微晶片科技 (MCHP) 2007 Q2 法說會逐字稿

Good day everyone and welcome to the Microchip Technology's second quarter and fiscal year 2007 financial results conference call.

As a reminder today's call is being recorded.

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

Please go ahead, sir.

Thank you so much.

Good afternoon and welcome to our second quarter 2007 conference call.

During the course of this 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 10K for the fiscal year ended March 31st, 2006, and our 8K [coverage] 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, Executive Vice President.

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

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

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

Our net sales for September quarter were at record levels of 267.9 million up approximately 2% from net sales of 262.6 million in the immediately preceding quarter and up approximately 17.9% from net sales of 227.3 million in the prior years second quarter.

On our earnings per share, we are continuing to include additional information in our press release that relates to the adoption of FAS 123R.

Our nonGAAP results exclude the effect of the adoption of this accounting standard, providing comparability to prior GAAP results.

Our nonGAAP net income for the September quarter was at record levels of 84.2 million or $0.38 per diluted share, an increase of 3.4% from nonGAAP income, from nonGAAP net income of 81.4 million or $0.37 per diluted share in the immediately preceding quarter.

And an increase of 28.2% from GAAP net income of 65.7 million or $0.31 per share in the prior year's second quarter.

GAAP net income for the September quarter was 79.5 million or $0.36 per diluted share inclusive of all share-based compensation expenses.

The impact on earnings related to the adoption of share-based compensation in the September quarter was 6%.

Our sales in Asia grew by approximately 4.5% sequentially in the September period while both Americas and Europe were essentially flat.

In the summer quarter we got the performance in Europe as being seasonally strong.

Asia continues to be our largest geography representing approximately 45% of total sales.

Americas and Europe were both at approximately 27.5% of total sales.

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

Take a look at operating P&L information, initially our gross margins, they continue to improve reaching 60.45% in the September quarter.

For comparative purposes, now in operating expenses, this is prior to the effects of share-based compensation, and operating expenses were 24% of sales in the September quarter, essentially the same as they were at the previous quarter.

Research and Development costs were $26.5 million representing 9.9% of sales.

And sales and general administrative expenses were 37.9 million representing 14.1% of sales.

Total operating expenses on a GAAP basis including the effects of share-based compensation were 26.4%.

The tax rate for the September quarter was in line with our guidance of 24% and we expect that to continue for the rest of this fiscal year.

The dividend declared today of $0.25 per share was an increase of approximately 6.4% sequentially, and an increase of 56.3% over the same quarter in fiscal 2006.

The dividend payment that will be made in the December quarter will be approximately $54 million.

Let's turn our attention now to the balance sheet and initially, Microchip's inventory.

Excluding the impact of FAS 123R, inventories were essentially flat in dollars at 114.4 million representing approximately 99 days, a decline of two days from the June quarter.

Including the adoption of share-based compensation, inventories were 117.6 million or 101 days of inventory.

Distribution inventory continued to be at very moderate levels in all geographies.

As of the end of September, our distributors held about 1.9 months of inventory down from two months at the end of June.

Combining inventories on our balance sheet and at our distributors, they would represent 134 days of total inventory, the lowest total inventory that we have seen in the last five years.

Microchip's receivables at September 30 were $123.2 million, lower than the levels at the end of June by $14 million.

Payment performance by our customers continued to be strong, delinquency and payments were minimal.

The principal reason for the decline in receivables related to distributor inventory reductions that I mentioned earlier.

On our cash position at September 30, Microchip's cash and total investment position was approximately $1.3 billion with 80.8 million of short-term debt on the balance sheet.

During the quarter Microchip generated net cash flow from the business of $128.5 million.

Payments related to our cash dividend of $0.235 were 50.5 million and we also reduced our short-term borrowings by 56.5 million in the period.

We anticipate continuing to pay down the short-term borrowings over the next two quarters.

Capital spending for September was approximately $17 million for the September quarter.

Depreciation expense for the September quarter was 29.2 million versus 27.6 million for the same quarter last fiscal year, and 28.1 million in the June quarter.

Our capital expenditure forecast for fiscal 2000 is now $70 million, previously it was $80 million.

And our depreciation forecast is expected to be approximately $150 million for the full fiscal year.

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

Steve?

Thank you, Gordon and good afternoon, everyone.

Today, I would like to make a brief comment reflecting on the results of the September quarter and then pass it on to Ganesh Moorthy who was promoted today to Microchip's Executive Vice President.

Ganesh will comment on the product lines, and then I will discuss the guidance for the December 2006 quarter.

All of the figures in our 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.

We delivered another record quarter in every respect despite very challenging industry conditions in the late quarter military led coup in Thailand.

The political situation in Thailand is calm and there are no lingering effects from the coup.

We achieved record net sales, record gross margin percentage , record operating profit percentage, record after-tax profit, and also record earnings per share.

We also achieved record sales in each of our strategic product lines, 16-bit microcontrollers, 8-bit microcontrollers, Flash microcontrollers and analog products.

Now I shall pass it on to Ganesh Moorthy for some expanded comments on the individual product lines.

Congratulations, Ganesh, on your promotion.

Thank you, Steve and good afternoon, everybody.

Let me now comment on the individual product lines.

Starting with microcontrollers, our microcontroller business grew by 1.6% sequentially and was up 19.3% over the year ago quarter.

Our Flash microcontroller business was even stronger and grew by 6.7% sequentially and was up 42.3% over the year ago quarter.

Flash microcontrollers now represent over 64% of our microcontroller business.

We shipped 16, 275 new development tools last quarter demonstrating continued strong design win activity. 16-bit microcontrollers, our 16-bit microcontroller business was up 53% sequentially in the September quarter, and up 210% over the year ago quarter.

The growth of our 16-bit microcontrollers business continues to be similar to that of our high end 8-bit microcontrollers architecture called PIC18 at a similar stage of it's market ramp.

After 2.5 years since the start of of production, we believe 16-bit microcontrollers have reached the tipping point with a large number of designs reaching production stage.

The number of high volume customers grew to 484 in the September quarter from 349 in the June quarter, an increase of 39%.

And in terms of 16-bit customers of all volumes, that number is in the thousands.

We now have 78 16-bit microcontrollers in production and four more that are sampling.

Based on the momentum we see, we expect 16-bit microcontrollers to be up another 15 to 25% sequentially in the December quarter.

Moving to analog products, our analog business was up 2.2% sequentially and up 43% over the year ago quarter.

The market for analog products has been tough with a majority of competitors guiding to a sequentially down quarter in December.

We believe that we are continuing to gain market share in analog.

The number of products-- the number of customers buying our analog products grew from 11,546, sorry, to 11,546 from 11,369 in the previous quarter, a growth of 177 customers.

And on our [inaudible] cord memory business, this was up by 5% sequentially.

Business rebounded from the weak conditions of the last several quarters and we continue to focus on serving our strategic customers wherever we can attach [inaudible] products to a microcontroller or analog product.

Pricing in this segment remains essentially flat quarter-over-quarter.

Let me now pass it back to Steve for some comments on our guidance for the December quarter.

Steve?

Thanks, Ganesh.

Before I discuss our guidance for our December 2006 quarter, I would like to make one important comparison.

This comparison is important before our largest competitor, Freescale Semiconductor leaves the public marketplace emerging as a private company.

Freescale reported that their September quarter sales of TSPG segment, where microcontrollers are housed were down 2% sequentially.

Microchip's microcontrollers sales were up 1.6% sequentially.

On an annual basis, Freescale's TSPG sales were up 7%, while Microchip's microcontrollers sales were up 19% over a year ago quarter.

A substantial difference.

So despite the significant questions we keep hearing regarding Freescale, we're continuing to gain substantial market share.

Now, the guidance for the December 2006 quarter.

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

We looked at our own bookings and business activity in various product lines.

Our book-to-bill ratio was 0.94 and the starting backlog for December quarter, for direct customers as well as distributors, was lower than that of September quarter.

We also looked at the inventory situation.

The inventory at our distributors continues to be at the lowest level of our historical range.

The historical range has been 1.9 months to 3.3 months, current distribution inventory is 1.9 months.

Our own inventory is lower than the middle of our historical range.

The historical range has been 74 to 134 days.

The inventory is currently at 99 days lower than the middle point and has been dropping for several quarters.

We also looked at lead times.

Our lead times remain in the three to five weeks range which is the shortest amongst our competitors.

Looking at it geographically, we expected this to be a strong quarter for Asia but we are continuing to see softer build activities.

We are engaged with all of our customers but the run rates in general are lower than expected.

In the other two geographies of Americas and Europe, this is a seasonally weak quarter due to Christmas holidays.

Taking all these factors into account, we expect net sales in the December quarter to be down approximately 5% sequentially.

Looking at the current market conditions, we have lowered our capital expenditure forecast for the fiscal year from $80 million before to $70 million now.

Gross margin for December quarter are expected to be about 60.25%.

I'd remind investors that our long term growth margin guidance continues to be 62%, however, we're seeing a temporary pause in the growth of gross margin due to market conditions.

Earnings per share are expected to be about $0.36.

This is prior to the share-based compensation.

Earnings per share with share-based compensation expense should be about $0.33.

We expect to build approximately $100 million of net cash flow before payment of $54 million of dividend just announced today, and we look forward to sharing this cash with investors with another increasing dividend in the next quarter.

So let me summarize a few key points.

Our net sales are expected to be down approximately 5% sequentially and now without the equity compensation expense , our gross margins are expected to be about 60.25%, operating expenses to be about 24.5 to 24.75% of sales, and earnings per share are expected to be about $0.36.

With that, [Tilottie] would you please poll for questions?

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Adam Parker with Sanford Bernstein.

Yes, hi, guys.

Just trying to understand some of the data you're giving us.

I mean do you think that the guidance here in terms of being particularly weak is just a function of all demand?

Or do you think there's demand weakness, or do you think there's maybe some of your inventory at your distributors customers, or can you help us at all with why they kind of look at it and say well this is maybe the second worst December in the history of the Company, is at all just macro or--?

Well, some of the conditions in the industry are similar to what was experienced in 2004, but it doesn't look as bad as it was in 2004.

The book-to-bill ratio was better, the general environment just does not look as bad.

Looking at the other companies guidance, everything doesn't look as bad as 2004, so I'm sure there is some component of inventory.

The distributer inventory itself does not effect our sales because we do not take that as a revenue, but if distributors customers have some inventory, that's really hard to get at when you have 50,000 customers, and the majority of them being served by distribution.

As far as our own customers are concerned, which are really the direct customers we serve, that's approximately what 38% of our business roughly?

35, 36%.

Yes.

So in that range, 36% of our business.

At those customers, we don't really see any signs of major inventory correction.

We just see the run rates to be lower as everybody seems to be cautious just given the market conditions, GDP and all of the other data and all of the talk, so everybody is just cautious.

So just a weakening economy, your fears about that I guess?

I'm sure there is some ability in inventory correction in there at some customers in there, but it's really not broad based.

It doesn't look to be all inventory correction.

Okay, the follow up I have or the second question I have is just, you guys made some comments, you made some changes I guess in your distribution network and I was trying to understand if you're feeling that there was too much order fulfillment, and not enough incremental revenue generation, or can you just talk a little bit about what your strategy there is and how it's evolved and why it's good for you guys going forward?

Well we have been tweaking of our demand creation for a better part of about 4 years now through several layers of changes.

In one we added some dedicated production win reps which only carry Microchip product line and do not carry any of the competitor product lines.

We added a layer for regional distributors in various territories in the world and regional distributors again do not carry any competitive lines.

We made changes to the global network where our experience was that the global network, I would say with the exception of Future Electronics, was really not creating any demand for us and was largely leaving order fulfillment.

So we adjusted the compensation scheme so we were paying appropriately only for the demand fulfillment.

And with several years into these changes, it's quite clear that we made the right call there and despite level of ureteric on all sides, and our sales are growing faster than our competitors, I gave you comparison to Freescale, our funnel is full with demand creation.

Our 16-bit microcontrollers sales are exploding, they went up 53% sequentially albeit from a small base.

And basically, we were seeing that the global distribution network again with the exception of Future, wasn't really creating any demand on 16- bit, we didn't win a single design from them.

So we took control of it ourselves, we added a lot of direct people and added some reps, regional distributors and some other things and the results are very obvious, analog business was up 42% over a year ago, or 43.

So all of the strategic product lines are growing, Flash microcontrollers are growing.

So in answer to your question, I think that the data is here.

We made the right call.

Okay, great.

Thanks, guys.

Welcome.

And we'll move next to Michael Masdea with Credit Suisse, First Boston.

Yes, thank a lot.

I guess I just have another follow-up on the [inaudible].

It seems a little bit surprising that they're at these all-time lows and that they're going to further reduce in the fourth quarter, is it the case that there's something that allows them to get even lower than we've seen before or do you think they're pushing too far?

Well, you know, really aren't sure.

If you listen to [Ira's] call this morning, they reduced inventories by $200 million quarter-over-quarter, Michael.

They took their inventories down by about 12% on their balance sheet.

And while they were a little bit more [redisant] in indicating exactly where they're going forward , they said that lead times were supporting them in their goal of getting a turns versus earns basis in their model.

And so we've seen that really across the board in many of our distributors as they continue to exercise better control over working capital, as lead times continue to be short.

And that's just part of the phenomenon that we have to deal with.

Now, having said all of that, with the type of reductions that [Ira's] is instance here, that in their inventory their sales were flat.

So obviously their reduction in inventory isn't a reflection of the business conditions that they're seeing directly, much more related to how they intend to manage their business.

We can influence that, fortunately, we're not a POP supplier.

We're much more focused on creating demand or fulfillment through some of our global distributors to the benefit of Microchip.

Okay.

That makes some sense.

One just follow-up and the second question is just on the microcontrollers side.

With such explosive growth in the 16-bit strong growth in Flash, just help us out with what was going on with the remaining segment.

Where the relative weakness, that we've came from.

Ganesh?

In the September quarter, I think we broke down so we had growth in the analog business.

The analog business--

He's talking micro.

Within micros, just is it the 8-bit and what part of the 8-bit were relatively weak?

So we don't usually break that out.

We provide the microcontroller data and it's totality and we put 8 and 16-bits combined there.

We break out the 16s in terms of the growth rate but not the rest of the pieces.

Was there maybe not in terms of numbers, but was there any segment or is it all just the push off in the Asian build where you saw the weakness, the relative weakness rather than just giving us numbers can you give us a little color?

We have such a broad-based business with so many customers, so many applications and segments, there's not really one piece I can point to which is the sole or primary cause for where we ended.

If you look at geographically, trying to get to the answer, our European business was very strong last quarter.

European Business in some result was down because of the European holidays but our business was flat so that was seasonally good.

The majority of the weakness came out of Asia.

U.S. was okay, but slightly weak.

But the biggest weakness came out of Asia and when we made a press release back in the middle of September, we totally saw that we were seeing a push out and slowdown of the Asian build related to Christmas.

Asia business should have been up quite significantly than it was.

It was up 4.5%.

It was strongest geography but that was a geography that missed the most regarding what they should have done.

Okay, thank you.

And next we have Romit Shaw with Lehman Brothers.

Thanks, just given your plans to reduce CapEx by a little more than 10%, I mean is it fair to assume that you guys expect this softness in build activity to potentially spill into next year or is the visibility at this point too low?

Well, the CapEx is simply we need it to spend the capital in the current quarter and the next quarter to grow to another record sales, basically that's what drives CapEx.

We need it to buy some FAB equipment, assembly and test equipment to get to another record level of sales.

With sales down 5%, you don't have to get to another record level and then it will take whatever time it would take to get back to that record sales.

So it's a push out of the capital that would have needed in the next three to six months, which we do not need anymore, because sales are going to be lower than the record, which means we have largely the equipment in place already.

And there's always some [inaudible] hid in there for some small issues, but there is no incremental capital needed because we do not have to jump the high bar.

It's just that simple.

And our long term design visibility continues to be strong so we're very confident in the longer term direction of the business when new products that we've brought to bear.

Certainly the short-term backlog visibility is what we're speaking to as we move into December, but that doesn't give us any concerns as to the future direction over strategic products.

Just on the, on OpEx, I mean, Steve, do you think you have leverage with OpEx meaning if current conditions persist, can you bring down SG&A as a percentage of sales?

Well, even in our current guidance, there's a substantial , Gordon you have the numbers handy.

Yes, there's obviously at the levels that we've projected, there is a substantial reduction in operating expenses.

In absolute dollars.

In absolute dollars but not in percentage terms and we'll continue to exercise areas where we believe using those elements at our discretion in our business to further the business model.

But the back drop of that also, Romit, is we have 36% operating margins and we're driving this business not entirely for next quarter but also for the future.

So we have to be selective where we make those decisions because we don't want to find ourselves not being able to effectively promote and market our products for future revenue opportunities.

The entire reduction in OpEx from September quarter to December quarter is driven by the variable compensation bonuses and just general tightening up for discretionary spending and stuff like that.

There is no reduction in headcount, not needed we're just extremely profitable.

In fact we're continuing to make investments in our 16-bit microcontrollers and our sales force and other strategic areas, that they're continuing to be open acquisitions in the Company to build for the long term future.

We think it's a one quarter problem.

If you look at this seems to be similar to 2004, we were down in December quarter 2004 and we came right back up, we grew in the March quarter and we grew substantially in the June quarter.

And this doesn't even look that bad as it was in 2004.

So for now, we think internally that this would be a one quarter problem again because this quarter being down 5%, it sets up an easy competitive for the March which is historically a weak quarter, but then this quarter isn't strong then it makes it easier.

So there is really no long term reduction needed in expenses.

Of our R&D expenses last quarter were 9.9%of sales, that's about half of many of the technology company spend, so we're already the most profitable in terms of return on R&D dollars, and we want to keep spending that wisely.

Okay.

Just one final question on stock compensation expenses.

Maybe my numbers are incorrect but it looks like the stock comp expense increases by a significant percentage this quarter.

Any color, Gordon on why?

Absolutely.

We've talked about this before.

Manufacturing expense starts to flow through inventory into the P&L.

That's the absolute reason for it.

So there's some timing involved with stock-- share-based compensation flowing through inventories into the P&L.

So the change is obviously primarily driven by that.

The reduction in revenues makes some increase in terms of the percentage also, but it's in line with what we said initially of between 7 and 8% when fully deployed.

Thank you.

You're welcome.

And we'll move on to Craig Ellis with Citigroup.

And thanks, good afternoon guys.

Starting with the clarification on the gross margin line, with the guidance in the fourth-- the calendar fourth quarter down about 20 basis points, is that a utilization dynamic that's at play, or is that more of a mixed dynamic as we think about the 16-bit business growing and some of the other businesses have 8-bit and the analog business declining sequentially?

It is pretty much coming out of utilization dynamics.

I mean, of the 20 basis points, is just look at the percentage it is up 68.5%.

It's just a very very small number and really just a minor tweak and the guidance always is plus/minus 20 basis points or 20 basis points difference is really truly very, very small.

We have reduced the manufacturing build in the back end largely because for guiding down, we know how many units we're going to need, and it's just a purely utilization dynamics driven from that.

We don't expect much mixed change at all.

We expect a healthy increase of 16-bit microcontrollers which is positive.

Analog should do well and that's positive, and that leaves the 8-bit micro and memory, wherever they will come.

Okay, Steve.

And then as we think about just uses of cash in the past, the Company's been pretty [vosipherous] about maintaining a dividend and now you've got the stock buyback plan.

Can you just share the thinking on why you went with the stock buyback plan now, and how should we think about your appetite for using that by back plan?

Definitely.

That's a good question.

We continue to be committed to dividends and continuously increasing dividends over time.

The stock buyback, we have announced today is just basically a measure as we have said before that we only buy stock when we believe that the street has thrown the [baby] with the bath water.

And that, last time that happened was in 2003, right after war on sales when stock was 17, people were calling it 12 and it went to 30 within six months.

So those are the kind of occasions when we like to buy the stock when there is a high level of misunderstanding about the Company's opportunities and a single down quarter somehow drives into a downdraft.

It did not happen in 2004 and we cannot call it, we cannot predict it, how a market will react this time.

So it's a safety net in place to be ready to buy a large amount of stock.

We have money available to invest and we're telling you now in this conference call that the Company continues to do extremely well on all of it's metrics in terms of design wins and new products and gross margins and everything, and this is a temporary phenomenon driven by the market conditions we're seeing.

And I think after street having seen the results of many of the other semiconductor companies who reported similarly, we hope that the results will be understood but if there's any misunderstanding, the buyback gives us a safety net.

Okay that's a clear message, Steve.

One last question for Gordon.

Just a clarification on the balance sheet.

Deferred income to distribution was down about 13 million sequentially.

As I look for precedent in my model it's-- I think the most significant percentage decline since 2001 on a dollar basis, it goes back further than that.

Is that what you expected going into the quarter and anything that's surprising as you look at that line?

I think it's a little lower than we would have expected going into the quarter.

I think that some of the, I mentioned Arrow and other distributors are following similar patterns where they're looking to hold lower levels of inventory and they're supported by the fact that our lead times are continuing to be very short. 90% of our products are available in three to five weeks.

They obviously see some level of uncertainty in their business plus they are trying to improve their working capital management overall.

So it's definitely at the lowest levels we have ever seen.

Today, we expect that to be flat-to-down just based on the feedback we're getting, not that that is directly an indication of business conditions, but I think it's directly related to how distributors are managing their business in the current environment.

Okay, thanks, guys.

[OPERATOR INSTRUCTIONS] And we'll move to mark Edelstone with Morgan Stanley.

Good afternoon, guys.

Hi.

Hello Mark.

Steve, are you seeing any difference in terms of just the order patterns between analog and say the 8-bit Controller business, specifically in Asia?

We're not.

Very similar.

We're engaged with all of the 8-bit customers, we're engaged with all of the analog customers, and many times the customers are the same.

Were they're essentially running [inaudible] and what parts going in, and then the run rates are lower.

Run rates across the board would be seeing bookings, the run rates are pointing to a lower number than we experienced in the September quarter.

Okay, great.

No, no customers going away, seem to be no loss of market share anywhere, no large designs going away, not a single major design loss or a major customer loss.

It doesn't seem to be just one thing.

It's just everybody is less confident about their business.

And then you talked about tightening up things on the back end.

Are you also slowing wafer starts at this stage?

We tend to not make the wafer start changes as quickly unless we see a longer term phenomenon and the reason being to run at the so high yield and so consistent that we run at , the training required in the front end is much more laborious, so we don't really tend to move the wafer starts.

We just allow usually-- we did this again in 2004 also.

We just allow inventory to go up a little bit and then the sales grow in the next quarter, and too the inventory comes back down and you've seen that number of times.

So no, we have not changed wafer start.

When the entry days getting to maybe only 106 at the end of this quarter, Mark, we're still in very good shape.

Long life products, no obsolescence issues in our business, that's all and so we're in very good shape from that perspective.

A high point at the end of the 2004 cycle was somewhere in the 118, 120 days, somewhere in there so in a way we are doing extremely well.

We manage inventory extremely well in this up cycle.

We kept lowering inventory quarter-after-quarter for the last five, six quarters almost, and at that time, we could have actually ramped FAB harder with a slightly higher gross margin.

We decided to keep the inventory low because in the next cycle we didn't want to have to take the FAB down and which is what's happening right now.

So we're running the FAB at the same cycle as we ran last quarter.

Right now your in great shape there.

I guess what I was trying to figure out is unless we get a big snap back in the March quarter it sounds like we should probably expect to see another slight uptick in days inventory in the March quarter before maybe starting to head back down again in June?

Our internal analysis for the March quarter obviously I can't give you the guidance here, but the inventory was actually comes down slightly.

And obviously it depends on what the demand environment is.

Makes a revenue assumption but our inventory actually comes back down a little bit from the high water mark we said in this quarter.

Okay thanks a lot, guys.

Thank you.

Welcome.

And we'll move to Simona Jankowski with Goldman Sachs.

Hi thank you.

Just a quick modeling question first on your guidance of $0.33 for next quarter.

Can you just expand on if that's based on a flat share count or should we assume a declining share count behind that guidance just as a starting basis point?

Well, a lot of that's going to be based on what the stock price is over the next 90 days, still with treasury waiting in there, but we would expect it to be plus or minus 0.5 million shares probably.

Okay.

Okay so that didn't include any of that benefit basically, if there was a benefit from the buyback?

You're in total lack stock buy back.

No, it did not.

Okay.

And then the other question, and I'm not sure if you'll be able to really comment on this or not.

But it was interesting earlier today on Arrow's call, they commented on having a book-to-bill which was between 1 and 1.1 across their end markets and in particular, commented on reasonably decent demand by their small to mid-sized customers.

And this is something that is definitely not consistent with what most of the other analog components suppliers have been saying.

So just curious if you guys are in any position to maybe comment on why they're seeing a stronger pattern than yourself and others that you compete with?

I think that that book-to-bill ratio is very encouraging for our sales and for other suppliers generally speaking.

Certainly, our book-to-bill ratio is colored by their inventory holding pattern.

If we look at our book-to-bill ratio for our distributer business versus our direct business, our direct business was higher than the 0.94 reflecting the fact that they're absolutely taking inventory out of the channel and out of their business, so we see that as a positive indication.

They said that their small to medium customers really have limited inventory and they see no issues from that.

But obviously they did indicate that their larger customers it's more difficult to see where that's going.

So overall, we're quite encouraged it's sort of confirmed our feeling relatively in the marketplace that this is not a long-term phenomenon that this is really fairly short-term in nature.

Sure, and I guess maybe just to reconcile so the percent of your business that is actually direct, the reason that that book-to-bill was not necessarily above one is because those tend to be larger customers.

That's why they're direct.

Is that the kind of [correlary] to that?

That's true.

The larger customers in general tend to be direct.

And larger customers have larger volumes so when they have any kind of reduction they're more meaningful.

If you look at the smaller customers, Simona, we have grown our customer base from about 50,000 customers we have quoted in the past to 55,000 customers that we have really calculated very recently.

If you look at analog customers that grew by 177, if you look at our 16-bit customers, they're now in the thousands, and even the volume 16-bit customers were up 38%,

So if you count all of the smaller new customers we're adding, that book-to-bill can easily be positive.

But see, we don't take bookings from those small customers.

Our distributors take bookings from the small customers so that number could be extremely positive for us too.

That's why all of the strategic product lines with small volumes and new customers are all growing.

Okay so we can really think of that as a somewhat leading indicator for you guys?

I would think so, but the conclusion with Arrow with their book-to-bill ratio that they quoted is they still guided [inaudible] be flat to minus four.

So even with a book-to-bill ratio, that was [inaudible] one, the phenomenon of fewer work days or ship days or other elements are obviously reflected on their overall business also.

It also means they can pick a larger customer is larger than even the smaller customers having positive book-to-bill.

Right.

Great.

Thank you very much.

Welcome.

Next we have Chris Danley with JP Morgan.

Hi thanks, guys.

Quick question on gross margins.

If we just assume that March quarter revenue is flat or flat to slightly up, does that mean your gross margins would probably be flat or down or up in that environment?

If it's, if March quarter is flat, our gross margin probably would be flat to maybe even slightly up.

Got it.

And then Steve, can you just talk about the transition to Ganesh?

I mean, can we expect you to completely phase yourself out over the next year and why now?

Anything else?

Oh.

There's really no-- as the press release said, there's really no change in the direct responsibilities that Ganesh has in terms of his managing the [inaudible] with microcontroller business, all of the 16-bit microcontrollers business, digital signal processor business, any future architecture with developing, he has the automotive business , he also manages the Microchip Thailand plant.

So he has substantial responsibility.

But in the global marketplace today, him and I both travel like crazy, so we have set a system where when I'm traveling, none of the activity has to essentially go on hold because if he's here and if he's traveling and I'm here, so he'll just help me in the broader functions of the Company like strategic planning, our annual operating plans, our quarterly reviews, our monthly reviews and internally and externally and all that, but there is no timetable for me phasing out.

I'm only 51 years old.

Don't push me out yet!

Many of the investors have met Ganesh, and when we've gone to conferences, and you can expect to see him a little more visible there.

Again, helping to share the load with Steve when Steve's traveling, visiting customers or other business activities.

Okay thanks, guys.

Next we have Chris Caso with Friedman, Billings and Ramsey.

Yes, thanks.

I wonder if you could just clarify some of the earlier comments, and I'll let you know what I heard and correct me if I'm wrong.

It sounds like the majority of the weakness that you saw coming into the quarter was related to the seasonal businesses that are based in Asia.

I guess if you comment a little bit on the daily run rates that I guess you've seen and are seeing in the U.S. and European Markets, which I guess are a little more tuned to the industrial markets.

Have those held up or are those daily run rates down also?

Well Europe is doing very good.

What would you say for Americas?

I would say slightly weaker.

Slightly weaker, sure, than our expectations.

Europe is doing extremely well.

Either we just got a bit of product traction or the general, our regional distribution network in Europe has always been significantly stronger.

There are really no regional distributors left in the U.S.

They've all been gobbled up the [inaudible].

So in the last several years, we have built the demand creation engine in U.S.

And is doing extremely well,and Future Electronics is do being extremely well for us.

But when you go to Europe, in each of these countries, the biggest distributer in every country we have in Europe is usually one or two regional distributors so that's very very mature network.

And over the last several years, they have responded extremely well to our new products, 16-bit, analog and others because they never had any competitive lines for those products.

So we're doing actually extremely well in Europe.

Last quarter was really pleasing and the European economies are doing relatively better than U.S. and their economies.

Asia was the weakness.

Okay.

Well and I guess if you just remind us kind of what typical seasonality is as you go into the March quarter, and I guess typically you have more selling days in the U.S. and Europe and typically that picks up and Asia turns down.

Is that the correct assessment?

Yes.

I think in many years what we see is Asia has a couple of weeks off during the Chinese New Year, so driven by that, you do less number of days, Asia is usually flattish.

It can be down too but it's usually down-to-flattish.

It has an overall growth but because of loss of number of days, it really, the general growth makes up for the number of days lost.

Europe does very well and U.S. does okay.

So we have a good chance of really being up here in the March quarter.

Okay.

And I guess the swing factor there, we'd be watching would be those daily run rates in U.S. and Europe, I guess, for revenue to actually be up in the March quarter then?

Yes, and the daily run rates also in Asia.

I mean, Asia has still 43% of the business.

Is it something like that?

Yes.

Right.

But you would still, typically expect that to be down in the March quarter in a typical year though?

The daily run rates are not down.

They just have less number of days.

I see.

If you want the daily run rates to grow and if there's any softness now, we expect that to recover, and news in the economy is starting to get positive.

The consumer conference is starting to get positive, other consumer numbers came out were pretty good so oil prices have come down, so whatever is driving the current weakness, it's already on the way to mending.

And hopefully, by next quarter we see that the consumer is back on the mend and we want the daily run rates including Asia to be up but then there are a less number of days.

Asia comes back from the Chinese New Year and generally speaking, the rate of activities in the factories compensates for the fact that they've been off for five or six or seven days and that's been the pattern that we've seen and that leads into June and September which are obviously traditionally our strongest periods.

Okay, great.

That's great color.

Thank you.

Next we have [Uti Orshi] with UBS.

Hello.

Thanks for taking my question.

Can you quantify for us the impacts of the Thai coop, if there was any, wether you were able to make up the loss business during that period, and if some of that spilled into the December quarter guidance?

In the Thailand coop, we basically were impacted for a portion of just one day.

Okay.

The day the coop happened, all the government offices were closed and public transportation system was closed and the airport was closed down.

And so that was really the only day and if it happened in the middle of a quarter, there'll be absolutely no issue.

But it happened about 10 days or so before the end of the quarter, so it created a flurry of activity and out of-- there was another issue where Thailand changed their airport in Bangkok, they shut down the airport on the 29th of September and opened a new airport they had been building for awhile, and whoever scheduled the airport start on the 29th of September should be shot!

But somebody had a key result to make for the quarter, a box to check and so there was some flurry of activity there.

Altogether, I don't think we lost much.

I think we made up most of it but there was some impact in a few $100,000, not really very meaningful.

And just one last question.

Thanks for that by the way.

Just one last question on the December quarter guidance.

Revenues were down 5%, gross margin is kind of flattish and yet the EPS is going to be flat.

How do we think about how you're going to flex OpEx and would that be a new run rate to use if we think about in March quarter?

No, EPS is down from $0.38 to $0.36 on a nonGAAP basis and it's down a further $0.01 on a GAAP basis, so --

Just look at GAAP-to-GAAP and nonGAAP-to-nonGAAP.

It's really the FAS 123 really confuses it.

The numbers we just announced were $0.38 without the effect of equity compensation and that $0.38 comes down to $0.36.

Right.

The GAAP numbers were 36 and they come down to 33.

Okay, that's clear.

Just let me just go back on one point.

If I look at your June quarter, if I had to look at gross margin on a GAAP basis also are you able to quantify that for me just so that I can have a clear [train]of what the impact is and have a good comparison for June and September, [inaudible] to December?

June quarter was 60.36.

Correct.

And this includes is on a GAAP basis?

On nonGAAP.

On GAAP basis do you have that?

They were the same.

There was no impact of share-based compensation in the June quarter because it wasn't flowing through from the inventory into the P&L.

The first quarter that's going to occur is in the December quarter.

Okay.

That's very clear.

Thank you very much.

You're welcome.

Next we have Tore Svanberg with Piper Jaffray.

Yes, good afternoon.

First of all, Steve, you said there's a good chance maybe business bounces back in March.

Is that more predicated on what you saw a couple years ago or are you actually also hearing from your customers that this will be a very temporary slowdown?

Well, I'm just reading the tea leaves.

What I hear, what I see, the customers are still relatively positive about the business prospects, the new designs we're winning, the economy seemed to be on the mend when you read the reports from other large consumer giants, other system companies and what they're saying.

There is a lot of money going back into consumers pocket to a significant decrease in interest rate, I'm sorry, increase in oil prices and gas prices and stuff like that, so I'm just building a view from that.

I don't have bookings to reflect that.

That's just in this environment, you don't really get a tremendous amount of bookings for the next quarter year.

Great, thanks.

And also, Gordon, maybe I can ask the inventory question a little differently.

You said combined with the channel the level is 144 days-- 134 days and that's quite low to historically.

At what level would maybe the supply chain get nervous?

Are we talking about this level or could it go down further?

Well, I think that the G2 from the distributors are they feel that they can take it down modestly lower, but I'm not sure that we have the insight to know what their end goals are here, Tore.

Certainly our lead times continue to be short.

We're well placed to be able to deliver.

Part of the concern we have is then are we really getting brokered to an extent and again, one of the factors that the distributors earn their margin on is based on inventory holding as well as receivables and design creation and other factors, so it's at a stage where I wouldn't expect to see substantially, substantial reduction in those channel inventories.

But I suspect if you'd ask me that question when it was at 2 or 2.1 months, I might have probably answered the same way, so the right guys to ask are and [Outned] and see if you can get some commentary out of them.

Fair enough.

Finally, is your analog gross margin still running ahead of your corporate average?

We don't break the gross margin for product lines for comparative reasons.

Okay thanks again.

Next we have Sumit Dhanda with Banc of America.

Hi.

Just one question.

Steve, when you actually lowered guidance for the September quarter, just a little before the quarter closed, my recollection was that your analog business was tracking towards the high end of expectations.

Did it see a very sharp slowdown right at the end of the quarter?

Is that what happened and has that been the area where the slowdown has been the most dominant early through this quarter?

Well, I do not think that when we change our guidance for the quarter, we had modeled that new guidance across the product lines to break them out by-product line.

You may recall, the coop had happened the night before, and not knowing the impact it would have on the manufacturing plant on a business, and not having fully modeled what the impact of Asia and all that might be, we were going to a conference and we're going to get ton of questions and we were, it was actually your conference.

Exactly.

But your conference, yes, and we were in the air as the press release had been drafted, so we had not modeled the impact of the reduced guidance which was from 4% to 2% across the product lines, and I don't think we implied anything different.

And if we did, we had not modeled it completely.

Okay, because my recollection was that you had indicated that 16 and analog was tracking to the high end of expectations.

Okay, all right.

Thank you very much.

16 definitely yes.

Analog we do not imply that I think.

I think the volumes in analog are such that it's getting to be somewhat of a more mature business.

We certainly didn't have the visibility to imply that.

If we said that unintentionally certainly, that was not what we were intending to do.

Okay thank you very much.

Welcome.

And we have time for one more question and that's from Jeff Rosenberg with William Blair & Company.

Hi thanks.

I guess my question is did, I may have missed it, but did you give the break out of percentage of sales of microcontrollers, analog and memory for the quarter?

We did not.

We gave the growth, the last quarters numbers but we can also give you the percentage.

Sure.

Just hold on one second.

While you're looking I'll ask you a qualitative question.

On the 16-bit when you look at the volume customers, is that still heavily weighted towards the dsPIC product lines or have you started to see some of the newer product lines from a year ago begin to enter volume, I mean, getting designs going into production?

The volume of customers obviously is still predominantly from the dsPIC 30 but we definitely have the PIC 24 and the dsPIC 33 starting to ramp in volume as well.

But in terms of number of customers it's still dominated by the fact-- we have long design cycles if you remember.

It takes 24 months to design in so on average and we have some that are faster but for the most part, today's volume of customers are primarily in the dsPIC 30.

So when you look at the dsPIC and where it's been successful, I mean do you feel like it's weighted in one direction towards niche-type DSP type applications, like motor control and things like that?

Or is it more towards areas where it's the more robust, just microcontroller capabilities are really what drives success?

I mean, is there a waiting towards where you see the products been the most successful?

Well the dsPIC really is a 16-bit microcontroller with a DSP engine on it, so it's core applications are primarily microcontroller applications that need higher computational power.

It goes into a very very broad set of applications, so yes, motor control is certainly is one of those applications but there are many many others as well that it gets designed into.

Okay.

And I guess --

Okay Ganesh.

On the revenue split, Jeff, so for September, microcontrollers were 80.1%.

That's down modestly.

It was 80.5 in the prior quarter, memories about 12, that was up 11.7 in the prior period, and analog is about level at about 7.9%.

Okay, thanks.

You're welcome.

And that does conclude our question and answer session.

I'll turn the call back over to Mr. Sanghi for any final or additional remarks.

Okay thank you very much for joining our conference call and we'll see you on the road at some of the conferences coming up.

And otherwise we'll talk to you on the next conference call.

Thank you.

And that does conclude our conference call.