微晶片科技 (MCHP) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology fourth quarter 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 Microchip's Chief Financial Officer, Mr. Gordon Parnell. Please go ahead, sir.

Thank you very much, Jimmy, and good afternoon, everyone.

During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such 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 31st, 2006, and our 8K 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, Executive Vice President. I will comment on our fourth quarter and full fiscal year performance, reviewing geographic data and discussing balance sheet and cash information, and Ganesh and Steve will then give their comments on the results, outline our guidance for the June quarter, and update other pertinent matters regarding our business. We will then all be available to respond to specific investor or analyst questions after the comments.

To facilitate the review of the information this afternoon, we will be using some PowerPoint slides. You should already have access to those slides. I would also suggest that having the press release available will enhance your understanding of the information we'll be sharing today. So with that, let's move on to slide 2.

Our net sales for the March quarter were $258.2 million. They were up approximately 2.9% from net sales of $251 million in the immediately preceding quarter, and up approximately 4.5% from net sales of $247.2 million in the prior year's fourth quarter.

Next, I'd like to comment on our earnings for the quarter. So, moving to slide 3. In the detail on this slide we are providing GAAP and non-GAAP information. I want to focus on the non-GAAP initially, excluding the effects of stock-based compensation and the tax benefit related to our tax settlement as indicated in the press release.

Gross margins were a record 60.52% for the March quarter, up 24 basis points from the December levels of 60.28%. With this result, we marked the bottom of our gross margins in this cycle in December, which were only off our previous highs by 17 basis points.

Operating expenses for the March quarter were 24.52%. They were down 21 basis points from operating expenses as of the December quarter.

Research and development costs increased $600,000 in the march quarter compared to the previous period. And sales and general administrative costs increased by $700,000 quarter over quarter.

Operating income for the period was $93 million, or 36% of sales, an improvement of 45 basis points from the December period.

For purposes of the non-GAAP presentation, a tax rate of 24% was used, that tax rate being in line with the prior guidance we had given the street.

Non-GAAP net income for the March quarter was $81.3 million, or $0.37 per diluted share, an increase of 3.3% from non-GAAP net income of $78.7 million or $0.36 per diluted share in the immediately preceding quarter, and an increase of 7.6% from GAAP net income of $75.6 million, or $0.35 per share in the prior year's fourth quarter.

With that, let's move to slide 4. And here, we're looking at GAAP information.

The operating performance on a GAAP basis really shows some very similar trends to that that I've indicated. Our gross margin, operating expenses and operating income all showed improvements from the December quarter. Operating income increased by $3.8 million from comparable measurements in the December period.

During the March quarter we completed the process related to a tax settlement. This settlement created a benefit to the P&L during the March period of $52.2 million, or $0.23 per diluted share. As indicated in the press release, the closure of this matter has allowed us to take a fresh look at our effective tax rate on a go forward basis, and we are guiding to 20% effective tax rate for fiscal 2008.

GAAP net income for the March quarter was $127.7 million, or $0.57 per diluted share, inclusive of all share-based compensation expenses and the effect of the tax settlement. The impact on the earnings related to the adoption of share-based compensation in the March quarter was approximately 7.8%, which was in line with previous periods of this fiscal year.

Moving to slide 5, looking at an annual basis, net sales for the fiscal year ended March 31st, 2007 were at record levels, $1.0397 billion, an increase of 12% from sales of $927.9 million from the previous fiscal year. This marks the first fiscal year that Microchip has achieved more than a billion dollars in net sales.

GAAP net income for the fiscal year was a record $357 million, an increase of 47% from fiscal 2006, or $1.62 per diluted share.

Moving on to slide 6 and looking at the comparable performance of '07 to fiscal '06, I'd like to focus on non-GAAP results. Our record gross margins for fiscal 2007 were 60.4%. This was an increase of 103 basis points over the results of fiscal 2006.

Operating expenses were essentially unchanged as a percent of sales in fiscal '07 versus the prior fiscal year, with operating income for fiscal 2007 of over $375 million, or 36.1% of sales. Net income for fiscal 2007 on a GAAP basis was $325.6 million, or $1.48 per diluted share. This represented an increase of over 19% year-over-year.

Moving on to geographic sales on slide 7. In the March quarter, Europe grew approximately 19% sequentially; Americas was essentially flat; and Asia was down approximately 6% sequentially. The March quarter has traditionally been a very strong quarter for Europe and that followed that trend. And Asia results are colored obviously by the Chinese Lunar New Year in that particular region.

Asia represents approximately 40% of revenues, Europe approximately 33% of revenues, and Americas the balance at 27% as shown in the pie chart. This is all based on the quarter ended March, 2007 ending data.

Moving to slide 8, looking at cash balances. As of March 31st, Microchip's cash and total investment position was approximately $1.3 billion with no debt on the balance sheet. During the quarter Microchip generated net cash flow from the business of approximately $100 million prior to dividend payments. Payments related to our cash dividend of $0.265 was $57 million, and we also reduced our short-term borrowings by $29.5 million.

In the fiscal year, we generated a record $470 million in cash flow prior to dividend payments for the year, which was $208 million.

Now, looking at dividends on slide 9, the dividend declared today of $0.28 per share was an increase of approximately 5.7% sequentially, and an increase of 30.2% over the same quarter in fiscal 2006. Dividend payments in fiscal 2007, as I indicated, represent $208 million. And the dividend payment that will be made in the June quarter based on the declared dividend will be at an annual rate of approximately $240 million.

Moving on to some of the balance sheet information on slide 10, initially looking at receivables, receivables increased by 3.7% or approximately $4.4 million during the March quarter. Collection performance was excellent during the quarter, particularly factoring in the geographical impacts of the Lunar New Year in Asia, and the traditionally longer terms for our business in Europe. Receivable balances are in excellent shape with minimal amounts that are significantly beyond established payment terms.

Moving to inventory information on slide 11. Here, I'm measuring inventories without the effects of share-based compensation so that we still maintain a comparative basis.

Inventory on our balance sheet declined by approximately $800,000 in the March quarter. It now represents 105 days of inventories, a decrease of 3 days from December. We are now in the middle of the range for inventories that have supported our business and we're very comfortable with where we are. Our lead times continue to be short, with the majority of our products being available within 3 to 5 weeks.

On slide 12, we're looking at inventories at our distributors, which continue to decline. It now represents 1.8 months of sell-through, down from 1.9 months as of the end of the December quarter. This is the lowest level we have seen historically, and relates to working capital management, not sales activity in the channel. Distributor sell-through, in fact, increased by 5.7% quarter over quarter.

When combined with the inventory on our balance sheet, the overall inventory in support of our business is near the lowest levels we have experienced for almost five years.

On slide 13, depreciation expense for the March quarter is shown at $28.1 million versus $26.9 million for the same quarter last fiscal year, and $29.1 million in the December quarter. Depreciation for fiscal 2007 was approximately $114 million.

Capital spending was approximately $9 million for the March quarter and approximately $60 million for the full fiscal year. Some level of projected fiscal 2007 capital ended up being pushed into fiscal 2008 due to the business conditions. Our capital expenditure forecast for fiscal 2008 is now $80 million, based on our outlook for this fiscal year. Depreciation is expected to be approximately $105 million for the fiscal year.

I'll now ask Gnash and Steve to discuss the performance of our business, and guidance for the June quarter, and update other business matters.

Ganesh?

Thank you, Gordon, and good afternoon, everyone.

I will now comment on the individual product lines, after which Steve will walk you through our guidance for the next quarter. Please move to slide number 14.

Starting with microcontrollers, our microcontroller business was up 4% sequentially, and up 6.5% over the year-ago quarter. Fiscal '07 microcontroller revenue hit an all time record at $834.2 million.

Our flash microcontroller business was up 7% sequentially, achieving a new quarterly revenue record, and was up 21.3% over the year-ago quarter. Flash microcontrollers now represent over two-thirds of our microcontroller business.

Additionally, we expect to ship our 2 billionth flash microcontroller later this quarter. And we believe this is, by a significant margin, the largest number of flash microcontrollers shipped by anyone.

Looking at one of our leading indicators, we shipped 24,847 new development tools last quarter, which was another all-time record. The record shipment of development tools demonstrates continued strong designment activity and acceptance of our products. Let's move to slide number 15.

Earlier this month Dataquest published their 2006 report for 8-bit microcontroller market share. Dataquest's report confirms that Microchip became the number one supplier of 8-bit microcontrollers in dollar terms for the first time. Recall that we had already achieved the number one position in units back in 2002.

Moving to slide number 16, a little more color on the Dataquest information. According to Dataquest, in 2006, Microchip, with a growth of 15%, was the number one supplier, surpassing Freescale who declined by 12% and Renaissance, who grew by 4%. NEC, who held the number four position declined by 12%, and ST Micro, who held the number five position, grew by only 2%.

Also for the Dataquest report, Microchip is now not only the number one 8-bit microcontroller supplier, but is also 22% larger than Freescale at the number two position. These results exemplify the strength of Microchip's differentiated business model in producing sustained industry-leading results.

Moving to slide number 17, on 16-bit microcontrollers our business was up 41% sequentially and up 135% over the year-ago quarter. Our 16-bit design win momentum and development tool sales remain very strong.

The number of volume 16-bit customers grew to 735 in the March quarter from 638 in the December quarter. In terms of 16-bit customers of all volumes, that number is in the several thousands.

We shipped 3,278 16-bit specific development tools in the March quarter, bringing the total shipped to date to 23,427. We now have 92 16-bit microcontroller in production.

Moving to slide number 18, this slide compares the growth of our 16-bit revenue with the high-end 8-bit microcontroller product line called PIC18. PIC18 has been a very successful product line for us and was introduced four years prior to the introduction of the 16-bit product line.

The graph shows that the growth of 16-bit microcontrollers in revenue is equivalent to the growth of the high-end 8-bit, despite a very demanding comparison, including longer design times associated with the 16-bit products.

On slide number 19 we have the analog product performance. Analog products were down 3.3% sequentially. However, fiscal year 7 analog products revenue was 24% higher than fiscal year 6, and hit an all time record of $82.7 million.

While the market for analog products has been challenging, with the majority of competitors reporting significant sequential declines in the March quarter, we appear to have the best reported performance in analog among our competitors and we believe we're continuing to gain market share.

The number of customers buying our analog products grew to 12,147 from 11,687 in the previous quarter.

Serial E's core memory products, the net sales were down 0.7% sequentially. Pricing declined moderately quarter over quarter.

With that, let me now pass it to Steve for some general comments and our guidance for the June quarter. Please move to slide 20.

Steve?

Thanks, Ganesh.

Today I would like to first reflect on the results of the March quarter, then I will discuss the guidance for the June 2007 quarter. All of the figures in our comments will be prior to share-based compensation expense in order to do a fair comparison to the prior quarters. The figures with share-based compensation expense are all available in the press release.

We beat our guidance for the quarter despite very challenging industry conditions and a broad-based inventory correction. Our sequential growth last quarter was higher than all other semiconductor companies that have announced results so far, and most companies had sequential declines.

Our net sales were up 2.9% sequentially. We achieved another record gross margin of 60.5%, thus we demonstrated a peak to trough gross margin decline of only 17 basis points in the cycle, and then we achieved another record growth margin just one quarter after the trough. We also achieved an operating profit of 36%.

This quarter also marks the 66th consecutive quarter that we have been profitable, a testament to the resilience of Microchip's business model over many business cycles.

We shipped a record number of new development tools, indicating strong acceptance of our products and strong designment activity. The record shipment of development tools is also an indicator of the success of Microchip's demand creation initiative.

In the last several years, we have increasingly taken more direct control of demand creation. We have added Microchip direct resources, as well as regional distributors, catalog houses, design houses and manufacturers' representatives. All in all, this retooling of demand creation has been very successful.

As one evidence of the success of our demand creation program, is that our global distribution net sales were up 9.3% sequentially. It clearly shows that our demand creation efforts are being successful, and that customers are then buying the product from global distributors. In addition, the relationship with Arrow is normalizing.

The Dataquest report that Ganesh highlighted clearly shows the evidence that the difference in our performance versus the industry's has widened, further validating our demand creation strategy.

Another point I would like to note is that Microchip proved once again that the book-to-bill ratio of the prior quarter does not correlate to the revenue for the following quarter. In the December quarter our book-to-bill ratio was 0.97, and some investors questioned our flat guidance while most competitors were guiding down significantly. We in fact achieved a growth of 2.9%, reaffirming that the book-to-bill ratio does not predict the next quarter's revenue. Having said that, the book-to-bill ratio for the March quarter was 1.01.

So, please move on to slide number 21. So now, the guidance for the June 2007 quarter.

As we looked at the June quarter, we took several factors into account. We looked at our own bookings and business activity in various product lines. Our starting backlog for June quarter was slightly higher than that for the March quarter. We also looked at the inventory situation. The inventory at our distributors hit another all time low of 1.8 months. The historical range has been 1.9 months to 3.3 months.

And as we have talked before, we believe that the bulk of inventory correction was over in the December quarter, and the rest of it got completed in the March quarter. Our own inventory continues to be in very good shape. Our internal inventory ended at 105 days, down 3 days from last quarter, and significantly lower than our guidance of 111 days.

We also looked at lead times. Our lead times remain in the three to five weeks range, with most products available off the shelf. So, next slide please.

The June quarter is also a seasonably strong quarter for Microchip. Therefore, taking all these factors into account, we expect our June quarter net sales to be up about 5% sequentially. Our internal inventory is right in the middle of our historical days of inventory, and we are heading into another up cycle.

Therefore, we have started to increase the wafer starts in Fab4 in Gresham. We're also increasing production rates in our assembly and test facility in Thailand. We have also increased our CapEx forecast for the fiscal year 2008 to $80 million from $60 million actual for fiscal year 2007.

Non-GAAP gross margins for June quarter should be up by about 25 basis points to about 60.75%. Non-GAAP operating expenses are expected to be about 25%. The effective tax rate is expected to be about 20%. Non-GAAP earnings per share are expected to be about $0.40, and earnings per share with share-based compensation expense should be about $0.37.

We expect to build approximately $110 million of net cash flow before payment of $61 million of dividends just announced today, and we look forward to sharing this cash with investors with another increase in dividend in the next quarter.

So, let's move on to our final slide, number 23.

So, in this I'll summarize a few highlights of the business. We have achieved continued strong growth through market share gains in the 8-bit microcontrollers. And Dataquest reported that we became number one in 8-bit market share in revenue in 2006.

We have gained traction in 16-bit microcontrollers, demonstrating strong sequential and year-over-year growth.

In our analog business, we outgrew all other major analog competitors, with 24% growth in fiscal year 7 over fiscal year 6.

In our gross margin performance, we demonstrated a near 17 basis points peak to trough decline during the industry cycle. We have achieved record gross margins again, and we have started the climb towards our long term guidance of 62% gross margin.

We have shown strong growth through our unique demand creation model. The revenue coming from our distributors has continued to increase, reflecting that our demand creation efforts are channel agnostic, and we have boldly headed into another up cycle.

Based on the results I have just summarized, we find ourselves uniquely positioned to continue to gain market share in all of our strategic product lines and outgrow the competition.

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

Certainly. (OPERATOR INSTRUCTIONS.) Tore Svanberg with Piper Jaffray.

Yes, good afternoon. My first question is on the channel inventories. You said they're now at 1.8. The historical range is 1.9 to 3.2. So, just going forward, what do you think the new historical range will be?

Our feeling is that distribution is continuously setting into a mode of high returns on their own inventory, getting more cycles of inventory. And I don't think it's ever going back to the high point of 3.3 before. Will it always stay 1.8, or it could go closer to 2 or even slightly higher? That is certainly possible. But, the whole average inventory distribution we'll carry will be much lower than the average than ever before.

Great. And my follow-up question is, could you comment a little bit on how business has been so far in the month of April?

The business in the month of April has continued to be very good. Bookings are very strong. They should be -- April should be up well over the prior first month of the quarter. So, there are really no issues.

Thanks. Congratulations on another impressive quarter. Thank you.

Thank you, Tore.

Simona Jankowski with Goldman Sachs.

Hi. Thank you and congratulations on your share gains. With your being up 19% in the quarter, is that just seasonality or are you starting to see some of the effects from signing some regional distributors there in the last couple of years?

It's -- Simona, it's a combination of effects. Europe is seasonally a strong quarter, March quarter, because the March quarter tends to have no holidays. The other quarters have either Easter or summer or Christmas or some other holidays. So seasonally, it's a strong quarter.

But, the results in Europe are absolutely tremendous and they go far beyond really what the seasonality would imply. So, there are significant share gains resulting from our efforts in the channel, adding regional distributors, adding design houses.

But, a lot of it adding a large number of our own people who are creating demand. And in fact, a bunch of their demand is getting satisfied through the global distributors, albeit at a slightly lower margin.

Our global distributors were up 9.3% sequentially, significantly more than Microchip was up total. So, the total global distribution issue that has been around for awhile in the minds of investors and analysts should really be put to bed here.

And then just one more question on the manufacturing side. I think you had initially expected less upside in your growth margins while you were reducing your internal inventories. But, as it turns out, your inventory came down more than you had expected while margin was up more than you had expected. And it seems like guidance is similar for the June quarter. So, I just wanted to get a sense of what turned out better than you had thought in the quarter.

Gordon, do we know that?

I think gross margins were really fairly close to what we had guided. I think many of the factors in our gross margin continue to be positive. We see depreciation as a percent of revenues continuing to help us to drive gross margin. We see favorable product mix from this current quarter with microcontroller being a larger component of our business.

As we look forward, those will continue to be factors. And as we start to increase the activity levels in our business, both in wafer fab and in assembly and test, over time, as those costs begin to represent themselves in subsequent quarters, that will help us to continue to move towards the 62% goal.

What was really very important for us was that these revenue levels that -- both inventory on our balance sheet and in distribution declined, showing that we're very well balanced and very well positioned to be able to take advantage of the conditions in fiscal '08.

Great. Thank you very much.

Michael Masdea with Credit Suisse.

Yes, thanks a lot. When you talk about hitting the bottom and going into an upturn, one thing that you typically hope for is underlying demand growth is starting to accelerate as opposed to just inventory ending. It seems to me maybe that's more like the latter in this case, so let me know if you're -- are you seeing something different or any sort of acceleration from an actual demand perspective rather than just a supply chain perspective?

Well, I don't really know how to decipher it. We believe for our business most of the inventory correction was over in the December quarter as we said before. And we actually guided March quarter to be flat and we actually beat that by 2.9%.

So, the march quarter itself represented some of the growth from various initiatives we have had in new product lines extended and other than the demand creation efforts. And June quarter is just heading into another strong quarter, partially seasonally, partially continuing to be the results of those efforts.

So, I do not consider the June quarter guidance to be a bounce up from a depressed March quarter which had a substantial inventory correction. March quarter was actually up.

Now, if you compare our results to many of the others who have announced that their results for March quarter were down 7%, 8%, whatever those numbers were, and they were guiding significantly up for the June quarter, those results would have the inflection coming from a depressed level to a balance. Our numbers are just -- do not show that.

All right. That makes sense. I guess in a follow-up then, I guess can you give us sense of your growth you're seeing right now? What percentage or what piece of it's really coming from what you think is market share gains and going into new markets versus underlying demand? And to that end, what do we look for beyond 16-bit and analog? Are there other things we should start to think about for your future?

Well, Michael, we cannot separate the business that we won, whether that -- given design win we won is a new demand or it's a market share regained. I mean, it's really one and the same thing. There are customers, the new designs come up and maybe in the prior model they were using somebody else now they're using us. And that's a gain of market share.

Another case is the product goes into a brand new application maybe, where something else was used, a Micro wasn't used, or it was -- it's really -- with 55 to 60,000 customers we have worldwide, that's a very, very difficult question to answer.

So therefore, our focus really is to continuously build feature-rich products and then really market them with the best sales system in the industry that really creates demand and continues to be focused on winning every design out there. And sometimes that design is a brand new design, other times or most times our designs are what were previously -- our competitors are doing. So, it's a combination.

Well, it's working well. Thank you.

Yes. So the other thing you can look at is look at the underlying markets, how fast they're growing. When you look at the underlying markets how fast 8-bit is growing or 16-bit bit is growing or analog is growing, those numbers are available to you from other industry sources.

And I think the markets have been relatively flat. There's not a strong growth. So, that would really highlight that much of our success is coming from producing superior products and superior selling efforts, and hence a larger portion of that is really market share gain.

Got it. Thank you.

Chris Danely with JPMorgan.

Thanks, guys. Hey, Steve, can you give us a sense of what sort of I guess time or time amount or revenue level it would take to get to your target gross margin? And do you guys have any target operating margins out there you'd want to throw out?

Giving you a specific number is difficult. We still see in the next one to two years getting to the 62% range in terms of our guidance. This is on a non-GAAP basis, just to make sure we're speaking from the same currency perspective.

As you go farther out in time, many of the factors become more difficult to predict, whether that's product mix or utilization factors or market conditions. And we're always continuing to look for ways where we can grow the business profitably and ensure that we can continue to gain market share and drive our top line growth.

So, there's a complementary aspect of that, Chris, that we think is very important. So, we're still comfortable with the range of the next one to two years to get to the 62% level.

Okay. Then the follow-up is are you guys seeing anything new or more competitive from the competition, especially now that say Freescale has gone private and seems to be focusing on microcontrollers more?

Well, Chris, when is it they said that they were not focusing on microcontrollers? I mean, I think we heard that in several different reincarnations when they were part of Motorola then separated then private then pubic and back private.

So, I think you have to separate really some facts from some rumors and speculation here. Let's take a look at some of the facts. Their VP of Distribution they hired from Microchip a couple of years ago is no longer there. It's also a fact that his replacement now reports at a lower level in the organization. It's also a fact that Microchip's demand creation model has been very successful. I've spoken about it quite a bit already.

And the rest are rumors and speculations. Why did he leave and what would they do with their program and would they focus on microcontroller or not focus on microcontroller. We don't really care. You've seen us over time, that we focus our resources, our channel partners, and our strategies are really -- we're several steps ahead, usually, and focus on our own moves rather than the moves of the competition. So, I don't really know what they might or might not do.

Okay. Thanks a lot.

You're welcome.

[Gil Alexandre] with [Garfield Associates].

Good evening. Could you give us some color on your tax rate going down to 20%? And would that tax rate hold beyond the next year?

As we said in the conference call here and in the press release, we settled a number of years of tax audits related to the change in the $52 million, which was a favorable P&L perspective. Much of this is related to the complex nature of a tax structure of a company like Microchip. We are an international organization with many tax boundaries that we need to deal with, and many taxing authorities that, again, we need to be responsive to.

Certainly, as we look forward, provided there are no substantive changes from a tax basis in the main jurisdictions that we're in, we believe that 20% is sustainable.

Thank you, Gordon. And congratulations.

Chris Caso with Friedman.

Hi. Thank you. I wonder if you could talk a little bit with respect to capacity? And you talked a bit about the CapEx goals for this year. Where do you sit right now in terms of the Gresham utilization rate, and isn't that something you need to think about in the future in terms of doing some further capacity expansion as we're looking into what's potentially the upturn here?

Well, there are really no capacity issues, short term or even slightly longer term. We have shown slides before that we have an installed capacity of $1.4 billion between our two fabs. From the run rate we're running at today, that's a substantial headroom. And we have -- in addition, we have significant clean room space available in the Gresham fab to get another $300 million more than that. So, we've got a capacity all the way up to $1.7 billion. And then a portion of our output is really coming from foundries where we outsource production. So over the next few years, that gives us another couple of hundred million dollars of revenue. So, we think we have capacity to get to $2 billion, which is substantial headroom before we really have to worry about really getting to any kind of capacity issues. And similarly, we have capacity in assembly and test.

Now, there's an ongoing requirement of some equipment, certainly assembly and test and some in fab, because when we bought our Gresham fab it was not a 100% equipment match to really what we needed. So, as we ongoing increase our production, we have to add certain equipment as we go. And that represents the $80 million forecast we have just given you. And a portion of that is really actually what we pushed out from fiscal year 7 into fiscal year 8. When the inventory correction hit in the December quarter, we basically pushed out several million dollars of capital into this quarter. So, we can see that almost at a maintenance level capital of about $80 million or so, we've got significant headroom in capacity.

Great. And as a follow-up, I'm sure you guys saw what -- I guess it was a week or so ago, what Linear Technology decided to do. There's some other companies in the space that seem to be having a different attitude towards capital structure and taking on debt with part of that being to buy back stock. Obviously, you guys are clearly focused on the dividend. But, taking a look at what someone like Linear decided to do, would that be something that you guys have entertained? Have you looked at any sort of changes to the capital structure such as that?

Well, you have to begin with caring about the shareholders and being shareholder friendly. And we have been told by investors and analysts over time that we have been one of the most shareholder friendly semiconductor companies, largely through a very, very strong dividend program. So, we were the first ones to start paying dividend, or significant dividend, and we're now really one of the highest dividend paying companies in the industry. So, your question really is whether we'll go to the next step and buy a large portion of the Company back, together with a convert kind of transaction like Linear did. We are continuing to review such alternatives, but we really have not made any decisions yet.

But, you'd be open to a transaction if it were accretive and made sense for you guys?

Well, we always look at all available alternatives. In general, we're not fans of financial engineering. We'd rather focus on product development and selling and grow our business. However, we constantly look at all available options to grow shareholder value and this is really no different and we're studying it.

Okay, great. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS.) [Ian Eigenbrot] with Banc of America.

Hi. It's Sumit Dhanda. Hi, guys. Congratulations on another stellar quarter.

Thank you.

I had a couple of questions, Steve or Ganesh. It seems like consistently you're flash microcontroller business outpace the rest of the 8-bit controller category and that's now over two-thirds of the business. As we're thinking about the long-term growth for the 8-bit category, and this continues to be a bigger and bigger part of the mix, do we really think about the overall growth rate for the category moving higher, or as the 8-bit flash controllers get more mainstream the growth rate starts to taper off?

If you're talking about the 8-bit market overall, if you've noticed over the last several years, that's been a steady, relatively flat market. What has been growing inside the 8-bit market is the flash and the programmable -- and reprogrammable portions of that market.

And the story behind our growth has been writing the programmable market share, and then with flash the reprogrammable market share. And I think -- we expect that there is still lots of growth left as more and more of the overall 8-bit market becomes programmable or reprogrammable in its nature.

Right. I understand that. But, my question was inherently it seems like the flash-based market's getting higher growth rates. Do you think that growth rate ultimately comes down, or do you think your overall microcontroller category migrates to that higher growth rate which has been happening in the flash category?

I'm not really sure.

Some of both. I mean as -- I think a year ago the flash market was about -- or the programmable market was about 40% of the total 8-bit microcontroller. I believe the number this year is about 45 or so, 45%. So, as that flash market becomes a larger and larger portion of the overall market, then definitely its growth rates will come down. At the same time as that becomes a larger and larger portion of Microchip's business and growing at a faster rate, our growth rates will accelerate. So, I think the answer is yes to both of them.

Okay. Very good.

Somewhere in the middle.

And the follow-up I had was, Steve, you mentioned that the relationship with Arrow has "normalized." Could you just expand on what you meant by that?

Well, I think I would look at the larger issue first. The entire worldwide Microchip sales and applications team really has one simple mission that they execute on a daily basis, and that mission is really drive design wins to revenue. We put that as our singular focus and we don't really focus on the commercial aspect of where the customers want to buy the product.

Whether the customer buys the product from Microchip, from a distributor, from a Microchip website, or any other way, we think it's completely in the hands of the customer. We don't direct the business one way or the other.

So, with a totally non-commissioned sales force, which is unique in our industry, there is no corporate or individual incentive to direct the placement of the business in any particular manner or to any particular channel.

So globally, we're dedicated to winning designs. And beyond that, we're channel neutral in terms of where the customer wants to buy the product.

Now, our distribution business five years ago was about 65% of our (inaudible). And now, our distribution business is about 65% of the business. So, a lot of the stories and rumors you hear about Microchip -- our distribution is just not correct. All we are doing is taking more direct control of our demand creation, and a large amount of that business continues to go through distribution because they're in the field, they carry inventory. A customer can quickly buy the product. They provide additional services like [kitting] and [con-bon] and programming and other.

So, despite the changes that we have made in the global distributors, our distribution business continues to grow. And I mentioned earlier the global distribution business was up sequentially quite a bit.

Now, coming down to your specific question, which is really about Arrow. With the resources that Microchip has added and the record demand that we're creating for our product, a lot of this demand is being served through Arrow. So, our business at Arrow is not falling off the log at all. Our business at Arrow is actually growing.

In the March quarter we just completed and we're announcing today, our net sales through Arrow channel was up 5.4% sequentially, more than sequential growth of Microchip in total. So therefore, the relationship itself with Arrow is normalizing. They're benefiting, we're benefiting, and our demand creation efforts are really positive for both.

Okay. Thank you very much.

You're welcome.

Louis Gerhardy with Morgan Stanley.

Good afternoon. This is [John Owen] calling in for Louis Gerhardy. Congratulations on a great quarter and congratulations on an equally good outlook.

My question actually has to do with I guess expectations for the next quarter. Do you have a turns target that you have, or a turns bookings target that you have to hit your goal?

Well, yes. The turns target is just a calculation based on the guidance we gave you minus the backlog we started at. We don't have that number here, but I did mention in my commentary that the backlog, starting backlog for the quarter was higher than it was for the March quarter. So, it's a calculation, but we don't have that number, not do we give out.

Yes, I mean, it's more of a subjective element, (inaudible) with distribution having a tremendous focus on working capital. And we've seen inventory come down. Often the backlog and the revenues or the product shift to distribution isn't indicative of what the point of sale results of that would be, also.

So, we look at all those factors in terms of determining what our revenue guidance is and where we think revenues -- or excuse me, where we think inventories are going to settle on our balance sheet also.

I see. Well, as a follow-up to that, is there a historical turns bookings rate that you've had in the past, to kind of give me a better indication?

Well, over the business cycles, the turns required have ranged between 25% to 75%. And I know that doesn't help you. And we have shown over and over, when we used to give the turns required years ago, that it does not correlate in our business. It absolutely does not.

When 90% of your business is proprietary products, the only person you're competing with is yourself. If the customer designing your product, they can't buy it from anybody else. They're going to buy it from you or they're going to buy it from one of your channel partners.

So therefore, whether that business was booked on March 25 for delivery into May, or whether it was booked on April 5 for delivery into May, it doesn't really matter. Therefore, starting backlog, book-to-bill, those things have not been meaningful indicators in our business.

And if you've been long to a Microchip investor, you will know that I've made that comment hundreds of times and I've shown many, many times, including the quarter we just completed with a .97 book-to-bill ratio in December, we were up 3% sequentially. So now it's .97 book-to-bill ratio we had a substantially higher turns requirement for March than we had in the December quarter, yet we beat the number. If we had given you that number in January, there would be a lot of concern. So, it simply raises volatility, it raises concerns, and the indicator is not valid.

Okay. Thank you.

You're welcome.

Jeff Rosenberg with William Blair.

Hi. Just real quick I wanted to ask, could you tell us what your market share is in the 8-bit market according to Dataquest?

I think Dataquest numbers--.

It's between 15% and 16%, as measured by revenue. And I think we can get you an exact number if you want.

No, that's helpful. Thanks a lot.

You're welcome.

Joseph Osha with Merrill Lynch.

Hi, there. Yes, following on from the previous question, do you -- is there some point at which you think looking at the 8-bit CAM that it becomes harder to gain share; 30%, 50%? When you think about this, is there any sort of theoretical limit as to how much -- how big you can get in this market?

There probably is borrowed in time. I mean, I think at the moment we see no real limitations to growth. At 15% to 16%, that says 84% or 85% of the market is still left for us. As we continue year after year, we find that we're able to find that growth. And I think a lot of that comes because the reprogrammable segment is growing a lot faster than the overall 8-bit market, and that's where we play the largest and that's where the portion of 8-bit is growing the fastest.

So there isn't -- when you thought about it, you haven't said, okay once we hit 30% or something -- well, obviously that's a long way from now, but there isn't sort of a number that you look at and say, all right, we can't get past that.

Well, Joe, in any competitive market with a number of players, it's not unusual to see that the largest player has 30% plus market. I mean, Xilinks has it, Altera have it, TI has it in DSPs. You can look at a number of different markets. People in the data end or flash business.

So, a market leader with -- if you look at last year, our growth versus the number second player, the difference was 27%. Our growth versus -- our plus double-digit and their negative double-digit. So with that kind of market share gains, I think we can continue to grow.

Is there a top number somewhere? It's way out there that we don't really worry about it right now. And while we approach towards that number, we think our 16-bit product line, our analog product line are rapidly coming where, over time, they become larger and sizeable where they pick up the slack.

Sure. And that 35% number, Steve, is reasonable if you look at other markets.

Just a quick follow-up then. In the 16-bit market, have you -- is the competitive environment at all different? As I look at the competitors it seems to be the same bunch of guys, but has it been different at all?

I think it's very much the same set of competitors. There are some who don't play in 16-bit, they only play in 8 and then they're on to 32-bit. But, many -- if you look at the numbers, 2, 3, 4, on 8-bit, they are they same or in that same group of top 16-bit players.

Sounds great. Please don't do a convert. Thanks.

(OPERATOR INSTRUCTIONS.) Uche Orji with UBS.

Thank you very much for taking my question. Just for Steve, if I look at your exposure to the consumer market, at the moment it looks like the global growth is offsetting the weakness in the U.S. Do you potentially think this could be a problem in the future if the U.S. consumer continues to slow?

Well, our business is global. We sell in every country in the world where it's legally allowed to sell. 75% of our business almost is outside the United States. So, with so much focus on the U.S. consumer, it doesn't really directly correlate to our business.

So, last quarter, what, 33% of our business was in Europe? So a third of the business is in Europe. And while the U.S. is about 25, some of the business which is in Asia comes back to U.S. through multinationals and others. So, if you are just for that, our best guess is our business is a third in Europe, a third in U.S. and a third in Asia.

So, we participate everywhere. And there is very strong growth in Europe. We know right now German and UK and a lot of other countries are doing extremely well. And all the slowing of China, gloom and doom scenarios have not come true. Our business continues to do very well in all those geographies. And people always talk about U.S. slowing down. I just have heard that forever. And we seem to be more than making up for it through other geographies, as well as superior market share gains.

That's also the content story. And it's true in consumer products just as it is other markets. But, just the number of microcontroller opportunities and white goods, small appliances, audio/video, other key markets that we look to continue to also give us a much more positive view of those, rather than looking at GDP factors.

Right. Right. Just another question. If I look at your OpEx sales, it seems to indicate your OpEx seems to keep growing marginally faster than revenue. And I presumed that's because of the investment in your direct sales force. Now, at what point does that start to stabilize and when should we start to expect to see some type of leverage on the operating expense line? Thank you.

I don't think that assessment is correct, unless you're looking at non-GAAP to GAAP.

Or longer term, perhaps.

Yes. So number one, if you just look at the GAAP numbers, they have option expensing. And if you look at the numbers a year, two years ago, they were not. So, it will show that the expenses have increased.

If you look at non-GAAP to non-GAAP, the long-term guidance we have been giving for long time is 24% to 25%. And we're seeing longer term, in the model we said it's 25%. We leave some headroom, 50 basis points to the average. So, if you need some investments or something, it could be closer to 25. Sometimes it could be closer to 24. Last quarter was 24.52 non-GAAP, right in the middle.

Okay. All right. That's clear.

We will continue to invest in new products and design creation model. It's critical for our business that we deploy those to get the results on the top line that are important.

I think for the entire previous three, four years, we have been making investments in [Sylvan] applications to turn up our demand creation model. I do not believe it has happened at the expense of higher operating expenses.

Okay. Fair enough. Just another question. If I look at your outstanding buyback, you -- I think in the press release you say 1.5 million shares you've bought back that's left in the program. In terms of the choice you make between dividend and buyback, what drives those choices? And should we expect that this program could be renewed or increased? I mean, this business keeps generating a lot of cash. And well done on that, anyway.

Our choice between dividend and stock buyback is unquestionably dividend has been for a long time. We have stated many times before that the only time we like a significant buyback is when market throws the baby with the bathwater, where the story is not understood, and we think the stock price is unreasonably depressed because of some concerns in the market which we have not been able to rectify.

The last opportunity we had like that I think was in 2003 during the SARS crisis in Asia. Since then, we really not have -- we have not bought stock. So, since we announced this large buyback a couple of quarters ago, we have not bought a single share.

Just to clarify what is available, we had a 2.5 million share buyback authorized back in '04. And there's about 1.5 million of that still available. And then in October of '06 there was an additional 10 million share buyback. So effectively, we have 11.5 million shares available to us in terms of the buyback.

All right. Thank you very much.

You're welcome.

Chris Danely with JP Morgan.

Thanks, guys. Just two quick follow-ups. Steve, I think you mentioned earlier that you expected -- I want to say a couple hundred million bucks worth of outsourced products in three or four years. Is that true? And can you give us a sense of how much of your products are going through foundry now?

Well, right now I think the foundry business is about 3.5% of our revenue, roughly. And we have said over 5 years it could be 10% of revenue.

And that still holds true?

What do you mean still holds true?

So, that's according to that -- a couple hundred million bucks, that's the way you got to that number?

Don't walk me into a forecast, but these are wild extrapolation. We're developing some products at foundries. We have some business plans where it needs unique processes, which we do not have inside. And so there are reasons to develop them outside other than spend the money inside. So, there are a lot of different reasons. Whether it goes to 8 or 10 or 12, 5 years out, it's -- don't pin me down on that.

Okay. And then last question. As we look at the rest of the year, how do you expect relative growth rates between [E-Squared] versus analog versus microcontrollers?

Boy, that's tough to call. Do you have anything--?

I mean, I think for microcontrollers overall, I suspect analog will be the fastest growing of the three lines. The 16-bit portion of our microcontrollers will be obviously growing even faster than analog. But overall, microcontrollers are probably a little lower than what analog is.

And on E-Squared, we're really not trying to drive growth in it as much as to have it as a complementary product line. And it will grow through the natural part of us growing the microcontroller and analog products.

Got it. Thanks a lot, guys.

Welcome.

And at this time, we appear to have no further questions coming in. Gentlemen, was there anything further that you wanted to add?

No, we just want to thank all the investors and analysts on the call. And we'll see you at one of the upcoming conferences. Thank you.

And that does conclude our conference. Again, thank you all for your participation. We hope you enjoy the rest of your day.

Bye-bye.