微晶片科技 (MCHP) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Microchip Technology 4th 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 conference over to Microchip's Chief Financial Officer, Mr.

Gordon Parnell.

Please go ahead, sir.

Thanks, Keith, and welcome, everyone, to our fourth quarter and fiscal year 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 the Company.

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

We refer you to our press release of today, as well as our 10K for the fiscal year ended March 31, 2007, and our 18 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 fiscal year 2008 results, reviewing geographic data and discussing balance sheet and cash information.

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

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

Let's begin with net sales for the March quarter, which were 260.4 million, up approximately 3.1% from net sales of 252.6 million in the immediately preceding quarter, and up approximately 0.9% from net sales of 258.2 million in the prior year's fourth quarter.

Net sales for the fiscal year 2008 1.036 billion, essentially flat year over year.

In earnings per share, we are continuing to include additional information in our press release related to files 123R.

Non-GAAP results exclude the adoption of this accounting standard and a favorable adjustment related to tax reserves.

Earnings per share on a non-GAAP basis were a record $0.42 per diluted share in the March quarter, compared to $0.39 cents per diluted share in the immediately preceding quarter and $0.37 per diluted share in the prior year's fourth quarter.

Non-GAAP net income for the March quarter was 79.2 million, which was impacted by interest expense associated with the convertible transaction that the Company entered into in December 2007.

Net income in the March quarter included the full effects of the transaction, with net income being reduced by 3.9 million compared to prior to the transactions.

GAAP net income was 76.7 million or $0.40 per diluted share, inclusive of all share-based compensation expenses and the adjustment related to tax reserves.

The impact on the earnings related to the adoption of share-based compensation in the March quarter was 8.9% and earnings per share was favorably impacted by $0.02 related to the adjustment on our tax reserves.

Fiscal 2008 non-GAAP earnings per share were up 6.1% to $1.57 compared to $1.48 for fiscal 2007.

Our GAAP earnings per share were $1.40 for fiscal 2008 and included share-based compensation which was approximately $0.13 impact.

the sale of Fab 3, about an $0.08 impact, and the benefit from various tax matters which were favorable by about $0.05 combined.

Geographic sales for both the Americas and Europe were up sequentially, while Asia revenues were down in the March quarter, really all in line with our expectations in entering the quarter.

Our results regionally reflect the seasonal impacts in our business in these particular territories.

Europe grew 15.6% sequentially, and the Americas also grew sequentially by 1.6%.

Asia revenues were impacted by the Lunar New Year in many of the territories in the March quarter, being down 3.8%.

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

Europe represented approximately 31% of sales.

And Americas approximately 26% of sales.

Again, this measurement 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 or where the consumption is occurring.

Taking a look at operating P&L information.

Initially, I'm using gross margin and operating expenses prior to the effects of share based compensation.

Gross margins were at record levels of 61.5% in the March quarter.

And operating expenses were 26.8% of sales compared with the prior quarter, which were 26.5% of sales.

R&D costs were 28.6 million, representing 11% of sales.

Sales and general administrative expenses were 41.1 million, representing 15.8% of sales.

Operating expenses in the quarter were impacted by the continuing weakness of the dollar on expenses in our international locations, as well as higher bonus allocations as a result of the results -- as a result of what we saw in the March quarter P&L.

On a full GAAP basis, gross margins including share-based compensation were 60.9%.

Research and development expenses and SG&A expenses combined were 76.9 million or 29.5% of sales.

The tax rate for the March quarter was 18.8% on a non-GAAP basis and 13.7% on a GAAP basis, which included the favorable adjustment that I mentioned related to our tax reserves.

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

The dividend that we declared today of $0.33 per share was an increase of approximately 3.1% sequentially and an increase of 17.9% over the same quarter in fiscal 2007.

The dividend payment related to the dividend declared that will be made in the June quarter will equate to $60.9 million.

Turning now to the balance sheet.

Inventories were essentially flat in dollars at 124.5 million, representing approximately 112 days.

This is down two days from inventory levels at the end of December 31.

And deferred income and shipments to distributors was 95.4 million, which was up 2.1 million from the December reported information.

At March 31, distributors were holding about 1.8 months of inventory based on sell throughs, down from 1.9 months as of the end of December.

When we combine inventories on our balance sheet and add the distributors, they represent 145 days of total inventory.

And this is down four days from December levels.

Microchip's receivables at March 31 were 138.9 million, an increase of 23.9 million or 20.9% from balances as of the end of December.

The increase in the balance reflects not only the sequential growth in revenues but also the back end waiting of revenues in Asia due to the Lunar New Year, as well as the transitionary changes at our global distribution network.

Payment performance by our customers continues to be excellent, with minimum balances beyond terms.

In our cash position, at March 31 our cash and total investment position was approximately 1,519,000,000.

During the quarter, Microchip generated net cash flow from the business of approximately $99 million.

Payments related to our cash dividend of $0.32 were 60.4 million and the cash used in our stock buy back was approximately 173.3 million, representing about 5.5 million shares.

Operating cash flow for fiscal 2008 was approximately 476 million, and dividend payments for the full fiscal year were 252 million.

During the year, we we also bought back stock for $1.14 billion, offsetting the net cash received from the convertible transaction of about 1.13 billion.

And again, that transaction was completed in December 2007.

We anticipate continuing to build cash operationally in the June quarter, adding about $120 million in operational cash prior to dividends and our stock buy back activities Capital spending for the March quarter was approximately 20.7 million and depreciation for March was about 22.9 million.

This is versus 27.9 million for the same quarter depreciation-wise, and 23.4 million in December of last year.

Capital spending for fiscal '08 was $70 million and depreciation for the fiscal year was $98 million.

Our capital expenditure forecast is calling for $100 million, and depreciation forecast is approximately 95 million, both for fiscal 2009.

Our capital expenditures include approximately $30 million related to the addition of a new building in Thailand in support of our growing assembly and test requirements.

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

Ganesh?

Thank you, Gordon.

Good afternoon, everyone.

I will now comment on the individual product lines, and starting with microcontrollers.

Our microcontroller business was up 4% sequentially.

Our flash microcontroller , meanwhile, hit another record and was up 7% on a sequential basis and up 11% on a year ago quarter basis.

Flash microcontrollers now represent 75% of our microcontroller businesses.

Development tool shipments, which are one of our leading indicators, were very strong with a record 33,472 development tools shipped last quarter.

In fiscal year 8, we shipped a record 116,832 development tools, 39% more than what we shipped in fiscal year 7 and over the 100,000 per year mark for the first time ever.

These strong development tool shipments are indicative of the continued strong design and activity and acceptance of our solutions, and should bode well for future growth.

Moving to 16-bit microcontrollers, we had another strong quarter, with revenue up 12% sequentially and up 90% over the year ago quarter.

We shipped 3,433 16-bit development tools in the March quarter, bringing the total 16-bit development tools shipped to date to just over 44,000.

In fiscal year 8, we shipped a record 20,575 16-bit development tools, almost twice as many as we shipped in fiscal year 7.

The revenue growth and development tool shipment results reflect our strong design and momentum across a broad range of customers and applications.

New product introductions continue at its current pace as we brought 51 new 16-bit products to market in the March quarter, Bringing the total number of 16-bit products now in production to 152.

The number of 16-bit customers grew by -- 16-bit volume customers grew by 13% to 1,261 in the March, quarter up from 1,117 in the December quarter, and the number of customers of all sizes remained in the several thousands.

Our 32-bit microcontroller line continues to make good progress.

Four more new products began sampling in the March quarter, bringing the total number of of product sampling to eleven.

Customer interest remains very high, and industry accolades for this product line continue to come in; and while we expect the design win cycles for the 32-bit product to be very long, we are very optimistic about its contribution to the overall microcontroller growth and (inaudible) positions.

Finally, in the area of microcontrollers, Gartner Dataquest just published their microcontroller market share information for the calendar year 2007.

The rankings confirm that Microchip remains firmly in the number one position.

(inaudible) put microcontrollers 24% larger than the number two company.

We believe that the slower growth of our 8-bit business that we experienced in 2007 was purely the result of our higher exposure to the housing and consumer market segments.

With the growth and momentum we've seen so far in 2008, we believe we will continue to gain market share through the combination of our strong product line offering and enhanced demand creation initiatives.

Moving to analog products, our analog business was up 8% sequentially, achieving a quarterly record for revenue.

Many more opportunities that we have been incubating for some time started to ramp into production, and we see more such designs poised to continue this trend in the coming quarter.

We continue to be very encouraged by the level of design and activity and the breadth of customers this activity is occurring at for our analog business.

(inaudible) memory products, our business was down over 6.5% sequentially.

Even though the pricing environment was more challenging, we maintained our discipline of not chasing low margin revenue growth.

Let me now pass it to Steve for some more general comments and our guidance for the fourth

Thank you, Ganesh.

And good afternoon, everyone.

Today, I would like to first reflect on the results of the March quarter, then I will discuss the macro environment as we see it; and finally, I will provide guidance for the June 2008 quarter.

I'm very pleased with our execution in the March quarter amidst challenging industry conditions.

Our original guidance for net sales for the March quarter was minus 2 to plus 4% sequentially.

We achieved near the high end of the non-GAAP guidance with net sales of 3.1% sequentially.

We also achieved the high end of our gross margin guidance and achieved an all-time record high gross margin of 61.5% on a non-GAAP basis.

Our original guidance for earnings per share was $0.35 to $0.38 on a GAAP basis and $0.39 to $0.42 on a non-GAAP basis.

We achieved the high end of the non-GAAP guidance, and exceeded the high end of GAAP guidance by $0.02.

So all in all, it was very a good quarter in which we resumed growth after two quarters of sequential decline.

Now I will discuss the macro environment as we see it.

March quarter continued to validate the scenario that we had been painting for investors.

By going into this downturn two quarters ahead of the rest of the industry, we have left the worst behind us in that December 2007 quarter.

Our March quarter was sequentially up, and we expect June quarter to be sequentially up, too

Many of our competitors have reported revenue declines in their microcontroller business in the March quarter.

This has been consistent with the scenario that we described for the investors where we were more exposed to consumer segment and saw the revenue drop in September and December quarters, while our competitors were more exposed to PC and communication segments and have now seen the drop in the March quarter.

Microchip is seeing improving business conditions due to our own superior demand creation efforts.

This goes back to 2.5 years ago when we hired 150 direct sales and field application engineers working directly for Microchip, and we changed our business model with the global distributors, especially aeroelectonics.

Some of the commentary we have seen about this change does not reflect an understanding of the reasons for the change or appreciate the positive effects of these changes on our business.

We believe that these authors have completely missed the tremendous positive effect of 150 direct sales and FAEs and a number of regional distributors we added who have been much stronger demand creators than Arrow ever was this.

The result of this all is we have a very strong design win pipeline that we have been incubating for some time.

They are just now starting to ramp into production, and there are many more designs that are behind in the next one to two quarters.

We did not want to share the fruits of our own labor with Arrow, who has largely acted against us in the last two years.

Therefore, during the last quarter, we have terminated our relationship with Arrow.

We have transferred all of that business to either Avnet Mimic, Avnet Silica, or Future Electronics or one of our regional distributors.

In the process, we have gained significant additional demand creation resources from Avnet and Future Electronics.

We expect that there will be no negative effect of Arrow's termination on our business short term, and there will be tremendous positive impact longer term.

While the result of these additional demand creation resources from Avnet and Future will be seen in four to six quarters from now, we are seeing the results of resources we added two years ago now.

Our book to bill ratio for March quarter was 1.06.

Our starting backlog for June quarter was 8% higher than our starting back log for March quarter.

We completed -- almost completed, really on our mark, to finish our April as the best ever first month of the quarter in bookings.

We are starting to see lead times on certain products push out by a week to two weeks.

And we are seeing very large number of expedites from the customers.

We increased wafer starts in our Fabs in March, first time in the last nine months, and we are preparing our assembly and test facility for the foreseeable [rain].

We are also mindful of continuing challenges in the U.S.

economy and its possible effect into the global economy.

Taking that all into consideration, and after our comprehensive review processes, we expect our net sales for June quarter to be up 2 to 6% sequentially.

Our growth is driven by strategic product lines.

We expect 16-bit microcontrollers to be up 12 to 15% sequentially in the June quarter and analog to be up 8 to 12% sequentially in We expect to achieve another record growth margin of about 61.6 to 61.75% on a non-GAAP basis.

Now, the earnings per share calculation has several moving parts.

The dramatic reduction of interest rates from the Fed in March knocks a penny out of our earnings per share from the March quarter baseline, and we have assumed another rate cut after the Fed meeting this week which will affect EPS by another half penny or so.

These effects of lower interest rates are somewhat negated by 5.5 million shares of stocks purchased in the March quarter which will have full effect in this quarter.

On a GAAP EPS, there was also a one-time effect in March quarter which positively impacted March quarter GAAP EPS by $0.02.

This does not repeat in the June quarter.

And with stock price moved above the strike price for the $1.15 billion convert, it adds approximately 1 million shares to the share count.

So taking all that into account, our non-GAAP EPS is expected to be $0.43 to $0.45, which is in the record territory, and our GAAP EPS is expected to be $0.39 to $0.41.

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

Certainly.

(OPERATOR INSTRUCTIONS).

We'll go first to Harsh Kumar with Morgan, Keegan.

Hey, Steve and Gordon.

Congratulations, guys -- tremendous numbers and guidance.

Just one quick question, Steve.

Could you give us an idea of perhaps by end markets where your backlog and orders are the strongest?

Thank you.

Harsh, basically with 60,000 customers worldwide we no longer break that out.

A lot of our customers are multinational customers who build products in -- all different types of products, consumer industrial and others, with 65% -- or 62% of our business really being from distribution.

It's very difficult to get the mix of where the product is going.

So therefore, we really do not have any further commentary on end market mix.

Got it.

Thanks.

I'll come back later.

Thank you.

We'll go next to Romit Shaw with Lehman Brothers.

Thanks a lot.

I wanted to clarify first.

Was Europe up 16% sequentially?

And if so, how do you guys get comfortable that the customers in that region are not getting ahead of themselves?

Yes, it was up 15.6% sequentially.

You know, this is always a very strong quarter of growth for Europe, coming off the heels of December where it is extremely negatively affected by the seasonal impact, translates into this type of a performance in our business.

We are certainly mindful of our customer base in Europe; and as we compared the information we have available to us and consulted with our sales and channel partners in Europe, we have taken that into consideration in terms of our guidance for the current quarter.

Okay.

Great.

And just a follow-up on the convert.

Gordon, can you just explain how the math works now that the stock is above the conversion price.

What's the dilution to the share count as the stock theoretically moves higher?

As it moves above the strike price -- first of all, you have to remember that this is an instrument that is settled in cash its treasury waiting for the shares beyond that.

So it is the same treasury waiting that is evident in EPS calculations related to RSU and stock options.

We will continue to give the Street guidance on this as we move forward to at least keep you in tune with what we see in terms of that dilution.

If you have any modeling as you go forward you can see some of the impact obviously moving above the $34 and change conversion price.

Obviously, we don't know where the stock price is going to land.

Hence, we have given you some level of a range in our guidance in the looking forward area of our press release.

If we assume like a $40 start stock price, would that add about 4 or 5 million shares?

Not as high as that.

I'd have to go do the math offline but I don't think it would take it up quite that high.

It goes up very, very slowly.

This is unlike regular five-year convert type where once it moves above the strike price essentially you start looking at as converted and all the shares go back in.

This is a 30-year convert with investors having no right to ever put the stock back to us; so it really (inaudible) very, very slowly at the denominator.

Okay.

Thank you.

We'll go next to Chris Danely with J.P.

Morgan.

Thanks, guys.

Hey, Steve, you gave a nice breakout of what you expect the relative growth rates from your different product lines to do this quarter.

Can you just talk about what you expect in terms of the product lines for the fiscal year in terms of relative growth rates?

The fiscal year past or fiscal year coming?

The one we are coming up on.

I don't have that long-term guidance.

We don't really ever give one-year basis.

And to break it out into further product line I can't.

I would just venture to guess that 16-bit will continue to do the kind of sequential growth we just talked about it and then you can model it yourself.

Analog is doing also quite strong.

That has legs on it, and that also could continue to do the kind of growth we talked about.

Okay.

And as my follow-up.

Could you just compare and contrast the linearity of the March quarter versus the June quarter?

March and June quarters --

So how are the bookings in March?

Were they stronger at the end or beginning?

And then how much of the June quarter is going to be done during the month of June?

Is it very back end loaded?

Well, the March quarter bookings at the end were very strong.

March bookings were absolutely very, very strong.

April bookings were even stronger heading for an all-time record for the first month of the quarter.

June quarter is probably a normal quarter where it doesn't have the Chinese New Year in the middle, it doesn't have the Europe shut down, like, August.

Doesn't have the Christmas and Thanksgiving.

So this is the most normal quarter in the way.

March linearity -- the month of March was a higher component of linearity based on the Lunar New Year.

June is pretty much (inaudible).

So this quarter will be better linear than last quarter.

Okay.

Thanks.

We will go next to Uche Orji with UBS.

Can you hear me?

Yes, sir, your line is open.

Thank you.

Steve and Gordon, I must congratulate you on the numbers.

But let me just look at Q1 guidance again.

First of all, I think if I looked at it historically, Q1 you intend to grow roughly around 6% sequential.

So when I look at your guidance of 226, while it is commendable in this environment I think the midpoint is below now.

If given that, Steve, you have been calling the way things are turning, is it fair for us to assume that you're still very cautious on environment even though you've called the bottom for your stock.

If I look at it (inaudible) 10% growth for your company annually.

How will I try to consolidate and find out what you think is limiting growth beyond your declined macro?

That's probably my first question.

I think there were three or four questions in there.

Let's try to sort that out.

Sure.

First thing you said that normal June quarter is 6% growth?

Yes.

I think you're wrong.

I don't recall.

Last year it was 2%.

I don't recall the number before.

We probably haven't done a 6% sequential growth quarter in quite awhile.

If you do a 6% growth in a single quarter, there would be very, very high growth for the Company.

And where the markets are going these days, 6% growth in one quarter would be exceptional growth, not lower than the usual.

So I don't really agree with that assessment.

The second part of your question was are we being conservative?

I don't really know.

I think the end results will tell what we were.

My feeling is no matter what guidance with we give over the course of the quarter as we see a lot of investors, some push for why the guidance was so conservative and others push for why the guidance was so high, what's happening in the consumer segment, with head winds, what's happening in Europe.

The (inaudible) question was really learning towards that with 15.6% growth in Europe are you comfortable Europe is okay?

So this is where we came out after substantial discussion and looking at a lot of data and rest of it you get to make the call what you want to believe.

Just one more question.

If I wanted to specifically push on the market share.

You referred to (inaudible) Data, and you're finally number one at 15%.

But we have seen a few competitors grow quite fast, if I looked at ones like Cypress, for example, even a couple other Japanese.

Can you just give me a sense of what you're seeing within the comparative market?

In Data you cite that the companies that grew very strongly there -- a couple of Japanese names and of course Cypress, which about 84% year on year.

So what can you say about the company's environment even though you're still falling in at number one.

How do you assess your position and especially in light of what we have seen from so many Japanese companies like (inaudible) and Cyprus?

Well, I can pick and choose products in areas where -- in a narrow product line you can really grow.

We grew over 100% fiscal year over fiscal year in 16-bit micro.

I can quote that too.

You can go try to compare with somebody who got $1 billion in 16-bit business and ask them the question, how come Microchip is growing so fast?

From a small base and a narrow product line, you can.

If I look at Microchip's growth in a certain portions of the 8-bit market, -- and I won't spell out what those portions are for competitive reasons -- we had 80% plus growth in certain segments.

We consider Cyprus as a fairly narrow comparative.

The majority of their business is in the tech sense area.

That's one area they have really done well.

But in that area plus many other areas we are growing very, very high; but on the $1 billion of Microchip business, you don't get the air time on a specific segment where we are growing 80%.

We run out of time by the time we have talked about the broad beach front that we are trying to defend $1 billion going forward.

But otherwise, we have plenty of segments where we are gaining significant market share and where the businesses are growing 50, 60, 80 and even 100% a year.

Beyond that, the company you mentioned was down sequentially, what, 30% this quarter?

Quarter over quarter.

So you could have a single large customer drive the business significantly higher then take a 25 to 30% sequential drop.

Microchip's business has never done that.

We have built our business very consistently, dividing our business in a very broad area of customers.

Top 10 of customers only make up 10% of our business, and that's the thing investors have come to expect from us.

You know significant, predictable results.

We had a couple quarter of problems last year driven by unusual things happening in the consumer and housing market.

We got past that and business is doing quite well now.

On the Japanese guys, if you go look in history, these guys have very high market share in Japan; and in the years in which the Yen strengthens, they will report much higher dollar tone revenue, and in other years they don't.

Just go look at the last four or five years for those same companies.

It has a lot more to do with the high presence in Japan and the change in the exchange chane rate than it has to do with their market share performance on a day-to-day basis.

And that translates to several our European competitors also exactly the same comment that the weakness of the dollar translates into reporting stronger Data Quest information because they tend to be Euro based and have a higher percentage of their business in any case in their own sphere of influence.

We believe the entire market growth in microcontrollers as reported by SIA and can be accounted for currency change in Europe and Japan.

And that there was really no real growth if you were really to go back to the original (inaudible).

Now that's for somebody else to verify but I've seen data to that regard.

That's very helpful because I was wondering when the Japanese just decided to bounce back very strongly.

(inaudible).

All right.

Maybe we can take it offline, but if I look at the data, data 6% and 2005, 5%, 11% in 2004.

So that's what I was referring to.

But I will take that offline with you.

Thanks for your answers.

Okay.

(OPERATOR INSTRUCTIONS) We will go next to Kevin Cassidy with Thomas Weisel Partners.

All right, thank you.

Congratulations on a great quarter.

Your growth in analog -- it's the first time you've grown in about a year.

Would you say it's related to new designs going into product or how much is attached to new microcontroller designs?

It's all related to a lot of new design wins.

And I think the answer really goes back to what I described as really creating demand creation resources.

We were with a structure before where a company like Arrow Electronics essentially had every single analog company they sell for and we couldn't get share being a small analog business -- we couldn't get the share of mine in microcontrollers either.

They were basically -- the way to go to market was whose products the customer wanted to use, they simply sold that product, which was truly selling the benefits of our products.

So when we added 150 sales and application engineers ourselves, a portion of those people added were analog experts in various different geographies; application engineers, which will engage with customers selling the benefits of our products.

And with the design cycles and all that, you are seeing really it is a result now with a lot of tail wind and you will see that in this quarter, last quarter and the coming quarters is really we are back to growth.

Okay, then some of these analog designs then aren't necessarily attached to microcontrollers?

They are stand alone designs?

Many are, many aren't.

We don't really break it out anymore.

I described on this call before we deployed a three-phase strategy on analog.

The first phase of our strategy which we implemented back in 2001 was to focus around our microcontrollers and try to attach analog products to the microcontrollers.

The second stage of the strategy which we started two or three years after the first phase was now to start selling analog broadly into any microcontrollers.

So if we didn't win the microcontroller socket -- Free Scale or or [inaudible] or somebody else won it, we still going to be able to sell our analog.

So we started to sell analog much more broadly into the general microcontroller market.

And that one was quite successful.

And the third phase of the strategy was to sell analog anywhere and everywhere in direct competition with TI Linear Maxim, ADI and smaller players.

So right now all three elements of the strategies are functional, so therefore we don't really break it out what portion is attached versus not.

Okay.

If I could ask one other question about the 150 new sales and FAEs.

Where are they deployed percentage-wise?

Can you say?

Asia, Europe and North America?

Well, after ten quarters, I took the courage to tell the people how many there were.

I wouldn't want to provide any further breakdown and I don't want to provide that because of competitive reasons.

But I happened to do it because I think people on the call needed to understand really where the growth is coming from in a very bare economic market and how the change with Arrow affected and what we did.

This is really what we did.

I won't further break it down how many sales, what regions we deployed them.

Okay.

Thank you very much.

You're welcome.

We will go next to Jeff Rosenberg with William Blair.

Hi.

You understandably sounded more cautious about the North American market versus the rest of the world.

Specifically, can you talk about your expectations sequentially in June across different geographies?

We don't break the expectation further by geography.

I did not mean to sound more cautious in North America.

We have absolutely -- the thing with North America is nothing really books here.

A lot of the growth we are talking about, you know, good portion of it is coming from North American customers but they are all buying in China.

So as we report the numbers like our last quarter of growth in Americas was 1.6%, but that's really not real.

I mean, it's really -- it's the customer who does the design in San Jose and buys the product in China.

We report that into the growth in China.

That's really not right.

There is no other way to do it.

That's the simplest way to report where the product was shipped because the rest of the analysis is very difficult.

So, no, we are not saying that the growth is not coming from U.S.

-- a lot of it is.

Designs.

And if you look at the things that a year ago -- and I realize this is several quarters back that were more on a drag, are they pretty stable right now and no real noticeable differences in terms of the various customers that you roll together in those indices you provided us when you were trying to give clarity on the weakness in the North American market.

Is that whole segment pretty much in line with the rest of your business at this point, or is there still a little bit of less growth there than there is elsewhere?

Well, there is less growth there.

There's no growth there.

You're referring to the U.S.

housing index.

I stopped reporting the U.S.

housing index because I originally said I would only do it for a couple of quarters because a lot of moving parts and designs go away, new designs come in, you win a brand new design so the dollar numbers look higher.

But that doesn't really mean that segment is stronger.

But without giving you the numbers, the U.S.

housing index was minutely up.

Or slightly up.

Okay.

Thanks.

We'll go next to Craig Ellis with Citi.

Thanks.

Nice job on the quarter, guys.

First question really a clarification.

Steve, you mentioned that you're seeing some lead time stretching out and an increase in customer expedites.

Can you comment on how broad based that is and given the general concerns that we all have about the macro back drop?

Do you think that's due to particular end market seasonality, the distribution model changes that the Company has made in the past that are now starting to bear fruit?

Or what's driving that increase?

I think it's a combination of lots of different factors.

I'm not sure that it is anything to do with the distribution model change.

You know, the total amount of inventory left at Arrow on the way to being returned is of the order of what?

3.5 million -- in D.C.

currency.

$3.5 million.

So in the grand scheme of thing,s the amount of inventory which is really on its way to being returned, therefore not being put to active use, is really very, very small.

We will be easily able to deflect that if that was not available.

So it's really not driven by that.

I think customers have gotten used to very short lead times, a product has been immediately available.

No one wants to commit anything, nobody wants to forecast anything.

So typically that's why in the entire industry the visibility has been very low and we reported our starting backlog was 8% better so we were getting strong orders; and therefore, some of the near term product got booked because of the strong orders.

So now the customers who did not place their order, wanted the parts like tomorrow, and they are being told they have to wait two weeks.

So that's the kind of thing we are talking about.

Okay.

That's helpful.

And then a longer term question.

It looks like we have got pretty clear visibility toward the Company getting to it's gross margin target of 62%, but it seems like it is a longer gap to the operating margin target of 37 to 38%.

Can you help us calibrate how we should think about the timing with which the Company feels it can get to its operating margin target level?

The operating margin target we have shown recently has been 37% approximately.

62% gross margin non-GAAP, by the way.

25% operating expenses non-GAAP, which would give you 37%.

Where we are still farther apart is really on the operating expense line.

We -- just to put it a quarter at 26.8% non-GAAP.

So 180 basis points away.

And the difference really has been not on the expense side, but on the denominator, on the revenue side.

With two quarters of decline of revenue that we saw last year, it really put that number in the negative direction.

We were in the range of 25, 25.5 before that.

So we were a lot closer.

And if we had made gross margin improvements and had not slipped back on the operating expense, percentage would be in the striking range of that.

Considering where we are at, and it needs some good revenue growth, I would say it's 6, 8 quarters to really get the operating expenses back in line.

Okay.

Thanks, Steve.

Go next to Craig Hettenbach of Goldman Sachs.

Yes, thank you.

You mentioned that orders had jumped around a bit in Asia around the Lunar New Year.

Can you just discuss the geographies of North North America and Europe, how the orders progressed through the March quarter?

They performed well.

You know, we saw good coverage in terms of our expectations in both our direct channel and our distribution network, and it's continued into April also.

So no real surprises from that perspective.

They came in with decent linearity and obviously supporting the results we're delivering here.

Thank you.

And just as a follow-up.

I know you're not breaking out business by end markets, but do you have any commentary around the Com end market in terms of some trends you are seeing within the Com space?

Com space -- that's the lowest exposure end market for us.

Historically, when we broke those numbers down, Com was the smallest segment for Microchip (inaudible), battery charges for cell phones and some coin phones and feature phones, and other stuff.

So it was a smaller segment for us and we have no further commentary on it.

Thank you.

We will go next to Joanne Feeney FTN Midwest.

Yes, a question about your auto efforts.

I know that's a relatively new area for (inaudible).

I'm wondering if you can comment on how that's progressing?

Auto is not a new area for us.

We have been in auto business for over a decade.

And when we were breaking out the numbers, auto was approximately 18% of our business.

And how is that -- how have you seen that change over the last quarter?

Is that something that is picking up?

There is no significant thing to report.

Like we don't really break out the end market any more.

Auto didn't show anything positive to say or negative to say.

Okay.

Then just a housekeeping couple of questions.

Can you give us a breakdown of your interest income and your interest expense for the quarter?

I can in a moment.

Just go to your next question.

Okay.

And then on the gross margin, following up on a previous question.

Over the next several quarters, what do you see as the potential drivers for further improvements in gross margins?

Well, we have guided longer term margin non-GAAP to be 62.

We're guiding for the current quarter about 61.6 to 61.75.

So you've got another 30 basis, 35 basis points left.

The driver is the same they have been for a number of years now.

There is higher volume, so better absorption.

Depreciation rolloff.

We're adding new capital slower than the old capital is depreciating.

We're richening product mix.

Higher percentage of the business being flash.

Higher percentage of the business being analog.

Higher percentage of the business being microcontrollers.

Slower growth in memory.

Just lots of odds and ends.

And th en in terms of your relatively new relationship with Avnet and Future, I'm wondering when do you see design creation activities with them really picking up?

Do they have a lot of learning to do, in otherwards, in order to play a stronger role for you in that regard?

Well, our relationship with Future is not new.

Prior to this change they were our largest distributor.

Our relationship goes back 18 years.

On the Avnet side, though.

So Avnet is a newer relationship.

We are in the process of training all these people now.

And like I said in my commentary, the new designs it will create will take about six quarters to revenue.

But between now and six quarters a lot of the growth is coming from the 150 people that we added 2, 2.5 years ago and a large number of regional distributors we added back then which took their six, eight quarters and a lot of their revenue is showing now.

Okay, and any comments on the interest income or interest expense numbers?

Interest income is 12.1 million, and Interest expense is 6.3 million.

And the interest expense is all related to a convertible transaction and will continue at those rates as we go forward.

The interest income is obviously determined by cash balances and and Fed fund interest changes that may affect our investing elements.

Okay, thanks.

That's it for me.

We will go next to Eric (inaudible) with MorningStar.

Thanks for taking my call.

I just wanted to go back to operating expenses for a moment.

I'm looking at the GAAP OpEx.

I'm noticing they are growing a little bit faster than your revenue grew in the quarter.

I wonder, is there something there seasonally, or is there some extra color to that?

Well, you know, the operating expenses sequentially from December to March quarter Non-GAAP went from I believe 26.6% to 26.8%.

20 basis points.

The entire amount was really driven by higher conversion in dollars our expenses in Euro and yen and Chinese and other currencies, and there was a little bit effect for higher reserve of the bonuses because March quarter was a lot better quarter sequentially up than December quarter was.

December quarter was sequentially down.

So little bit of higher bonus reserve.

But large portion of it was really all currency changes.

I see.

And just wanted to ask a question about the 16-bit line.

I wonder, are you seeing strong competitive response from some of the larger competitors against whom you compete against one of their divisions?

I just wonder as you move into the 16-bit and 32-bit products whether or not these companies are fighting harder to keep you out?

Our competition never has been easy to get share away from.

So whether it is 8-bit, 16-bit, 32-bit, competition has always been hard.

And we expect that.

We see that on our 8-bit and our 16 bit.

So nothing different from what we would expect in terms of competition.

Thanks very much, and congratulations on a good quarter.

And ladies and gentlemen, we will take one final question from Harsh Kumar with Morgan, Keegan.

I'm good.

Thank you.

All my questions have been answered.

Thank you very much.

Thank you.

At this time, this does conclude today's question and answer session.

I would like to turn the conference back to your speakers for any additional or closing remarks.

Well, thank you very much for joining us on this conference call.

And there are a number of investor-financial conferences we will be going to this quarter and we will see some of you on that circuit.

The next conference is actually where Gordon is going to a Merrill Lynch conference.

Merrill Lynch on Tuesday.

Thank you very much.

Thanks.

Ladies and gentlemen this does conclude today's conference.

We appreciate your participation.

You may disconnect your phones at this time.