微晶片科技 (MCHP) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology first quarter and fiscal year's 2010 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 Mr.

Eric Bjornholt, Chief Financial Officer.

Please go ahead, sir.

Thanks, Jessica.

Good afternoon, everyone.

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

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

We refer you to the Press Release of today as well as our 10-K for the fiscal year ended March 31st, 2009 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 operation.

In attendance with me today are Steve Sanghi, Microchip's President and CEO, Ganesh Moorthy, Executive Vice President and COO and Gordon Parnell, Vice President of Business Development and Investor Relations.

I will comment on the first quarter fiscal 2010 financial performance and Steve and Ganesh will then give their comments on the results, discuss the current business environment, discuss our guidance for the September quarter and update other pertinent matters regarding our business.

We we will then be available to responds to specific investor and analysts questions.

Net sales for the June-quarter were $192.9 million, up approximately 11.4% from net sales of $173.3 million in the immediately preceding quarter and down approximately 28.1% from net sales of $268.2 million in the prior year's first quarter.

On a geographic basis, revenues in the Americas was up 4.7% in the June quarter.

Europe was down 7.4% and Asia was up 29.5%.

Asia continues to be our largest geographic region, representing 48.7% of sales.

The Americas are 25.6% of sales and Europe is 25.7% of 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 and where the end product consumption is occurring.

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

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

Non-GAAP results exclude share based compensation expense, gains and losses on trading securities, acquisition related expenses, costs to acquire patent portfolio licenses, nonrecurring tax events, and the impacts from a tax basis of these excluded items.

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

Non-GAAP net income for the first quarter of fiscal year 2010 was $35 million or $0.19 per diluted share, an increase of 25.4% from non-GAAP net income of $27.9 million or $0.15 per diluted share in the immediately preceding quarter and down 57.6% from non-GAAP net income of $82.6 million or $0.44 per diluted share in the prior year's first quarter.

The after tax impact on the June quarterly earnings that have been excluded from non-GAAP results include $7.8 million in share based compensation expense, $3.4 million in gains from trading securities, a $1.1 million charge associated with the acquisition of a patent license, $1.1 million in charges associated with our acquisition activities, and $0.9 million noncash interest expense associated with our convertible debt.

GAAP earnings per share for the June quarter were $0.15 per diluted share.

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

I will be referring to gross margin and operating expense information on a non-GAAP basis, prior to the effect of share-based compensation, acquisition related expenses and the acquisition of a patent license.

Gross margins were 51.4% in the June quarter, compared to 49.3% in the March quarter.

The quarterly increase in gross profit margin was driven by a variety of factors including higher production activity in our factories, continued cost reduction efforts from our global manufacturing operations and our favorable product mix from the sale of our proprietary products.

With the increase in revenue, we were able to achieve operating leverage from the business with total operating expenses of 29.2% of sales in the June quarter, compared with 30% in the prior quarter.

Research and development costs were the $24.6 million, representing 12.8% of sales.

Sales and general administrative expenses were $31.8 million, representing 16.5% of sales.

Operating expenses continue to be managed appropriately based on the overall economic environment.

On a full GAAP basis, gross margins including share-based compensation and acquisition-related expenses were 50%.

Total operating expenses were $65.3 million or 33.8% of sales and include share-based compensation of $7.3 million, acquisition-related expenses of $0.3 million, and an expense associated with the acquisition of a patent license of $1.2 million.

On a non-GAAP basis, the tax rate for the June quarter was 13%.

The GAAP effective tax rate for the March-quarter was 16.2%.

The difference in the GAAP and non-GAAP tax rates was driven primarily from the higher tax rate that applied to the gains on our trading securities and the noncash interest expense on our convertible debt.

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

The dividend declared today of $0.339 per share will be paid on September 3, 2009 to the shareholders of record on August 20, 2009.

The cash payment associated with this dividend will be approximately $62.2 million.

Moving on to the balance sheet, in the June quarter Microchip adopted FSP APB 14-1, accounting for convertible debt instruments that may be settled in cash upon conversion.

The adoption of this pronouncement required Microchip to record some significant balance sheet reclassifications during the quarter, and retrospectively applied the accounting change to our prior GAAP financial statement.

The major impacts of adopting this new accounting pronouncement in the June quarter were to reclassify $813 million of debt to equity, record a $313.2 million deferred tax liability for the debt that was reclassified to equity, to record noncash interest expense to reflect the accretion of the remaining debt ton balance sheet to par value of the debt over the life of the convertible, and to adjust retained earnings by $4.4 million for the retrospective adoption of this accounting pronouncement.

Microchip recorded $1.5 million of noncash interest expense in the June quarter and will continue to have a charge for noncash interest expense for the balance of the term of the convertible.

The noncash interest expense will be about $1.6 million in each of the remaining quarters of fiscal 2010.

Although our financial statement presentation related to our convertible debt was changed significantly due to the adoption of this new accounting pronouncement, the overall economics and the cash flow have not changed.

Microchip's inventory balance at June 30, 2009 was $113.9 million, representing approximately 108 days.

Inventory on Microchip's balance sheet was reduced by $17.6 million or 26 days in the June-quarter.

At June 30, 2009, our distributors were holding about 38 days of inventory which is similar to the levels that they were holding at the end of March.

With combined inventory days of 146, we have right sized our inventory position, allowing our factories to increase their production output in the September-quarter and produce higher gross margins.

At June 30, our receivables were $98 million an increase of $9.5 million or 10.8% for the balances as of the end of March.

Receivable balances continue to be in excellent condition and we have seen any material deterioration in the payment performance from our customers.

We continue to closely monitor customer activity to ensure we are protecting the receivable assets on our balance sheet.

As of June 30, Microchip's cash and total investment position was $1,438,000,000, a decrease of $2.6 million from the March balance including a $61.9 million dividend payment and a $12.2 million payment related to interest on our convertible debt.

If the interest payments on the convertible debt were made quarterly instead of semi annually, our cash balance would have grown during the June quarter.

Our cash generation continues to be strong and we fully expect our cash and total investment position to increase in the September 2009 quarter.

Capital spending was approximately $4.1 million for the June quarter and our fiscal 2010 capital expenditure forecast is currently $20 million.

The fiscal 2010 capital forecast represents a reduction of 80% from the fiscal 2009 levels and we are selectively investing in equipment to support the revenue growth of our new products and technologies.

Depreciation expense for the June quarter was $21.7 million, compared to $23.2 million in the same quarter last fiscal year and $22.9 million in the March quarter.

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

Ganesh?

Thank you, Eric, and good afternoon, everyone.

I will now comment on the individual product lines and let's start with micro controllers.

Our micro controller business was up a strong 11.9% on a sequential basis.

Flash micro controllers represented approximately 80.5% of our micro controller business in the June quarter.

Our 8 bit micro controller business had an excellent quarter as all segments of our 8 bit product line experienced strong growth.

Our 16 bit micro controller business also had a strong quarter with 15.7% sequential growth and 33.3% growth from the year ago quarter, as well as another quarter -- another record for quarterly revenue.

New customers and new designs going to production continue to help to drive growth as the number of volume 16 bit customers grew by 145 customers to 1,842.

Our 32 bit micro controller product line continues to make good progress with a number of customers and volume production approaching 100.

Moving to development tools, we had a record quarter with 35,608 development tools shipped in the June quarter.

We also passed another key milestone during the quarter with the shipment of our 800,000 cumulative development tool.

Both milestones are indicative of continued strong design and activities, and acceptance of our solutions by our customers and should bode well for future growth.

In April, Microchip introduced the industry's lowest power micro controllers with ur announcement over our XLP, our extreme low power micro controllers.

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

Since that announcement, customer interest as well as our design momentum has been strong and we have continued to press that advantage with the introduction of a steady stream of additional new XLP micro controllers.

We now have over 50 micro controllers with extreme low power technology in production.

Microchip also continues to make significant strides in establishing our leadership in the growing area of touch technology with our touch sensing and touch screen solutions.

We now have over 100 customers in volume production, using our touch technology solutions including marquis names like General Electric, Siemens, Samsung, LG, Toyota, JVC/Panasonic, Toshiba, Activision, LogicTech and NCR among them.

We also have over 500 other customers who are actively designing with our in touch solutions.

We are very pleased with the market interest, the customer acceptance, the design win momentum and revenue growth of our broad range of in touch solutions and are excited by their potential to drive growth.

Moving to analog products, our analog business was up a strong 12.2% sequentially.

A tier two --we are pleased with the design win and revenue momentum this business has shown.

And we continue to introduce a steady stream of innovative new products and expect continued strong revenue growth from our analog business in the coming quarters.

Finally on (inaudible) memory, that business was up 5.5% sequentially and we continue to run this business in a disciplined fashion that maintains consistent profitability and serves our micro controller customers to complete their solutions.

With that, let me now pass it to Steve for general comments as well as our guidance for the September quarter.

Steve?

Thank you, Ganesh, and good afternoon, everyone.

Before we get any feedback, that the webcast was started a few minutes late.

Evidently someone forgot to push the button.

Some of the information that Eric gave, especially geographic information, was missed by the ones who are listening to the webcast.

I will give that information again.

On a geographic basis, revenue in the Americas was up 4.7% in the June quarter.

Europe was down 7.4% and Asia was up 29.5%.

Asia continues to be our largest geographic region, representing 48.7% of sales.

The Americas are 25.6% of sales and Europe is 25.7% of sales.

These measurements are based on where the product is delivered for manufacturing purposes and it doesn't necessarily represent where the design activity may be taking place.

There was the part that was missed.

Today I would like to first reflect on the results of the June quarter and then I will talk about our guidance for September 2009 quarter.

The June quarter saw a strong rebound from the bottom established in the March quarter.

We originally set our internal plan for the June quarter at up 5% sequentially.

In early June, we guided up to between 8% and 10% growth, and I am pleased to report that we exceeded the high end of that guidance by achieving a sequential revenue growth of 11.4%.

We also exceeded the gross margin guidance beating the high end of the gross margin guidance by 70 basis points.

The strength of our gross margins continues to validate the strong proprietary value embedded in our products and our franchise.

Our earnings per share both GAAP and non-GAAP exceeded the high end of our guidance on the strength of strong revenue growth, strong gross margins, and excellent cost control on the operating expense side.

Our inventory came down to 134 days at the end of the March quarter -- came 534 days at the end of the March quarter to 108 days at the end of June quarter.

The inventory is now below our target of 115 days.

Therefore, we have started to grow the wafer starts in our fabs.

The increased manufacturing utilization will have a positive effect on our gross margins.

We expect gross margins for the September quarter to be up a bit to 250 to 350 basis points above the June quarter.

From the product line perspective, our increased focus in two areas of micro controllers is paying off.

Ganesh discussed both of them and I will summarize them again.

First, we have introduced an industry-leading extreme low power micro controller product line that is making waves throughout the industry.

We have 50 products in production on this XLT product line.

And we are gaining significant design activity on these new products, displacing the competition in most cases.

Secondly, we have the leading technical solution on touch sense micro controllers.

We are currently shipping volumes silicon to over 100 customers and have over 500 customers that are designing with our in touch solutions.

Our design wins span every idea of industrial, consumer, automotive, medical, PC, and communication applications.

Our financial results clearly indicate that our business model and is profitable even at the bottom of this deep recession.

While a majority of our competitors lost money, Microchip just posted over 22% operating profit; a testament to the resiliency of our business model, the loyalty of our customer base, the hard work of our employees worldwide, and the competitive advantage of our company culture.

We have been profitable for 75 consecutive quarters and the September quarter will be our 76th.

I also wanted to high like the comparison to SIA, Semiconductor Industry Association numbers, that were recently released.

While Microchip does not participate in SIA and short-term SIA numbers are often suspect and later revised, many of investors and analysts follow those numbers.

Based on SIA data, cumulatively over the last two quarters, SIA 8 plus 16 bit micro controllers were down 18.5%.

While Microchip's 8 plus 16 bit micro controllers were up 1.2% over the last two quarters, showing significant market share gains.

Microchip is in -- Microchip in the first half of 2009 had its highest market share of 8 bit micro controllers ever.

For those who have predicted market share losses for our 8 bit micro controllers, I hope this data puts your concerns to rest.

And we steadily and continuously keep gaining market share in 16 bit, achieving record sales in the June quarter.

From a competitive standpoint, our product line is one of the strongest in the industry with the broadest coverage from low-end 8 bit to high-end 32 bit, from lowest performance -- from lowest [coverage XSP] product line to high performance MCUs and with broadest set of peripherals, [intestines], motor controls, digital power supplies, connectivity, analog and RF.

Our micro controller continues to be a compelling solution for the market.

We have significantly broadened our server available market and we are getting a large number of design wins outside of our traditional core group of customers.

Regarding specific competitors, we are already getting customer inquiries and design wins due to concerns about the pending merger of [MEC and Symantec].

Other competitors like [Free Scale, NSD and SD Micro Electronic] are in significant restructuring mode.

Free Scale micro controller business was down 3.3% sequentially whereas Microchip being up 11.9% sequentially.

Free Scale blamed it on the weakness of automotive business.

We did an analysis of our top direct automotive customers.

Microchip's automotive was up 17.5% sequentially.

Our automotive business was up in all geographies with US automotive up 10.6%, clearly evidencing market share gains for Microchip.

Investors and analysts have also been concerned about our consumer business.

With a similar top data customer analysis, the home appliances part of our business was up 10% sequentially.

We cannot differentiate between what someone called it the correction of -- the inventory correction and market share gains through new designs.

We believe there are some of both, but the performance relative to competitors clearly points to market share gains.

Regarding [Acmed], Acmed has lost momentum on micro controllers as seen by their results in the last two quarters.

It was clear to us that Acmed's prior year's growth was inflated due to the acquisition of Quantum that distorted year-over-year numbers and due to the reclassification and significant micro controller business from prior years to [APIP]..

Let's be mindful of the similar tactics going forward and watch for any reclassification of business back to micro controllers to show how it works on MCU.

Overall, Microchip sees plenty of opportunities for continued market share gains and we are boldly making new investments in product lines, people, customer training and distributors.

And we see continued market share gains ahead.

Now I will discuss our guidance for the September quarter.

Our book to bill ratio for the June quarter was 1.18.

Our starting backlog for the September quarter was significantly higher than our starting backlog was for the June quarter.

The visibility is improving significantly.

The bookings rate so far in the quarter has been strong.

On the other hand, we are now in August, and Europe is sure to go on summer vacation.

Considering all of that, we expect our net sales for the September quarter to be up between 7% and 11% sequentially.

We expect our non-GAAP gross margin to be between 54% and 55% which is 250 to 350 basis points improvement over the June quarter.

This improvement in gross margin percentage is primarily driven by higher factory utilization.

Our inventories are now fully corrected and are actually below our target.

We continue to ramp up the factories to meet the increase in demand.

The gross margin percentage through the balance of fiscal year 2010 will depend on revenue increases in subsequent quarters.

We currently expect about 100 basis points improvement in gross margin percentage in each of fiscal Q3 and fiscal Q4.

Regarding our per share guidance for the September quarter, we expect non-GAAP earnings per share to be between $0.23 and $0.26 and we expect GAAP earnings per share to with between $0.18 and $0.20.

Both GAAP as well as non-GAAP earnings per share assume no effect of mark-to-market consideration on public securities only.

As you can see from our balance sheet, we produced very strong cash flow last quarter.

We were nearly able to cover our dividend and the interest payments on the convertible without dipping into cash reserves.

Starting the September quarter, we actually expect to build cash even after paying our dividend.

The dividend is -- the coupon payment is every six months.

We are glad to have demonstrated to investors our strong commitment to the dividend.

Unlike many S&P 500 companies, we did not cut our dividend even though -- even through the deepest part of the recession.

I want to take this opportunity to thank our customers, investors, analysts and employees for their support through this very difficult period and assure them that their support is never taken for granted.

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

(Operator Instructions).

We will pause while we assemble the queue.

Our first question comes from Brendan Furlong from Miller Tabak.

Good afternoon.

Thank you very much.

Quick question on the SG&A, should we think about it running in the 32% to 33% for the foreseeable future -- for the next three, four quarters at least?

You can see from the information in the Press Release in the outlook section that we have actually -- the range is to be flat to down up to about 75 basis points.

Depending on revenue does, we can see some incremental leverage there.

But I am looking more into Q3 and into fiscal 2011.

Should we consider more or less around the same percentage of revenues?

It will largely depend on how much revenue growth is there beyond this quarter.

We don't have visibility, but with revenue growth you should continue to see some operating leverage.

Okay.

My other housekeeping question then just on the tax rate going forward, you are guiding 12% next quarter.

Should we consider that the run rate on the future quarters?

Yes.

Thank you.

That's it.

Thanks a lot.

You're welcome.

Thank you.

Our next question comes from Kevin Cassidy from Thomas Weisel Partners.

Thanks for taking my question.

On the automotive side, what's your exposure to Europe and Asia and US, as you compare the three markets?

Exposure, we have looked at is really nearly one-third, one-third, one-third.

Your US was up 10%.

Were you stronger in any one of them, Europe or Asia?

It would have to be.

You have to be de --

Which one of -- which one?

We don't have the info.

Both were strong.

Okay.

Is it analog products along with micro controllers or is it just the micro controllers that you are selling into automotive?

They sell all controllers, but they're dominated really by micro controllers.

That's the majority of our business.

The analog portion in automotive will be relatively small.

Okay.

Just as we were talking about the different markets and if -- as you are gaining back market share, do you think some of it is related to the markets you addressed growing faster than some of other markets?

Or is it a complete swap out of one micro controller for your micro controller?

You use the word gaining back market share, our data does not show that we lost any market share.

It was a direct correlation to the consumer segment and housing basically leading the downturn and it was so strong that it took our global financial system into a meltdown.

When that was happening and we were seeing a substantial fall from it, other companies were not as exposed to it .

No matter how much we explained it, I don't think it ever got through.

We were winning a large number of design wins.

We were doing record number of development systems quarter after quarter.

The 16 bit growth was strong.

We are seeing the results of many of these design wins into productions.

There's really not any dislocation from our standpoint.

We had a heavy concentration in consumer and automotive.

Consumer clearly led the decline and automotive joined later.

During that time, yes, we had larger fall that some of the competitors.

As we have said, our 8 bit market share is the largest we have ever had in market

Okay.

Great.

Thank you.

Our next question comes from Ruben Roy of Pacific Crest Securities.

Hi, Steve.

I don't think you talked too much about the industrial market.

Can you give us an update on what's going on there and what your outlook is for industrial?

The breath of what we are seeing in the market is across all of the segment we participate in -- so clearly not only have we seen it in automotive and home appliances that Steve talked about, but the other segment including industrial have shown strength.

Many of those are designs we have been incubating and working on.

Some them are older designs and they have come back into a higher level of consumption.

Industrial has been good.

Okay.

And Ganesh, do you have a 16 bit development fill number for the quarter?

I don't have it off the top of my head, but we will get one to you.

Okay.

And then just for Eric, another question on OpEx -- maybe a little differently.

We are seeing some stabilization here and Steve talk about a bottom being established in March.

It is an improvement in the environment.

How are you going to start thinking about potentially getting more aggressive with investing in the business?

We feel we are investing in the business as appropriate.

We still think that our operating expenses as a percentage of sales compared to others is really quite good.

But we are not under investing in the business to make sure that we continue to have success with future design wins and new products.

Remember through the downturn, we did not do any layoffs.

All of our sales and marketing and design and product resources have been fully invested.

Our product line is just absolutely awesome and fully trained people are going to take it to market.

We have potentially better rating more than ever before -- very, very strong because of the downturn and we came out.

Product line is very strong, lots of new products.

We (inaudible) because we let a whole bunch of people go.

We cut expenses largely through paycuts and through the bonuses.

And as the businesses is recovering now, we are giving some of the paycuts back to the employees so that is adding a little to the operating expense.

But the revenue is growing faster than that so we are getting operating leverage.

At the same time, we have all these [famed] employees doing an awesome job of improving everything in the Company.

Great.

Last question, can you give us a utilization for the June quarter and then the outlook for September?

All we can say is that utilization will be higher this quarter than last quarter.

We have stopped giving the numbers because we have found it to be very consuming.

There are many technologies.

Some have less number of steps and larger numbers of steps.

A portion of the business comes from foundries.

You can't really plot from point A to point B.

Based on the revenue you look at [you can't] gross margin.

It does not work and we have found that extrapolation by the analysts to be highly confusing and misleading.

All right.

Actually --

We are giving you the guidance.

We gave you the guidance for the gross margin for the September quarter and we also gave you guidance for the following couple of quarters with about 100 basis point improvement in each quarter.

All right.

And then sorry, just one last one.

I think historically the September quarter has been back-end loaded.

Do you expect linearity to be any different this quarter for any reason?

The backlog is very strong for September quarter.

Usually it slows down quite a bit.

Usually you get a lot of the orders in September, but this time it is different.

This time we had very strong bookings in July.

August appears to be very, very strong.

The backlog is filling in nicely.

That's why we reverted from giving you an internal target back to giving guidance.

For last two quarters, we gave you internal target.

We didn't give you guidance.

We gave you guidance and we also have you fairly narrow guidance, compared to many of our competitors because it is very strong.

Thanks, Steve.

You're welcome.

(Operator Instructions).

Our next question comes from John Barton with Cowen.

Thank you very much.

Steve, you highlighted the fact you have customers coming to you because of some of the challenges that your competitors are having -- some economic driven M&A, et cetera.

How do you see that over the next several quarters?

Do you think it continues?

Do you think as the economy stabilizes, you won't have that same trend?

How are you feeling about that?

I would expect it to increase because the merger hasn't happened yet.

As the merger happens and it starts to rationalize product lines and architecture and combined sales offices and distributors and one salesman stays and the other one goes and all of these changes.

We are certainly seeing the front end of what people are really concerned about, but the restructuring is only -- not only in (inaudible).

As you can see, every one of our competitors is essentially restructuring significantly -- most of the competitors.

There is a lot of concentration.

Over the last 20 years or so, we have not seen customers largely concerned about whether they're supplier makes money.

If a customer is getting a good product at good cost, they don't really care whether the supplier is financially profitable or not.

First time ever through this cycle, we are seeing people really concerned because people have not received the support.

There are very large lay offs and others -- large companies have lost the support they used to get from their suppliers.

Maybe technical support, maybe customer service, maybe specific sales people or whatever it may be, people are experiencing significantly lower support.

One company that hasn't cut back on that support at all is Microchip.

Any response to the previous question about OpEx?

You eluded to the fact that you've been zeroing out of bonuses, pay cuts.

I think I heard you say and I want to clarify this.

You have already started to return some of those cuts.

We saw some of it in the June quarter.

You will continue it going forward, but you will do it at a rate that is slower than the revenue growth so we don't have to worry about the spend function of -- in OpEx, impacting the bottom line in the foreseeable future.

Did I interpret your statements correctly?

Yes.

You should continue to see operating expense leverage.

Okay.

And last question if I could.

Last quarter, you talked about the fact that M&A strategy was limited to small technology tuck-in type affairs.

Are you still looking at it that way?

Does the stabilization of market change your view of that?

It does not change our view of that.

Thank you very much.

We will now go to Chris Stanley from JPMorgan.

This is Boyd [Tinfar] for Chris.

I want to get a sense of what you think are the relative growth rates in your MCU analog number businesses for the next few quarters.

What are some of the drivers you anticipate in that?

I don't want to break out the growth rates that level of fineness, but the drivers that are going to be producing that growth.

We expect 8 bit will grow.

It is the largest piece of our micro control business.

The 16 bit will grow at an even faster rate than that.

We expect the 32 bit growth to be as good or better.

All aspects of micro controllers we expect to grow with the new product lines having much faster growth.

We expect analog for several quarters will have very good growth.

The product line has had an excellent acceptance and designs wins.

You have seen that already in the last quarter.

With over 12% growth, you will see that for several quarters here.

Those are the fundamental drivers.

It's our micro controller business, 8, 16, 32 and analog business.

Okay.

Great.

Thank you.

Another question around your memory business, how are your prices trending in that business?

In the past quarter and going forward?

Memory is a competitive market.

We play in the aspects of those business that are important for us to be in.

We are not trying to chase revenue at the expense of gross margins in that business.

Our ASPs have been trending down at a historical rate, but nothing that is of concern to us.

Great.

And just one last question, it sounds like your auto business did really well.

How is your auto rev compared to your peak historically?

Is it how much down is it?

In comparison to the peak?

I don't have a percentage of where it is going to be.

Obviously, it went down as a percentage as automotive had its decline, but it is not that easy for us to be able to track at a fine detail of every automotive account.

What Steve gave you was a percent of a representative sample of our large automotive customers that we have direct insight into.

62% of our business is from distribution where we do not get a breakdown, whether they are consumer, industrial, automotive or what.

These vertical market analysis, we hardly ever do.

We internally see no value because our products are standard to go into all five markets.

Once in a while when there's a lot of noise on Wall Street, we can do a simple analysis like we have done this time.

But routinely, we are not run by vertical markets.

We run horizontally by producing very feature rich products that sell horizontally across all markets to 70,000 customers.

Great.

Thank you.

Our next question comes from Gil Alexander from Darfil Associates.

Good evening.

Could you give us an idea of what your -- what the market share is for -- in the field for programmable 8 bit market?

I can say that it is very high.

When we used to track that and used to break these numbers out, our market share would provide a third of the entire market.

I think then significant -- additional portion of the market has converted from nonfield programmable to field programmable.

Everybody else who wasn't making field programmable micro controller is now making field programmable.

A lot of the competitors have been converting their non preprogramable customers to their field programmable.

The market is now -- the majority of the market is field programmable.

Our marketshare of the overall market is like I said a record in the first half.

And market share of field programmable is even higher than that, but we don't know the number.

I know we're in a recovery state, but is there a way of judging what the 8 bit programmable market should grow over the next few years?

It's tough for you because you are in a recovery state, but should it be something like 5% to 7% if you took out the recovery of the market?

We don't know how to put numbers on them.

When various market analysts are a $1 billion part with $5.5 million market on the size of the market -- 5% differential analysis are not meaningful.

And that has been the main issue that unlike FDGA, unlike micro processors, the micro controller market is highly fragmented with a large number of competitors having significant internal consumption, especially in Japan and Europe.

And the overall size of the micro controller market that we hear from SIA never jives with what we hear from any of the other market analysts which give a breakdown by company like data processing and others.

This has always been a big challenge.

You pick your target.

Either look at Data Quest or look at SIA or look at somebody else, and consistently watch them and you can see a trend.

If you jump around and try to figure out what the size of the market is, you get a number plus or minus $1 billion.

By consistently watching the number, we are telling you that our marketshare for 8 bit micro controller is the highest we have ever had.

Thank you.

Just st for housekeeping, what is your depreciation estimate for the year?

It is about $88 million.

Thank you very much.

And good luck.

Thanks.

Our next question comes from [Craig Ellis from Carris and Company].

Thanks for taking the question.

Steve, you provided some commentary on potential gross margin for the second half of the year.

Obviously there was some underlying revenue assumption around that.

I am wondering if you can provide some color there, whether it is just normal seasonality?

Something north or south of normal and whether you think there's any channel inventory build that might be occurring there as we think about those parameters?

It is north of normal.

That's all I can say.

Okay.

And then switching gears.

Regionally, Europe was down in the June quarter.

No surprise.

It seems like everybody that has talked about Europe is seeing weakness there.

As you have moved into the first fiscal quarter, are you seeing that geography stabilize?

Or what are you seeing out of Europe as you start to move through the quarter?

Europe seasonally is the weakest in summer quarter which is the quarter we are in right now.

We are not seeing it this year.

It could just be driven by -- usually they're very strong in the March quarter and this year they were not.

That was a death of the recession program.

Usually they're okay in June quarter and they were not.

They were down.

You are getting some effect now in the current quarter where they are usually down this quarter.

And this quarter, it doesn't look like -- seasonality is all screwed up by geography.

At this business, you are covering another year or so (inaudible) reestablish what is the cyclicality of each geography and what the the cyclicality of the business is.

Okay.

You have started to see an improvement in your European business?

Yes.

Okay.

Lastly for me, you mentioned that you see plenty of opportunity for share gain out there.

Can you pin point some of the opportunities that you see?

Largely, we are growing share in every single market, 8 bit, 16 bit, 32 bit and analog.

You could break it out by vertical markets.

We don't have that tracking, but it seems like we are differentiate automotive, in industrial and consumer and medical and by application.

We serve thousands of applications.

We are in everything you own.

Everything you see that has power connected to it.

All right.

Thanks, guys.

Our next question comes from John Pitzer from Credit Suisse.

Good afternoon.

When you look at the September revenue guidance, what is the expectation for just the inventories?

Do you expect it to be a quarter where inventories stay flat, go down, build a little bit?

We would project that in terms of number of days -- going to hold that it would be about flat.

About flat sequentially?

In days.

In dollars, we would expect it to be up to maintain that level of days with increasing revenue.

And then, Steve, is there any way to quantify the dollar opportunity within the (inaudible) merger as far as what you could potentially pick up --

(multiple speakers) lots of business.

It's not a dollar amount, but what timeline would you expect to start to see any potential share gains start to run?

It is the usual stuff.

In certain fast moving application -- it can again be faster than six months.

But the majority of that is a year, year and a half and slow moving even longer.

It is just -- you don't really know.

People are in all different stages when the design is finished, when the design comes up for renewal.

Everybody doesn't get up one day and say, okay, let's move.

They move because there is a platform change coming up or an upgrade design coming up or parts they buy are no longer available.

There is just now way to speculate anything like that right now.

Given the book to build numbers for June at 1.18.

The guidance for revenue to be up 7% to 11%, my understanding is you would expect that the September quarter would be stronger linearity than the first half and slow because of Europe -- seasonality in the second half of the September quarter.

Is that the way to think of it?

If you are trying to talk about book to bill and the revenue growth in the (inaudible).

It's never worked.

I've told you that many times before.

There is no correlation.

You could have -- correlation historically is when the book to bill ratio and revenue growth -- simply of whether the customer placing order early or in the quarter.

Okay.

If I take book to bill -- just linearity in the September quarter, front half loaded and then slowing in the second half around normal season?

Or how --

The shipments are not linear.

The visibility has improved so we have very strong backlog.

But the quarter is normal in terms of linearity.

We have no shipments in July and no shipments in August and normal shipments are in September.

It is fairly linear because the backlog is healthy.

Just my last question is around geographic breakdown of revenue.

I understand it is where you ship, not where the end product finally gets consumed.

But if you had to take a guess of your exposure to Asia from a consumption standpoint, what would be the right ballpark to think?

I don't have a number that I can -- analysis so just pull it out of the air.

Appreciate it.

Thank you.

We will now go to Brendan Furlong with Miller Tabak.

Thank you for the follow up question.

On the 16 bit, 33% growth year-over-year -- what is -- can you tell me, what end markets, what products, or what is driving that growth rate in your 16 bit?

We have never had a particular end market strategy to drive growth.

There is a lot of hard work that has gone in over the years to create the product, to create the support infrastructure, from both our own field sales team as well as our partners.

It is a very broad range of customers and applications that is is driving that growth.

We have consistently worked on building the revenue pipeline.

What you are seeing is a fruit of the hard work that have been done over many, many years to build it and we expect that to continue for a long time.

Thank you.

My last question -- you are probably not going to go there on this one.

On your touch sensing, you have 100 customer shipping in volume.

Any ballpark in terms of percentage of revenue or dollar value?

No.

We don't break out by customer or market segment that way.

Okay.

Thank you very much.

There are no further questions.

I would like to turn the conference back over to our presenters for any additional or closing remarks.

Thank you, everybody, for attending the conference call and I apologize again for a rough start, especially on the webcast side.

Hopefully you have the information you need and if you don't, just call us and we will give it to you.

Thank you very much and we will see many of you on the road this quarter.

Bye bye.

This concludes today's presentation.

Thank you for your participation.