微晶片科技 (MCHP) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology fourth-quarter and fiscal year 2009 financial results conference call.

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

At this time, I'd like to turn the call over to Microchip's Chief Financial Officer, Mr.

Eric Bjornholt.

Please go ahead, sir.

Good afternoon, everyone.

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

We wish to caution you that such statements or 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 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 are Steve Sanghi, Microchip's President and CEO; Ganesh Moorthy, Executive Vice President; and Gordon Parnell, Vice President-Business Development and Investor Relations.

Steve is traveling in Europe this week and is participating in this conference call from the UK.

I will comment on our fourth-quarter and fiscal year 2009 financial performance.

Steve and Ganesh will then give their comments on the results, discuss the current business environment, discuss our internal plans 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.

Net sales for the March quarter were $173.3 million, down approximately 9.8% from net sales of $192.2 million in the immediately preceding quarter and down approximately 33.5% from net sales of $260.4 million in the prior year's fourth quarter.

Net sales for fiscal 2009 were $903.3 million, down approximately 12.8% from the fiscal 2008 levels.

We are continuing to include information in our press release on various GAAP and non-GAAP measures.

Management believes that the non-GAAP measures are useful to investors because they enhance the understanding of our historical financial performance and compatibility between periods.

Non-GAAP results in fiscal 2009 and fiscal 2008 exclude share-based compensation expenses, gains and losses on trading securities, nonrecurring tax events, an acquisition of a patent portfolio license, the sale of Fab 3, and acquisition-related expenses.

We have posted a full GAAP to non-GAAP reconciliation on our Investor Relations page on our Web site at www.microchip.com, which we believe you will find useful when comparing GAAP and non-GAAP results.

Non-GAAP net income for the fourth quarter of fiscal year 2009 was $27.9 million, or $0.15 per diluted share, a decrease of 32.2% from non-GAAP net income of $41.2 million or $0.23 per diluted share in the immediately preceding quarter and down 64.8% from non-GAAP net income of $79.2 million or $0.42 per diluted share in the prior year's fourth quarter.

GAAP earnings per share for the March quarter were $0.12 per diluted share.

The after-tax impact on the March quarterly earnings that have been excluded from our non-GAAP results on an after-tax basis include $7.2 million in share-based compensation expense, $7.4 million in gains from trading securities, a $3.6 million cost associated with the acquisition of a patent portfolio license, and $1.7 million in charges associated with our acquisition activities.

For fiscal 2009, non-GAAP earnings per share were $1.27, compared to $1.57 in fiscal 2008.

GAAP earnings per share were $1.33 for fiscal 2009, compared to $1.40 for fiscal 2008 and include, on an after-tax basis, $27.2 million in share-based compensation; $4.5 million in losses on trading securities; a $3.6 million cost associated with an acquisition of a patent portfolio license; $2.4 million in acquisition-related expenses; and $51.3 million in benefits from various tax matters.

On a geographic basis, revenue in the Americas was down 7% in the March quarter.

Europe was up 1.2%, and Asia was down 18.1%.

Asia continues to be our largest geography, representing approximately 41.9% of total sales.

Revenues from Europe represented 30.9% of our business, and the Americas is the balance at 27.2% of total sales.

These measurements are based on where the product is delivered for manufacturing purposes for our customers but does not necessarily represent where the design activity is taking place or where the end product consumption is occurring.

I will now go through some of the operating results for the March quarter.

I am using gross margin and operating expenses information prior to the effects of share-based compensation, acquisition-related expenses, and the acquisition of a patent portfolio license.

Gross margins were 49.3% in the March quarter, compared to 55.2% in the December quarter.

The quarterly reduction in gross profit margin was primarily driven by costs related to reduced production levels at our manufacturing facilities being charged to cost of goods sold during the quarter.

During the March quarter, we operated our fabs at about 57% of what the peak loading levels were in the September 2008 quarter.

Total operating expenses were 30% of sales in the March quarter, compared with the prior quarter, which were 29.4% of sales.

Research and development costs were $22.8 million, representing 13.2% of sales.

Sales and general and administrative expenses were $29.1 million, representing 16.8% of sales.

Operating expenses were reduced by $4.6 million over the prior-quarter levels and by $18.6 million from the levels in the September 2008 quarter, an overall production of 26.4% over the two quarters.

On a full GAAP basis, gross margins, including share-based compensation and amortization of acquisition-related intangibles, were 48.5%.

Total operating expenses were $64.9 million, or 37.5% of sales, and include share-based compensation of $6.9 million, acquisition-related expenses of $2.1 million, and a $4 million cost associated with an acquisition of a patent portfolio license.

On a non-GAAP basis, the tax rate for the March quarter was 11%.

The GAAP effective tax rate for the March quarter was 21.1%.

The difference in the GAAP and non-GAAP tax rates was driven primarily from the gains on our trading securities being taxed at US rates versus our overall worldwide effective tax rate.

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

The dividend declared today of $0.339 per share will be paid on June 5, 2009 to shareholders of record on May 22, 2009.

The cash payment associated with this dividend will be approximately $62 million.

Moving onto the balance sheet, inventories on Microchip's books were $131.5 million, representing approximately 134 days as of the end of March.

Inventory on Microchip's balance sheet was reduced by $5 million, or nine days, in the March quarter.

Deferred income on shipments to distributors was $83.9 million, down by $14.5 million from the balance of December.

At March 31, distributors were holding about 38 days of inventory, compared to 41 days at the end of December.

With inventory days and dollars declining on our balance sheet and in the distribution channel, we continue to make good progress in right-sizing our inventory position.

At March 31, our receivables were $88.5 million, an increase of $10 million or 12.7% from the balance as of the end of December.

The increase in receivables is attributable to the backend nature of shipment activity in the March quarter, driven by the lunar New Year holidays in Asia, compared to a more front-end weighted shipment activity in the December quarter.

We have not experienced any material deterioration in the payment performance from our customers and believe that our receivable balances are in good condition.

We continue to closely monitor customer activity to ensure we are protecting the receivable assets on our balance sheet and customer balances beyond terms continue to be at low levels.

As of March 31, Microchip's cash and total investment position was approximately $1.441 billion, a decrease of $33.2 million from the December quarter, including a $61.7 million dividend payment made in February.

There were several significant factors driving the reduction in our cash and investment balance during the quarter, including our business and patent portfolio acquisition activity.

For fiscal 2009, our cash and total investment position decreased by $78.3 million.

During fiscal 2009, Microchip funded $246.7 million in dividends, repurchased $123.9 million in common stock, and made three small acquisitions.

We are confident that our free cash flow can support our current level of dividend payments in fiscal 2010.

Capital spending was approximately $10.5 million for the March quarter and $102.4 million for fiscal 2009.

Depreciation expense for the March quarter was $22.9 million, compared to $23 million in the same quarter last fiscal year and $23.2 million in the December quarter.

Our fiscal 2010 capital expenditures forecast is currently $15 million, a reduction of 85.4% from the fiscal 2009 levels.

One final note relates to Microchip's convertible debt.

GAAP after-tax earnings in the quarter ending June 30, 2009 will be impacted by approximately $0.9 million to $1.2 million from the adoption of FSP-APB 14-1, accounting for convertible debt instruments that may be settled in cash upon conversion.

This pronouncement will require us to record non-cash interest expense of approximately $1.5 million or $2 million in the quarter ended June 30, 2009, which we will exclude from our non-GAAP results.

Additionally, this FSP will require a portion of the convertible debt on the balance sheet to be reclassified as equity with the remaining debt balance accreting to the $1.15 billion principal amount over the remaining life of the convertible, which is more than 28 years.

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

Ganesh?

Thank you, Eric, and good afternoon, everyone.

I will now comment on the individual product lines.

Let's start with microcontrollers.

Reflecting the current challenging macro conditions, our microcontroller business was down 9.5% on a sequential basis.

Flash microcontrollers represented approximately 78% of our microcontroller business in the March quarter.

About a month ago, Gartner Dataquest released their microcontroller market share report for 2008.

For the third consecutive year, Microchip retained the number one position for 8-bit microcontrollers.

While the overall 8-bit market was down 5.4% in 2008, Microchip declined less than the 8-bit market as a whole, reflecting continuing share gains against the overall market.

Even more impressively, the gap between Microchip and the number two 8-bit competitor grew from 19% in 2007 to 25% in 2008.

Although we don't subscribe to the SIA numbers, we are aware that some investors and analysts do follow their reports.

For the recently published SIA report, 8-bit plus 16-bit microcontroller revenue for the March 2009 quarter was down 46% as compared to the March 2008 quarter.

In the same period, Microchip's microcontroller revenue was down 33%, so by the SIA data, we outperformed the market over the last year by 13 percentage points.

As we have explained before, the housing segment led to the current global financial crisis.

Microchip saw the impact of the housing crash starting in 2007, leading some investors and analysts to interpret those events as a weakening of Microchip's competitive position and as translating to market-share loss.

As the rest of the industry segments, like cell phones and PCs, have joined in the global financial crisis, Microchip's relative performance is much clearer now.

Based on the SIA March quarter data, our 8-bit microcontroller market share is in the high teens, an all-time record high market share for Microchip.

So, whether one measures by the SIA yardstick or the Gartner Dataquest yardstick, Microchip's relative performance over the last year looks positive as compared to the overall market.

In these difficult times, we are especially humbled and gratified that customers continue to vote overwhelmingly that Microchip is their supplier of choice for microcontroller solutions.

While some of our large competitors continue to tout their revenue growth and market share gains, it is illustrative to compare this performance against their profitability over an extended period of time.

In the 8-bit microcontroller market, we estimate that, after Microchip at number one, the next profitable competitor is not until one gets to number 14 in the Gartner Dataquest 2008 rankings.

Anyone can grow revenue by selling dollar bills for $0.90.

The conscious path Microchip has taken is to balance growth and profitability and avoid the perils of profitless prosperity that some of our large competitors seem to revel in.

Over time, the markets and our investors have recognized the strength of our operating model, but a reminder -- particularly in these difficult economic times, helps to assure that our core values are being appropriately recognized.

Moving on to our 16-bit microcontroller business, despite the challenging macro environment, this business performed much better comparatively.

16-bit revenue was up 6% sequentially and was up 21% from the year-ago quarter.

New customers and new designs going to production continue to help drive growth in the current environment, as the number of volume 16-bit customers grew to approximately 1700.

On a fiscal-year basis, our fiscal year '09 16-bit microcontroller business was up 43% as compared to fiscal year '08.

Our 32-bit microcontroller business in the meanwhile continues to make good progress.

Customer interest remains high, and we have a large number of designs incubating across a broad range of customers and applications.

The first designs are starting to ramp into production, and we expect the 32-bit product line to start contributing to our microcontroller revenue in fiscal year '10.

Two weeks ago, Microchip introduced the industry's lowest power microcontrollers with our announcement of our nanoWATT XLP, standing for eXtreme low-power, microcontrollers.

The combination of high functionality and low power offered by Microchip is unparalleled among microcontroller suppliers and capitalizes on an increasing trend of battery-powered and power-constrained applications.

Microchip also continues to make significant strides in establishing our leadership in the growing area of user interface solutions for the embedded marketplace.

Our capacitive and inductive Touch Sensing solutions, introduced within the last two years, are now designed into over 100 customer applications.

The acquisition of Hampshire Company, a leader in the touch screen controller market, back in October 2008, has enabled us to tap into a growing trend of touchscreens in embedded applications.

We are excited by the market interest, the customer acceptance, and design win momentum of our broad range of user interface solutions and their potential for growth.

Moving to development tools, we shipped 33,514 development tools in the March quarter, the highest number of tools we have ever shipped in a fiscal fourth quarter.

In fiscal year '09, we shipped 136,531 development tools, 17% higher than what we shipped in fiscal year '08.

Even in these challenging business conditions, we see no slowdown from our customers in their design-in the activity, reflecting their continued desire to differentiate their end products to extract themselves out of this recession, which should all bode well for future growth.

In February, Microchip acquired HI-TECH Software, a world-class provider of development tools that is based in Brisbane, Australia.

The HI-TECH acquisition extends Microchip's leadership in compiler technology and offers our customers the benefit of highly efficient, industry-leading code density for our microcontrollers.

Let's now move to our analog products.

Our analog business was down 13% sequentially.

On a fiscal-year basis, our fiscal year '09 analog business was essentially flat as compared to fiscal year '08, among the very best performances for analog businesses over the last year.

As for the SIA data, the analog market segment was down 9.6% from April '08 to March of '09 while we were flat.

So, we continue to gain market share in our analog business too.

Late in March we completed the acquisition of R&E International, a leader in providing innovative solutions for security and sensing systems that is based in Norristown, Pennsylvania.

The R&E International acquisition complements Microchip's existing leadership position providing both microcontrollers and analog products for security and sensing applications, and now enables us to offer an enhanced solution base to a broader range of customers worldwide.

We expect this acquisition to be immediately accretive to Microchip's non-GAAP earnings.

Last but not least, our CLD2 memory products -- this business was down 9.5% sequentially.

Although market conditions were challenging, we continue to run this business in a disciplined fashion that maintains consistent profitability and serves our microcontroller customers to complete their solutions.

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

Steve?

Thank you, Ganesh Moorthy, and good afternoon, everyone.

I am speaking to you today from London, where I am visiting our customers and distributors, getting a first-hand impression of the market situation here.

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

Then I will talk about our internal plan for the June 2009 quarter.

The March quarter saw a steady improvement in the business environment.

Our total backlog bottomed out early in the quarter and then gradually improved through the quarter, albeit at a very slow pace.

We provided guidance to our investors on March 9,2009 which was consistent with our internal plans that we had shared back in late January.

We ended the March quarter very slightly north of the midpoint of our guidance from a revenue standpoint.

Our earnings per share reached the high end of guidance, mainly on the strength of excellent cost control on the operating expense side.

Our worldwide non-manufacturing employees took one week off unpaid in addition to being on a 10% pay cut and 0 [bonuses] worldwide.

On the gross margin front, we came in at 49.3% to non-GAAP gross margins, versus 50% internal plans.

During the quarter, we (inaudible) a fab at 57% utilization, versus the 60% that we had guided to.

The silver lining is that we put the trough of the gross margin behind us in the March quarter.

Secondly, our inventory came down from a high of 143 days to 134 days at the end of March.

The inventory is expected to continue to come down in subsequent quarters.

From a product line perspective, 16-bit microcontrollers turned in a respectable performance, being up 6% sequentially and up 21% from the year-ago quarter.

The backlog on 16-bit microcontrollers is up significantly from last quarter, and we expect continuing good growth ahead.

At the Embedded Systems conference a month ago, Electronic Design magazine gave our 32-bit product line, the PIC32, the Innovation Award in the Microcontroller category for 2008.

At the same conference, Microchip also won the EE Times ACE award in the Company of the Year category.

Reflecting on our fiscal year '09 new product performance, we introduced 125 microcontrollers, analog products and memory products.

In addition, we expanded our product portfolio through the acquisition of the Hampshire Company for touchscreens, HI-TECH in software, and R&E International in the security and sensing area.

As you heard from Ganesh, we have been introducing industry-leading solutions in the area of extreme low power capacity (inaudible) and inductive [touch sensors] that are all gaining significant customer traction.

By staying invested in the new product development during this downcycle, we expect to introduce approximately 150 new products over the next year that will offer superior value to our customers.

We will also continue to make selective, elbow-out type of acquisitions that broaden our product portfolio and can rapidly be accretive to our earnings.

Now, I will discuss our internal plan for the June quarter.

The semiconductor industry is still suffering from the global financial crisis.

While our starting backlog for the June quarter is higher than our starting backlog was for the March quarter, the visibility is still low relative to a historical basis.

Our book-to-bill ratio for the March quarter was 1.04.

The bookings in April were substantially higher than that of January.

With that backdrop of mix indicators, we will continue to not provide guidance for the June quarter.

We have set our internal plan for revenue for the June quarter at $182 million, or up about 5% sequentially.

Our internal plan for non-GAAP gross margin is about 50%.

Our internal plan for non-GAAP earnings per share is $0.16.

Our plan for GAAP earnings per share is $0.11.

As Eric pointed out, this has about a little less than $0.01 impact because of the adoption of this new FASB regulation.

In both GAAP as well as non-GAAP earnings, the internal plan assumes no effect of mark to market considerations on public securities owned.

Now, reflecting further, our financial results clearly indicate that our business model is working and is profitable even at the bottom of this deep recession.

None of our competitors, including Atmel, ST Micro, Cyprus, Freescale, and XP Semiconductor, Infinion, MEC, Renesys, were profitable on an operating basis in the March quarter.

Texas Instruments was essentially breakeven.

These companies combined the loss an astounding $2 billion in the March '09 quarter.

During the same quarter, Microchip posted a 19.3% operating profit, a testament to the resiliency of our business model, the hard work of our employees worldwide, and the competitive advantage of our company culture.

We have been profitable now for 74 consecutive quarters, and the June quarter will be our 75th.

We recently heard that NEC and Renesys are combining their operations, and substantial restructuring of the product lines, organization and factories is expected.

Similarly, most of the other competitors that I mentioned are all in the mode of significant restructuring.

Microchip sees a significantly weakened competitive landscape in which we are boldly making new investments in product lines, people, distributors and acquisitions.

We see continued marketshare gains ahead.

As Ganesh pointed out, the Semiconductor Industry Association data recently released confirmed the record market share for Microchip in 8-bit microcontrollers and continued marketshare gains in both 8 and 16-bit microcontrollers.

On the dividend, we have said enough about dividends and will not continue to belabor the point.

We will add, though, that we expect the June quarter operating cash flow to come very close to covering the dividend payment.

We expect fiscal year '10 free cash flow to cover the dividend payment.

This will obviously be aided by low capital expenditure, decreasing inventory, increasing gross margins and operating margins and growing revenues.

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

Thank you.

The question-and-answer session will be conducted electronically.

(Operator Instructions).

Romit Shah, Barclays Capital.

You guys are forecasting gross margin to increase modestly in the June quarter.

Does that assume -- or should we factor in any increase in production levels as well?

The gross margin improvement is driven by several factors.

While the factory utilization in our fabrication facilities is expected to be about the same as we had last quarter, because we're still trying to burn off a significant amount of inventory.

The gross margin improvement is driven by increased activity in our backend operation where the utilization will increase, continuing enrichening of our product mix, and various other cost reductions quarter-over-quarter that will impact the gross margin.

Steve, with inventory days down to around mid 130 level, where are you in terms of right-sizing inventories back to I guess your target range?

Well, we have historically said that the right inventory was in the 115 days although, with the increasing number of line items, with all of the analog products and now 16-bit and 32-bit products and the distributors traditionally getting lower inventory, the end customers really at an all-time low inventory, one could make the case that even a slightly higher level of inventory would be appropriate.

So, we are at 134.

With the internal plan we have, it takes us to about another 9, 10 days down to around 124 or so at the end of the June quarter.

We are starting to get in the range.

So we will start to increase production passed the June quarter and then bring the rest of the inventory down by another ten days or so more slowly.

Okay, and then just a final question from me.

Steve, you sort of noted that some of your competitors are not in great financial health today.

Do you think customers are taking note of that and looking at your offering more closely than they might have in the past?

You know, I would say, historically, they didn't care.

You know, historically, the customers haven't really cared whether their supplier makes money or not, because many of the customers in various markets, automotive and others, themselves don't make money.

A few customers obviously did, but with the depth of the financial crisis and a number of companies in various industries going bankrupt and all of the money squeeze, I am seeing a significant increase in the number of customers that are asking those questions and reviewing our balance sheets and making comments in meetings with them regarding how they feel comfortable doing business with Microchip.

We got overtures from customers who are concerned about continuing supply from some other customers -- from some other competitors.

Okay.

Just last question for me -- Ganesh, could you give us what 16-bit tool shipments were in the quarter and how many 32-bit products you have?

I don't have the 16-bit number off the top of my head.

The 32-bit products in production I believe are at 18.

John Barton, Cowen.

Steve, if you could just go back to your last response regarding gross margins looking to the June quarter, you talked about fab utilization being basically flat and the backend being up, you know, helping gross margins.

The delta between those two, do I infer from that you're going to pull stuff out of die bank?

Is that the difference?

Yes.

So we own a large vacuum facility in Thailand for assembly and test, and we cut back on the utilization for the assembly and test facility also.

We had a number of small shutdowns last quarter.

In fact, as we speak, just in the last week leading up to building this kind of internal plan, as we see strengthening of the business, we have canceled one of the shutdowns in Thailand.

So when you produce more output, then you have higher utilization and there is an accretive effect of that in the gross margin.

There are other moving parts.

You know, quarter after quarter, the larger portion of the business moves toward newer products, shrink products with higher margins, and some other largely discretionary expenses that we have taken out last quarter which didn't have effect for the full quarter.

They will have effect for the full quarter this quarter.

So it's a combination of all of that.

We are talking 70 basis points target improvement and have a lot of moving parts.

Just to clarify in a slightly different way, I believe fab utilization remains flat in June; assembly utilization goes up.

One would think they are directly correlated, unless you are moving something from a contract manufacturer in-house, or again maybe you are pulling out of a die bank.

What I'm really asking (multiple speakers) --

We are pulling out of die bank.

Yes, we have a large -- we keep most of our inventory in die bank.

I got it.

So yes, we are taking inventory down in our pipeline by taking inventory out of the die bank, yes.

Understood.

You commented about the success of the 16-bit designs wins for volume customers, etc.

Are there any trends there worth highlighting?

Meaning, particular end verticals that you are being more successful with, or particular applications where you are beating out the competition?

Or any way we should be thinking about that?

Usually, we don't really signal that because we don't want to tell our competition where we are winning.

But Ganesh, do you want to answer that question?

I think the best way to think about it, the 16-bit business in many ways resembles our 8-bit business.

It is across a broad, broad range of applications.

Within that, we have some of the best performance 16-bit applications in terms of how well they can operate, how good the code efficiency is.

So to the extent there are applications that are sensitive to meeting higher performance, meeting good code efficiency, we are able to easily win those out, and they compete quite well with the full, broad range of both 16-bit and some of the low end of the 32-bit product lines as well.

So I can't pick a single application that is leading the growth.

It is really across a broad range of both customers and applications.

Last question -- on the M&A front, you know, you talked about using that as a strategic front, so to speak, as some of the other competitors are challenged, etc.

How should we think about the potential magnitude and direction of your M&A activity?

I mean, could we potentially see --

Our M&A activity, what I've called internally here is "elbow-out strategy." You know, after really being unsuccessful in trying to buy a large company, Atmel, that we abandoned back in February, the new strategy we are on is really for an elbow-out.

These are very small, bite-sized acquisitions, trivial in terms of the revenue contribution and the size of Microchip.

Many of them are just a few million dollars, single-digit, but they have significant capability sometime in a narrow market.

It could be their (inaudible), their security and sensing, you know, (inaudible) in the case of compiler.

So these are really -- all of these small acquisitions which allow us to sort of elbow-out where we are the microcontroller and there are things occupying next to our microcontroller, either a front-end analog chip or a better compiler capability, or some other touchscreen capability, and we simply elbow-out into adjoining spaces where our parts are already being used and we build up really strength.

That's sort of the strategy we are on right now.

So you know, these are not sizable acquisitions, but they are going to be several small ones.

(Operator Instructions).

Chris Danely, JP Morgan.

How much of the revenue increase that you're seeing in the June quarter do you think is increased demand versus some inventory replenishment out there?

Well, you know, I don't know what the difference is, Chris.

I think it is a little bit of both.

You know, these run rates went down certainly lower than the actual demand, which always happens in an inventory correction environment, so some of that is bounce-back.

But I think where the growth is coming from is really all Asia.

We expect Europe business to be down further this quarter from last quarter.

Out of the three geographies, Europe has the most economic challenges.

We're looking at US business to be flattish to up maybe just a little bit, and most of the growth is really coming out of Asia.

You know, China has done a marvelous job in their stimulus plan.

I mean, they are taking empty factories and building stuff, building brown goods, white goods, and discounting them and selling them to the rural communities and taking these capabilities to the farmers, Internet, to TVs, to refrigerators, two metering and all of that.

We are participating in that significantly.

So, we are really seeing real gross domestic product going up in China through the stimulus package.

You know, obviously, in the US, the brighter minds have chosen to do something different.

It's impact is not yet understood yet.

Great.

Then on these, this flurry of acquisitions you guys did, is there any change to the Microchip long-term business model in terms of your gross margin or operating margin or operating expenditure goals and target?

No, I mean these acquisitions are very small.

Like I said, these are -- some of these are low single digit sort of annual revenue, and you're talking about a few people, a handful of people -- 8.

10, 12.

So they don't really move the needle, but they give us a significant capability on which we, in building to our products, we can really grow that quite substantially over the year.

Over the years, we've developed a lot of those capabilities ourselves, which are substantial revenue for us today.

We continue to do so.

But on such a large revenue, we just need more tentacles, so we are using that capability to acquire additional capability.

But they are not really the model mover.

Great.

That leads into my last question.

So given that we are coming off the bottom here and hopefully things steadily improve in the second half of the year, how would you expect your operating expenditures and your gross margins to trend after the June quarter?

Well, our gross margin should continue to increase.

So like I said, if you get to like 124, 125 kind of inventory days at the end of the June quarter, which is quite likely here, you know, you are really within the striking range.

If we run the factory at the current utilization, then in the following quarter, we will be below 115.

So it's almost really corrected.

So, we have to significantly start increasing production here in maybe the late part of this quarter into the next quarter.

So that will have a very accretive effect on the gross margin.

The same thing would be in the backend.

You know, we continue to really have to produce more product.

We burned down inventories.

So that will again have the accretive effect.

In terms of the operating expenses, what we have said is that the operating expenses should very much track, as a percentage of revenue, to where we are today.

You know, we have taken operating expenses down about 25% to 27%.

I think what is our exact number right now?

I believe it is 26.9%.

Yes, so 27% we have taken it down.

We have done that all really through cutting the pay, removing the bonuses, moving other discretionary expenses.

The intent of that is so our worldwide sales force, product teams stay deployed.

So we are going to produce substantially larger number of new products compared to competitors who are laying off lots of people.

We are calling on a record number of customers.

Our salespeople, application people, are engaged, winning new designs, filling up the funnel.

We keep getting bigger and bigger.

The result would be that we will get good growth out in time.

However, as we start to get that growth, we have to pay these people back with our gratitude, with extreme thanks, because everybody in Microchip, on the average, lots of these people I'm talking to are on 20%, 25% pay cuts, if you combine the combination of a 10% pay cut plus (inaudible) their bonuses and no 401(k) matching and all of that.

I will be glad to give them that money back, not the past money back but to really reverse their pay back to normal with my extreme gratitude.

So none of these OpEx cuts are going to come back I guess into the September quarter?

No, no.

You shouldn't expect that we will lift the finger off and let them come back faster than the growth of the revenue.

What you should expect is that about 30% operating expenses -- which we roughly are now -- you know, that kind of operating expense percentage should continue.

Then Eric, do you guys have any figure or estimate for your incremental gross margin after the June quarter?

No.

It really depends on what the shape of that revenue curve is going to be.

So we won't guide on that until we guide for the September quarter.

Brendan Furlong, Miller Tabak.

A couple of quick questions -- kind of going back to the gross margin, the outperformance of the 16-bit in the March quarter, did that help your blended gross margin in the quarter?

You know, by product line within the microcontroller, the gross margin doesn't move much.

Don't make the automatic assumption that 16-bit makes higher margin than 8-bit and 32-bit makes higher margin than the 16-bit.

If that was to be the case, all of these leaders in 32-bit micro Freescale on down, would be very, very profitable.

You know, these higher end micros are much more complex.

They are larger die sizes, bigger packages, more complex technology.

So their cost is higher and their ASPs are higher, but the margin profile business model we are shooting for is roughly equivalent.

Okay.

Then on the things that are over there in Europe, what are your -- in the customers you are visiting, I know obviously right now the industrial and auto markets are the weakest place in end markets and globally.

What are they saying about six months from now?

Do they think they will be out of this three months from now, six months from now?

Thank you.

Well, you know, the more customers and distributors you talk to, the more varied opinion you get.

You know, Europe is still not a monolith; it is not like the US.

You know, I got slightly different answers from Germany versus the UK, versus France, versus Italy, versus Nordic, versus Russia.

But they are all down, you know.

Nobody is up.

They're all down; all market segments are down.

Europe is -- the thing is Europe takes longer to take actions usually.

It's just that, because they are not all one country and they can't make decisions on interest rates as quickly as we can make in the US -- as quickly as they can make it in China.

So we are seeing the effect of stimulus packages to be best in China.

The US comes much further down.

Europe I think has just really begun.

So I think it will take a while.

Douglas Freedman, Broadpoint.

It's [Ian Eng] for Doug Freedman.

Thanks for taking my question.

I am wondering if you can provide more color on the opportunity to take share in the landscape.

You mentioned that Renesys being acquired by NEC.

However, these two very large companies do have a lot of internal customers, like the Hitachis and Mitsubishis and NECs.

What sort of target markets would you go after?

Ganesh, do you want to take that?

Yes.

You know, certainly they have a large capital market and a large percent of the market that is in Japan.

But they are also present in other geographies and other customers where we see them.

Typically, when these type of combinations happen, roadmaps will change, product lines will come to an end that cannot be -- continue to be invested in at the rate when they were losing money.

As those transitions happen, they all present opportunities for Microchip solutions to be in contention.

As we are investing in our product lines, as well as our customer support, we are in a better position to be able to identify and capitalize when those opportunities present themselves.

Great.

As a follow-up, the 32-bit processors, you mentioned that this year they will be starting to have some material wraps.

When do you think it will start becoming worthy of reporting, like looking at sort of mid-double-digit growth rates?

You know, you're obviously much higher now.

You know, I think, as we go through the fiscal year '10 quarters, at an appropriate time when it makes sense, we will begin to provide some of that detail.

Really, I think it is probably less important from our perspective.

We are looking at 8s, 16s, and 32s as a portfolio that solve customer applications and in many cases a 16-bit can go into a 32-bit application, or a 32-bit could fit into a 16-bit application.

They become less and less meaningful.

I'm sure, at some point, we can provide you the data, but as we think about it, we don't look to just grow 32-bit or grow 16-bit.

We are trying to grow them all and identify the right solution for the customer, be it 8, 16 or 32.

(multiple speakers)

You know, we won't break out the 8, 16 and 32-bit revenue for competitive reasons.

But like we tell you the 16-bit growth rate, we will tell you that 32-bit growth rate quarter-over-quarter.

You know, right now, it doesn't help.

I mean, 32-bit grew 400% sequentially last quarter.

What does it help you?

That doesn't help because it's a very small base.

So in the next two or three quarters, by the end of this year, we will start to tell you consistently the number of large customers, their development (inaudible) and some of the growth rate parameters on 32-bit like we do on the 16-bit.

Exactly, that's helpful.

Thank you.

And then the final question, like a housekeeping question here -- are you guiding interest income for the June quarter, the pro forma?

Are we what?

The pro forma interest income for June?

Eric, do you have that?

Yes, so the net of interest income/interest expense will be somewhere in the minus $2 million range, $1.5 million to $2 million.

I see.

That's all I had.

Thank you very much.

Versus what this quarter?

This past quarter was about the same range, Steve.

It was minus $2.1 million.

Okay, so about the same.

John Pitzer, Credit Suisse.

Good afternoon, guys.

Steve, thanks for taking my questions.

Steve just a little bit -- you talked about linearity in the March quarter improving month-on-month.

I think you mentioned that April booking is a lot higher than January.

I am just kind of curious.

When you look at the 5% sort of internal guidance for the June quarter, does that assume that linearity continues to improve month-on-month, or are you already at a run rate where you don't need that to hit that guidance?

Then I guess, on the same vein, book-to-bill (inaudible) in the quarter was 1.04.

Given that you are expecting June to grow 5%.

Implicitly are you expecting more turns in the quarter, or just help me understand that?

Well, you know, Eric, do you remember what our book-to-bill was a quarter ago?

Not off the top of my head.

Wasn't it like 0.97 or something?

Yes it was -- no, it was less than that.

It was 0.77 or something.

(inaudible)

The December quarter bookings were very, very low.

I'm sorry, when we came to March quarter in the beginning of January, we had just come off a quarter with a book-to-bill ratio very, very low.

Yet we grew -- I'm sorry, we did much better than the book-to-bill ratio would show.

We have said repeatedly, the book-to-bill ratio doesn't really track with the end revenue.

So the book-to-bill being 1.04, it doesn't really -- is not a proxy on -- you can't really calculate what your growth rate would be.

I mean, it just has never had any correlation.

You can get a large amount of bookings.

They just don't age in the quarter; they age in the following quarter where the bookings are (inaudible) but they don't ship out.

But I just, I have never been able to correlate those numbers; they don't correlate.

Then Steve, just around linearity, I am just kind of curious.

To hit that 5% sequential in June, do you need month-end linearity to improve?

Or are you already at a run rate where that is not necessary?

Well, bookings are not a problem; bookings are very good.

We want them to continue to improve because bookings are still low on a historical basis.

But you know, the linearity doesn't really have to improve to hit the numbers.

The aging has to be right.

Then Steve, just back to Chris' earlier question about inventory versus end demand.

I know you gave us some explicit guidance on what you thought your own internal inventory would do in June.

I am kind of curious.

Any comments around [disty] inventory in the June quarter relative to end consumption?

Do you expect that to move higher, stay the same, or continue to bleed lower?

Our model in our guidance assumes just inventory going down further.

You know, about a month ago, our assumption was that this inventory would go down much further, and even in the month starting April 1 to the announcement of these numbers, we have revised that twice, feeling that the [disty] inventory is not going down as much.

But we still have [disty] inventory drain dialed in.

Whether it will go down even less than that, we can't control.

But it shouldn't affect our revenue because we don't take that as a shipment.

Then my last question, just back on the market-share gains and the comments you made, is the expectation study consistent share or do you actually see opportunity out there where bigger chunks of share might come your way on a more near-term basis?

Ganesh, do you want to take that one?

Yes, you know, in the embedded business, market share does not move that dramatically in short periods of time.

It is a sustained battle that you have to win.

So I would expect that market share gain happens over a period of time, but happens at a more sustained basis.

Great.

Thanks, guys.

I appreciate it.

Kevin Cassidy, Thomas Weisel Partners.

Thanks for taking my question.

I wonder if you can give a little more color on your plans for the touch marketplace.

You know, what applications are you targeting and what markets?

Ganesh?

You know, when we talk about touch, there's two parts of touch.

There is touch sense and there is touch screens.

Touch sense is any time you have a human interface, a button, a slider that can go into a broad range of products -- they can be in consumer products, they can be in home appliances, they can be in printers.

So it has a very, very broad range of places where people are replacing mechanical buttons and replacing them with the kind of touch solutions that Microchip has.

We see it in industrials; we see it in consumer; we see it in automotive, in medical.

So in all of these applications segments, there are opportunities.

Touchscreen, on the other hand, is similar to what touchsense does, except there is now a visual screen and the interface.

So if you think of a navigation system in a car, for example, you're making an interface through that screen; there is information that is on that screen that you are interacting with.

But it also goes into many, many embedded applications, and it is a richer data that the customer is interacting with, with touchscreen.

Okay.

Do you plan on just -- are you going to be selling the silicon and then going to a module maker, or are you going to sell the whole solution?

No, our solution is really the silicon and all of the other software pieces that a customer needs.

But the integration and the modules in the final products are really what our customers do.

Okay, great.

Do you expect this to be in the -- I would imagine you are saying about the same gross margin as any microcontroller.

Yes, we expect that these will fit into the profile of where our microcontroller margins typically run that.

Okay, great.

Thank you.

Romit Shah, Barclays Capital.

Eric, just I had a couple of housekeeping questions just on the other income.

You guys reported $9.9 million.

There was a one-time gain, is that right, from the fab sale and some trading securities?

Yes, there was a one-time gain from trading securities, and that was $12 million.

Okay, and your --

There was no fab sale.

Where are you reading "fab sales"?

That is last fiscal year, Steve.

Oh, okay.

Then, why are you forecasting a loss again in the June quarter?

Well, just because interest income is lower than interest expense.

Okay, so this is something that is going to persist through fiscal '10?

That is correct, unless something changes dramatically with interest rates.

Okay, thank you.

Gil Alexander, Darfil Associates.

The question was just answered.

Thank you.

Ruben Roy, Pacific Crest Securities.

I just had a quick question.

Ganesh, sorry if I missed this, but did you give out the 16-bit development tool shipments for the quarter?

I apologize.

I did not.

We will get back to you and I think there was a question earlier on for somebody else and we will get back to both folks on it.

Okay, thanks very much.

That's all I had.

At this time, our question-and-answer session has concluded.

I will turn it back over to you, gentlemen, for any closing or additional remarks.

Well, thank you for all the investors for joining us.

I think it has been a difficult fiscal year, fiscal year '09, but we are still profitable.

We are still doing well.

We put the bottom behind us.

We are growing, and we have performed better than a lot of our competitors and the outside data is now starting to confirm that.

So our biggest objective here is to put any kind of market share concerns to rest, which have been the concerns of many of the investors and analysts for the last year.

You know, it started with the crash of the housing market.

I think now, as everybody else has joined in the fray, our numbers look substantially better than our competitors'.

We boldly look ahead and are putting the bottom behind us, and we will start to grow from here.

Thank you very much.

That concludes today's presentation.

Thank you for your participation.