微晶片科技 (MCHP) 2009 Q2 法說會逐字稿

Welcome to the Q2 2009 Microchip Technology financial results conference call.

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

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

Steve Sanghi.

Please go ahead sir.

Thank you, Jill.

Good afternoon everyone.

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

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

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

In attendance with me today are Gordon Parnell, Chief Financial Officer, Ganesh Moorthy, Executive Vice President, and Eric Bjornholt, Vice President of Finance.

As you know, during the quarter, we together with ON Semiconductors, made an offer to purchase Atmel Corporation for $5.00 per share.

In this transaction, Microchip will sell the non-volatile memory, RF, and auto business segments of Atmel to ON semiconductors.

Microchip also intends to sell the ASICs business segment to a third party.

Microchip will therefore keep the microcontroller business segments of Atmel.

As of this conference call, we have not received a response from Atmel, either publicly or privately.

Microchip is very committed to completing this transaction, and will keep all of it's options open based on Atmel's response.

As you also know, we announced the retirement of Gordon Parnell, and appointment of Eric Bjornholt, as our Chief Financial Officer, effective the beginning of calendar 2009.

This transition of CFO will continue as scheduled, however, Gordon Parnell has decided to stay with Microchip, and has accepted a newly created position as Vice President of Mergers & Acquisitions, reporting directly to me.

This appointment will expand Microchip's management bandwidth, as we take on the Atmel acquisition, to which we remain extremely committed.

I would like to thank Gordon Parnell for his excellent financial stewardship of Microchip, during which he built significant trust with investors and analysts.

I also want to thank Gordon for accepting the new position of Vice President of M&A.

His experience and background at Microchip will be of tremendous advantage in this role.

I would also like to thank Gordon for training his replacement, Eric Bjornholt, and I look forward to working with Eric.

Now, I will pass this call over to Gordon Parnell.

Thanks Steve.

I am very pleased to be staying with Microchip, and very excited about my new responsibilities, and and hope to continue to be able to deliver significant value to the business, to my focus in these areas.

Let's get on with the call information today.

Eric and I are going to comment on our second quarter fiscal year 2009 results, we will review geographic data, discuss our balance sheet and cash information, and Steve and Ganesh will then also give their comments on the results, and outline our guidance for the December quarter, and update other matters that are pertinent to our business.

The four of us will then be available to respond to any specific investor and analyst questions.

Our net sales for the September quarter were at record levels, $269.7 million up approximately 0.6% from net sales of $268.2 million in the immediately preceding quarter, and up approximately 4.3%, from net sales of $258.6 million in the prior year's first quarter.

In EPS, we are continuing to include additional information in our press release related to share based compensation, FAS-123R.

Our nonGAAP results exclude the effect of the adoption of this accounting standard, and also a charge related to the sale of Fab 3, which was in the second quarter of fiscal 2008.

EPS on a nonGAAP basis were a record $0.45 per diluted share, an increase of 2.7% from $0.44 per diluted share in the immediately preceding quarter, a net increase of 18.8% from $0.38 per diluted share in the prior year's second quarter.

GAAP earnings per share in the September quarter were $0.41 per diluted share, inclusive of all share based compensation expenses, and the impact on earnings related to share based compensation was approximately 8.3%.

Geographically, Asia revenues were up sequentially, while both the Americas and Europe were down in the September quarter.

Asia continued to improve their revenues effectively in the September quarter, growing 6.3% sequentially.

The Americas and Europe were impacted by economic and seasonal factors in both territories, resulting in those regions being down sequentially, 2.3% and 6.2% respectively.

Asia continues to be the largest geography for Microchip, representing approximately 48.9% of total sales.

Europe represents 27.1% of sales, and the Americas approximately 24% of sales.

This measurement is based on where the product is delivered for manufacturing purposes for our customers's needs, but does not necessarily represent where the design activity is taking place, or where the consumption is occuring.

Operating P&L levels, as I mentioned FAS-123R expenses are excluded from our nonGAAP information, and this is initially were I will report.

Our gross margins were 61.62% in the September quarter, establishing new record levels.

Our total operating expenses were 26.2% of sales, compared with the prior quarter which was 26.4%.

Research & Development costs were $28.7 million, representing 10.6% of sales.

Sales and general administrative expenses were $41.8 million, representing 15.5% of sales.

And both areas of OpEx made modest improvements compared to the prior quarter.

On a full GAAP basis, gross margins including the share based compensation were 60.9%, and total operating expenses were $77 million, or 28.5% of sales.

The tax rate for the September quarter was 18.1%, both on a GAAP and a nonGAAP basis.

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

The dividends that we declared today of $0.339 per share, was an increase of approximately 9.4% over the same quarter in fiscal 2008.

The dividend payment associated with this declared dividend will be approximately $62 million, that will be paid out in the current quarter.

Now I will ask Eric to walk you through the balance sheet information for the September quarter, and other related items.

Thanks, Gordon.

I have been very fortunate to work with Gordon over the past 13 years, and I am honored to follow in his footsteps, and become Microchip's CFO in January.

I also appreciate the opportunity to participate in today's call, and I am looking forward to meeting many of you in the coming months.

I will be reviewing some of Microchip's key balance sheet metrics today.

Inventories on Microchip's balance sheet were $126.8 million, representing approximately 110 days as of the end of September.

Deferred income on shipments to distributors was $103.5 million, up by $6.4 million from the balance in June.

At September 30th, distributors were holding about 35 days of inventory.

The combined inventories on our balance sheets and at our distributors represents 145 days of total inventory, similar to the inventory levels as of the end of fiscal 2008.

At September 30th, our receivables were $120.9 million, a decrease of 14.9 million, or 10.8% from balances as of the end of June.

The reduction in receivables reflect excellent collections performance and shipment linearity in the quarter.

Customer balances beyond terms are at very low levels.

As of September 30th, Microchip's cash and total investment position was approximately $1.519 billion.

During the quarter, Microchip generated net cash flow from the business of approximately $129.4 million.

Payments related to our cash dividends of $0.338 were $62.2 million, and the cash used in our stock buyback activity was approximately $100.3 million.

We anticipate building approximately 85 to $95 million in operational cash in the December quarter prior to dividends and stock buyback activity.

Capital spending was $46.3 million for the September quarter.

Depreciation expense for the September quarter was $23.9 million, versus $25.4 million for the same quarter last fiscal year, and $23.2 million in the June quarter.

Our capital expenditures forecast is currently $115 million, and depreciation forecast is approximately $95 million for fiscal 2009.

The CapEx forecast includes approximately $35 million relating to the addition of a new building in Thailand, in support of our assembly and test requirements, and a new building for our R&D and support operations in India.

I will now ask for Ganesh to give his comments on the performance of the business in the September quarter.

Thank you, Eric.

Good afternoon, everyone.

I will now comment on the individual product lines, let's start with microcontrollers.

Our microcontroller business was essentially flat on a sequential basis, and was up over 5.5% from the year ago quarter.

The Flash microcontroller business meanwhile hit another record, and was up over 2% on a sequential basis, and up 14% from the year ago quarter.

Flash microcontrollers now represent over 77% of our microcontroller business.

We are on a pace to ship over 1 billion microcontrollers in calender year 2008, and expect that 7 billion cumulative microcontrollers shipment to occur some time in December of this year.

Moving to Development tools shipped, we had another record quarter with 35,282 development tools that were shipped in the quarter.

This is the fourth consecutive quarter of record development tool shipments, and we also shipped our 700,000th cumulative development tool in the quarter.

Both of these milestones are indicative of continued strong design and activity, and acceptance of our solutions that should bode well for future growth.

Our 16-bit microcontroller business had another good quarter and achieved record revenue as well, revenue was up approximately 17% sequentially, and up 76% from the year ago quarter.

We shipped 5,069 16-bit development tools in the September quarter, bringing the total of 16-bit development tools to-date to 53,310.

The revenue growth and the development tool shipments results, reflect our continued strong design win momentum across a broad range of customers and applications, and the number of volumes, 16-bit customers, grew by approximately 15% sequentially, to 1,641 in the September quarter.

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

We now have 17 products in production.

Customer interest remains very high, and we have a large number of 32-bit designs, that are incubating across a broad range of customers and applications.

Revenue shipments commenced to several of our early adopter customers, although the revenue is still small at this stage of the product line.

While we know the design in cycle for most 32-bit customers will be long, we are optimistic about the product line's contribution to our overall microcontroller growth and leadership position.

Moving to our analog products, the analog business was up approximately 12% sequentially, and was up approximately 21% from the year-ago quarter, achieving another record quarter for revenue.

The strength in our analog business reflects the results of a three-pronged strategy we embarked on several years ago.

First, it was to attach to Microchip microcontrollers, and this has been amplified by the greater analog content we find around our more advanced 8, 16 and 32-bit microcontrollers.

Second is to attach the microcontrollers from other suppliers, which gives us a beachhead in those applications, to win with our microcontrollers in the future.

Third is to win wherever analog is required, attaching to FPGAs, DSPs, ASICs, et cetera.

The investment in expanding our sales force over the last few years, as well as our focus on providing low power products, with [repeater] specifications and short lead times, continues to attract new customers to Microchip for our analog solutions.

This is reflected in the number of customers buying our analog products of the last 12 months, having grown by 10%, to 14,080 customers.

Our serial E-Squared, our serial E-Square business was down approximately 2% sequentially, and the pricing declined moderately quarter over quarter.

Finally, last week we announced the acquisition of Hampshire Company, a leader in the touch screen controller market.

Microchip already has very strong market momentum with our mTouch sensing product portfolio.

And Hampshire's touch screen product portfolio enables us to extend this momentum, and offer our customers a broader range of industry-leading user interface solutions.

We are excited by the possibilities we see in applying Microchip's scale and geographic reach, to exploit the full potential of Hampshire's product portfolio.

Let me now pass it to Steve for general comments, and our guidance for the December quarter.

Thank you, Ganesh.

Good afternoon again.

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

I am very pleased with our execution in the September quarter, amidst one of the most challenging business environments that we have seen.

Despite this environment, we made new records in the net sales, gross margin, and nonGAAP EPS.

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

We also shipped a record number of development tools for the fourth quarter in a row, providing evidence of continued strong design momentum on our products.

During the quarter, we also saw some continuing investor concerns about China, during and after the Olympics.

We completed the quarter with record sales in China, which were up 10.7% sequentially.

Now I will discuss the guidance for the December quarter.

By this time, you have seen the December quarter guidance from several semiconductor manufacturers, and some large multinational electronics distributors.

They are all seeing weak bookings and substantial concerns in the economy, due to the financial crisis and credit crunch.

The story at Microchip is not very different in that respect.

Our book to bill ratio for the September quarter was 0.93.

Our starting backlog for the December quarter was significantly lower than our starting backlog for the September quarter.

We have seen weak bookings so far in October.

It seems that customers and distributors are frozen in their tracks, and do not want to release orders.

The business situation is extremely difficult, with liquidity and credit issues reducing visibility, making revenue determination very challenging.

With that backdrop, after our internal and customer facing review processes, we expect our net sales for the December quarter, to be down 8% to 16% sequentially.

With such a large drop in sequential revenue, we expect our inventory to grow substantially.

To keep this inventory growth from spinning out of control, Microchip will implement a two-week shutdown in our fab facilities at the end of this quarter.

We will also implement a one-week shutdown in our assembly and test facility in Thailand.

We will also ask all employees to take one week off unpaid during the balance of this quarter.

We needed this revenue guidance to get into the public domain, so that we can take the information deeper to our employees, factories and suppliers.

Our track record of managing gross margin impact, and cutting operating expenses during prior recessions has been very good.

We again expect to be able to mitigate the impact on gross margin percentage, and cut some of the operating expenses, including cutting bonuses, freezing new hiring, taking some attrition, and reducing all other discretionary expenses.

By taking all such actions, we expect to achieve a nonGAAP gross margin percentage of between 59% and 60%.

NonGAAP OpEx is expected to be between 26% and 27%.

NonGAAP EPS are expected to be between $0.35 and $0.41.

I also want to assure investors that Microchip will maintain it's commitment to dividends, despite a sharp decrease in revenue.

We expect to generate approximately 85 million to $95 million in free cash flow this quarter.

Our dividend is fully supported by the operation out of cash flow generation.

We are not able to provide complete GAAP guidance, because the impact of the acquisition of the Hampshire Company on our GAAP financials is subject to a purchase price allocation, which is not complete yet.

I recently read a TJ Rogers paper on the issues with GAAP accounting with interest, and I find myself completely in agreement with TJ, therefore I will provide you GAAP guidance, without the impact of the acquisition.

GAAP gross margins are expected to be about 70 basis points lower than nonGAAP.

GAAP EPS are expected to be about about $0.04 to $0.05 lower than nonGAAP EPS.

The acquisition of the Hampshire Company is expected to be accretive to our nonGAAP EPS.

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

(OPERATOR INSTRUCTIONS).

First question today is from Doug Freedman of American Technology Research.

Hi Steve.

Thanks so much for taking my question.

Clearly it is a really tough environment out there.

Can you give us any color on whether you see, where you see turns for the quarter?

How you guys are managing in this time?

Whether you are seeing any pockets of inventory?

It appears we are really trying to pull down production at the same rate as demand is coming in.

Do you think you are doing a good job of balancing that?

I look at this as a model for demand destruction and inventory correction.

Although any time you have reduction in demand, then and inventory anybody has would be multiplied, and it looks like more inventory than they need.

But the cause of that is not high inventory, anywhere at our customers or channels, the starting point from this is really a reduction in demand, because of credit, and other financial economic issues.

We are managing it realtime, and have taken swift action to allow a reduction in our expenses, a reduction in all sorts of discretionary travel and other expenses, and to reduce the inventory build by scheduling a two-week shutdown in our factories here and fabs, and all of the other actions I described.

Great.

Thank you so much.

Second question is from John Pitzer of Credit Suisse.

Good afternoon Steve.

I appreciate your taking the question.

Given how volatile the environment is with your own business, how comfortable are you in being able to make a good valuation assessment on the Atmel acquisition?

If your partner ON were to pull out of that acquisition, would you still be committed to moving ahead with it?

Appreciate it, thanks.

Regarding Atmel, we have tracked them for a long time, and understand their business.

We are in several of those businesses, like microcontroller and E-square, and all of that.

We have not been provided any due diligence so far, to really be able to confirm our assumptions, and we are hoping for Atmel to come to us and want to get into meaningful negotiations and provide us some due diligence, which they have not been able to.

While this environment is rapidly changing, we believe the Atmel acquisition is a long-term opportunity to build value for our shareholders, and it will take several months for the acquisition to complete, even if it were to turn friendly tomorrow.

I think the short term severe reduction in demand that we are seeing is really not meaningful, in terms of analyzing the Atmel acquisition.

The second part of your question was if ON were to pull out, ON is headquartered here locally in Phoenix, and I meet with them all the time, including a meeting just two days ago, and ON is fully committed to this acquisition, they are making good progress in lining up financing, and we believe that both of us are jointly committed.

We are also making a very, very good progress, and at this point have several options, interested parties for the ASICs business.

Great Steve.

Thank you.

Next question is from John Barton with Cowen and Company.

Thank you very much.

You made comments about cutting down the fab production by shutting down for two weeks at the end of the quarter.

That addresses this quarter, and making the assumption it will be level loading until that point.

If we continue to see weakness into the March quarter, how would you address it at that point?

The thing to go back to, we have seen these environments before.

History, back in 2001 at the tech bust, we had a significant demand reduction like this right after [inaudible] in 2003.

We saw some impact in '97, due to the Asian financial crisis, so history could be a judge.

We have short-term impact which we managed through these shutdowns, and sometimes repetitive ones, that could be done in subsequent quarters also, but eventually with strong proprietary business models, underlying substantial growth in 16-bit microcontrollers, emerging 32-bit, strong growth on the high end of the 8-bit microcontrollers, analog and others, we always bounce back, we always have in the past, and there is no doubt in anybody's mind, that we shipped a record number of development tools last quarter.

As I have said before, nobody buys these tools to play games on them.

All you can do is design with our products.

So design win momentum and the demand creation efforts continue unabated, it is just that customers are buying less products short-term, Because of their own concerns about liquidity, credit, and other stuff.

And temporarily they are like deer in the headlights, they are stopped in their tracks, and not releasing orders.

We don't really believe that such a deep drop in revenue is really any longer term sustainable.

Another reminder for investors, maybe some of you have a history with Microchip.

As we have managed through these various events in the industry, with a proprietary product mix, the long lived nature of our products, we don't have obsolescence problems for these periods.

We manage it up front, similarly to what we are doing here today, but we haven't seen any impact from that side of the business, and anticipate that we can manage this event just as effectively.

(OPERATOR INSTRUCTIONS) Our next question is from Chris Danely with JPMorgan.

Thanks guys.

Just a follow-up on John's question.

Assuming this tough environment does extend to the March quarter, and we do have another down quarter, can we expect you to try and hold OpEx flat and gross margins flat?

What would happen to your inventory in that case?

First of all, we wouldn't today expect the March quarter to be down.

I think after such a steep drop, usually there is some sort of bounce, because the correction goes too far.

We have shown that a number of times, where after a drop the following quarter is moderated, but taking a question, if that were to happen, then we will address that question at that time.

Do another shutdown, or reduct starts, of some other actions to cut expenses, and keep the draconian actions we are implementing in terms of discretionary spending cuts, and pay freeze, and all that kind of stuff, they will just have to continue longer, and maybe even deeper.

Next question is from Harsh Kumar with Morgan Keegan.

Hi Steve.

Can you talk about the timeframe on the acquisition of Atmel?

Obviously, it doesn't look like the Board is coming back to you?

How long are you prepared to wait, and what happens next?

Then I have a quick other one.

Harsh, that question you should be asking Atmel, the ball right now is in their court.

We made an offer, and we need a response, we have not received it.

We made receive it along with their earnings release, possibly next week, and we may receive it tomorrow, and we may not receive it even next week, we don't know.

The next step is theirs.

If the response is not coming in due course, then with the help of our advisors, we will frame the next steps, and we have several options.

If you don't mind giving us a picture by end markets, maybe which were some of your end markets that were worst hits, are if there are any bright spots at all?

We have really no end market commentary.

We serve very, very broad end markets, with over 63,000 customers, and really do not give any end market breakdown any more.

Thanks, guys.

Gordon, congratulations on your new position.

Thanks Harsh.

Our next question is from Ray Rund, Shaker Investments.

Thank you for taking my question.

Given that you have announced your intention or at least desire to purchase Atmel, and you have named a price, is there anything that stops you from buying Atmel stock at the current market price?

First of all, welcome back, Ray.

That is a sign our stock may have gone low enough.

I have been here all along.

I haven't seen you lately, welcome back.

Thank you.

In answering your question, no, nothing stops us from buying Atmel stock other than the normal issues, there are limits on how much you can buy based on antitrust Hart-Scott-Rodino clearance, then at 5% you have to file, and there are some other restrictions about that, they have a poison pill, they are various regulatory restrictions along the way, but it doesn't stop you.

Have you actually been making prudent purchases up to the limits of the stock at these lower prices?

We are not prepared to answer that question.

Okay.

Thank you very much.

Gordon, good to see that you will be continuing.

Thank you for taking my question.

You are welcome Ray.

Next question is from Uche Orji with UBS.

Thank you very much, can you hear me?

Yes.

Thank you.

Two questions first on the Hampshire acquisition, can you give us an idea what will be the incremental revenue contribution, and you have your own touch screen controller, Hampshire brings some, and then if and when the deal with Atmel completes, you would also have incremental technology.

What do all of these technologies bring?

Do they bring end market exposure to customers, or complementary technology?

Let me see if I can take your question.

This is Ganesh.

With respect to the revenue contribution from Hampshire, I expect it will be less than $1 million in this quarter, in that size.

We certainly see, we don't really have a touch screen controller solution in our portfolio today.

We have touch sensing for buttons and sliders, and that kind of stuff in our portfolio, so Hampshire gives us an expansion, or extension of what we offer today in our mTouch portfolio.

With respect to the Atmel product line, it is probably too early to talk about them.

We will give you an update on that at a future date.

We see that they have solutions that are complementary to what do, but right now we are focused on how do we provide our solutions from mTouch for touch sensing, and touch screen control for Microchip.

Steve, in terms of Gordon's new role, it sounds like a role that will extend just beyond even when the Atmel deal goes through.

Should we expect a more active role in terms of consolidation in the marketplace, and if that were to be the case, can you maintain a dividend?

Yes, Microchip is absolutely committed to paying dividends, as I said earlier.

We are generating very, very large cash from operations, and short-term, there is some inventory build that is going to happen, despite taking some shutdown actions.

But longer term, as our inventory goes back down, it further generates an even higher level of cash generation.

There is no problem in Microchip's profitability or cash generation, we are fully committed to not only paying dividends, but continuing to grow the dividend on a quarterly basis.

Gordon's role is driven purely by, Atmel is a significant acquisition requiring due diligence, a lot of regulatory actions, a significant amounts of work, and at Microchip, we have no such person fully committed to really doing that kind of work.

I do it in my spare time, Ganesh does it in his spare time, everybody else does it, and there is a fair amount of work, the amount of time it has taken just for Atmel to respond, I don't know really what that means.

We have prepared, with Gordon agreeing to really do this full time, to help us expand the management bandwidth to be able to take all of those actions, and with this financial background, everybody at Microchip, a long history and knowledge of the product lines and gross margins, our cost structure and others, Gordon's skills will be very, very useful.

You mentioned something broader about consolidation.

I am not ready to be a proxy of the industry or consolidation on a grandiose scale in any way.

Microchip has a number of small acquisitions on it's plate, like the Hampshire Company.

This one we were able to complete, another one of a similar size, we lost in the last three or four months, but there are two or three others that we have on our plate, and one or two of those we may or may not be able to complete in the next three to nine months.

But Atmel is a big one, and the smaller ones require some attention also, so Gordon will be spending time on all of those.

Thank you very much.

One last question.

I dialed in a little bit late.

I know you said bookings continue to be weak, but what turns are you planning in terms of this quarter's mid-point guidance, and if you can reference that in terms of the [third quarter trans] level for Q4, that would be helpful.

Thanks.

We never answer that question.

It just never correlates to any history.

We have said a lot of times, just look at the book to bill ratio at this time the last quarter, was 1.15, and in the conference call we got questions, why was our guidance so conservative if our book to bill ratio was 1.15, you see that we finished the quarter only up about 1%.

And this quarter our book to bill was 0.93, and we are guiding down 8 to 16.

Our history and our experience has been that the book to bill ratio, or the amount of turns needed are absolutely no correlation to the results.

Customers sometimes place the orders early, other times they place it late, other times they place them and then they cancel them, or they push them out, and it will depend on customers behavior as the demand develops, and there is really no correlation to the mid-point of turns needed.

It is also driven by the behavior of our distribution partners.

We have 65% of our revenue that we recognize on a sell to basis.

If they have a different philosophy, and they are holding inventory on one quarter versus another, it affects the book to bill ratio, and hypothetically, the gross shipment components.

So that just adds further complexity on that one metric.

We don't take the gross shipment to distributors as revenue.

So book to bill has absolutely no correlation to the actual sales out from the distribution, and out of new recognition.

So sorry, I can't really answer that very well.

Next question is from Chris Danely of JPMorgan.

Thanks guys.

Steve, can you talk about what the effects of the credit crunch are having on your distributors?

The distributors have reasonable inventory today, most of our larger distributors are reasonably funded and there is no problem.

Some of those smaller distributors around the world and region or territories, could see some pressure, but the bigger pressure is really their ability to ship it to their customers who have even less credibility than them.

Microchip has 63,000 customers worldwide.

We just don't really know the situation of every single customer out there.

That is where the issues are, not really directly with Microchip's channels so far.

Okay, then as my follow-up, sounds like the [AFIT] business took quite a big hit this quarter.

Do you expect it to continue to lag the growth of your other business, and can you just give us a few words of explanation on what is going on there?

The AFIT business did not take a big hit at all, the AFIT business did quite well.

Your assessment of taking a big hit big is driven by inadequate assumptions about the split of the 8, 16, 32.

Alright.

Thanks.

Our next question is from John Pitzer of Credit Suisse.

Steve, thanks for taking a follow-up question.

In response to an earlier question, you talked about your expectation for the March quarter not to be down.

Given the limited visibility, and given the fact that a demand driven downturn is a little bit less predictable than an inventory downturn, what gives you that confidence, especially if the credit issue resolves itself, but we go into a recession?

I can't prove anything to you at this point in time, visibility is limited.

I made that comment looking at a lot of the historical parallels.

As I have seen various industry events materialize, and how our business has behaved.

Many times, we have had a sharp correction in a single quarter, followed by a small increase.

Any color just around geographic comments for the December guidance?

I don't have the breakdown by geography, but historically Europe is weaker in the December quarter always, because there are significant holidays at the end of the year, America also tends to be weaker because of the large number of holidays.

In Asia, usually stronger in the quarter because their real holidays don't come in until the March quarter when the Chinese New Year takes place there.

Will Asia actually still be up sequentially?

I do not know.

Such a large change, with 8 to 16% then, I don't really know where all of the geographies will come out.

Great.

Thanks again.

Next question is from Craig Ellis with Citi.

Thanks for taking the question.

Steve, the offer for Atmel has been out for about a month and a half now.

I am wondering if you can offer some feedback you might be hearing from either channel partners or customers on that proposed deal?

The offer for Atmel was made on October 2nd.

It has been out for 21 days, three weeks, not a month and a half yet.

I have largely talked to a lot of investors and analysts during that time, and we have purposely not tried to talk to customers or distributors in great length, there are lots of [rues] and issues related to it.

We issued a deal customer latter which is posted on our website, you may be able to see it there, just essentially saying that Microchip will have access to a more expanded portfolio of product and solutions to meet the needs of our customers, and other than that we don't really have any feedback from that channel.

My guess would be we are really engaged with them, and partially I have been waiting for Atmel's response, before we engage with any of them.

My feeling is that the response will be very, very positive.

On a separate topic, looking at the capital budget for this year, the Company is at $150 million, that is flat or up from where we were a quarter ago, in terms of what we were looking for given the guidance for the current quarter.

Why wouldn't we have seen that come down?

We are making really no new capital commitments right now, with the guidance coming down that much.

There is a lot of activity to push out existing orders of various stuff, which were ordered when there was growth expected.

Last quarter was a record quarter.

Going into the quarter ago, we were not expecting this quarter to be down.

We were actually expecting some growth.

A number of businesses are growing, like 16-bit, and analog and others.

Plus there are always mix issues, a handler for a different package, something for some other stuff.

There is a lot of stuff on order.

Sometimes again, you need guidance to be in the public domain before you can go aggressively work that with your suppliers, and windows in canceling or pushing out equipment, if you start to do that ahead of time, before announcing this, then it leaks out in the marketplace, and cause some problems.

A larger part of our capital this year is in brick and mortar.

We know that we are going to need the extension, the expansion, maybe not as quickly as we originally thought, but it is still an important part for us.

We want to go ahead and compete that, so there is no flexibility related to that component of our capital.

That is what, $35 million, out of $115 million, is really the brick and mortar in Thailand and India.

Thanks, guys.

Next question is from Romit Shah with Barclays Capital.

Good afternoon, guys.

Steve, regarding the Atmel deal, would you still consider financing the deal with stock?

Will we still consider financing the deal in stock?

Well our offer is in cash.

Like I said before, the next step is for Atmel to come and engage with us in meaningful deliberations, and give us some due diligence, so we can understand what it is worth inside, and then sit down with us and try to carve out, I can't really answer that question without really knowing anything about it.

I think you said previously that you were open to issuing stock to get the deal done.

When you announced that the stock was 26 or 27, I was just wondering if you were open to it with the stock down here?

It is a good question Romit.

I am not pleased with where the stock is, and offering stock when it is so low, really doesn't present a good proposition, but think about this, they can buy the stock from the market and then give it to them.

It is equal in to paying in cash.

Think of it as two step solution, if you are going to give $100 million in stock, you can buy $100 million of stock from the market at 21, 22, and then give them that stock, so it is equivalent to giving them $100 million in cash.

There are a lot of things that can be worked, but they have to be meaningful negotiations with Atmel privately, not really in the public marketplace like this call.

I guess the reason why I am putting this out there is about a year ago, you made a big bet on Microchip, and a fairly large buy back when the stock was 27, 28, and now it is at 21, 22.

I was just wondering if your mind set had changed?

Regarding what?

Did you expect a year ago we will have a global crisis?

If that is the case, I want to see you.

Every stock has taken a substantial hit over the last two months.

These are uncharted waters we are all going through, in relationship to what we thought 12 months ago.

It is a new ball game.

After we bought the stock, it went to 42.

It went to 42 as a high.

If you were the 1% in the world, who knew what was going to happen here, with the S&P down 40%, then we should meet.

I want to pick your brain.

Thank you.

You are welcome.

Next question is Craig Hettenbach from Goldman Sachs.

Thank you.

To follow up on the Atmel deal, you mentioned product line expansion.

Can you give us a little color in terms of motivation behind the deal?

If I think about three different buckets, be it product line expansion being one, consolidation in an industry that needs it and is very fragmented, and then number three, just some economic value to Microchip doing the deal, can you put any weighting behind some of those different scenarios, in terms of the motivation behind the deal?

I really can't put the weighting behind.

All three points are valid, and those are some of the rationale for the deal we have described before.

It provides customers with a more complete solution, with a very good strong 8-bit product line, a strong fixed product line for Microchip, and it combined a very strong 32-bit product line, combining our 32-bit portfolio along with theirs, and it provides significant value to Atmel shareholders, and still leaves value to be created with our shareholders as we apply our manufacturing strength, and management strength and infrastructure to improve that business.

I think it is a good deal for everybody.

That is the rationale.

Okay.

Thank you.

You are welcome.

This concludes the question and answer session.

I would like to turn the call over to Mr.

Sanghi.

Thank you all.

I think that you all know that these are completely unchartered waters.

Every semiconductor company that has announced, their results have just been absolutely something people didn't expect, starting from Linear Technology, who were the first ones.

I am really so glad that I was not the first one this time.

I have been a few times, and that is not pretty, usually, it is not pretty being later either, but here we are.

We assure you that we have managed through these times very, very well.

Better than any of our competitors in the past.

And we will show you again this time, we will see many of you on the road, as we visit some of the conferences this quarter.

Thank you.

Thank you for your participation in today's call.

Have a wonderful day.