微晶片科技 (MCHP) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology first quarter fiscal year 2008 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, and good afternoon and welcome to our first quarter 2008 conference call.

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

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

We refer you to our press release of today, as well as our 10-K for the fiscal year ended March 31, 2007, and our 8-K current reports that we have filed with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

In attendance with me today are Steve Sanghi, Microchip's President and CEO, and Ganesh Moorthy, Executive Vice President.

I will begin by commenting on our first 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 September quarter, and update other pertinent matters regarding our business.

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

Net sales for the June quarter were $264.1 million, up approximately 2.3% from net sales of $258.2 million in the immediately preceding quarter, and up approximately 0.6% from net sales of $262.6 million in the prior year's first quarter.

Our earnings, we are continuing to include additional information in our press release related to FAS 123R.

Non-GAAP results excludes the effect of the adoption of this accounting standard.

Non-GAAP net income for the June quarter was $86.7 million, or $0.39 per diluted share, an increase of 6.6% from non-GAAP net income of $81.3 million, or $0.37 per diluted share in the immediately preceding quarter, and an increase of 6.5% from non-GAAP net income of $81.4 million, or $0.37 per share, in the prior year's first quarter.

GAAP net income for the June quarter was $80.3 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 June quarter was 7.4%.

The results by geography in the current quarter were mixed.

Asian net sales increased by 9.7% sequentially, while the Americas were essentially flat, growing 0.5% sequentially.

Europe net sales were down 5.4% sequentially in the June quarter after being up 19% sequentially in the March quarter.

Asia continues to be our largest geography, now representing approximately 43% of total sales.

Europe was approximately 30% of sales, and the Americas was approximately 27% of sales.

This measurement I'm using is based on where the product is delivered for manufacturing purposes for our customers, but doesn't necessarily represent where the design activity is taking place in our business.

Looking at operating P&L information, I'm using gross margin operating expenses information initially prior to the effects of share-based compensation.

Gross margins were 60.6% in the June quarter, reaching new record levels.

Operating expenses were 25.4% of sales in the June quarter, an increase from 24.5% in the previous quarter.

Research and development costs were $27.2 million, representing 10.3% of sales.

Sales and general administrative expenses were $39.9 million, representing 15.2% of sales.

Gross margins, including share-based compensation, were 60%, and total operating expenses on a GAAP basis, again after the effects of share-based compensation, were 27.8%.

The tax rate for the June quarter was 20.3%.

Our tax rate is impacted by the mix of geographical profits and a percentage of our cash that is invested in tax-advantaged securities.

The dividend that we declared today of $0.295 per share was an increase of approximately 5.4% sequentially and an increase of 25.5% over the same quarter in fiscal 2007.

The dividend payment that will be made in the September quarter will be approximately $64.5 million.

Now turning to the balance sheet, inventories in the June quarter increased approximately $2.8 million to $123.8 million.

It's now representing approximately 107 days of inventory.

Distribution inventories on the balance sheet fell $1.5 million quarter over quarter and represent approximately 1.8 months based on a sell-through characterization.

Combining inventories on our balance sheet and at the distributors, they would represent 138 days of total inventory, both elements of inventory measurement being essentially flat in days from the prior quarter.

Microchip's receivables at June 30 were $127.3 million, an increase of $2.7 million, or 2.2% from balances as of the end of March.

Payment performance by our customers continues to be strong with minimal balances beyond terms.

Our cash balance--our cash in total investments position was approximately $1.3 billion as of June 30.

During the quarter Microchip generated net cash flow from the business of $126.2 million.

Payments related to our cash dividend of $0.28 were $61.1 million.

Capital spending for the June period was approximately $25 million.

Depreciation expense for the June quarter was $26.4 million versus $28.1 million in the same quarter last fiscal year, and $27.9 million in the March quarter.

Our capital expenditures forecast is currently $70 million, and depreciation forecast is approximately $105 million, both for fiscal 2008.

With that, I'll ask Ganesh to discuss the performance of our business, and Steve will then follow on from there.

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.

Let's begin with microcontrollers.

Our microcontroller business was up 2.5% sequentially and up 1% over the year-ago quarter.

While we were not satisfied with results, they should be viewed in light of market conditions as reflected in the microcontroller business results announced so far by competitors like TI and Freescale DSBG Group, which is the relevant group for microcontrollers.

Freescale DSBG experienced a year-over-year decline in the microcontroller business, while TI was flat year over year as compared to Microchip's modest growth, and on a sequential growth basis, Freescale DSBG was about the same as Microchip, while TI's microcontroller business was also flat sequentially.

Our flash microcontroller business was up 3% sequentially and up 10% over the year-ago quarter.

Flash microcontrollers now represent approximately 69% of our microcontroller business.

Notably, we shipped our two billionth flash microcontroller during the last quarter and believe that this is, by a significant margin, the largest number of flash microcontrollers shipped by anyone.

Looking at one of our leading indicators, we shipped 28,294 new development tools last quarter, which is another all-time record.

The record shipment of development tools demonstrates continued strong design win activities and acceptance of our products.

Moving to 16-bit microcontrollers, our 16-bit business was up 24.5% sequentially and up 165% over the year-ago quarter.

Our 16-bit design win momentum and development tool sales remains very strong.

The number of volume 16-bit customers grew to 897 in the June quarter from 735 in the March quarter, up almost 22%.

In terms of 16-bit customers of all volumes, that number is in the several thousand.

We shipped 8,290 16-bit development tools in the June quarter, the highest quarterly shipment of development tools ever.

This strong growth in development tool shipments reflects strong design win activity augmented by broad worldwide customer training programs that Microchip has been running.

This brings the total 16-bit development tools shipped to date to 31,717.

We now have 92 16-bit microcontrollers in production and expect this to grow to be about 150 products by the end of fiscal year '08.

Moving to analog products, analog products were up 1.7% sequentially and were essentially flat over the year-ago quarter.

The number of customers buying our analog products grew to 12,627 from 12,147 the previous quarter.

For Serial E's core memory products, net sales were up 1.3% sequentially.

Pricing declined moderately quarter over quarter.

After our pre-announcement in June, our serial E's core business performed slightly better than our expectations.

We were expecting a sequential decline at that time, but instead we pulled off a small sequential increase.

Now let me pass it to Steve for some general comments and our guidance for the September quarter.

Steve?

Thanks, Ganesh, and good afternoon, everyone.

Today I would like to first to reflect on the results of the June quarter.

Then I will discuss the guidance for the September 2007 quarter.

We experienced very challenging industry conditions during the quarter that led us to lower our guidance in the month of June.

We met that guidance and were up 2.3% sequentially.

We achieved another record gross margin of 60.64% prior to the equity expense charge, and we also achieved an operating profit of 35.2% before the equity expense charge.

This quarter also makes the sixty-seventh consecutive quarter that we have been profitable, a testament to the resilience of Microchip's business model over many, many business cycles.

We shipped a record number of new development tools, indicating strong acceptance of our products and strong design win activity.

Now, before I go into the guidance, I want to give you an update on three factors that led to the pre-announcement during June.

The first of these was the impact of a dramatic slowdown in the U.S.

housing.

New housing starts in U.S.

saw a dramatic decline during the start of the calendar year 2007, and Microchip products usually get bought a few months into the housing build cycle.

Therefore, we saw the impact of it during our June quarter.

Then we took 10 large U.S.

customers and we created a U.S.

housing index.

Two of these customers build garage door openers, two build air conditioning equipment, two build appliances, two build security systems, one of these customers builds thermostats, and the final one, one builds irrigation equipment.

So our sales to these 10 large customers was down 14.2% sequentially in the June quarter.

So therefore, from the base of March quarter, we created sort of a U.S.

housing index for Microchip of 85.8--85.8 is 100 minus 14.2, which our business was down sequentially last quarter.

So I must caution you that customers move their designs around from U.S.

to Asia and various new design work production.

As we are gaining share of these customers, the business can increase with the new designs going into production.

In addition, it is difficult to split the volume that contract manufacturers sometimes assign over to the U.S.

housing.

So this index is not very meaningful, even just a couple of quarters out.

But over a very short term, we believe that we can track these 10 customers to give you some insight into where this segment is headed.

Now, ordinarily, due to the large number of customers that Microchip serves, our revenue is fairly stable.

At any given point in time, one end market is going up, another end market is going down, and we have thousands of customers in each end market, and it's really very hard to track any end market segment very meaningfully.

However, with a 14.2% decline in this segment, we had to call it out, and it affected our guidance by about one percentage point.

And by now you have seen the reports from Sears, Home Depot and homebuilders confirming the issues related to the U.S.

housing market.

Now, the other point is despite being down in the U.S.

housing area, our overall business in the U.S.

was slightly up in the June quarter, as Gordon mentioned.

We were up about 0.5% overall in the U.S., which gives you the diversity of lots and lots of customers, that even after this segment being down 14.2% sequentially, we were up slightly in the U.S.

The second factor in our guidance was Europe, which was down 5% in June after being up 19% in the March quarter, and the Europe sector did actually slightly worse, even after our pre-announcement.

We believe that Europe will continue to be weak this quarter due to seasonal factors.

It's summer quarter and because of European holidays, they're always sequentially down in the summer quarter.

And the third factor of our pre-release were, which actually did slightly better than we expected after our pre-announcement, as Ganesh mentioned, so it already did better last quarter and it continues to further stabilize.

So with the update on those three factors, now let me give you the guidance for the September 2007 quarter.

As we looked at the September quarter, we took seven factors into account.

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

Book-to-bill ratio for June quarter was 0.99, very close to parity but not quite one.

The U.S.

housing activity is expected to stay depressed with all that subprime market mess that we hear about every day.

Europe is expected to stay seasonally weak for the summer quarter, so therefore we expect our September quarter net sales to be about flat to up 2% sequentially.

Gross margins for September quarter should be flattish, at about 60.6%, earnings per share expected to be about $0.39.

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

EPS with share-based compensation expense should be about $0.36.

We expect to build approximately $100 million of net cash flow before payment of $64.5 million of dividends that we just announced today, and we look forward to sharing this cash with investors with another increase in dividends in the next quarter.

So let me summarize a few key points.

Our net sales are expected to be flat to up 2% sequentially, and without the equity expense, compensation expense, gross margins are expected to be about 60.6%, operating expenses to be about 24.4% to 25.6% of sales, and earnings per share are expected to be about $0.39.

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

Thank you, sir.

(Operator Instructions.) And we'll take our first question from Craig Ellis from Citi.

Thanks and good afternoon, everybody.

Just looking at some of the details of the business, in analog, it looks like--at least in our model--that that business is growing a little bit more slowly than it did back in calendar 2005.

With the strength in the 16-bit business and microcontrollers overall, do you expect reacceleration as you move into the back half of the year and next year?

Well, it is correct that analog business this year has grown slower than it grew back in 2005.

If you compared it to really where all the other analog companies are coming in, every single company is actually still down year over year, and Microchip business is not down year over year in analog, although growing slower.

That was sort of the first part of the answer to the question.

But the second part is does it accelerate with more 16-bit?

Now, we do have larger dollar content around 16-bit applications with our own analog products versus with 8-bit products, number one because there's more analog around it, and number two, 16-bit applications are newer, so there's not an incumbent and we can get in first, while in 8-bit applications some other analog guy may already be there.

So driven by all those factors, yes, we are doing better with attachments with a 16-bit, and as 16-bit business gets larger and grows further and gets significantly meaningful, it will help accelerate the analog.

That's helpful, Steve, and then with regards to the outlook in the just-completed quarter, there was broad-based growth across the different product lines.

Do you expect the modest growth that you're guiding to to be similarly broad-based?

Yes, and as we look at it internally, we're only guiding flat to 2%, so it's pretty hard to extrapolate, but internally, none of the divisions currently is looking at negative.

Now, when you're zero to two, these are small numbers, but we don't really look at any division to go down substantially in any way.

Okay, and then lastly for me, given that the 5-plus percent dividend increase relative to the revenue growth, it seems like you're saying that you view the revenue deceleration as a temporal issue.

Is that correct?

Yes.

We basically understand that the revenue deceleration is coming from significant impact of the housing market, and that's somewhat certainly lower to the rest of the consumers.

Europe, which is usually seasonally slow, but the longer term, as we have said before, we have not tied the growth in dividend to growth of revenue or earnings.

Investors have asked us, do we have a ratio in mind, and we largely say that no, we do not have a ratio in mind.

Our cash earnings continue to be substantially ahead of, really, the GAAP EPS earnings, and therefore we are committed to continue to increase dividends for well into the future and are not deterred by temporary interruptions of the quarter or so driven by cycles and events.

Thanks, Steve.

(Operator Instructions.) Next we'll hear from Michael Masdea of Credit Suisse.

Yes, thanks a lot.

Steve, ever since you switched your accounting and moved to a sell-through, you've done a very good of managing inventories, et cetera, but it does look like you're got a little out of control given the gross last quarter and the fall-off this quarter, sir.

Anything from a systems perspective or anything different that you're doing that maybe caused that to happen that we can prevent that in the future, or am I missing what happened over there?

Well, I think you are missing the--the change from sell-in to sell-out really was a distribution, where we do not recognize sales to distribution as well as distribution ships it out.

When we changed it back in 2003, Europe has always been based on sell-out.

That change in 2003 was made in Asia.

In Europe we have been at sell-out for the last, ever since we've been public and even before.

And if this Europe negative inventory issue you were talking about is really either at the European OEM customers or customers of our distributors.

We did not have a higher distribution inventory in Europe, and that distribution inventory did not change in the last two or three quarters.

We just had a significant growth in sell-out, and distributors were giving out significantly higher forecasts regarding what the sell-out would have been in the June quarter, and distributors did not really realize that sell-out, because they saw some inventory correction at sale-end customers where they had shipped a lot of product in January.

You know, the backdrop for Europe, Europe has been very strong for several quarters.

And I think if we look back over the last two fiscal years, it's been probably the strongest geography that we had at Microchip.

And it's certainly possible that the end customers of our distributors, with that as a backdrop, perhaps got ahead of themselves in some way in terms of what they saw as demand from their own economy, and perhaps some of those factors that have affected it.

But certainly, our ability to have any changes in that end market lead, the customers' demand in the distribution channel is really based on their own outlook on their business, the economic factors they see at that point in time.

Okay.

If you look at some of the results that have come out from distribution so far, they're really pretty lukewarm.

You know, evidence has not even come out yet, but our results have, and the June quarter was essentially flat and was down 2% last year, and for the September quarter, they're forecasting the components business to be minus 4.3% to up 1%.

So the distribution isn't forecasting very good results overall for their components business.

So--.

That's helpful.

I appreciate it.

Gordon, on the lead times front, what were your lead times?

And the reason I ask is partially because some of, I guess, a few of the analyst companies at least have seen some extending the lead times and wanted to see if yours has stretched at all and also if your competitors or some of the--I don't have actually the right word--but some of the others out there, there will be top stretching.

Is that impacting the bill of materials lead time at all?

Our lead times are three to five weeks and really haven't changed substantially over the last few quarters.

It's certainly, with longer lead times in different parts of the board, it's possible that that can have an impact on business differently, and the fact that we have shorter lead times perhaps results in us not having as much backlog visibility in some way, shape, or form.

And so it is an internal (inaudible) board that our customers are trying to populate.

Okay, great.

Just a last quick one.

You guys filed a lawsuit against Shanghai Haier.

Just want to understand kind of, what kind of tick per quarter in terms of spending of this material and secondly, what's your ultimate goal, given that's actually sometimes a tougher route to go for a lot of the U.S.

companies?

Well, the impact is really very small.

These things take a long time, and some of the customers we have litigated in Taiwan in the past can take years.

So it's really nothing, there's no short-term impact on expenses of any kind.

They're trivial.

As it gets well into it, these amounts, maybe lawsuits like you're used to with some other U.S.

company to U.S.

company.

It's really on a very small segment of products, and longer term, we have taken similar actions against customers--not customers--several competitors in Taiwan very, very successfully.

We took an action similarly against a U.S.

company years ago.

The company used to be called [Scenic] Semiconductors, and they don't really make those copied products anymore.

So our success in enforcing our intellectual property has been relatively pretty good, and that's why we've enjoyed very, very good margins over long periods of time.

And here, we're not talking about the entire Microchip portfolio.

Our product line is very, very vast.

You know, it's really at the bottom end of all the microcontrollers that Microchip has been making for 10 to 12 years now, where there is some breach of intellectual property, and in due time we'll take care of that.

Great.

Thanks a lot.

Yes.

Next we'll hear from Chris Danely from JP Morgan.

Hey, thanks, guys.

A question for Steve or Ganesh.

Have you guys talked to those 10 customers, sort of housing related, that pushed out in the June quarter?

And if you have, what are they saying about their September quarter, and are you getting any commentary from them regarding their inventory levels or how long this is going to last?

Well, yes, yes, we have.

Basically, they're not very confident in their own forecast, because they read the same headlines like all of us read, and just today's over 300 points market drop in the middle of the day, largely the headlines I read were driven by housing and subprime roles and so on and so forth.

So the customers are forecasting this quarter to be sequentially down on their own business for those 10 customers that I mentioned.

So the U.S.

housing index, as I--don't try to correlate that to a U.S.

housing index that you may hear from homebuilders and anybody else, because within these 10 customers, we may have additional design going into production, people moving to Asia.

It's just really complicated.

But rather than not having anything, I tried to really take a judgment and tried to give you an indicator which will give you a feel for really how our business is doing at these 10 customers.

And in the September quarter, that business is expected to be sequentially down.

Okay.

And then, Steve, you raised the dividend, and clearly, you're still confident in the business model.

I'm just curious as to why you wouldn't be buying back more stock.

Well, I think we have said many times before that we buy stock, really, at occasions when we feel that stock is substantially under-priced to the point where the market has thrown the baby with the bath water.

And last time, I've given examples before.

The last time it happened was during (inaudible), where it significantly went happened and Shanghai invasion was ghost towns and our business was way substantially impacted.

But the market reaction of that was somehow we lost the recipe, and the market has gone to 16-bit and our margins were not maintainable, and so on and so forth.

We haven't seen any of that kind of reaction in the market this time since we invested in the stand where what's happening and housing's a well-known phenomenon.

It's being talked about every day.

And having said that, word this stock has come down from the highs of 42 before, and depending on what the market reaction is in the coming days, the Board has a chance to really rethink that and trigger that any time they feel it's reasonable.

We have a large amount of stock buyback authorization in place, and we're not going to signal to the investors when we start acting on it.

But it's fair to say if we get another 15% sell-off, you guys will think of stepping in?

That would be signaling.

That would be giving you a definitive answer.

I can't give you a definitive answer at what point in time the Board and management will meet and think that it's the right time.

Okay.

Thanks.

(Operator Instructions.) Due to time restrictions, please limit your questions to just one per caller.

Thank you.

Next we'll talk to Simona Jankowski from Goldman Sachs.

Hi, thank you.

I think in the past you've indicated that consumer's about a third of the business, and I know it's difficult to kind of track how much of it goes into the U.S.

versus overseas.

But is there any guideline, roughly, that you can give us of how much of your business overall is exposed to the U.S.

consumer?

Well, one thing we want to separate, Simona, is the consumer versus housing, because consumer versus housing are not the same.

Housing, you look at things that are going to new housing--appliances, security systems, thermostats, air conditioners, garage door openers--that's housing.

Consumer could be anything, stuff we sell into things consumers buy and all sorts of electronics and entertainment and other equipment.

That's not related to new U.S.

housing.

Now, some people have asked what's our exposure to U.S.

housing.

It's kind of, we had to figure that out, but I believe our guess is somewhere in the 7% type of range.

And how we arrived at it is really, by looking at these large customers and roughly looking at--there's a huge tail--but roughly what portion of the business is these 10 customers that I talked about.

These 10 customers that I talked about are slightly over 3% of our business.

So if you just double it, take care of the long tail, it really gets in that range.

I don't know if that really helps you, but investors shouldn't confuse U.S.

housing to U.S.

consumer.

U.S.

consumer is still doing well.

And you're right.

One-third of our business worldwide is consumer, but our U.S.

overall business last quarter was slightly up.

So, no, that's very helpful.

That's exactly what I was getting at.

I guess related to that, the U.S.

housing market has been weakening for a while.

I was just kind of curious from your perspective, has the decline been pretty similar in the last two quarters and as you're vetting entire quarters other parts of the business like Europe are strong enough to offset it so it wasn't observable from the outside, or is it the case that this quarter in particular, the deterioration accelerated?

I think you answered it.

You know, we serve 60,000 customers around the world, and we've been gaining market share tremendously.

As you know, data across numbers on 8-bit microcontrollers, our competitors were down last year, and we were up nearly 15%.

So with that kind of market share gains and really broad base of customers, we're often able to take the impact of a single segment in our (inaudible).

At any given point in time, out of 60,000 customers, there are customers going and customers going down, customers who win against their competitors and customers who lose against their competitors.

Sometimes we're on both sides side of the equation, so we don't win or lose.

But other times we are at a customer who loses and then in market, so these kind of phenomena happen all the time.

It's a lot of numbers, and our revenue's certainly stable.

But this was a very dramatic change, number one, and the change came in parallel with really another factor in serial E's core and another factor in the other.

And at the top of, when most companies are announcing year over year negative growth in an otherwise difficult, challenging market, so you couldn't take all of that together.

Sure.

Thank you.

Next we'll hear from Sumit Dhanda from Banc of America Securities.

Yes, hi.

Steve, I had a question for you.

If you sort of look at your normal seasonality in the September quarter, your five-year average about 4%, 10-year average is about 5%, and so the delta versus that seasonality is, depending on what frame of reference you choose, is about three to four points.

Any sense you can give us as where that delta's, what that delta's attributable to?

For the (inaudible) large, is it just that the backlog and the book-to-bills number, you'd like it to be able to guide to normal seasonality?

Well, it's really all of the above.

You know, backlog, but more than the backlog, and I think I've historically said that we don't really rely much on backlog, because whether the customer places the order on the 25th of June or gives it to us on the 7th of July doesn't really make any difference.

I think the biggest issues are the housing market is still going down, and we know from this segment that we'll have another negative indicator.

Europe will be down this quarter, driven by Europe, and any time the market is weak, it can go down more than you think it can go down, any given segment.

Our, as we look at the guidance from the rest of the industry, just in the last quarter, the Semiconductor Industry Association, DataQuest, (inaudible), everybody has dropped the overall semiconductor growth for 2007 into really low single digits like 2% high when it used to be 7% to 8%, which basically means with half the year ahead, which means they're not optimistic on the second half of the year.

Just this week, earlier, ST Microelectronics dropped their 2007 industry forecast down to 1.8% on a number which was 5% to 6% high.

So I think people, in general, I think, is a bit more pessimistic about the second half of the year.

And therefore, all that is accounted in our guidance for the September quarter.

But it's just--I don't want to belabor the point--but it's just that I think with this, you've indicated that your "housing exposures" come at about 6% to 7%, and your exposure to Europe's about 30%.

So it almost seems like you would need to see declines of the same magnitude you saw last quarter to see that two- or three-point delta.

I mean, is that the right way to think about it?

Your housing exposure is down, is down sequentially another 15% and maybe Europe declines another 5% to 7%?

Is that what you're basing of your forecast, Steve?

Well, I don't know how to split that out in so many portions, Sumit, but I think when you are trying to extrapolate back to an average of the last X number of years being 4% or 5%, your basic assumption is starting from, that the industry conditions today are average of the last 10 years, and from there you're trying subtract out specific effect of housing or Microchip's specifics.

I don't believe that the conditions, industry conditions, are average right now.

I think industry conditions are below average.

You know, I'm looking at guidance and announcements from most companies.

I think Microchip is one of very few companies that are up year over year.

Companies like TIs and Xilinx and Alteras and Actel just announced today, and a bunch of large companies, they're all down year over year, and they're not talking about huge growth.

Everybody's stock has gone down in an announcement in the last 10 days.

So I don't think that you should start from an average industry condition of Microchip's growth to be 4% or 5% and try to subtract a specific factor.

You've got to take a good-sized judgment that our industry conditions are not average.

On a different note, as either or you Ganesh announced before the questions, in terms of your 16-bit microcontroller product, not as a percentage of revenues but as a percentage of your design portfolio, which I think was disclosed in the past, has it moved substantially from the 25% type number?

Is there an update you can give us on that metric?

I'm not sure we have provided that metric.

Are you referring to--?

Taking a number of products, we have 92 products out of the total.

Right.

So in that sense, it's probably close to that same ratio.

We have about 450-ish total microcontrollers, 16-bit is about 100--a little less than that--about 92, somewhere in that range.

So it's in that 20% to 25%.

Would you expect an acceleration in that in the near future?

I would assume so, or if not--?

No, we're not.

As the investment 16-bit, we're not disinvesting any bits, so we still have substantial 8-bit investments, substantial market share yet to gain, so you will continue to see a steady drumbeat of 8-bit products from us, even as we bring out a substantial number of 16-bit products and, in terms of acceleration, we're telling you that you should see us close to 150 products by the end of fiscal year '08.

So that's 50% more than where we're at today.

Okay.

Thank you very much.

You're welcome.

Next we'll hear from Jeffrey Rosenberg from William Blair.

Hi.

I wanted to follow up on that 16-bit question as well.

Of those 92 products, how many of those have been in the market for, I don't know, if like two years or more would be the right sort of time frame to think about when they've had a chance to start to ramp to a reasonable volume of revenue?

How would you look at it that way in terms of kind of by class?

How many of them have been in the market long enough where they are reaching that point?

Very good question.

There's probably one-third of them that have been around for more than two years, and so a lot of the newer products have come out and are still in their design cycles.

The early customers may have gone to production, but there's many, many more that are in the incubation phase that have not generated production.

Okay, thanks.

And then if I could ask one more.

Just, and Steve, in terms of parsing things and looking at different segments, how's, do you think Asia will have a growth rate that is somewhat softer than you would have normally expected as well, and you're just thinking about the non-housing-related consumer and the ramp seasonally?

Are you seeing that, or is that muted as well?

Well, a lot of the U.S.

customers produce in Asia, so our Asia number really has a substantial amount of export from Asia back to the U.S., so if we are, if you're looking at some customers in here, then, yes, we're reflecting the Asia number, too.

The numbers we have internally baked in for Asia are a bit lower than the number I would have liked to see.

Okay.

Thank you.

(Operator Instructions.) And due to time restraints, please limit yourself to one question.

Next we'll hear from Kevin Cassidy from Piper Jaffray.

Thank you for taking my call.

You had mentioned that the serial E's core, the business got better after the pre-announcement, and I wanted to know what changed that made that business get better.

Did ASPs go up?

No, it's not that the ASPs went up.

I think a significant portion of our business is always distribution, which we only recognize when we get the distribution sales report, and we don't have it all the time.

We get these periodic reports, and I think in the final, as we tallied the numbers, the distribution sales out was slightly better.

Sometimes we'll get a real flash report, we get a total.

But we really don't get a breakdown by each product line, so distribution sales, "Okay, I sold out so much." They don't really periodically give you a breakdown of every product line every week, so when we finally got that number in early July, there was a bit more business--I believe, Gordon, of the type of $0.5 million plus?

Half to three-quarters of a million.

Yes, $0.5 million to $0.75 million more had moved in the category of serial e-square, and this business is, what, a $30 million business, roughly, per quarter.

So that's sizable and that can change it from a slightly negative to slightly positive.

Okay.

What percentage of the memory business goes through distribution?

It's not that dissimilar--.

I'm not sure, but it's very similar to really what the rest of it is.

Two-thirds of it is through distribution.

Okay.

So since it was through distribution, were you able to tell what market segment it was?

Our memory business is very similar to the rest of the business.

It's a very broad-based number of customers, applications, markets it goes into.

There's nothing unique about memory in one market segment.

I must say that these $0.5 million to $0.75 million change from one product line to other product line, e-squared to micro, micro to e-squared analog, they happen all the time.

They happen every quarter.

But they don't get the scrutiny.

We don't believe forecast for you what every product line will do every quarter unless we give you the numbers at the end, and we see that change internally.

This is very, we're talking about a $1 billion business, and 60,000 customers, these kind of changes happen all the time.

Now, coming off the quarter, where we had a negative pre-announcement, we know the investors are anxious to really know more, and so we worked hard to provide you a bit more on the U.S.

housing index and serial e-square and all that but we, these are trivial changes in general over time.

Okay.

I was just looking for what the changes were.

Thank you.

You're welcome.

And our final question comes from Uche Orji from UBS.

Thanks.

Can you help me?

I know we've talked about each full change, but if I look at the other subsegments, were there any areas where you saw trends that you thought was notable?

And this just, wanted to get a sense, a proper sense of what other areas where there have been some improvements that may be interesting for us to note?

Well, we manage our business by product line divisions, not by end market.

Of course I knew that, yes.

We do not have an end market, we don't have an organization selling into communications or selling into consumer or selling into office automation.

Our products are standard programmable products.

Exactly same microcontroller can be used in a cell phone, in an automobile, in a toaster or blender, in a washing machine, in a garage door opener.

The only difference is the customer has designed it differently in those different application boards.

So therefore, our approach to market is very horizontal in nature.

So we can tell you, really, how product lines did, and we're telling you that the 16-bit product line was a runaway winner with over 25% growth, and the other product lines were essentially all, were close to weaker.

But we can't tell you by end market.

We saw a significant impact of housing, and it took a lot of work to bring you some data, and we've done that.

But with 60,000 customers and hundreds of end markets, in general we don't manage it that way.

No, fair enough.

I understand that.

I just was hoping that given how much details you gave us in housing you could help us get some insight in other areas.

Let me ask you a different question.

What happened at Europe?

You had a strong performance in March, and then things have kind of slowed down, and do you think that the seasonal impact we have seen out of Europe may be somehow amplified by an inventory correction, given the strength it showed in March?

Do you think so?

Is the impact amplified by the inventory corrections?

(Inaudible - multiple speakers)

You know, had this strong performance in March, and there's this--.

I think we admitted that.

I don't know whether you joined on the call later, but we talked about that it's possible that the distribution overshipped to the end customers.

Or the (inaudible) customers over--.

To the end customers over a period of time, and there was a very, very strong growth in March, 19% growth sequentially, so the end customers were very bullish, the distributors were very bullish in terms of the forecast they were giving us, and those forecasts were not realized.

Uche, if your question is about next quarter, I think there's not an overhang from this, from the September quarter.

That's my question I asked to be answered.

(Inaudible - multiple speakers) Information going into the September quarter.

I mean, if you look at most of the GDP and other factors in some of the leading economies there, they still are strong, and this could certainly have been some level of an overreaction from our OEM and distribution end customers, that rectified itself here, or represented itself, I should say, in the June quarter.

Right.

Okay.

That's helpful.

Thank you very much.

You're welcome.

Due to time restrictions, the question-and-answer session has ended.

I will now turn it back over to our speakers.

Thank you very much, and we'll see you on the road as we go to various conferences.

That does conclude today's conference.

We appreciate your participation.

You may now disconnect.