微晶片科技 (MCHP) 2009 Q1 法說會逐字稿

Welcome to this Microchip Technology first quarter fiscal year 2009 fiscal results conference call.

As a reminder, today's call is being recorded.

At this time, I would like to turn this call over to Microchip's President and Chief Executive Officer, Mr.

Steve Sanghi.

Thank you and good afternoon everyone.

Let me first welcome you to Microchip's earnings conference call for fiscal first quarter 2009.

I'll pass this call to our Chief Financial Officer, Gordon Parnell, for our financial results.

Gordon.

Thanks, Steve and good afternoon, everyone.

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

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

We refer you to our press release of today as well as our 10-K for the fiscal year ended March 31, 2008 and our 8-K current reports that have been filed with the SEC, that identify important risk factors that may impact Microchip's business and results of operations.

In attendance with mean today as well as Steve is Ganesh Moorthy, our Executive Vice President.

I will comment on our first quarter fiscal year 2009.

Financial results reviewing geographic data and discussing balance sheet and cash information and Steven Ganesh will then give their comments on the results, outline our guidance for September quarter and update other important markers regarding our business.

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

Net sales for the June quarter were a record 268.2 million, up approximately 3% from net sales of 260.4 million in the immediately preceding quarter and up approximately 1.6% from net sales of 264.1 million in the prior year's first quarter.

We're continuing to include additional information in our press release related to FAS 123 R.

Our non-GAAP results exclude the effect of the adoption of this accounting standard and a favorable adjustment related to tax reserves in the fourth quarter of fiscal 2008.

Our earnings per share on a non-GAAP basis were a record $ 0.44 per diluted share in the June quarter, an increase of 4.6% from $0.42 per diluted share in the immediately preceding quarter and an increase of 12.1% from $0.39 per diluted share in the prior year's first quarter.

GAAP earnings per share for the June quarter were $0.40 per diluted share, included of all share based compensation expenses.

The impact on earnings related to share base compensation in the June quarter was 7.6%.

Looking at geographical information, Asia revenues were up sequentially while both Europe and Americas were down in the June quarter.

Asia bounced back very strongly in the June quarter growing 11.5% sequentially, the most significant portion of growth we experienced was from our China region which grew 18.2% sequentially as we reported in our press release today.

The Americas and Europe were impacted by economic factors in both territories, resulting in both regions being down sequentially 1.4% and 5% respectively.

Asia continues to be our largest geography representing 46.3% of total sales.

Europe represented approximately 29.1% of sales and Americas approximately 24.6% of sales.

I'd remind you this measurement is based on where the product is delivered for manufacturing purposes for our customers not necessarily representative of where the design activity is taking place or where the consumption is finally occurring.

Taking a look at operating P&L levels, looking at gross margin and operating expenses prior to the effects of share based compensation and the initial review here.

Our gross margins were 61.6% in the June quarter establishing new record levels for the company.

Our total operating expenses were 26.4% of sales in the June quarter compared with the prior quarter which was 26.8% of sales.

Research and development costs were 29.1 million representing 10.8% of sales.

Sales and general administrative expenses were 41.8 million representing 15.6% of sales.

The improvement in total operating expenses reflects movement towards our longer-term goals in this area that we have shared with investors.

And now on our full GAAP basis, gross margins including share based compensation were 61% and total operating expenses were $77 million or 28.7% of sales.

The tax rate for the June quarter was 18.1% on both a GAAP and a non-GAAP basis.

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

The dividend that we declared today of $0.338 per share was an increase of approximately 2.4% sequentially and an increase of 14.6% over the same quarter in fiscal 2008.

The dividend payment associated with this declared dividend will be approximately $62.5 million and will be cashed out in the September period.

Turning our attention to the balance sheet, our inventories were 125.8 million at the end of June, representing approximately 110 days which was down two days from the inventory levels as of the end of March.

Deferred income on shipments to distributors was 97.1 million, up by 1.7 million from March reported information.

At June 30, distributors were holding about 32 days of inventory, using the same calculation as I use for the inventory days that I just mentioned.

Based on distribution sell through activities, the inventories in the distribution channel reflect approximately 1.71 of sell through.

The combined inventories on our balance sheet and at our distributors represent now 142 days of total inventory, down by three days from the March levels.

At June 30, our receivables were 135.8 million, increasing by 2.6 million or 1.9% from balances at the end of March.

Although net sales in the quarter, the June quarter, increased sequentially, 3% as I indicated, net sales in the June quarter were less back end weighted compared to the March quarter and that combined with excellent customer payment performance offset the sequential increase in revenues.

Our payment performance by our customers continues to be in good shape with minimal balances beyond terms.

As of June 30, Microchip's cash and total investment position was approximately 1.553 billion and during the quarter, Microchip generated net cash flow from the business of approximately 118.3 million.

Payments related to our cash dividend of $0.33 were $61 million and cash used in our stock buy back was approximately $23.6 million in the quarter.

We anticipate billing approximately $110 million in operational cash in the September quarter, prior to dividends and any stock buy back activity that we may be involved with.

Capital spending for the period was approximately 21.7 million in the quarter.

Depreciation expense in the quarter was 23.2 million versus 26.4 million for the same quarter last fiscal year and 22.9 million in the March quarter.

Our capital expenditure forecast is currently $110 million and depreciation forecast is approximately $95 million, both for the fiscal year -- the full fiscal year 2009.

The capital expenditure forecast includes approximately $30 million relating to the addition of a new building in Thailand in support of our growing assembly and test requirements.

I'll ask Ganesh to give his comments on the performance of the business in the June quarter.

Ganesh.

Thank you, Gordon and good afternoon, everyone.

I will now comment on the individual product lines.

Let's start with Microcontrollers.

Our Microcontroller business achieved record revenue and was up 3% sequentially and up 2% from the year ago quarter.

Flash Microcontroller business, meanwhile hit another record and was up 3.5% on a sequential basis and up 11.5% from the year ago quarter.

Flash Microcontrollers now represents 75.5% off our Microcontroller business.

Development tools, which is one of our leading indicators were very strong again, achieving another record with almost 35,000 development tools shipped last quarter.

This is the third consecutive quarter of record development tool shipments, indicative of continued strong design and acceptance of our solutions and this should bowed well for future growth.

Moving to our 16-bit microcontrollers, this business completed another good quarter and achieved record revenue as well.

Revenue was up 5% sequentially and up 60% from the year ago quarter.

We shipped over 4200 16-bit development tools in the June quarter bringing the total 16-bit development tools shipped to date to over 48,000.

The revenue growth and development tool shipment results reflect our strong design and momentum across a broad range of customers and applications and the number of 16-bit volume customers grew by over 13.5% in the quarter to 1,433 in the June quarter from 1261 in the March quarter.

In terms of 16-bit customers of all volumes, that number continues to remain in the several thousands.

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

We now have 11 products of the 32-bit family that are in production with several more that are sampling.

Customer interest has been very high and the industry accolades have continued to come in for this product line.

We have a large number of designs across a broad range of both customers and applications that are starting to incubate and while we know that the design cycles will be long, we're optimistic about the 32-bit line's contribution to our overall microcontroller growth and leadership position.

Moving to our analog products, our analog business was up 2.5% sequentially and up 8% from the year ago quarter.

Achieving another quarterly record for revenue.

The number of customers buying our analog products grew to over 14,000 from 13,400 in the previous quarter and we continue to be encouraged by the level of design and activity and the breadth of customers that this activity is occurring at.

Finally on our Serial lease cord business, this business was also up, over 2.5% sequentially and we returned to a pattern of growth after two quarters of sequential decline.

The pricing in this marketplace declined moderately quarter-over-quarter.

Let me now pass it on to Steve for general comments as well as guidance for the September quarter.

Thank you, Ganesh and good afternoon, everyone.

Today I would like to first reflect on the results of the June quarter, then I will provide guidance for the September 2008 quarter.

I'm very pleased and proud of our execution in the June quarter amidst one of the most challenging business environments that I have seen in a while.

Despite this environment, we made new records in net sales, gross margin and non-GAAP earnings per share.

It was also pleasing to see that we achieved growth in all of our product lines with microcontrollers, 16-bit microcontrollers and analog all making new records.

We also shipped a record number of development tools providing evidence of continued strong design momentum on our products.

With this growth and comparing it to our competitor's reports, it is clear that we are continuing to gain market shares after a perceived pause in the market share gains last year due to our exposure in the US housing market.

During the quarter, we also saw some investors' concerns emerge about the possible negative effect of earthquake in China.

This concern was very hard to understand because we were having record quarter in China.

At the end, we completed the quarter with record sales in China and were up a whopping 18.2% sequentially.

Against a back drop of these results, we are disappointed by the level of carnage done to Microchip's stock price by reports of a slowdown in China.

Now I will discuss the guidance for the September quarter.

Our book-to-bill ratio for June quarter was 1.15.

We achieved all time record bookings in the June quarter.

Our starting back log for September quarter was significantly higher than our starting back log for June quarter.

We're also on a path to complete the month of July as the best first month of the quarter ever and better than the month of April last quarter.

We have seen lead times for many of our products push out from two to four weeks and that was partially responsible for some of the strong bookings last quarter and continuing into the current quarter.

Bookings are great because it builds back log and operational visibility, but we only recognize revenue when we ship the product to our direct customers or to distributors sell through.

In revenue recognition, we're not seeing the kind of strength that we are seeing in bookings.

We are also mindful of continuing challenges in the US economy, effects of strong Euro as well as summer holidays in Europe and the effects of high energy prices globally.

There's also a possibility of some disruption with Chinese government shutting down factories within 200 miles of Beijing to clean up the air for Olympics, although many customers are moving production to other factories outside this 200-mile radius.

Were are taking all that into consideration and after a very comprehensive review processes, we expect that our net sales for September quarter to be up zero to plus 3% sequentially.

We expect to achieve another record gross margin between 61.6 to 61.7% on a non-GAAP basis.

Our non-GAAP earnings per share is expected to be $0.44 to $0.45 and our GAAP earnings per share is expected to be $0.40 to $0.41.

With that, would you please poll for questions?

(OPERATOR INSTRUCTIONS) .

We'll pause for just a moment.

First we'll go to Chris Danley with JPMorgan

Thanks, Steve.

Looks like I was a little off on my China prediction there.

Can you just talk about what you saw as area of strength there and then talk about other goes out in the world?

Well, thanks, Chris.

China was the strongest geography overall in the world and Asia did well over china.

China was up 18.2% and overall Asia was up 11.5% as Gordon mentioned.

A lot of business we do in China are really exports back to mostly US but some to Europe, also.

We will never know the exact number because of a lot of the product really moves around, but a significant portion of the business that is done in China is really by multi nationals doing manufacturing there.

So at the end, the strength of overall business in China comes down to, back to our strong demand efforts, here in the US, through our own efforts in the last two or three years and continuing efforts of demand creation in China and Asia where we also added a lot of resources to further take control of the demand creation and I think we've been talking about it for a while and now you are seeing results show through in the demand creation effort resulting into revenue.

We are doing business with record number of customers.

At the last count, I think we had mentioned 60,000 customers.

We didn't quite count them prior to this earnings call.

I believe the number has grown further.

We're doing business with lots of additional customers, however, because of the economy, every customer is buying, less product than they were buying otherwise.

So run rates are smaller, but we're doing business with record number of customers.

So when you do the overall math, record number of customers even buying slightly less product overall is resulting into sequential growth.

Less sequential growth than we would like otherwise, nevertheless, business is still growing.

We grew in March quarter 3%, we grew in June quarter 3%, we're guiding September quarter up zero to 3.

So you can see that we're heading for significant growth over the four quarters here compared to where some of the data quest and SIE numbers are and I was just handed a note, our total customer base worldwide is now over 63,000.

Great.

Thanks.

We'll now go to Joanne Feeny with FTN Midwest.

Thanks for taking my call.

I had a question about some of the new products, the 16-bit and the 32-bit and also your efforts in analog.

Last quarter you had thought that you might end up doing sequential growth in 16-bit in the range of, I think you said, 12 to 15% and in analog something in the order of 8 to 12% and it came in considerably lighter than that this quarter.

Can you help us understand what the hold up is there?

The growth doesn't always come linearly quarter-by-quarter.

You've seen prior quarters where we've had 16-bit growth, 30 and 40% sequentially.

So we take our best shot at the beginning of the quarter, but customers can place -- it can be a month off one way or the other, but if you look at it on an annualized basis, I think it's a much better way to look at the growth.

Okay.

So you're still feeling that that's the kind of number we should think about quarter to quarter to generate an annual forecast for both of those areas it sounds like?

Well, I think the -- some of the comments I made in general about record number of customers with everybody buying less quantity than they will buy otherwise holds good for analog and 16-bit also because they're going to similar market exposures where we have others.

We usually do not break out sales by product line at the start of a quarter.

We report them at the end of the quarter.

Once in a while we have taken the liberty to kind of point out what was driving the growth and we mentioned the numbers on analog and 16-bit.

In hindsight looking back at it, probably wasn't so we're not repeating that this quarter.

The analog customer base became a new record as Ganesh mentioned earlier, the 16-bit microcontroller was a new record, however, the number of units everybody bought was lower than really what we had anticipated.

So we still sequentially grew 3%, sort of middle of the guidance range, but our internal expectations were a lot higher.

If I could follow up, you talked last quarter about how you thought you saw the bottom in December and that you guys sort of led the industry and you were seeing a turn.

Do you still feel that way about the market?

You are expressing some caution here.

Are you seeing anything in terms of trends that sound very positive that gives you still that confidence even though you're being a bit cautious?

Well, I think, I think there is a brand new economic phenomenon taking over the world which is the high energy prices, the very strong Euro, extreme economic weakness in US, whether it's headed for recession or not.

Our comments back in December time frame were really, coming out of the inventory correction or whatever that happened, the first wave of housing issues back in September and November time frame.

We did recover from that and then we talked about our internal demand creation effort was quite strong and was keeping us ahead of really the general market environment in the industry, we did perform to that, we were up 3% in March, up 3% in June, guiding up for September, so in general, I think we feel pretty good about it, but at the same time, we have to give you caution about the global market environment.

If you look at all the earnings report, we have been tracking for the last, week to two weeks, TI on down, the guidance are coming in almost minus 3 to plus 3, centering around zero.

So that reflects the overall what is being seen in the global economy.

We feel we're doing slightly better than that because of some of the efforts we have put in.

Okay.

Thanks very much.

Welcome.

We'll now go to Doug Friedman with American Technology Research.

Thanks for taking my question.

Can you talk a little bit about the fact that you're seeing your lead times extend and the fact that distribution seems to be willing to place orders on you.

Steve, you mentioned the TI call where we saw distribution sort of signaling that they really didn't want to carry some inventory here at this time.

Can you just comment on that versus what you're seeing?

Well, we are seeing very strong orders from distribution and we are seeing distributors willing to give us visibility as well as willing to place inventory.

Our distribution inventory isn't growing.

Last quarter, distribution inventory was 1.7 months down from 1.8 months a quarter before.

So that result isn't any different.

However, microchip takes revenue recognition as sell through, Texas Instruments takes revenue recognition at sell in.

So they get directly impacted by what distribution takes in.

We do not get impacted by that.

We only get impacted by what sells out.

And sales out were pretty good even though the distribution inventory declined.

However, the strong orders reflect that we're building back log, we're getting good operational visibility and part of that is because of strong demand and we have had some -- some specific package issues also, two or three packages demand just tripled and quadrupled on us where certain volume customers decided to take one package versus the other.

So a couple of lead times went out and that kind of created the effect of people wanting to secure more product and pretty soon it kind of spread across the board.

So the bookings were very, very strong and we have good visibility from distributors going all the way, I would say, into September.

Having said that, it's not like distributors are stocking inventory and building inventory.

Even if they were, that wouldn't affect our revenue.

Correct, understood.

Can you talk whether you're seeing any impact -- you mentioned the packaging.

Are you seeing any impact from commodity prices and flowing through or people, your suppliers starting to try to raise prices or any of that impacting, do you see or are you concerned about that?

Well, gold prices are up 2 X and aluminum and copper are similar, the natural gas prices, transportation costs and really all of those have gone up.

So nobody can escape those.

We are doing record yields in our factories, record outputs in our factories.

So to some extent, counter some of those effects, we're pleading with our customers.

Many of them we are not giving any price reductions.

We maybe have done some selective price increases to pass through some of the cost of the commodity prices and we still produced record gross margin, not a whole lot higher than the prior quarter, nevertheless a record and we are in that - - approaching that 62% non-GAAP gross margin that we've been guiding you towards and it's 61.6 right now, so it's really within 40 basis points of that and we'll take a few quarters to get there because there's a lot of head wind in terms of commodity pricing.

And my last question for you, on the capital spending line, you're showing that you're going to spend I believe it's 110 million this year.

Can you give us an idea of where that's targeted at?

And that will be my last one.

Thanks so much.

Well, the capital is pretty spread out.

Largest amount of capital out of that is assembly and test where we have to really add capital, one to one where when we are growing, we have to add capital.

The fab portion is a lot smaller because as we have mentioned to you before, we have $1.6 billion revenue worth of installed capacity in the fab and we only have to add small incremental amount of capital to get there because we had purchased aggression fab heavily loaded with equipment.

So the largest portion of the 110 is assembly and test.

Also included in that 110 is $30 million of brick and mortar building which depreciate over 25, 30 years.

So don't look at the $110 million of capital as, -- and $95 million depreciation as if the depreciation would grow.

Take the 30 million out and then the capital only becomes about 80 million, which would really depreciate over a shorter time and current depreciation is 95 million.

So the net depreciation in the company is still dropping.

The 30 million building is a one-time cost which will depreciate over many, many years.

Terrific.

Thanks for the detail.

I think that was very good.

Okay.

We'll now go to Jeff Rosenberg with William Blair & Company.

Hi.

Could you give us an update, I think you've talked about in recent months some noise in your bookings as it relates to the Arrow transition, can you say how that's played out?

I think you can see by the results it has played out quite well.

There were speculations by some on the Street that this would be a huge negative and we never understood how it could be a huge negative, for two years or so people are saying, well, that wasn't doing anything, so it was a negative for Microchip and we terminated them and there was a report again it would be negative because we terminated them.

You can't have both sides.

Either they were not doing anything, so terminating them would only be positive, which is really the case.

They were really not doing anything.

The Arrow transition has been completed.

All of the Arrow business has been successfully transitioned to our other distributors around the world, to future electronics, to Avnet, to Silicon, Europe, which is a branch of Avnet, to some of our other regional and local distributors and catalog distributors around the world so that transition this point in time is complete and I would think it's an extremely good transition.

The resulting distributors now are extremely charged up, doing demand creation, adding dedicated resources.

As we speak, we are undergoing our Annual Masters Conference, in Arizona which is a strategic technical exchange and review with our customers.

There is a record attendance, over a thousand people in attendance.

People are paying a huge amount of money to come here with the heat out in Arizona which clearly shows that people are interested in our product, coming to learn it, paying money to truly come here and there are a large number of distributor field application engineers here, also, as they're engaging and want to learn and want to go out and sell the product.

So the entire distribution momentum has really turned very positive.

Okay.

Thanks.

And then the other question I wanted to ask you was just looking at the strengths you're seeing at 16-bit made me wonder in general about whether you're seeing stronger -- if there's any difference in the demand trends you're seeing, high end, mid-range, low products, I mean is the 18 series 16-bit seeing any different trends than what you're seeing in your baseline products versus your, real low pin count products.

I don't know if there's anything to be gained there from the different trends you might be seeing across the product line.

Let me pass it to Ganesh.

There's really nothing specific about 16-bit necessarily.

I think 16-bit is growing faster, obviously, from a smaller base, but we are seeing growth across all of the different architectures.

Okay, thank you.

We'll now here from Craig Hettenbach with Goldman Sachs.

Gordon, on the operating margin front.

Going forward, is there anything in terms of efficiencies to be gained there or do you think that operating margins grow more with the revenue growth going forward?

Well, we have directed the 62% overall gross margins from -- on a non-GAAP basis, so as Steve said, that will take several quarters to realize.

As we look at our operating expenses line, we expect to continue to make some efficiency improvements over time, but again, we want to make sure that we offer the appropriate investment from an R&D and a sales infrastructure and technical support for our customers as we go forward.

So again, we expect to see some modest improvements over time getting to our corporate goals in that area.

Okay.

And if I could follow up, Steve, any new, updated silhouettes on the acquisition of M& A environment out there?

Well, I would say the M& A environment continues to be difficult.

Stock prices are down quite substantially from six months ago, a year ago.

Ordinarily, that would really mean there should be opportunities, but no management teams like their stock prices, they all think the stock prices are usually knocked down and everybody wants premiums above that.

Very few deals are getting done.

I just watched the roster and not hearing a lot of announcements, so we continue to be interested in the proposition.

We have the cash to do it, we have the currency to do it, we have some desire to do it, but we are very selective.

Growth has largely been organic, but if the right kind of acquisition would come along, we would be quite interested in it, but we're more interested to not do a bad deal than to do a good deal.

So we'll pass on a good deal to avoid a bad deal and good deals are not easy to come by.

Okay.

So sounds more like tuck-in type deals if deals happen in the near to intermediate term.

There's nothing in the near to intermediate term.

There's nothing -- we're not anything close to -- that close to that you can call it near-term.

Okay.

Thank you.

Yes.

We'll now go to Romit Shah with Lehman Brothers .

I'm still trying to get my arms around the revenues coming in toward the lower end of your guidance and the back log being so strong.

Can you spend a little time talking about linearity in the quarter and does that explain part of the disconnect?

I think the quarter was quite lenient.

The quarter we finished was the most linear quarter we had.

The March quarter nonlinear because of Chinese New Year, September quarter is nonlinear because of August shutdown in Europe and the December quarter is nonlinear because of all the holidays at the end.

The June quarter is probably the most linear quarter we go through.

WAs it different, Gordon?

No, I think it was really in the order that you indicated.

I think one of the key elements here is the extension of lead times in specific areas that we've spoken to and that customers have given us an improved visibility in terms of back log in those areas because of an extension of two to four weeks in particular areas of our business.

So that is certainly one element that's important to take into consideration as you look at our results.

Is it fair to say that the six-month back log has grown at a faster rate than the three-month back log, then?

I really wouldn't know what those statistics are.

I think three-month back log is up quite a bit, also.

I don't know if six-month back log has grown faster than three months.

Nobody has asked the question that way, so we haven't looked at it.

Okay.

As I mentioned, the three-month back log, starting back log on July 1 was substantially stronger than starting back log on April 1.

However, I've been broken record on it for many, many years.

Book-to-bill never correlates with our end results and starting back log never correlates with our end results and the Street is obsessed with it.

Maybe it makes sense for other people's business or in the commodity business where you're competing with others to get their orders for the current quarter in flash or analog.

In our business, it's a designing business and once we have won the design, the business is ours.

It doesn't matter whether you get the order on July 1 or you got the order on June 30.

So, therefore, don't read way too much into it.

I simply look at it as an operational visibility.

We can be more efficient in starting the wafers, manufacturing the product, planning the capacity with more certainty, but if you get larger orders before, it simply means the terms are going to be lower because the customers already gave you their orders.

Okay.

And then just lastly, on the strength in July, have you guys seen North America and Europe start to come back or is the strength still being driven mainly by China?

The strength is driven by Asia, yes.

China in particular and Asia in general.

The -- North America business is really quite strong because, again, I would emphasize that a good portion of what we do in China is really North American customers simply manufacturing there.

So while the US economy is totally sick, our US business is very healthy and if you were to magically measure it by where the business is consumed rather than where it's manufactured, then you will see that our US business grew very handsomely.

We created a tremendous demand in US despite a very, very soft economy.

All right.

Thanks a lot.

Good luck.

You're welcome.

From UBS we'll go to Uche Orji.

Thank you very much.

Steve, just follow up on the distribution -- distributor relationships, how will you now rate the -- the agreement with (inaudible) Avnet demand creation?

Has that been tracking in line with what you expected?

And then, also, can you just update me on your head count in terms of how you also are driving internally and specifically head count in China versus the developed markets.

So two questions there.

Well, our distribution relationships are the best they have been in a very long time.

They are better than what they were, preconflict with Arrow because in the new distributor relationships, we are getting very, very strong dedicated resources from Avnet and future.

In Avnet, we're not in the larger Avnet, which is Avnet Electronic marketing.

We're in the mimic branch of -- mimic branch of Avnet, where none of our larger competitors are there.

TI, Atmel, Cyprus, [Renascence] MEC, Phillips, [Infixion] anybody else, they're all in the Avnet end, general purpose Avnet division.

We are in the mimic division which really has Microchip as the only main microcontroller line.

I think they have a couple of small ones like (inaudible) micro.

So we are getting a lot of dedicated attention of large number of happens engineers.

We have created a similar structure inside a future and a large number of regional distributors that we have.

In fact, the Chairman and CEO of Avnet, Mr.

Roy Valley, is the key note speaker tonight in front of 1,000 of our customer engineers present at our Masters Conference I talked about earlier in Scottsdale tonight.

So this relationship has been all time wonderful.

However, there's a time to market.

So it will take another year or so before you see significant acceleration from the results of the enhanced distributor relationships.

The results you're seeing meanwhile in the last three quarters are the results of our own efforts where we edit a large number of internal Microchip resources to create demand and grow our business.

That's what you're seeing here today.

Right.

In terms of the results addition, US and the emerging markets, excuse me, most of that is in emerging markets?

We are not going to give you that because that is a good consumption for our competitors.

Okay, fair enough.

One other question.

In terms of how you describe the US, in terms of you're creating good demand in the US even the micro environment is a bit tough, are you seeing -- what particular areas are you seeing this demand creation in terms of end products, and can you also comment on things like touch pad?

Because that looks like a MCUs, but since your relationship with quantum got terminated, what are you doing in terms of driving demand within that area?

Well, Microchip has its own touch sense technology we introduced about a year ago.

We have very, very large number of designs.

You'll see probably a year from now that Microchip makes the largest amount of shipments on touch base technology compared to anybody including Cyprus.

We just can't really share all that with you or name any customers or name any design wins.

Your first part of your question was what areas are we seeing this growth.

Let me tell you, we're not seeing it in housing and we're seeing it everywhere else.

Okay.

I wouldn't want to narrow down any more.

So the housing segment, I haven't given you housing index in a while because I told you before that I was only going to do it for about six months or so.

After that, there are new designs and customers moving to Asia and people manufacturing here and there and so many moving parts and it becomes very, very hard to correlate, but we continue to look at it internally, continue to try to track it internally.

The housing index was slightly up March to June.

Why -- don't ask me why it was up.

I think it was up because a few new designs went to production over there.

The housing index was up slightly, but nothing to write home about.

So our business is growing really outside of housing.

I'm actually quite proud of microchip people that very quickly shifted some of the resources to other areas of the business, took some low-hanging fruit and very, very quickly able to negate the impact of housing by growing our business in all of the channels worldwide.

What about automotive?

Automotive business, you read the story, you read the news.

The US automotive business is pretty sick.

We're doing better elsewhere in Europe and Asia, but the overall automotive business is not growing.

We'll now go to Craig Ellis with City.

Thank you very much.

Steve, I think early in the call you mentioned that there were some packaging issues that contributed to some lead time elongation.

Can you identify if those packaging issues have been resolved and if not when you expect that to happen?

The packaging issues have been resolved.

In fact, some of the additional capital we have added is in those areas to try to tool up those packages internally.

Remember, we do about 70% of the assembly ourselves and about 30% of the assembly is outsourced.

We do nearly 100% of the tests ourselves.

So we have added some additional capital to improve both the test capacity for those packages as well as bring some more internal capacity for the packages just outside.

So as we speak, we made very, very significant progress.

All the lead times have not come down yet, but we believe that going out of this quarter we shouldn't have any impact because of packaging.

And would you expect lead times to -- I don't know how much they moved out, but would you expect them to come back in a little bit as you make head way on getting shipments up given the back end investments that you've made?

Probably not completely because the next quarter is front end loaded quarter because of the holidays.

So people have to place their orders for October and November and we're likely to see strong back logs.

So, that continues to really put pressure on the lead times, so I don't think they will fully recover.

Okay.

Then maybe just a longer term question for Ganesh.

On the 16-bit business, it's my understanding that while you've got 150 or so products out there, due to the time it takes to get a design in, maybe half of them or less are actually generating revenue.

So if that's so, then what kind of visibility does that give you into the growth of that business over the next four quarters or so given the revenue fraction you've from those products that already -- you've seen from those products that already are generating revenue.

Of the 150, about a third of them are in revenue generation.

The other two thirds are in design from the time they were introduced.

I think we get a fair amount of customer design in visibility.

We're obviously involved with many of those designs.

We're helping those customers overcome the issues in the way of getting to production and so this over -- as we go quarter-by-quarter, you'll see more and more of these products be introduced over the last one to two years, getting to the point where their applications are tested, validated and going to production and so we expect 16-bit to benefit from that and we'll continue to see a sustained growth rate that is above what our corporate average is for some time to come.

Okay.

And then just quickly on the 32-bit business.

I know that development tools are seen as good proxy for growth prospects.

When will development tool shipments be sufficient to start to give you an idea of what the uptake for the 32-bit product line will be?

It's going to be a little more complex because many of the development tools on 32-bit are also shared with 16-bit and so I don't know if there's an accurate indicator from just development tools alone.

However, what we do track is customer engagements and how many of them, how far along they are, when they're going to -- when they're planning to go into production, et cetera.

And by looking at those indicators, we believe the 32-bit is very much on track with that expectation that it will have a design in cycle that is at or slightly above where the 16-bit design in cycles have been and 16-bit has been about an 18 to 24-month design in cycle.

Thanks, Steve, thanks Ganesh.

We'll now go to John Pitzer with Credit Suisse.

Good afternoon.

Thanks for taking the question.

A couple of follow-ups on the geographic breakdown.

The Europe revenue being down, how much of that do you attribute to macro weakness versus the fact that March kind of was a difficult compare?

Well, Europe has a strange revenue profile.

We call it the Euro curve.

Large portion of European business is really through lots and lots of regional distributors.

The largest distributor in Germany, the largest distributor in France, the largest distributor in Italy, in Spain, they're all regional distributors, they're not the global distributors.

So through the regional distributors, it's very much dependent on what the local number of working days and holidays and all of that pattern is.

Europe has the largest number of working days in the March quarter.

In the June quarter, they have the late part of June, there are some holidays, there are also -- Easter comes in April, August is closed because of summer and they have holidays in December quarter, so we usually every year see majority of growth from Europe in the first quarter.

This time in the March quarter we were up, what, 17%, some number like that?

Yes, I think it was in that region.

In that region was 16 to 17%.

Double-digit.

And June quarter will be flat to down slightly.

We were down a little more than we would like to be in the June quarter and that was because of the economy and strong Euro.

The September quarter in Europe is always down because of holidays in August.

We're modeling down a little more than we ordinarily would do because, again, of strong Euro.

December quarter again is always flat to down because of slight -- less number of working days and then the following March again is really always a very, very big quarter in Europe.

So that's sort of our profile.

We are slightly off that profile, the drop was deeper than we would like and we are modeling the September drop to be deeper than what we would like.

And then, too, this is the first time you've given out China's sequential growth and I understand you gave it out because of some of the concerns in the marketplace.

I'm wondering relative to that number, is that kind of how China's been growing the last several quarters, was this an acceleration or help me understand to kind of put that number in a little bit of perspective?

Well, we broke it out this time because there was a China specific call which did some major damage to the stock, so we thought we needed to answer that, that China was not an issue.

We don't plan to break it out in the future, unless there was -- in future there could be a specific issue in Italy, then maybe we break it out.

If you break out the numbers in a hundred different ways, then you just latch on to every single number and it's impossible to go through that.

I guess the reason why I'm asking is to your point, just given some concerns that the strength might be because of some disruptions around the Olympics.

I'm just trying to get a sense of how we get comfortable with the fact that this wasn't an anomaly ahead of the Olympics and you can see demand slow there?

It was not an anomaly ahead of the Olympics, no.

June quarter is traditionally a very strong quarter in China and you also have a easier comparison because of the Chinese new year in the March quarter.

So driven by that because March quarter has one less amount of weeks, so that itself is responsible for about 7%.

So if you take our 18% growth and take out about 7, then you get to about 10, 11% growth and, China has been growing very, very strong and our expectation in September quarter is also a majority of the growth comes from China.

Great.

That's helpful.

Thanks, guys.

(OPERATOR INSTRUCTIONS) .

We'll go now to Mark Edelstone with

Hi.

Thanks for taking my question.

How -- going forward, how should we think about the dividend growth?

You've been pretty consistent with growing it.

Should we think of you guys targeting some kind of a pad as a percentage of free cash flow or should we think about this growing with the cash flow?

Thank you.

The -- we have never targeted a payout ratio.

The problem we have with payout ratio is - - you could have a very strong quarter and then you pay a lot and then you have a weaker quarter, let's say the cash flow declines in a given quarter because of back end loaded, less receivables or whatever and then you lower the -- the dividend and the market doesn't respond very well to these kind of gyrations.

So our feeling is that we're probably the only company that grows the dividend every quarter, that's what we are committed to do.

Over time as the numbers become substantial, the increase becomes smaller as we have started doing in this current quarter, we grew it by $0.808 versus increasing it by about a $0.01 before.

But we want to grow the dividend every quarter.

So no matter when an investor buys the stock, either before the dividend or after the dividend, they can still continue to see dividend increases.

If you increase the dividend once a year like many companies do, then there's a lot of speculation around prior to the dividend announcement and people sell it before, so stock goes through some volatility just driven by the dividend.

So our commitment is to increase the dividend every quarter.

Over time the increases become smaller, but we're not targeting any kind of payout ratio.

Okay.

Very helpful.

Thank you.

And we'll take a follow-up question from Chris Danely.

Just a few follow-up questions.

So in terms of the lead times extending, is that on a certain product line or is it across the board?

And then, also, it sounds like you're saying that those lead times probably come in in the December quarter?

Well, certain specific packages lead time are a little more than normal, but the lead times a little bit on all of the products, also, because a lot of the equipment is common, a lot of the test equipment, testing equipment is common.

So with a 1.15 book-to-bill ratio with a tremendous back log, you get all that back log, you get booked up, so when the new orders come in, they have to be scheduled out.

Our sense is the lead times will probably be stable from here and stay in this range for quite some time.

Okay.

And then in your prepared remarks, you talked about high bookings, but due to some revenue recognition that wasn't translating into sales, am I misinterpreting that or could you just expand on that a little bit?

What I said is that, bookings are great because it builds back log and operational visibility, but operation at visibility, really what I mean is if I know what to build, then I can build it with much more accuracy and I can batch process it rather than breaking set ups all the time.

When you don't have back log, you don't have operational visibility, then you're building it to a forecast, you're building it to a guess what the customers will come and buy and then you have more tendency to be out of mix on a short-term basis, therefore you are less efficient in -- less efficient in trying to meet that demand.

So operational is nice, but strong bookings and strong back log does not result into a very, very strong revenue because we only recognize revenue when the distribute ships the product out and another investor was asking question relative to TI.

TI, set back, their distributors were lowering inventory.

We do not get impacted by distributors lowering inventory or increasing inventory because we only recognize revenue and what the distributor sell out.

What I said is we're not seeing the strength in sell out from the distributors which is our revenue recognition consistent with that 1.15 book-to-build ratio which somebody would like to translate into a 15% growth.

We're not seeing that kind of strength in sell out.

Since we have into the guidance we have provided.

Last question.

With the stock selling off here a little bit, why wouldn't you guys crank up the buy back?

We never said we will not or we are or we will or we will not.

We have been in a quiet period.

We don't buy stock when we have inside information, so we basically did not execute any stock buy back after we entered the quiet period.

The window for us opens on Monday and what we will or will not do you'll probably see that in the 10-Q.

Okay.

Thanks.

And it appears that's all the time we have for questions.

Mr.

Sanghi, I'll turn the conference back to you.

Thank you very much, everybody and we'll talk to some of you on the road as we go to some conferences and otherwise talk to you next time in the next earnings call.

Thanks, everybody.

Again, that does conclude our conference.

We do thank you for joining us.