential growth that we achieved.

However, we suffered from significant product mix issues.

We largely build the product on a forecast of product mix.

Many of the 16-bit products are very new and have less history than the established 8-bit products.

Therefore, we left an additional 15% sequential growth on 16-bit microcontrollers in the backlog.

The starting backlog for September quarter on 16-bit microcontrollers is quite strong.

The book-to-bill ratio for our 16-bit microcontrollers was a whopping 1.5 last quarter.

Therefore, we see a very strong growth ahead, Based on the momentum with the customers we see, we expect that our 16-bit microcontrollers to be up another 25% to 35% sequentially in the September quarter.

[inaudible] memory products. [inaudible] memory products net sales was down 2.3% sequentially.

We are continuing to see memory business as weak.

We are focusing on serving our strategic customers whatever we can attach [inaudible] to a microcontroller or analog product.

Pricing remained essentially flat quarter-over-quarter.

Analog products.

Analog products were up only 1% sequentially and up 48% over a year-ago quarter.

Several customers took a pause last quarter after the torrid pace of growth for the last several quarters.

The design momentum on analog products continues to be strong and we do not see any fundamental shift in our value proposition.

The number of customers buying our analog products grew to 11,369 from 10,808 in the previous quarter, a growth of 561 customers in the quarter.

We see continuing growth ahead and expect a growth of about 4% to 8% sequentially in the analog products in the September quarter.

So summarizing the product lines, the last quarter's performance does reveal the strength of growth on our 8-bit microcontrollers.

We have been guiding investors for some time now that the 8-bit microcontroller market continues to convert to feel programmable.

Microchip is a leader and we see that this market is headed into the direction of our strength.

With small growth in analog last quarter, negative growth in memory, and a mix issue that we suffered in the 16-bit, the dollar growth for the last quarter was provided primarily by our 8-bit microcontrollers. 8-bit microcontrollers led us to beat the high end of our estimate.

The 8-bit business was very, very strong, and we see continued growth ahead in that segment.

Distribution strategy.

In the last quarter, I updated the investors on our distribution strategy, where Microchip defines our distribution network as global or regional distributors.

Regional distributors are mainly in Asia and Europe, and they usually do not carry competing lines.

These regional distributors have significant, dedicated technical resources applied to creating demands, specifically for Microchip.

Last quarter, we added several new regional distributors and catalog houses in various parts of Europe.

We will continue to add to this part of the channel in the Europe and Asia.

The second kind of distributor in our network is a global distributor.

These distributors have hundreds of product lines and carry most, if not all, of our competitor's products.

Therefore, the focus and effort of these distributors is highly diluted, and their sales and technical resources are pulled in too many different directions.

Microchip has not seen these distributors being very effective in truly creating demand.

On the other hand, these global distributors are very efficient in fulfilling demand once a customer has designed in the product.

So over the last three year, Microchip has steadily taken more and more control of its demand creation by adding a significant number of technical, sales, and application engineering resources.

This strategy has worked extremely well.

Our continued success in 8-bit microcontrollers, the very strong growth in 16-bit microcontroller, as well as analog, is essentially [vindicating] this strategy.

We also have a very special relationship with Future Electronics, our largest distribution partner in the world.

Future Electronics is, of course, a global distributor, but in fact, they actually act more like a regional.

In the microcontrollers, they do not carry some of our competitors, Atmel, Texas Instruments and Renaissance.

And in analog, they do not carry four of our Microchip's biggest competitors.

They do not carry Maxim, Linear, Analog Devices and TI.

So Future Electronics has committed a large number of resources to create demand for Microchip's products.

This is highlighted by the fact that they will have a very large number of the field application engineers attending Microchip's 10th annual master's event this month for comprehensive training on our products.

And now I shall discuss our guidance for the September 2006 quarter.

First of all, we are continuing to see positive signs in our business and we believe that the sky is not falling on the semiconductor industry.

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

We looked at our own bookings and business activity in various product lines, which continues to be good.

Our book-to-bill ratio was 1.01 and the starting direct backlog for September quarter was higher than that of the June quarter.

We also looked at the inventory situation.

The inventory at our distributors continues to be at the lower end of the historical range.

The historical range has been 1.9 months to 3.3 months.

Current distribution inventory is two months.

Our own inventory is in the middle of our historical range.

The historical range has been 74 to 134 days.

The inventory's currently at 101 days, right in the middle, and has been dropping for several quarters.

We also looked at lead time.

Despite strong bookings, our lead times remain in the three to five-weeks range, which is the shortest amongst our competitors.

We also note the global issues of oil prices, interest rate increases, and conflict in the Middle East.

By the way, Israel less than 1% of our business.

So taking all of these factors into account, we've decided to keep our guidance conservative, and we expect net sales in the September quarter to be up about 4% sequentially.

With decreasing inventory at Microchip and a forecast for continued growth, we are preparing our factories with equipment and personnel to execute the needed ramp.

We are well-positioned from here to the end of December 2006, and we are evaluating equipment needs from January 2007 on and some of that has to be ordered fairly soon based on the lead times.

Our CapEx for the fiscal year assumes this and our CapEx forecast stays at about $80 million.

Gross margins for September quarter are expected to be about 60.6%.

I'd remind investors that our long-term gross margin guidance is 62%, and we are steadily making progress towards that goal.

Earnings per share are expected to be about $0.39.

This earnings per share is without the share-based compensation expense.

EPS with share-based compensation expense should be about $0.37.

We expect to build approximately $125 million of net cash flow before payment of $50.5 million of dividends just announced today.

And we look forward to sharing this cash with investors with another healthy increase in dividends in the next quarter.

Finally, I want to thank those investors and analysts who have taken the time to read my book titled "Driving Excellence," which was released three months ago.

All the comments that I have received so far are very positive.

I hope that our long-term investors and analysts will get a chance to read the book.

It gets you inside Microchip to look at how the aggregate system of Microchip was built and implemented.

It reveals the culture of Microchip technology, which we believe is behind the exceptional performance of Microchip for so many years.

So let me summarize a few key points.

Our net sales are expected to be up about 4% sequentially.

And now without the equity compensation expense, our gross margins are expected to be about 60.6%, operating expenses to be about 24% of sales, operating profit to be about 36.6%, and earnings per share are expected to be about $0.39.

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

Operator?

Thank you [OPERATOR INSTRUCTIONS] We'll take our first question from Michael Masdea from Credit Suisse.

Hi, this is [Thomas Roth] calling in for Michael Masdea.

Could you discuss if you've seen any change in customer mentality, especially looking in the June month or even first couple weeks of July?

We have not seen any change in customer mentality.

Our July bookings month-to-date are actually very strong, so we are continuing the strength of bookings we have seen into June and entering into July.

Got it.

And maybe a follow-up question.

Could you discuss -- why are you bringing in lead times, especially in this environment?

What was the driving force behind the light short mean in lead time this is quarter?

Our lead times never went out.

We have substantial manufacturing capacity because of a large amount of capacity available in our Fab 4.

So through this entire cycle, our lead times basically has been three to five weeks.

So the lead times are not coming in, they never went out.

Never went out, okay, got it.

And then just the final question.

Looking more long-term, are you seeing any activity in the 32-bit microcontroller market?

And if so, is this an area you see Microchip having interest in?

If so, when do you think you would see more activity in that area?

Our dsPIC® products, our 16-bit products, in many cases have significantly higher performance than some of the prevailing 32-bit microcontroller architectures.

For example, our PIC24 architectures and the dsPIC® architecture have 50% higher performance in MIP speed compared to an Ohm 7.

So Microchip today is winning significant designs into the marketplace, which without for Microchip would have gone into a 32-bit architecture.

So we believe we already have a very, very competitive solution to many of the 32-bit products in the marketplace with our dsPIC® and PIC24 architectures.

Okay, thanks a lot.

We'll take our next question from Tore Svanberg from Piper Jaffray.

Yes, good afternoon.

Can you talk a little bit about your bookings trends?

You mentioned July it started strongly.

How about the linearity in the actual June quarter?

Gordon?

Yes, I think booking trends.

We operate a 445 model in terms of our months and bookings perform pretty much in-line with that.

There was nothing exceptional in any of the months that would take -- that would have any issue with linearity.

And that, obviously, helped to project on to our revenues being linear, as I mentioned during my comments.

Okay.

And you mentioned the mix issues in the 16-bit business that will lead to some pretty strong growth here in the September quarter.

Can you just add a little bit more color on that, please?

We have 65 products in production today, and we only started about a little more than two years ago shipping products into that 16-bit, so many of the products are quite new, although we have some sense into where the demand will come from because of the design win pipeline.

However, all these products are very compatible.

They all work on the same architecture.

They use same C compiler.

The pinout is very compatible.

So customers doing their design very often will move around and change their design from one product to another product, looking for slightly different features or slightly lower cost or whatever.

So we usually build the product to a mix of forecasts, which really comes bottoms-up from the sales.

With three to five weeks lead time, you're largely keeping those lead times because you usually get the mix right.

We always get the mix right, usually.

But on brand new products, where you do not have a lot of history, and with the small size of the business, customers can relatively come on a different product than you have thought.

So we suffered from a mix issues.

A lot of that have already been shipped into July, and some of that will be shipped into the balance of the quarter.

If we did not have those mix issues, we would have achieved about 25% sequential growth on 16-bit microcontrollers last quarter.

And we brought it up to investor's attention, so you see the real design and momentum and growth and opportunity in our 16-bit business, and see that at 25% level for the last quarter rather than a 10%.

The mix issues have largely been addressed.

There are a lot of additional new products coming into production this quarter, so there's always a risk, but I think we are overkilling it this time and should not suffer from the similar issues again.

Great.

And then, just finally, it does seem like you expect slightly lower turns this quarter than last.

Is that because of the summer months, or is it just pure conservatism?

Where do you get that?

Just thinking about your backlog being up and your bookings already being strong and with 4% growth, it just feels or sounds like you expect turns to be a little bit less this quarter, I could be wrong.

The prior quarter, the book-to-bill ratio was 107 and 101 here, so turns are somewhere in that same range, give or take.

Okay, that's fair.

Thank you very much.

Next we'll hear from Chris Caso, Friedman, Billings & Ramsey.

Yes, hi.

Thanks.

Just as a follow-up to that question.

You made a comment that you took a bit of a conservative view towards the September quarter guidance in light of the macro conditions.

Could you explain a bit what it -- if you're expecting a similar amount of turns for the next quarter, how are you being conservative with the guidance?

Could you just clarify it a little bit.

And in terms of your customers, either by their words or their actions, are they giving you any reason to be conservative, other than just we're all reading the papers every day?

We are getting no such guidance from our customers or our distributors.

We're just being conservative because a lot of macro kind of talk we're hearing, and [verbal] response we're hearing from investors and analysts and response to other company's numbers and just general talk.

We believe the investment community's determine to cause a problem even if there isn't one.

At least, we don't see any problem in our business.

Okay.

When you said conserve -- so is that to mean then, when you provided guidance, you didn't assume the full level of bookings when you provided your guidance, or are you assuming less turns?

How -- just -- I just --

We internally do a lot better than what we guided, but we were conservative.

Okay.

That's fair.

And then just with regard to the pause that you guys talked about in the analog space, could you give us some insight as to why you see that in the analog space and why not in the microcontroller.

Is that a function of different end markets between your analog businesses and microcontroller businesses?

The analog business was up 48% over a year ago.

The quarter before it was up like 52% over a year ago, it was up about 16 or 17% sequentially.

I'm just recalling some of these numbers.

So anytime you have any business at going at such a torrid pace, you can always have a few customers get ahead and they take a pause, so it's really driven by -- driven by that.

Our microcontroller business is growing very steadily.

Was up sequentially 8.2%, 21% over a year-ago quarter, so we didn't really see any pause in the microcontroller business driven by that.

Also, microcontroller business is much larger.

You know, it's a huge business with nearly 50,000 customers, so it's much, much more diversified than the analog business is today.

Okay, fine.

And just one final one.

With regard to the size of the 16-bit market, I don't think you guys have [inaudible] quantified that in the past.

Any guidance you can give us in terms of the size of that business, relative to microcontrollers?

Not willing to break it out still.

Okay.

Thanks very much.

Our next question comes from Jeff Rosenberg from William Blair.

Good afternoon.

Hello, Jeff.

I guess I just wanted to ask about the inventory trends, bringing them down five days or so per quarter.

Does that reflect any change in your strategy in terms of the rate of ramp in your production or the way you're trying to manage margins through any correction at whatever point we might see one?

The way I like investors to look at it is this.

You know, the center point of our inventory range over the last many, many years has been right around here, about 101 days, where we were last quarter.

And the distributor inventory sitting on the lower end of the range of 1.9 to 3.3.

So if you combine the channel inventory plus Microchip inventory together, they are less than the middle point of the inventory.

So first of all, I do not understand where all the inventory concerns are coming from.

And number two, our inventory has been steadily declining, so if we were to ramp our factories harder where the inventories were not declining, the gross margins will even be higher.

We're still producing record gross margins while the inventories are declining.

So essentially what we're trying to do is get the inventories a little bit more lower than the midpoint.

Last quarter they were in the midpoint.

Get it a little bit more lower and then start to ramp the factories to the point where the inventories do not decline, essentially keep our build as much as we sell.

And if you had adjusted that level of ramp at all from where you were -- or has it been pretty -- I guess, you've been bringing inventories down at a pretty consistent level, but have you done anything in terms of your planning differently than what you were thinking a quarter ago?

We ramp every quarter.

Every quarter we're producing more product than the prior quarter, but every quarter, despite the ramp, we have been producing product less than what we have been shipping, that's why the inventory has been declining.

And I think Gordon guided that the next quarter our inventory drops again from 101 days to 95 days.

So at that point in time, we are coming to the point where almost the inventory is right.

So basically during this quarter will be -- and I mentioned, we're putting things in place to essentially ramp harder where inventory doesn't decline any more after that.

Maybe decline a little bit, but not much.

Okay.

And then the follow-up I wanted to ask you just if there was any color commentary on the relative strength of the different regions and the weakness -- not weakness, but the much slower growth in the Americas versus Asia, is that just the traditional continuation of mix over to Asia, or anything more you could say about that?

Well, the overall activity in Asia is higher.

It's a much stronger growth region, I believe, than Americas or Europe.

That's one point.

And second point is, like you mentioned, there is a continuous transfer of designs which are done in U.S. and we go to Asia for manufacturing, so it's very, very hard to break out.

If you had ten customers, you could do the analysis.

Even 50 customers, you could do the analysis.

With 50,000 customers, it's impossible.

So we know a significant portion of that growth in Asia is because of designs in U.S., but we can't quantify that.

Okay, yes.

It seemed a little bit more divergent than usual, so I thought maybe there was something to add, but perhaps not.

Okay.

Thanks.

Now remember, Asia is coming off [inaudible] new year in the prior period as well, in terms of its growth, so you've got to compare that shipping period in the June -- or what drives in revenues in the June period versus the prior quarter also.

Okay, thank you.

Next we'll hear from Simona Jankowski from Goldman Sachs.

Thanks.

Hi, Steve.

Just wanted to dig into your bookings number a little bit more.

I think you said your book-to-bill is 1.01 and I think the 16-bit book to bill is 1.5, so I know that even though that's a pretty small piece of your business, still that would seem to imply that the remaining business has a book-to-bill that's maybe flat or maybe slightly below one.

I wanted to see if that math makes sense and also what that implies.

Well, without knowing the exact size of 16-bit, it's hard to do the calculation, but generally, you'd correct, yes.

Our overall book-to-bill was 1.01 and 16-bit was 1.5.

So if overall bookings for the rest of the business were maybe slight to below 1.0 book-to-bill and normally your September quarter tends to be an up 5% quarter, kind of historically, and I think you had mentioned earlier you had record bookings in April and May and July started off well, can you maybe just piece it all together and just kind of give us a sense for why the bookings are maybe a bit mismatched for the guidance?

Well, Simona, I'd say something I've said for ten years.

In the history of Microchip, our business has never correlated to book-to-bill ratio.

I'll tell you periods are for four, five, six quarters in a row when book-to-bill is one or slightly less than one and business has grown 4%, 5%, 6% sequentially.

When the lead times are four to five weeks, we see absolutely to reason why a customer has to place a large amount of bookings in the prior quarter.

The customer can give us the order today and we'll ship it to them in the next three weeks.

So during that -- in that environment, whether the bookings are one or .99 or 1.01, I don't think it makes any difference.

That's why we doesn't break out the turns anymore, because it just has never correlated in our business.

Okay.

Thank you very much.

We'll take our next question from Chris Danely from JPMorgan.

Thanks, guys.

On the 16-bit mix, so Steve, you're basically saying that the mix issue should be over by the end of this quarter?

That's correct, yes.

Great.

And then on the long-term gross margin target of 62%, can you give us a sense of what revenue or what metrics we need to see to achieve the 62%?

I think we -- you know, we guided -- a couple of quarters ago we said in the next eight to ten quarters and we're basically maintaining that.

So you could we're going up every quarter by 20, 25 basis points and one quarter could be a little more, one quarter could be a little less.

We're ready to ramp our factories here with the inventory getting below the midpoint after this quarter, so essentially you should -- we should expect to achieve that over the next couple of years or less.

That's fine, and then any update on the Foundry business?

What update are you looking for there?

What products or what percent of revenue Foundry is right now?

Oh, it's low single-digits.

It's really a very small portion of the business.

Okay, great, and then last question.

Even though the book-to-bill doesn't really matter, when was the last time your book-to-bill was below one for 8-bit micros?

Do you remember?

No, we don't.

Has it been a while or --

Have been below one probably in the last few quarters when we have even grown, so we have done substantial growth with less than one book-to-bill ratio in the past periods.

Okay, thanks.

[OPERATOR INSTRUCTIONS] We'll take our next question from Eric Gomberg from Thomas Weisel.

Hey, guys.

Nice results and nice job managing your inventories and the channel inventories.

Thank you.

Most of my questions have been answered.

Just one thing that stood out was the 16-bit development tools up 129% sequentially.

Seems pretty huge.

Could you talk a little bit about that and how that correlates to potential shipment growth of 16-bit product out a couple quarters?

Well, the lead time for developing a 16-bit product and taking it to market is more like two years, 18 months to two years, so the large growth of development tools does not really mean much for revenue in the next couple of quarters.

The revenue that comes in the last couple of quarters is based on the work we did six quarters ago, and there was substantial amount of work done six quarters ago.

The backlog is healthy.

The book-to-bill is extremely high on the 16-bit microcontroller.

We're looking for a very, very solid growth year.

The new development tool simply tells you that that's just the -- the party is continuing.

The growth is continuing and there are more and more customers designing with it and we're just opening a large number of new doors.

Planting the seeds for '08 and '09.

What is that?

Planting the seeds for '08 and '09.

Yes, '08 and '09.

Yes, very late '07 calendar year, but really going into early '08.

Okay, thanks.

Just on orders by geography, I think there's a lot of concern about build-up of inventory in Asia and don't want to beat a dead horse.

And you've commented on overall inventory, but do you feel that there's any difference by geography?

Is there any difference in terms of what [inaudible] or others may be holding in Asia?

The distribution -- the fee territories have always been somewhat different.

And Asia, probably because of the metrics and their business, have always tended to hold a little less inventory than the average.

Their margins are lower, often they're looking to get turns to earnings ratios appropriate for their business.

And while we've seen over the course of many, many quarters the inventory move down towards the low end of the range, they've moved down in all territories.

I wouldn't say exactly all at the same pace, but relatively speaking, they've all behaved pretty much the same way, as they've tried all to be, I think, improved asset managers.

I think what you are concerned about is that maybe the inventory in Asia is high.

What Gordon is telling you is, in our case, inventory in Asia is much lower than the inventory and distribution we see in U.S. and Europe.

Very helpful, thank you.

We'll take our next question from Harsh Kumar from Morgan Keegan.

Hey, guys.

Congratulations on a great quarter and then growth in a questionable economy, but had kind of a broader question.

You're clearly taking share from other people, but Steve, if I was to ask you to characterize how you see the overall market, maybe you can give us some color on whether you think the overall market is growing, your Company aside?

It's very hard to tell as we're going through the quarters whether the market is growing or not.

I think we get a report that looks at everybody's numbers at the end of the year, which gives us some reflection, but we really are not paying attention whether the market's growing or not.

We're paying attention to are we growing or not.

Great, thanks.

When you look at the 8-bit microcontroller, it seems like a number of players which are on the top -- you know, one, two, three, four, five -- they all short-term here seem to be doing well.

And each may claim they're gaining market share from the other person, but I think they're really gaining market share from the middle of the pack or the people in the low end of the pack, or they're all gaining through new applications in their respective territories.

I believe we are growing and the latest numbers we saw from Freescale, it seems like they're growing.

We'll hear from Atmel next week and most likely we'll see they're growing.

Cypress declined in that segment, I saw, but it's possible that a couple other guys may be growing.

So does it mean the 8-bit microcontroller market is growing?

We have always felt for years that 8-bit microcontroller is a very good market, but some how that growth never seems to correlate with the [SAN] numbers, which has been the age-old difference.

So either SAN numbers are not correct because they don't have the data from a lot of the non-numbers or it's possible that many of these companies are gaining market share over much weaker competitors, which are really at the bottom or the middle of the pack.

Got it, that's very helpful.

One follow up, I think in the commentary, guys, you might have given a 16-bit sequential growth number for September.

I might have missed that, if you gave that, if you don't mind repeating it.

Say it again.

A 16-bit sequential growth number for September?

Said a 25% to 35% sequential growth.

Thanks, guys.

Great quarter.

Next we'll hear from Adam Parker from Sanford Bernstein.

Hi, just a couple of quick questions here.

Steve, I know that the markets really appreciated the dividend increases, but given, as you said, that the market seems to determined to create bad news or keep the stock low, why wouldn't you be more aggressive with the buybacks here?

I know you have bought your stock well in the past.

Why wouldn't you be a bit more aggressive here?

Well, like it's almost a broken record here.

Our strategy always is to give the money back to the investors.

It is their money and if they feel the stock is cheap, they can buy more stock.

Stock doesn't go down by the good holders of the investors that keeps this for long time.

So we give the money back to them and they can invest the money into the stock if they believe it's cheap, or they can give it to their investors or do whatever they like with it.

Our goal is, in general, that we believe in dividends.

We do not believe in stock buyback.

We buy stock only at unusual locations, and last time we bought a significant amount of stock was during SARS, when stock was selling at half the price that it sold six months later.

You may make an argument such time may be approaching.

I hope not.

But in general, our values and where our board believes strongly is to a continued growth of dividends to give the money back to the shareholders and let them invest it.

One little corollary to that is as you well know, your Company's fundamentals, the revenue growth to go to where the margins are very stable, among the best in the industry, yet your stock itself, if you look at the standard deviation of volatility returns, is about average or even slightly more volatile than average for a broad semiconductor peer group.

Why do you think that is?

Do you think it's something you're doing?

Do you think there's something the market doesn't get?

Or how do you explain -- how do you think about the difference between the stability of your fundamentals and the stability of your stock?

Adam, I thought you were the analyst.

I was the CEO.

I don't know.

I don't understand the market.

My job is to run the Company and I'm doing a [expletive] good job at it.

[LAUGHTER] I'm not doing a good job, but I was trying to -- that's why I was trying to get your help.

Analyzing what the stock does is neither my expertise nor my job.

I deliver great results and it's now everybody else's job to take these great results and analyze them and position it accordingly.

All of us try to look internally and say is it something we're doing.

Is something where you think you're setting the near-term expectations or you're optimistic to the point where people try to play against that in the near term, or you're -- is it just, look, I can't worry about.

I just deliver the good results and, [expletive], eventually it'll take care of itself.

Well, I mean our attitude is not to [expletive].

I mean, we're working hard.

We went to a lot of conferences last quarter, including yours, and a few other investors and analysts, and trying to explain the story, and I think we explained the 8-bit story, conversion to Flash microcontrollers.

We're delivering the results on that.

And the 16-bit story, we're delivering the results on that.

Analog was a little weak last quarter, only 1% growth, but we'll come back and show you more growth there.

We're delivering the margins.

We're making the ramp in the Fab.

We just delivered record cash flow, increased the dividend again.

Done all those things.

But market always finds something to worry about.

All quarter market has been worried about inventories.

We come back and our own inventory has declined, our distribution inventory's flat.

Somebody asked the question about Asia.

Asia inventory is less than it is in U.S. and Europe and somebody else was further asking questions on the book-to-bill, I just got this -- the number in front of me.

September quarter last year -- September fiscal year '06, which will be September quarter last year, our book-to-bill ratio was one.

And in the December quarter, we grew 3.5% sequentially.

So somebody had asked the question whether have you had that case before.

Here was the quarter where the book-to-bill number was barely one, rounded up to one, and our growth was 3.5% in the following December quarter.

We have done that lots and lots of different times.

When the lead times are so short, then book-to-bill and turns required don't matter.

Whether people place the order on June 25 or July 3, it absolutely makes no difference.

Does that help?

Yes, I appreciate the time, Steve.

Thanks.

Thanks.

We'll take our final question from Craig Ellis from Citigroup.

Thank you.

Good afternoon, guys.

I'll start just by approaching the dividend a little bit differently.

Steve, you guys have done a great job raising the dividend.

The people I talk to like the job you're doing with it.

Can you talk about how comfortable you're continuing at the current pace in terms of the frequency with which you increase the quarterly dividend?

We have guided that we expect to generate about $500 million of free cash flow this quarter, in this year.

And if you look at the last two quarters, you think we are well on that pace to do that.

So as long as the earnings continue to rise, which we're guiding towards, and we're guiding for another $0.02 increase next quarter in earnings, we believe -- you know, dividend is announced by the board and they're not here in the room.

I believe they are comfortable with continuing to share that cash with investors.

Now over time, the rate of growth has to slow down of the dividend, as the numbers get larger and larger, but we just increased it sequentially 9.3%.

That's still a pretty torrid pace.

It is.

And as long as there's growth in the various businesses, then we will, obviously, at different points see cyclical dynamics at play, but we could expect you to continue to increase the dividend is what you're saying?

Yes, we expect to continue to increase dividend, yes.

Okay and then cycling back on the 16-bit business, 20 new products in the second quarter.

It sounds like there's going to be ten new products in the third quarter.

How should we think about the pace at which you want to bring out new products in that part of the business?

Well, every new product development doesn't take the same time.

It's like they're platforms.

It takes much longer to develop a platform and come up with the first two or three products and after that, your products rating is based on memory sizes and adding non-peripherals and stuff like that.

So, sometimes you're developing a brand new platform and turning new peripherals and other times you're proliferating existing peripherals, so don't think of it like 20 products last year, ten products this year, oh, like something is wrong.

It's just like this is a huge pipeline and sometime people are working on tail end of releasing the product, other times they're working on the front end of developing new peripherals, new capability, new stuff that's going to open new market.

This kind of happens all the time.

But is it reasonable to think that it's over the last quarter and the current quarter you're doing ten to 20 per quarter that over time that that pace would increase, or at you a pretty comfortable pace for how you see that business over the next 18 months or so?

Let me say Ganesh is comfortable giving you the number about the number of new products we'll have in production by the end of the fiscal year.

We're on a pace where we'll have somewhere between 90 to 100 products in production by the end of fiscal year '07.

There you go.

From 65 now to 90 to 100 by the end of March.

Okay.

Thanks, guys.

You're welcome.

We actually do have another question from[Janet Ramshitzu] from [inaudible] Capital.

Hello, Janet.

Hi, guys, Congratulations.

Another nice quarter.

Thanks for the dividend.

Steve, just in terms of the expansion and buying equipment, is your strategy still to try to buy used equipment where you can?

And given the growth in your business, when do you think you might have to visit the question of whether or not you pick up another facility?

Perhaps there might be an opportunity if we do have a real semiconductor downturn here.

Janet, the first part of your question, yes, we buy used equipment wherever we can.

But equipment needs are not very high here because we have largely the equipment and Fab 4 available to what we need.

We only need a little bit of equipment because the process which was running in Fab 4 prior to our purchase was not identical to our process.

It was close enough, so it's like a 90% match.

So we really need small amount of equipment here and there.

But we also need -- a portion of the equipment expense is also in assembly and test, R&D and care and other areas.

So yes, we do buy used equipment whenever we can.

In terms of for looking at another Fab, we believe it is way too early because in the last quarter or so, we have highlighted for investors our path to $1.9 billion, where the two existing Fabs have current capacity of -- installed capacity of $1.4 billion.

There is clean room available in our Fab 4 to expand it further, where the combined capacity of two Fabs becomes $1.7 billion.

And we are outsourcing a portion of our product lines in 8, 16-bit, analog, and all the different products, which will give us about $200 million of output, which will not be produced by us, but will be outsourced to professional foundries over the next five years, leading up to a total of about $1.9 billion.

So I think it's quite early for us to think of any other Fab.

Just one last little one, if I may.

Just in terms of the economy worldwide, are you beginning to see any signs of slowdown anywhere?

Or are there any particular unusual strength in any area in your markets worldwide?

We are not seeing problems anywhere.

We grew in all three geographies last quarter.

In the current quarter, we expect to grow in America, we expect to grow in Asia., Europe, obviously, is down low single-digits usually in the summer quarter.

But Asia geography is usually very strong this quarter, because the tail end of September, they start to build all the product for the Christmas, which has to get on the ships for six weeks getting back to U.S. and Europe.

So this should be a usually very, very good quarter, and we're not seeing softness anywhere in the world, driven by any of the macro factors we are hearing.

Thanks very much.

you're welcome.

There are no further questions at this time.

I'll turn the call over to Mr. Steve Sanghi for closing remarks.

Thank you very much for all the investors and analysts who joined this call today.

We'll be available here for a little while.

If you have any questions, give us a call on the investor line.

Otherwise, we'll talk to you during the quarter, either at the conferences or in our road shows or other things, or talk to you next quarter.

Thank you very much.

And that does concludes today's conference call and we thank you for joining us.

At this time, you may now disconnect your line.