微晶片科技 (MCHP) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the Microchip Technology second quarter and fiscal year 2010 financial results conference call.

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

At this time, I'll would 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 results of the company.

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

We refer you to our press release of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

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

I will comment on our second quarter fiscal 2010 financial performance; and Steve and Ganesh will give their comments on the results, discuss the current business environment, discuss our guidance for the December 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 September quarter were $226.7 million, up approximately 17.5% from net sales of $192.9 million in the immediately preceding quarter.

On a geographic basis, revenue in the Americas was up 13% in the September quarter, Europe was up 10%, and Asia was up 23.8%.

Revenue in all geographies exceeded the expectations we had entering the quarter.

Europe was exceptionally strong in what is typically a down quarter for that region.

Asia continues to be our largest geographic region, representing 51.3% of sales in the September quarter.

The Americas were 24.7% of sales and Europe was 24% 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 or where the end product consumption is occurring.

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

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 second quarter of fiscal year 2010 was $53.2 million or $0.29 per diluted share, an increase of 51.9% from non-GAAP net income of $35 million or $0.19 per diluted share in the immediately preceding quarter.

The after tax impact on the September 2009 quarterly earnings that have been excluded from our non-GAAP results include $8.3 million in share based compensation expense, $1.3 million in gains from trading securities, $1 million in non-cash interest expense associated with our convertible debt, and $0.7 million in charges associated with our acquisition activities.

GAAP net income was $44.5 million in the September quarter or $0.24 per diluted share.

I would like to highlight that during the September quarter, Microchip liquidated its holdings of trading securities, and at this time we do not anticipate there will be any mark-to-market adjustments from trading securities in the December quarter.

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

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

Gross margins were 55.5% in the September quarter compared to 51.4% in the June quarter.

The quarterly increase in gross profit margin was driven by a variety of factors including higher production activity in our factories and continued cost reduction efforts from our global manufacturing operations.

With the increase in revenue, we were able to achieve operating leverage from the business, with total operating expenses of 27.7% of sales in the September quarter compared to 29.2% in the prior quarter.

Research and development costs were $26.5 million, representing 11.7% of sales.

Sales and general administrative expenses were $36.3 million, representing 16% 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 54.4%.

Total operating expenses were $70.6 million or 31.1% of sales, and include share based compensation of $7.6 million and acquisition related expenses of $0.3 million.

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

The GAAP effective tax rate for the September quarter was 13.3%.

The difference in the GAAP and non-GAAP tax rates was driven from the higher tax rates that apply to the gains on trading securities and the non-cash 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 advantaged securities.

The dividend declared today of $0.34 per share will be paid on December 2nd, 2009 to shareholders of record on November 18th, 2009.

The cash payment associated with this dividend will be approximately $62.3 million.

Moving on to the balance sheet, Microchip's inventory balance at September 30th, 2009 was $108.5 million, representing approximately 96 days of inventory.

Inventory on Microchip's balance sheet was reduced by $5.4 million or 12 days, and the days of inventory at our distributors were flat to the prior quarter.

At the end of September, the combined inventory on Microchip's balance sheet and at its distributors was 131 days, which is the lowest level we have experienced in more than seven years.

Therefore, we are aggressively increasing our manufacturing output so our inventory balances can continue to meet the needs of our customers.

We expect inventory days on our balance sheet to grow in the December quarter by approximately six to 12 days.

The increases in our production output will have ongoing positive impact on Microchip's gross margin percentage.

At September 30th, our receivables were $106.7 million, an increase of $8.6 million or 8.8% from the balance as of the end of June.

Receivable balances are in great condition with excellent payment performance continuing from our customers.

Over the past year, we have not had any significant bad debt write-offs in our business.

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

As of September 30th, Microchip's cash and total investment position was approximately $1.473 billion.

Our cash generation from the business was $96.6 million prior to the payment of a $62.1 million dividend.

Our cash generation continues to be strong, and our total cash and investment position is projected to grow again in the December 2009 quarter.

Capital spending was approximately $6 million for the September quarter, and our fiscal 2010 capital expenditure forecast is currently $35 million.

We are investing in equipment to support the revenue growth of our new products and technologies, and are also taking advantage of low cost equipment opportunities in the marketplace that will position us well for future growth.

Depreciation expense for the September quarter was $21.7 million, which is equal to what depreciation expense was in the June quarter.

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

Ganesh?

Thank you, Eric, and good afternoon, everyone.

I will now comment on the individual product lines.

All three of our product lines, Microcontrollers, Analog, and [Serial E-Square] delivered outstanding growth in the September quarter.

We are seeing the results of our strategy to stay invested in our new product development, and demand creation resources during the global recession.

By employing a shared sacrifice of pay cuts instead of resorting to mass layoffs like many of our competitors did, we believe we are seeing the leading edge of differentiated revenue growth and operating profit results.

Let's now take a closer look at each of our product lines, starting with Microcontrollers.

Our microcontroller business delivered superb results and was up a strong 16.6% on a sequential basis.

Flash Microcontrollers represented approximately 80.9% of our microcontroller business in the September quarter.

Our 8 bit microcontroller business had another excellent quarter, as all segments of our 8 bit product line experienced very strong growth.

Our 16 bit microcontroller business achieved another record for quarterly revenue with very strong sequential growth of 49.1% as well as 70.3% growth from the year-ago quarter.

New customers and new designs going to production continue to help drive growth as the number of volume 16 bit customers grew by 208 customers to 2,050.

Our 32 bit microcontroller product line meanwhile continues to make good progress, with 56% sequential growth, albeit on a small revenue base, and well over 100 customers who are now involved in production.

Moving to development tools, we had another record quarter with 38,086 development tools shipped in the September quarter.

Development tools sales are an excellent leading indicator of continued strong design-in activity and acceptance of our solutions by our customers and should bode well for future growth.

Now moving to our analog business, here too we delivered outstanding results with very strong sequential growth of 25.5%.

As a result, our analog business in the September quarter was over 10% of Microchip's revenue for the first time ever.

Growth was especially strong in the linear, mixed signal, interface, and safety and security product lines.

We are very pleased with the design win and revenue momentum our analog business has shown.

We continue to introduce a steady stream of innovative new products that we expect will continue to contribute strong revenue growth in the coming quarters.

Now moving to Serial E-square products, this business was up 16.8% sequentially.

We were pleased to see solid growth in this area of embedded control products.

We continue to run this business in a disciplined fashion that maintains consistent profitability and serves our microcontroller customers to complete their solutions.

At a time when many of our competitors have significantly pushed out their lead times to between 14 to 26 weeks, Microchip's investment in inventory, flexible rotating time off in our factories during the recession, and ongoing operational excellence has enabled us to maintain our industry-leading lead times of roughly four to six weeks for approximately 90% of our line items.

In the current environment this is translating to further growth in our market share as we are better able to respond to rapidly rising customer demand and capitalize on competitors' inability to supply product, as well as to instill confidence in customers as to who they should commit new designs to so that they're assured a future supply.

Let me now pass it to Steve for some general comments as well as our guidance for the December quarter.

Steve?

Thank you, Ganesh, and good afternoon, everyone.

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

Then I will talk about our guidance for December 2009 quarter and also discuss our internal plan for calendar year 2010.

Reflecting on the September quarter, I want to thank the entire Microchip team for delivering a flawless quarter in every respect.

We beat the upper end of our revised revenue guidance by a significant margin, achieving a 17.5% sequential growth, marking our strongest sequential growth quarter in over 15 years.

We also beat the upper end of our gross margin guidance.

We continued to deliver solid improvements in operating expense, executing on our plan to deliver incremental leverage in this area of our business.

And on earnings per share, we beat the upper end of our guidance on both a GAAP and non-GAAP basis by $0.02 per share.

Our GAAP EPS grew by over 60% sequentially and our non-GAAP EPS grew by over 50% sequentially.

We have been profitable for 76 consecutive quarters, and the December quarter will be our 77th.

Our inventory dropped sequentially by 12 days to 96 days.

We begin to grow factory output aggressively in the September quarter and will continue to do so in the current quarter.

We generated $96.6 million in free cash flow prior to paying our industry high dividend.

After paying the dividend, we added $34.6 million in cash to our Treasury.

We also resumed nudging the dividend up on a quarterly basis, as you saw in our press release today.

I would also like to add that we have now returned over $1 billion to the shareholders in the form of dividends since we began paying dividends over six years ago, and that has to be a very significant return for our long-term shareholders.

From a geographical standpoint, as Eric discussed, we achieved substantial sequential growth in all major geographies of the world, and on product lines the story was impressive too.

As Ganesh discussed, we achieved significant sequential growth on all of our product lines, with 16 bit being up by 49.1% sequentially and analog up by 25.5% sequentially.

I also wanted to highlight the comparison to SIA numbers that were recently released.

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

Based on SIA data from December 2008 to September 2009, SIA's 8 plus 16 bit Microcontrollers were up 1.1%, essentially flat.

During the same time period of December 2008 to September 2009, Microchip's 8 plus 16 bit Microcontrollers were up 18%, showing significant market share gains.

Microchip has maintained its record share of 8 bit Microcontrollers and we are steadily gaining market share in 16 bit, achieving our highest market share ever on 16 bit Microcontrollers with record sales in the September quarter.

Now, I will discuss our guidance for the December quarter.

Our book-to-bill ratio for our September quarter was 1.15.

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

So the visibility is improving significantly.

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

On the other hand, due to holidays, December has fewer shipping days in Europe and the US than any other term of the quarter.

So considering all that, we expect our net sales for the December quarter to be up between 4% and 8% sequentially, which is certainly above what normal seasonality is for our business.

We expect our non-GAAP gross margin to be between 57% and 57.5%, which is 150 to 200 basis points improvement over the September quarter, and we expect our GAAP gross margin to be between 56.2% and 56.7%, which is 180 to 230 basis points improvement over the September quarter.

Regarding earnings per share for the December quarter, we expect non-GAAP earnings per share to be between $0.33 and $0.35, and we expect GAAP earnings per share to be between $0.27 and $0.29.

Now I would like to discuss the longer term outlook for calendar year 2010.

We continue to see significant opportunities in our strategic product lines.

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 power XLP product line to high performance MCUs, and with the broadest set of peripherals in touch sense, motor control, digital power supplies, connectivity, analog, and RF, our microcontroller product line continues to be the compelling solution for the market.

In addition, many of our innovative analog products are very well positioned and gaining market share.

We have significantly broadened our served available market and our multi-year demand creation efforts have yielded a very large number of design wins outside of our traditional core group of customers and applications.

Based on our confidence in the business, we want to share our strong outlook with our investors and the financial community.

We expect our business to continue to outperform the industry, led by a 16 bit and 32 bit opportunity, continued growth of our 8 bit business, and the leverage in our operating model.

The opportunity in our analog business is also another important catalyst for incremental growth and continued market share gains.

Our PIC 32, which is our 32 bit microcontroller, and our DS PICs are successfully competing with arm based controllers and gaining shares steadily, as evidenced by the design wins we have in the pipeline and the early revenue gains.

One way to further amplify our confidence in our growth prospects would be to disclose to the Street our significant design wins by customer, our focus areas, and our competitive differentiation.

But we continue to believe that part of the secret to our success is not disclosing these factors which can lead to loss of our competitive position.

Reflecting our expectations, we are taking the unusual step in providing you our calendar year 2010 internal plan, which reflects our understanding of the opportunities that we see.

So all the numbers that I'm about to share are from our internal plan for calendar year 2010.

Calendar year 2010 revenue of $1.05 billion, which would be another record year for Microchip in revenue, up about 26% from calendar year 2009.

Non-GAAP gross margin of 58.5% for calendar year 2010 and GAAP gross margin of 57.7% for the year.

Non-GAAP operating expense of 26.7% for calendar year 2010 and GAAP operating expense of 29.6% for the year.

Non-GAAP operating profit of 31.8% for calendar year 2010, and GAAP operating profit of 28.1% for the year.

And finally, non-GAAP earnings per share of $1.50 for calendar year 2010 and GAAP earnings per share of $1.29 for the year.

These EPS numbers are about 12% above the average of Wall Street research and up to 26% higher than some research, hence prompting us to share our internal plan and outlook with you.

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, Cynthia, would you please poll for questions?

Thank you.

(Operator Instructions).

And our first question will come from JoAnne Feeney with FTN.

Go ahead, JoAnne.

I was hoping you could perhaps elaborate a little bit on the places in the industry where you think you're gaining share in 16 bit.

I realize you don't have great detail on your end markets, but perhaps you could let us know if it's similar to the distribution of interest you have in your 8 bit products, say, is it consumer, industrial, automotive or is it quite a bit different?

Any details you could provide would be very helpful.

Thanks a lot.

The composition is across a broad range of applications and markets.

In that sense it its similar to how our 8 bit business is.

There are obviously certain applications where the 16 bit performance is a requirement that we're able to meet and those are the areas where we're taking some incremental share.

But really it's not concentrated anywhere.

It's a pretty broad base of areas we're winning our designs.

Are you doing the same thing with 32 bit, targeting a broad spectrum, or is it more focused?

It is, again, a broad spectrum of designs that we're going after.

We've always been about not trying to find a single market, a single application upon which to hang our hat and while we do see areas that are growing at different rates, it's really across a broad spectrum of applications.

Okay.

Thank you.

We're shipping to 2,000 volume customers on 16 bit and over 100 volume customers on 32 bit.

So that alone tells you that it's really broad based.

Our next question will come from Chris Danely with JPMorgan.

I know you guys usually comment that whenever we ask you about end markets or regions it's a very broad base.

But given what's happened this year, can you just give us your take on what's so strong in Asia -- I would suspect that it's China?

And then also if you could comment at all on the automotive market and what you're seeing there?

Last quarter we saw very broad-based strength around the world.

As Eric pointed out, the European business was up 10% in the summer quarter where they take the August off, so usually Europe business is down in the quarter.

Obviously, from a sequential revenue growth standpoint, China was the strongest, but we grew in the rest of Asia also by very large amount and US was also very up significantly and we grew in all different market segments.

Yes, we did very well in automotive because of Cash for Clunkers and others, but similarly we did very well in consumer, industrial, communication, and others.

Thanks.

I'll get back in the queue.

Next we'll hear from Uche Orji with UBS.

Thank you very much.

Steve, first of all, thank you very much for providing us the insight for 2010 plans.

Let me just try to dissect that a little bit.

How much of your 2010 plans will be driven by new products?

And within the existing products, what are your assumptions for areas such as automotive and industrial for 2010, so I just understand?

You're implying -- if I take the mid-points for December guidance, you're implying a calendar upside of as much as 26% for 2010.

So I would just like to see if I could break that down between new products and what's happening with existing products, thank you.

In average, a design cycle for Microchip's microcontroller and analog products are anywhere from nine months to two years plus.

We are here in November.

I don't think any of our growth next year comes from new products that we don't exist today.

Could be a very small number -- something we're just introducing in the next month may create a small amount of revenue in calendar Q4.

So all of our next year's revenue largely comes from products that are in production.

We've been incubating it for one year or two years.

They're design wins and they're really proceeding down the path of going to production.

Okay.

And then so if you can break down for me your expectation for automotive, industrial, and other markets for 2010 in terms of what's driving that internal plan.

I can't even do that for last quarter, actual, forget about the next year.

Don't have any ability to do that across 63,000 customers and with 60% of our revenue coming from distributors.

Fair enough.

Can I ask one more question?

Yes.

So let me -- in terms of your touch product, can you give me an idea how much progress you're making there and if I look into Q4?

Just so many other people talking about what they're doing in touch and I know you've been very active in this area.

So can you talk about your competitive positioning and how you see your products progressing through Q4 and possibly into 2010?

I think we've given you color last quarter on the number of customers that were in production and the number that were well along the way in terms of the design-in cycle.

Those numbers have grown since that time, obviously.

Some of the customers we were working with have gone to production.

So the production numbers have gone up and the number of customers that are working on design wins have also gone up.

The progression is on a path that we're happy with.

Our touch is differentiated from competitive alternatives in several ways.

First of all, we offer customers the ability for them to customize the touch solutions using the software that we provide.

Second of all, we provide the lowest power consumption when our products are used in touch solutions as compared to our competitive alternatives.

So in portable and power sensitive applications, we have the best power consumption for those touch applications.

Thirdly, our touch works across a broad range of our Microcontrollers, so you can pick the microcontroller that is appropriate for what you're trying to do in your applications, and add touch to it, which also allows the customer to cost reduce without having to have a microcontroller run the application and a separate microcontroller to run touch, which is how many of the competitive alternatives are set up to be.

And lastly, we offer a broad range of touch alternatives.

We have capacitive touch capability, we have inductive touch capability, we have touch screen capability.

So based on the application and the need, we have multiple solutions available for a customer to achieve their objectives with touch in their application.

Great.

Thank you very much.

Moving on to James Schneider with Goldman Sachs.

Good afternoon, thanks for taking my question.

I guess on the 2010 outlook, put it another way, could you give us a sense of what assumption you use for either microcontroller industry growth or overall semiconductor industry growth in getting to that revenue number?

We don't care about the semiconductor industry growth or the microcontroller growth.

Our results are highly differentiated.

They have been in the years past and we built this much more driven by the products we have in the market, the design pipeline at the rate of winning and using the metrics that are time-tested regarding what portion we win and go to production, in what timeframe.

So much more bottoms up driven than tops down.

That's right.

Then just a follow-up on the OpEx, if I look at the implied OpEx GAAP dollars run rate, Eric, about $77.50 per quarter for calendar year 2010, how should we thing about how that grows from current levels in SG&A versus R&D?

Well, we haven't broken that out specifically, but we're going to make prudent investments in the business that are required to grow.

And so I guess the expectation would be is that sales and marketing and R&D would grow at a faster clip than G&A.

But other than that, I don't think we can give you a lot of guidance.

Fair enough.

Thanks very much.

Moving on to Harsh Kumar with Morgan Keegan.

First of all, congratulations on a great quarter and great guidance.

You guys are clearly doing well.

Steve, as you look back, coming out of this recession, what were one of two things that you think Microchip did well relative to its competitors?

Was it simple case of balance sheet or new products?

Anything that you think you guys did better or worse versus your competition?

Well, there are a lot of people in the competition and of course 8 bit, 16 bit, 32 bit, analog competition.

So a large number of companies, and I'm not schooled on what everybody else did in various areas.

So let's just talk about what we did well.

We deployed a strategy going into a recession where we are here more than a year after the global financial crisis.

We did not lay off a single person at Microchip anywhere in the world, and yet we gained as much expense reduction on the operating expense line as anybody.

We've shown graphs in the past where we were in the top two or three companies of having gained the expense reductions.

So we did that through lowering a lot of discretionary expenses, our worldwide all employees were on a pay cut, we zeroed out the bonuses.

So we did that through shared cuts and sacrifices rather than doing a lot of layoffs.

Now, it has resulted into two advantages.

Number one, in terms of employee hours spent, we stayed invested in our R&D pipeline rather than rescheduling a lot of the activities, because we kept everybody employed.

And number two, we kept our demand creation effort in the marketplace, and a year later as we are recovering out of the recession, we're finding a very rich new product pipeline that we have put out in the market, as well as a very large number of design wins from a significantly larger served available market through all these new products in 8 bit, 16 bit, 32 bit and analog.

And in the manufacturing front, what we did was we gave employees rotating time off.

So at the height of the recession when the capacity needs were way down, we had fab people that would take every third week off, unpaid.

And then the following week, a different one-third will go off unpaid.

But everybody stayed certified.

Everybody had a job.

Everybody knew how to operate the equipment.

We didn't lay off people.

So as this business came back quickly in a V shaped recovery, we have found all of our competitors with a lead time of 14 weeks to 26 weeks.

And Microchip lead time as Ganesh pointed out is four to six weeks on 90% of our products, because we were able to simply increase the hours worked by those people.

They went from taking every third week off to every fourth week off and every fifth week off, every sixth week off.

It's really very easily scalable and people were certified, trained, they knew how to operate the equipment.

When you rehire, you end up hiring different people that make mistakes, they have to be trained.

So as a result, we are providing the very best service to our customers with very short lead times and gaining from that in two ways.

Short-term, we're getting a lot of pull-ins, a lot of new orders where competitors can't supply.

But longer term we're also getting new design win [sockets] because they're unhappy with the competitors, so they want to give the next design to us.

When things are equal, we're winning it on the margin.

That's very helpful.

And Steve, I know you don't want to get into numbers on this, but looking out for 2010, is there any vertical you're more excited about than the other [comps] -- consumer, industrial, auto, any color would be helpful?

I'm excited about all of our opportunities.

Thanks, Steve.

You're welcome.

Next is Terence Whalen with Citi.

Thanks for taking my question.

It's related to gross margin.

I think you had had said in the previous quarter that you thought you would get 100 basis points of gross margin expansion, both in the December and in the March quarter.

My question is, do you still have any expectation or visibility into gross margin in March?

Are you sticking to your expectation for at least 100 basis point margin expansion in the March quarter?

Thank you.

Well, I think if you look at the gross margin curve has been pulled in quite substantially.

With the upside in revenue, our inventories became too low and all through the quarter we kept increasing our production plan.

And we have never increased production plans so rapidly -- almost every two weeks we were adjusting the numbers as we were seeing the upside.

So a lot of the gross margin increase has been pulled in, and there is more ahead and you can look at the difference between our December guidance to the next year guidance.

There is some additional gross margin, plus there is a year's average, we go out of the year even higher than that.

Beyond that, I don't have the granularity.

It will just all depend on where we are in our guidance of 4% to 8% for this quarter, and this quarter will be the very similar.

We'll be changing production plans, continuously, as we see any of the upside materializing.

Okay.

Thanks, and as the follow-up to that, I think in your $1.05 billion calendar 2010 guidance, that equates to about a $260 million run rate plus or minus.

I think in the past when you've been near $260 million per quarter, you have been right at 60% gross margin.

Is there any reason not to think that you would achieve the same 60% gross margin on that level of a quarterly run rate of $262 million?

Thanks.

Well, I think, I can't break it down much further.

I mean, it's going to be close.

I don't know if it's a little bit this way or that way.

We don't expect that we will reach our peak gross margin by the end of calendar year 2010.

There will still be things happening.

Our prior record was I think closer to $270 million and the business always comes back in a slightly different mix.

So some of the older capacity we have is still growing and still utilization is going up.

I would think our gross margin would be rising well into fiscal year 2012, most of calendar year 2011.

I don't really have further granularity on how close we get to that number.

(Operator Instructions).

And our next question will come from Doug Freedman with Broadpoint.

Thanks for taking my question, and I echo the congratulations on a strong quarter.

Thank you.

Can you give us a little bit more detail on how you go into calculating your book-to-bill numbers?

I just was wondering what window of time you're looking at there.

Our book-to-bill ratio is total net orders we receive in the quarter, which is gross bookings, minus any cancellations, minus any returns.

So net bookings, divide that by the net revenue.

And that -- your booking window, does that extend -- ?

Net billings.

Net bookings divided by net billings.

Our net billings are not equal to net revenue because we don't recognize disty billings until they're shipped out.

Understood.

When you -- do you accept bookings outside of a six month window?

So are your bookings just the next three plus three or what are we looking at -- how far out?

We accept orders out of the six month window, yes.

That's what I was after.

One other question.

You mentioned that in your December quarter it has one of the fewer shipping days.

How many shipping days do we pick up when we go into March?

Everyone is really struggling with what is seasonality going to look like this year, given that we're in such an unusual environment.

Do you guys have any opinion there?

And just if you could offer some guidance on how many shipping days we're going to pick up in March.

So, if you look at it in round numbers, our Asia business is about half our business, little more than half, 51.3% or something.

And the US, Europe is other half.

So in December quarter, you missed one shipping day in US and Europe.

Asia usually keeps working, they don't have the Thanksgiving and Christmas -- they only have one day off.

Then when you go to the next quarter, US, Europe comes back with full shipping days but then Asia goes on Chinese New Year -- large parts of Asia, China, Taiwan, Singapore, good parts of other countries -- they go in Chinese New Year.

I don't think shipping days go up much.

Probably it's a wash.

Okay.

So we would actually possibly get an impact there -- the first time that we're really holiday-free is June, is that sort of the way to think about it?

Yes.

Well, that depends on -- I haven't checked the calendar, where the Easter lies.

Sometimes Easter is in late March, sometimes it's in April.

If Easter is in April, then you pick up a week of holidays in Europe.

Good parts of Europe.

Not all of it.

You guys have already commented on the impact that longer lead times have had on the availability of business for you.

But can you comment on -- has there been any noticeable change in the landscape with the mergers and balance sheet issues that some of your competitors are facing?

Are customers having those high level discussions with you?

Any commentary you could offer there would be helpful.

Well, we talked about it last quarter.

Most definitely so.

And the number of incidences where we have had inquiries, look ins, our design has gone into our favor, has continued to go up.

Lots of customers do not like the merger of (inaudible), and that's negative for them.

There have been issues related to other competitors that have significant balance sheet challenges, one big one in the US and the other big one in Europe.

And so there are issues both related to that, and we have won designs and people have shown concerns and all that.

So yes, that's a very real factor.

I think more than ever before, in 30 years of my business, customers historically haven't cared whether their supplier makes money or not.

They don't care.

Whether your supplier is profitable, they don't care, they just want the best price, the best quality.

But in the last year or so of the global financial crisis, where so many of their smaller suppliers, not necessarily in semiconductor, doing whatever -- so many companies have gone out of business that I think it has become a factor where companies are now asking more questions about sustainability and balance sheet and are you profitable and how will you continue to serve me.

So first time ever I've seen in 30 years.

All right.

Great.

And thanks for the answers.

You're welcome.

Next is John Barton with Cowen.

Steve, maybe to follow on to that topic of design activity behavior at the customers, my first question is in a business recovery, how much longer do you think customers focus on that scrutiny of the supply base?

How quickly do they forget about the challenges they went through and the balance sheet challenges their suppliers had.

Secondly, in the reorgs that the customers have gone through, letting go of their [own] engineers, et cetera, have you seen a significant change in design win opportunity, frequency -- meaning guys trying to get new products to market, people trying to make older products last?

And I know historically you've always answered that it depends on the customer, but now that business is starting to stabilize, any new trends there?

I think you answered your own question.

We had significant design win activity through our multi-year demand creation efforts and we were so well positioned a year ago.

We had done record in September quarter, and we were quite optimistic about where the business was headed in 16 bit and high end 8 bit and analog and others.

And when the global financial crisis hit, that's what happens where all designs freeze -- people get laid off and customers don't launch their new products into a very, very weak market because that launch will essentially be wasted.

So you're seeing a lot of those designs which were parked for several quarters now proceeding to production.

We saw that last quarter.

We're seeing that in the current quarter.

We are expediting products for a number of these customers.

We're taking their designs to production.

If I could add one more perspective.

It's not just about are these other competitors financially viable alone.

There are impacts of those folks have created on customers where road maps have been changed, products have an end of life, factories have been closed down, and products been moved, causing them to have issues, customer support has been reduced, and lead time has gone out.

So there's a number of other factors beyond just financial viability that are playing into customers' concerns.

So I think I could read into your response there that you expect that phenomenon to have a pretty significant length of time, customers aren't going to forget this and have a bias towards Microchip as a result of all the positive support, all the things you just highlighted for at least the next, I don't know, year or two, is that a fair statement?

Yes.

I mean, some last a year or two, some last five years and 10 years.

We have customers that we have served for a decade who we got them in the 1999 and 2000 because they couldn't get the parts from somebody, and we still have them.

So some memories are very long, some memories are short.

It's all over the place.

As you look into the supply chain and your customer base, obviously people have to build ahead for Christmas because of cycle times, et cetera.

Do you have any sense on how strong of a Christmas the supply chain is preparing for and maybe some form of year-over-year comparison?

Well, I think Christmas builds are done largely.

Christmas builds are usually done by the end of September because whatever has to come on the ships has to take a six week journey to get here before Thanksgiving.

And some late products that will fly in the plane and all that are done by October or early part of November.

So Christmas builds are largely down.

Now, the next phase really is when the parts actually go on the floors and regarding what sells, which models sell.

Then you get replenishment orders for those designs on which you have to deliver on a fairly short lead time.

That's where some of the upsides come from.

Last question, if I could.

Could you just update us on your thoughts of M&A?

Obviously you've been very clear last couple quarters, tuck-in acquisitions, only if they make sense.

As the business starts to stabilize, does that story change?

Any reason to be more aggressive on that front?

Well, we don't really have anything on our plate.

If you think we should look at something, please let us know.

Thanks.

And next is Gil Alexander with Darfil Associates.

Congratulations.

If we look longer term, can you give us what your guidance is now for operating profits and tax rate?

So in our calendar 2010 plan, we provided an operating profit on both a GAAP and non-GAAP basis.

Right.

That I have.

But I was thinking of longer term.

You have a longer term model.

Our tax rate should stay in the range of 13% on a non-GAAP basis.

It's just a bit lower than that on a GAAP basis, driven by some of the things that are taxed differently in the US, but it's in that 12.5% to 13.5% range.

I thank you.

On the operating profit, there should be further leverage going into the calendar year 2011, both on gross margin -- mainly on gross margin, could be a little bit on expenses.

So certainly we do not peak out by the end of calendar year 2010.

That I understand.

I thank you.

Welcome.

And next is Craig Ellis with Caris and Company.

Thank you.

And nice job, guys.

Steve, I'm wondering if you can share with us some insight from the bottom of the model as you look at 2010.

Can you tell, given the design wins that you have, if the growth that you'll be getting on a full year basis means that you'll be growing every quarter sequentially?

And is there anything that's notable about the growth, whether you're seeing stronger either first half or second half growth?

Well, I can't break out the quarter, but I guess I can confirm to you that we have growth dialed in at every quarter.

And then switching gears, on the inventory comments, there's an intent to build back up on an inventory days basis this quarter.

Will you be at target inventory levels by the time you exit the calendar fourth quarter or would you expect to be replenishing inventory in the first calendar quarter as well?

I think we'll be replenishing probably still.

Our long-term target for the inventory has been 115 days.

And our distributors are really holding lower inventory than historically they have or would like them to.

In fact, Eric mentioned that our total inventory, us plus distributors, is a seven years low.

So we're trying to rebuild those inventories.

We put out a lot more product last quarter but it all shipped out as we had had a huge growth.

Original guidance for the quarter was, what, 7% to 11% or something.

And we did 17.5%, so we were unable to build inventories.

In fact, we depleted.

We think we have ramped harder and we will grow inventory this quarter, but we do not know whether we will achieve our target, may still be growing the following quarter.

With the existing inventory being much lower, I wouldn't mind if short term we're able to get higher than 115, that would be positive for our business, especially because the competitive lead times are so long.

Is there any particular product area where you want to replenish inventory or is it fairly uniform across your 8, 16, and 32 bit businesses as well as analog?

It's largely uniform.

You build it on all volume products where there are high sequential products that ship a lot and you don't tend to build on products that have onesie, the twosie customers, and custom or whatever, so you really build on the larger part types.

Thanks, Steve.

Moving on to Kevin Cassidy with Thomas Weisel Partners.

Thanks for taking my question.

Just wondering on the analog growth being so much higher than the microcontroller growth, is it I guess higher content on microcontroller design or are you getting into designs where your competitors have the microcontroller and you're coming in with the analog?

There are three components to our analog strategy.

First was the attach to our Microcontrollers.

Second was the attach to any Microcontrollers and the third is to any product on the other side.

Doesn't have to be a microcontroller.

Can be a DSP, can be an FPGA, can be an ASIC.

All three of those are contributing towards the growth that we're seeing and it's not uniquely driven by just our Microcontrollers only.

Do you think, following on with that strategy, that having an analog component on a competitor's microcontroller design that you might eventually win the microcontroller?

Absolutely.

Because that gives us an understanding of the customer, it gives us an opportunity to engage when their design comes up for renewal, gives us an opportunity to provide some alternatives that they can consider.

So it is a strength to be able to have an analog win even when we don't have our microcontroller on it.

And you are seeing some success there?

Absolutely.

Okay.

Thanks.

Moving on to John Pitzer with Credit Suisse.

[Dusty Straud] for John Pitzer.

Thanks for taking my question.

As you mentioned earlier, your 8 bit MCO market share year-to-date in 2009 was higher versus 2008.

However, if you look at that quarterly SIA data, it looks like you undergrew 8 bit MTUs for the second straight quarter in September.

Are there any reasons or thoughts behind this or should we not be reading it as such quarterly trends?

What did he say?

The quarterly data.

He thinks on a quarterly basis that we underperformed in 8 bit.

How do you know our 8 bit numbers?

We've never broke it out for you, so it's again your own estimates which we haven't confirmed.

The SIA data is erratic quarter-to-quarter, so SIA says 8 bit microcontrollers grew 29% sequentially, and so there's a large amount of adjustments that usually go after three to six months later and revise the old numbers.

SIA numbers you have to look at over a period of time.

The number I gave you was December quarter to September quarter, which I can trust a lot more than I can trust just one quarter data.

Which company have you heard so far that announced results which will make you believe that 8 bit Microcontrollers grew 29%?

Well, that's a fair point.

That's the problem with that data.

But if you look at it over the year and after they have revised it and all that, the data makes more sense.

They may be low last quarter and up this quarter, and so don't take too much stock into SIA's number for a single quarter.

There is a special problem that I have seen for decades plus in SIA's numbers on Microcontrollers, which may or may not exist.

I think it doesn't exist when you look at microprocessors, you look at flash memories, you look at SBGAs.

In micro processors, you look at two companies and you almost get the number right.

In SBGA, you look at two or three public companies, you almost get the number right.

But on Microcontrollers, there are 25 competitors and large amount of microcontroller data is Toshiba shipping to Toshiba, Samsung shipping to Samsung, Hitachi -- shipping to their own company.

So I particularly find SIA finds it impossible to get at those numbers because fair amount of business is really long tail, and you can't take two or three companies' numbers.

Plus we're the largest in 8 bit and they don't have our numbers we're announcing today and we still don't break out 8 bit.

So how do they get the 8 bit numbers?

[Adver] hasn't announced yet, and they're in the top five or six 8 bit manufacturers.

So I take the data with a grain of salt.

But longer term, when I give you the data, I think it's a higher chance of being accurate.

Thank you.

We'll hear once again from Chris Danely.

Thanks, guys.

I'll be brief.

I have two quick follow-ups.

So Steve, it sounds like you guys have plenty more room for utilization rates to move up, i.e.

gross margins?

Well, correct.

Utilization is nowhere close the old record, so utilization will continue to move up.

But when a big portion of the progress in percentage terms and the progress from here is slower, it will happen over the next many quarters.

As I said, we don't even reach the peak by the Q4 of calendar year 2010.

It will continue into calendar year 2011.

If you look at your 2010 guidance, and it looks like you guys will be close to the previous peak revenue, but I think you mentioned your gross margins might be a little below the previous peak because of some -- I think you said mix issues.

Can you just talk about the differences and do you feel confident you'll be able to get back to the previous peak gross margins?

Well, we just don't really know.

I think when the business has gone through so much surgery where the gross margins are rising 200 to 300 basis points per quarter as they have done recently, it's very hard to look out six quarters and do an estimate on exactly what mix the products will be and what your utilization would be and what your expense structure would be.

And so I just -- we just haven't done that yet, but there is really no fundamental reason why we should not get reasonably close to our model.

Got it.

Perfect.

Thanks, guys.

And moving on to Ray Rund of Shaker Investments.

Thank you for taking my question.

You've given so much information already, it's been like trying to drink from a fire hose.

I was just curious about -- I may have missed these numbers, but can you just specify what your CapEx was in the quarter and what your depreciation was?

Yes.

We have it.

So CapEx was about $6 million in the September quarter, and depreciation was $21.7 million.

Thank you.

Just wanted to add my congratulations.

Obviously had a really good quarter and looks like you're managing the business for future growth in a very good way, so thank you.

And our last question will come from Uche Orji with UBS.

Thank you very much.

Steve, I just wanted to follow up one more time on your 32 bit microcontroller comments relative to arm.

You made a comment that you're gaining share regardless of the fact that -- I just wanted to get a sense.

When you compete against arm based controllers, microcontroller companies, what are the differentiating factors?

It's quite impressive and congratulations to that that you're able to do well in the market that arm seems to dominate.

Can you just please remind me some of the factors that continue to help you to win here and how much runway there is left in 32 bit?

Thank you.

Well, we don't want the competitors listening on this call to know why we win with our PIC 32, with what features.

Having said that, I can provide you some.

Go on, then.

I mean, I don't want to give the exact answer, but we can give you some flavor.

Okay.

Ganesh?

I think if you look at what customers buy, they're trying to buy a platform, and I think we offer with the PIC platform a range of products with peripheral compatibility, with development tools that are common across 8s, 16s and 32s.

You've heard all the key reasons from us before and I think many of those carry through in the PIC 32 domain of designs we're competing for as well.

But at the end of the day, we obviously provide customers the right combination of value that gives them a choice to use our platform with confidence and to grow with us.

Thank you very much.

There are no further questions.

Mr.

Sanghi, I would like to turn the conference back over to you for closing remarks.

Uche, are you still -- is the line still open?

One moment, sir.

We'll open his line.

Okay.

No, Steve, I think Ganesh gave us some answers.

I'm sure we'll take some of the more details we would like to hear about offline.

Thank you.

I had a question for you before you go.

What portion of 32 bit Microcontrollers do you believe are arm based in the industry?

It's hard to say, but if you look at just about everybody else that is in the 32 bit microcontroller, some of their own, some use arm.

Just fallacy.

That's the largest fallacy, which I'm really surprised about when you talk about misinformation.

Only 20% of total worldwide 32 bit Microcontrollers are arm based.

There are a number of other architectures which are substantially higher than some of arm based Microcontrollers.

Most of these other guys also even while they sell their own microcontroller, based on their own technology, they all, most of them have licensed arm, either as a hedge or just as a way to drive (inaudible).

You're the only major -- one of the few major companies in the segment that has not done that and I'm just curious as to -- ?

20 years ago it was the same situation in 8 bit, with 8051.

Everybody had Intel's architecture, 8051.

Microchip came with a proprietary architecture with PIC, and where is 8051 today and where are we now?

Another way to think about it is the core is really a means to an end.

The core is not the end.

And some how some of the discussions get trapped into this thing as some how the arm core is the end result.

It is just is a delivery mechanism for how you deliver an embedded control solution.

If the core was that important, don't you think Microchip would have done a proprietary core for ourselves as opposed to gone with an industry standard core?

We picked a core around which we could wrap our proprietary value.

That's clear.

Thank you very much.

I think I understand your point.

Thank you.

Operator, anybody else queued in?

There are no further questions, sir.

We want to thank all our investors and analysts on this call.

It's been a great quarter and we look forward to seeing many of you on the road.

I think there are some conferences coming up.

We'll be at the next conferences, CSFB Conference, which is actually in our backyard here in Scottsdale in early December, so we'll see many of you there.

Thank you very much.

This does conclude our conference call today.

We would like to thank you for your participation.