微晶片科技 (MCHP) 2011 Q2 法說會逐字稿

Good day, everyone and welcome to Microchip Technology second quarter and fiscal year 2011 earnings results conference call.

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

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

Steve Sanghi.

Please go ahead, sir.

Thank you operator.

Good afternoon, everyone.

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

We wish to caution you that such forward-looking 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 Ganesh Moorthy, Microchip's Chief Operating Officer, Eric Bjornholt, Chief Financial Officer, and Gordon Parnell, Vice President of Business Development and Investor Relations.

I will first comment on the status of the restructuring and integration of Silicon Storage Technology.

All of our financial results flow from the understanding of how this is being accounted for.

Eric Bjornholt will then give you the details of our financial performance.

Ganesh will give his comment on the results of the product line and then I will discuss the current business environment and discuss our guidance.

We will then be available to respond to specific investor and analyst questions.

Microchip acquired Silicon Storage Technology, SST, on April 8, 2010.

At that time, we determined that we would hold SST's SuperFlash memory NAND solid state drive, smart card, and RF businesses as assets for sale.

On May 21, 2010, we consummated and announced a transaction in which we sold NAND solid state drive, smart card, and certain older flash memory product lines to Greenliant Systems, Inc .

Then we announced a second transaction on July 8, 2010, in which we exclusively licensed certain flash memory products in geographical markets of Asia, mainly Taiwan and China to Professional Computer Technology of Taiwan, or PCT.

After that, we still had remaining SuperFlash memory business and RF business held for sale.

After operating the SST business for two quarters, we have found synergy between SST's RF business and Microchip's wireless, Microcontroller and analog businesses on the memory side after selling the low margin end of the business to PCT of Taiwan, we have substantially improved our gross margin for the rest of the SuperFlash memory business.

Additionally, we have found running some volume on the memory business is critical to pruning out the technology before it can be licensed.

There are also operational synergies with Microchip's memory business and technology synergies with Microchip's Microcontroller business.

As such, we have very substantially eliminated the excess overhead and dramatically reduced the operating expense of the SST business.

With that, we have decided to keep the SuperFlash memory and RF businesses of SST as ongoing businesses of Microchip.

In this press release and in future filings with the SEC, the first quarter of fiscal 2011 will be presented as if the SST SuperFlash memory and RF divisions were always included in the continuing operations of Microchip.

Microchip's second quarter of fiscal 2011 guidance provided on August 5, 2010, did not include the SuperFlash memory in RF division of SST.

Without these divisions, Microchip guided its net sales to be $340 million to $343 million for the September quarter and compared to that, our actual results were these businesses achieved $342.3 million, which is near the high end of our previous guidance.

The SuperFlash memory and RF divisions padded approximately $40 million revenue in September 2010 quarter.

The restructuring and integration of SST is now complete.

We have transformed SST into a very profitable entity that is accretive to Microchip's non-GAAP earnings per share by about $0.08 for the September quarter.

We expect SST to add approximately $0.32 to Microchip's non-GAAP earnings for fiscal 2011 compared to original guidance of EPS accretion for fiscal year 2011 of only $0.14 to $0.18.

For fiscal 2012, we expect the STT business to add about $0.40 to our earnings per share.

We are very pleased to have completed this project and believe that we have delivered on our commitment of providing significant shareholder value through this acquisition.

I will now pass this on to Eric Bjornholt, who will cover the financials on a fully consolidated basis including all continuing operations of Microchip on this revised (inaudible) including the SuperFlash memory and RF businesses of

Thanks, Steve, and good afternoon, everyone.

We are including information on our press release and in this conference call 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.

I will go through some of the operating results on a fully consolidated basis for the September quarter.

Any comparisons I make to the June quarter will also be based on a fully consolidated basis, which is revised to include the RF and SuperFlash memory businesses of SST.

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

Net sales in the September quarter were a record $382.3 million and were up approximately 7% from net sales of $357.1 million in the immediately preceding quarter and were up 68.7% from net sales of $226.7 million in the September 2009 quarter.

Non-GAAP gross margins were 60.2% in the September quarter compared to 60.3% in the June quarter.

Our factories produced record output during the quarter and our cost structures remained in excellent condition.

With the increase in revenue in the September quarter and our continued focus on prudent spending, operating expenses were 24% of sales compared to 24.5% in the June quarter.

Non-GAAP operating income was 36.2% of sales.

Non-GAAP net income from continuing operations was $119.6 million or a record $0.63 per diluted share, an increase of 8.8% from non-GAAP net income of $109.9 million or $0.58 per diluted share in the immediately preceding quarter.

On a full GAAP basis, gross margins, including share-based compensation and acquisition-related expenses which include the sell-through of written up inventory and tangible amortization were 58.9%.

Total operating expenses were $101.9 million or 26.6% of sales and include share-based compensation of $7.2 million, acquisition-related expenses of $2.2 million and $0.6 million in severance and office closure charges that are classified as a special charge within operating expenses.

GAAP net income from continuing operations was $104.8 million or $0.55 per dilute shared, an increase of 14% from GAAP net income of $91.9 million or $0.48 per diluted shared in the immediately preceding quarter.

In the September quarter, the non-GAAP tax rate was 13.2% and the GAAP tax rate was 13.4%.

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

We expect our combined forward-looking effective tax rate to be about 13%.

To summarize the after-tax impact that the non-GAAP adjustments had on Microchip's earning per share in the September quarter, share-based compensation was about $0.041, acquisition-related items were about $0.031 and non-cash interest expense was about $0.006.

As indicated in our press release today, Microchip will be paying two dividends in the December quarter.

The first dividend of $0.344 per share will be paid on December 2, 2010, to shareholders of record on November 18, 2010.

The cash payment associated with this dividend will be approximately $64.1 million.

The second dividend is an acceleration of the March 2011 dividend into December 2010 to allow our shareholders to take advantage of the lower tax rate that will apply in 2010 compared to what is expected for 2011.

This dividend is $0.345 per share and will be paid on December 27, 2010, to shareholders of record on December 13, 2010.

The cash payment associated with this dividend is expected to be $64.3 million.

Moving onto the balance sheet, keeping the SuperFlash memory and RF businesses of SST increased the dollar amount of Microchip's inventory in support of these businesses as we close the September quarter with $166.6 million of inventory representing approximately 97 days, which is down one day from the prior quarter levels.

Inventory at our distributors was 34 days, which is up one day from the prior quarter level.

At the end of September, the combined inventory on Microchip's balance sheet and added distributors was 131 days or flat to the prior quarter.

I want to point out that the deferred income on shipments to distributors increased 22.4% sequentially but this was impacted by the inclusion of the SuperFlash memory and RF divisions of SST and conversion of certain SST stocking reps into sell-through distributors during the September quarter.

I would like to remind you that Microchip recognizes its distribution revenue on a sell-through basis in its worldwide distribution channel.

During the September quarter, we continued to increase our manufacturing output to allow us to satisfy the needs of our customers.

We forecast inventory days on our balance sheet to increase in the December quarter but the amount of the increase will be dependent on the levels of inventory our distributors decide to hold for their customers, overall demand for our products and production levels.

Inventory on Microchip's balance sheet has been too low for the past several quarters and building some inventory this quarter will help bring our lead times closer to the levels our customers have come to expect.

At September 30, accounts receivable balance was $202.8 million, an increase of 4.8% from the balance as of the end of June.

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

As of September 30, Microchip's cash and total investment position was approximately $1.57 billion.

September quarter set a new record for Microchip with $156.9 million of cash generation prior to dividend payment of $63.9 million.

Our cash generation continues to be strong, and our total cash and investment position is projected to grow by approximately $125 million to $135 million in the December quarter prior to the dividend payments.

Capital spending was approximately $31.8 million for the September quarter.

We are continuing to invest in equipment to support the revenue growth of our new products and technologies and our capital expenditure forecast for fiscal 2011 is about $120 million.

Depreciation expense in the September quarter was $23.9 million, which was up from depreciation of $22.4 million in the June quarter.

If you have questions related to the financials for the June or September quarters, due to the inclusion of the SuperFlash memory and RF businesses of SST, please refer to the supplemental financial information tab on the Investor Relations page of Microchip's website.

Gordon and I will also be available to answer questions from investors and analysts following today's call.

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.

Microcontrollers, analog and memory products delivered another quarter of strong growth in the September quarter.

Let's now take a closer look at each of our product lines as well as Flash-IP licensing, which starting last quarter became our fourth reporting segment.

Starting with microcontrollers, this business delivered another strong quarter with revenue up 4.7% on a sequential basis and up 39.4% from a year-ago quarter, achieving a new record.

Microcontroller business broke through the billion dollar annualized revenue for the first time ever.

Reflecting the strong growth in our microcontroller business in 2010, we expect to ship our nine billion cumulative microcontroller shipped in the December quarter, having shipped the eight billionth microcontroller in the March quarter of this year.

Our 8-bit Microcontroller business had another strong quarter, achieving a new record as all segments of our 8-bit product line again experienced very strong growth.

Our 16-bit Microcontroller business also achieved another record for quarterly revenue, with strong sequential growth of 22% and up 102% from the year-ago quarter.

New customers and new designs going to production continued to help drive significant growth as the number of volume 16-bit customers grew to over 3200 customers.

Our 32-bit Microcontroller product line, which had 36% sequential growth in March, and 86% sequential growth in the June quarter, took a pause and declined 10.9% in the September quarter.

This is quite normal for a new product line where revenue growth tends to be more lumpy.

As we saw during similar phases of growth in our 16-bit and analog businesses several years ago.

32-bit Microcontroller revenue for the first six months of fiscal year 2011 was 320% higher than the equivalent period in fiscal year 2010 and I fully expect we will set a new record in the December quarter.

The number of customers in volume production for 32-bit Microcontrollers grew by 56% to 417 as we continued to build a broad base of customers to grow this business.

Moving to development tools, we shipped 48,970 development tools in the September quarter including our one millionth cumulative development tool.

Development tool sales remain an excellent leading indicator of continued strong design and activity and acceptance of our solutions by our customers and the continued trend of strong development tool sales bodes well for our future growth.

Now moving to our analog products, this business also delivered outstanding results with strong sequential growth up 11.6% and 99.8% growth, which is the year-ago quarter to achieve another record high for revenue.

This marks the sixth consecutive quarter of double-digit growth for our analog business.

In the first six months of fiscal year 2011, our analog business has grown 110.8% as compared to the same six months of fiscal year 2010.

We're very pleased with the design win and revenue momentum of our analog business so far and we continue to introduce a steady stream of innovative new products, which we expect will contribute to ongoing strong revenue growth in the coming quarters.

Moving to memory, our memory business is now comprised of Serial E- squared memory products as well as our SuperFlash memory products.

This business was up 12.5% on a sequential basis and we continue to run our memory business in a disciplined fashion that maintains consistent profitability, enables our licensing business and serves our microcontroller customers to complete their solutions.

In regards to Flash-IP licensing, the revenue for the September quarter was $17.3 million, up 12.5% from the June quarter.

We are very optimistic about the potential for this business to add to our ongoing growth and profitability.

Moving to manufacturing and lead time.

During the quarter we continued to increase our manufacturing output at a measured rate to support our growth.

Our current lead times are predominantly approximately six weeks and still well below where most of our competitors are at.

We continue to capitalize on this strength to further grow our market share, by enabling existing as well as new customers to achieve their business objectives with Microchip's solutions.

Let me now pass it to Steve for some general comments as well as our guidance going forward.

Steve?

Thank you, Ganesh.

As I reflect on the September quarter, it was yet Microchip's best quarter ever in our history.

I want to thank the entire Microchip team including the employees that joined us from SST for delivering an outstanding quarter in many, many respects.

We made new record in many aspects of our business.

We achieved record sales in Microcontrollers, analog and licensing businesses.

We also achieved record non-GAAP operating profit of $138.2 million and record cash flow of $156.9 million in September quarter.

The September quarter also marked our 80th consecutive profitable quarter.

This is 20 years of making profit every quarter in good times and bad a record that is unmatched among our peer companies and is testimony to the resiliency of the business model that we have developed and fine-tuned over time.

I will now provide guidance for December 2010 quarter.

Microchip's book-to-bill ratio for September quarter was 0.87.

While our own Inventory and distributors' inventories are in check and were flat in days from June quarter, we have seen an industry inventory correction.

December quarter is historically the weakest quarter of the year for Microchip.

Considering all that, we expect our net sales for the December quarter to be down between 2% to 8% sequentially.

We expect our non-GAAP gross margin to be between 59.1% to 59.3% for December quarter and expect non-GAAP earnings per share to be between $0.55 and $0.59.

Given all the complications of accounting for a large acquisition including purchase inventory write-up, amortization of intangibles and restructuring charges like many companies have done, Microchip will continue to provide guidance and track its results on non-GAAP basis.

We believe that non-GAAP results will provide more meaningful comparison to prior quarters and we request that the analysts continue to report their non-GAAP estimates (inaudible).

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

Operator, would you please poll for questions?

Thank you.

(Operator Instructions) We'll go to Doug Freedman of Gleacher & Company

Thank you for taking my question.

Steve, clearly things are moving pretty quickly in the industry right now.

Last quarter we were looking at being completely booked and very bullish on the December quarter and clearly bookings reversed course.

Can you give us a sense of how things are tracking right now and how long you think we're going to be in this situation?

Do you think we'll start to see a seasonal Q1?

What's your outlook look like?

Well what changed here was our bookings started to slow down in September as broad-based inventory correction in the industry start to take hold.

There was also some backlog that was scheduled for the December quarter that got pushed out into March.

As customers started to adjust their inventory and their backlogs.

Now we get this question in every cycle.

If you look at the history of Microchip, there have been only -- I believe two or three instances where we have had a back-to-back two-quarter decline in revenue.

One was during the global financial crisis in December 2008 and then down further in March 2009.

And the other one was -- I believe going back to the tech bust of 2000.

In most other cases, I think in every other case, almost, we usually see one quarter decline, which we are experiencing here in the December quarter, and then the inventory corrects and we usually start the recovery.

As you know, Microchip does accounting very, very conservatively.

We do not book any revenue around the world based on shipment to distributor.

We look at sales out 100%.

Many of our competitors who track the results based on sell-in and there are others who are hybrid where many of them take US and sell-out but Europe and Asia they go sell-in.

Microchip goes sell-out worldwide as we recognize that revenue so it's pretty conservative accounting and therefore, what is in distribution, whether distribution lowers or increases our inventory, does not have effect on our revenue.

We only have effect when the end customers are adjusting their inventory and we expect that to happen this quarter.

Great.

Thank you for the detailed answer.

If I could move onto the other thing that's really changed in the model -- that is rolling in the SuperFlash memory, producing more memory, it is pulling down the corporate-wide reported gross margins on a pro forma basis.

You guys have had a history of turning lower gross margin businesses into higher-gross margin businesses.

Can we expect the same type of results here?

What is your thoughts on where you can take corporate-wide gross margins?

Well in the last six months, we have already significantly improved our gross margins of the businesses that we're keeping.

The process has just begun.

There is a lot more to go so you're correct that we will continue to improve the gross margin of the SuperFlash memory as well as the RF businesses that we have decided to keep.

Now, the combined gross margin with the licensing is still very healthy, but these two businesses, gross margin will further increase into the next year under Microchip's (inaudible).

We expect our overall non-GAAP gross margin to go back to have a 61% or something in front of it as historically has been.

I think long-term guidance always has been in that 61% to 62% range and we should be able to get in that range over the next year.

Terrific, thank you.

I'll jump back in the queue if I have any follow-ups.

Thanks.

We'll take our next question from Terence with of Citi.

Hi, thanks for fitting me in.

This one pertains to some of the additional businesses that you've taken on from SST.

I think you made a comment in your prepared remarks that you would greatly improve the gross margin of the business.

I just want to make sure that I understand correctly.

On the additional $40 million of revenue from SST, it looks like the gross margin of that additional business was about $10 million or about 25% gross margin.

If I assume that you did attain your 62.5% gross margin on your core business -- is that correct?

Your assessment of $10 million on $40 million is not correct.

We're not breaking out the margins on individual businesses.

We never do, but from what I know off the top of my head, your calculation of 25% is not correct.

We wouldn't have kept it a 25% gross margin business.

Okay.

Somewhere your calculation is wrong but you're way under.

What I'm calculating is 62.5% gross margin, so the guided on the base revenue and then looking at the differential to what actually gross profit you printed on the GAAP basis and I get the $10 million additional on the $40 million.

I'm telling your calculation is somewhere grossly wrong.

Eric or Gordon can walk you offline.

I guess a corollary then would be -- so, was the base business gross margin within normal expectations or was it slightly below normal expectation as it came in?

I think you're excluding licensing.

So we added the $40 million of SuperFlash memory and RF business, which was previously held as a non-core asset but there was some Microcontroller business and there was some licensing business which was previously continued business, which we had already add ed to our numbers so the gross margin profile had substantially changed before, adding to those businesses.

I'll follow up with Eric, perhaps.

If I could just ask a follow-up -- I think, Steve, you had mentioned that the distribution inventory levels were at a fairly reasonably balanced level.

I was hoping you could comment, perhaps, on different regions if you feel certain regions have more inventories or certain regions have less inventory.

Thank you.

You want to comment on that?

I think that the distribution inventory was pretty well flat quarter-on-quarter on days and there wasn't any real variations we saw quarter-on-quarter by region.

It was fairly consistent.

Thank you, and I'll requeue.

Thanks.

We'll go next to James Schneider of Goldman Sachs.

Good afternoon and thank you for taking my question.

I think last quarter you talked about, given the big backlog that a large percentage of bookings were outside the current quarter.

Could you maybe -- obviously that's changed little bit.

Can you give a quantification of -- at this point, what percentage of your backlogs are outside the December quarter?

Well as Ganesh mentioned in his remarks, the lead times now on most of our products is about six weeks.

So with that, the large amount of bookings now are really falling in the quarter.

Some of them are going outside but with the lead times coming in, you have the natural correction that people don't have to place a lot of bookings into the following quarter.

Okay, that's helpful.

And then, I think there's been a pretty well publicized correction in the consumer electronics and computing spaces, specifically.

I know you don't have a ton of exposure to computing but can you maybe just comment on the end-market trends that you're seeing overall for your different customer groups?

I think it is true that the consumer electronics segment has one that has been weak.

Some of the other ones -- industrial, automotive, are not as weak perhaps as the consumer and computing.

But the correction is not all consumption-driven.

Some of it is inventory-driven.

It may not all reflect end-market consumption necessarily.

When the lead times go as long as they had you always have customers build a little bit of inventory, start to buy a little more than they really needed, and at the time, it never looks like anybody's building inventory because everybody's expediting and they want more and they're complaining about lead times.

But when the capacity catches up and the lead times come down, we have seen it from time to time, they're always -- they need some adjustment because the customers don't need everything they were planning to buy because some of that, they were trying to buy for safety.

So that's the bump we're seeing right now.

Understood.

That's helpful color.

Thank you.

We'll go next to Chris Caso with Susquehanna Financial Group.

Hi, thank you.

I just wondered if you could give a little color in terms of linearity -- I guess you said that the decline in bookings started in September.

Could you give a sense of where that's been in quarter-to-date October and what your customers are telling you now?

I guess we've heard from some others in the space is that the lead times come down, that they're expecting to see a continuing deceleration of bookings through the end of the quarter.

Is that your view as well?

I think what we have experienced we reached the bottom of the deceleration several weeks ago.

Bookings were quite weak in September.

It wasn't having an effect on the quarter, last quarter because when the bookings weaken in September those bookings were not for September quarter because September quarter was filled.

So the September bookings were really for -- some for the December quarter.

Some even for January because the lead times were longer so as the lead times started to come down, those bookings dried up so therefore bookings became much smaller and we experienced, really, the bottom, I would say three weeks ago.

Three weeks ago and it's been fairly consistent in that timeframe since.

Since then, the bookings have more normalized now.

They're normalized within our (inaudible) where we're not booking far out in time like we were before but bookings are normalized to the point where we're getting bookings that we really should be getting for the quarter.

Is it all corrected yet?

Probably not.

There's still lower than we would like but they no longer going down.

They're really stable now.

Okay, great.

And if you could remind us what you consider the normal seasonality in your March quarter and I guess you made a comment earlier that you've only seen two times where the revenue was declined for two quarter in a row.

Is that still your view this time?

Yes, which I mentioned earlier, in an answer to a prior question, we expect that we should correct in the December quarter and then March quarter will not be down further so we should see some small growth in the March quarter.

What's normal seasonality for the March quarter?

I don't know what normal is.

Yes.

I think you take out a major industry event, that's probably flat to up 3%, in that range.

Europe is typically very strong in the March quarter and Asia is a bit weaker due to the Chinese New Year.

Okay, great.

That's helpful.

Thank you.

We'll go next to Chris Danely with JPMorgan.

Thanks.

I guess I'm Chris, part two.

Hey, Steve, so if we think of the March quarter being normal seasonality, how would you expect your gross margins and operating expense to trend?

Can we expect the gross margins to improve based on further improvement in the acquired gross margin business?

And do you think you can squeeze a little bit more opex out of the newly combined entity?

We have squeezed a lot of operating expense out of the entity and you could see that the operating expenses on a historic basis are fairly low in the 24% range so the idea is really not to squeeze more out of the operating expenses below the critical mass but instead invest in these growth businesses.

So I wouldn't really have further reduction of operating expenses from these levels and then if you do an industry comparison, these are very, very low operating expense as a percentage of revenue.

I would add to that, particularly in a quarter where we're guiding to be down in revenue and operating expense is a percentage of sales is remaining fairly flat, 24% to 24% in the quarter.

So as far as the gross margin is concerned you have seen the story play out so many different times in every cycle where through the cycle we make higher highs and higher low in the gross margin.

So if you look at the prior cycle, gross margin at the bottom were much lower.

This quarter we expect this quarter to mark the bottom and then gross margin to slowly start improving.

Whether it happens -- how much it happens next quarter, I haven't really figured it out yet.

But basically you should see decrease in gross margin quarter along with decrease in revenue next quarter.

If the revenue improves, we should really have some follow-through and gross margins start to improve.

But it takes a quarter or so before they start to improve.

Great.

For my follow-up -- on the SuperFlash memory and RF, you said you could get that back to Company-average margins.

Any estimate or revenue level on how long that will take and do you think it will settle in somewhere between E-Squared and micros or will it be closer to one of the other one when you get it going the way you want it to be?

We don't want to talk about individual product line's gross margin because any customer listening or buying that product, we don't want them to think they're being XYZ.

So what I basically said is that we should be able to take the overall corporate gross margin, and put a 6% in front of it again where it is -- it was 60.2% last quarter, we're guiding 59.1% to 59.2% this quarter.

We should be able to put a 60% in front of it and late into next year we should be able to put a 61% in front of it by improving the overall utilization and absorption of our factories and improving the products as the overall revenue improves.

There's a contribution from the improvement of SuperFlash memory and RF, but there's also contribution from the overall absorption.

Remember, SuperFlash memory and RF, the $40 million at 10% of revenue out of the overall -- that alone can't make that large of a difference.

We have to improve the overall utilization to get roughly 2 to 2.5 percentage points over time.

Thanks a lot.

We'll go next to John Barton with Cowen and Company.

Thanks.

Steve, could you update us on the progress of integrating SuperFlash-IP into core products and any updated views on the competitive advantages you expect to gain from that going into the future?

Well, we were using SST's technology into our products well before the acquisition as long as five years ago.

And we were basically using that technology as a license and now we're the owners.

So what it allows us is access to more -- broad array of technologies inside of SST and go deeper into (inaudible) and be use more advanced technology which is currently under development.

In the past, we'll have access to what is really available out on the market, which sometimes is many year (inaudible)and we're already starting to develop products -- six months isn't a lot of time to develop a microcontroller but we're already starting to develop products which will be on the advanced leading edge of technology.

Since the announcement of the acquisition, you were very comfortable that your ownership of that IP would not impact the licensing to competitors, other people playing in the microcontroller area.

Based upon continued interaction with those customers, are you still very comfortable on that topic?

Yes, extremely.

There was some initial concern by our competitors that -- how will it work, them licensing the technology for Microchip, which was one of the competitors in the microcontroller business.

But after six months, they have seen we have operated the licensing business basically with a firewall and almost arms length from the Microchip's microcontroller business and the licensing business that reports directly to me and we have several licensing negotiation on the table just in the last week or so.

We have signed one new one and at least four or five new licenses which are on the table being negotiated and several of them should be signed this quarter and spill into next quarter.

As we speak, there is really, absolutely no impact of Microchip's ownership on the licensing business.

It did record last quarter.

We are confident it will do another record again this quarter.

Thank you.

(Operator Instructions) We'll go next to Brendan Furlong with Miller Tabak.

Thank you and good afternoon, everyone.

Quick question on the $40 million on the guidance for next quarter, how does it compare with the $40 million on SuperFlash and RF?

Is that down a similar amount sequentially?

We don't really break out individual product lines.

We haven't in the past -- when we refer to microcontrollers or analog, we just give a corporate guidance, the memory and RF divisions will be split.

The RF will be reported along with our overall analog revenue as it was reported in the last quarter and memory will be combined with Microchip's memory business and reported as memory segment.

So we'll compare the total memory to memory which will include Serial E- squared and SuperFlash.

And the analog will include our analog products, the RF products, and analog products also include some of the portion of the wireless products division we have, which also makes analog products.

That's helpful, thank you.

I guess what I'm really trying to get at is, what is the apples to apples comparison if you didn't have -- if you weren't including the business now as you had originally planned to do?

I don't think there are there were many differences.

I think they're all -- all industry's seeing similar stuff.

One business could be few percent higher, one could be few percent lower and those are such differences in the Microchip, as Ganesh pointed out, our 8-bit micro, 16-bit micro, 32-bit micro, analog.

They all had different percentage growth but there are really not huge anomalies of any kind if that's what you're trying to get to.

Great.

Thank you very much.

We'll go next to Ray Rund with Shaker Investments.

My question has actually been answered.

Thank you.

Welcome back, Ray.

Long time.

Not that long, Steve.

We have been following you and knowing you since 1996.

Okay.

Thank you.

We'll go next to Uche Orji with UBS.

This is Steve Eliscu for Uche.

I have a couple of questions.

First of all on the licensing business, it grew very nicely in Q2 but we only have a couple of data points in terms of seeing that business.

How should we expect that to grow longer term?

Is it going to be lumpy or should we expect some continued double-digit growth here?

Well I can't give you any long-term guidance because we owned it ourselves for a short period of time but it did make record last quarter.

We expect another record in the December quarter, even though all the other results will be down.

So the licensing business should be -- should model approximately equal to the industry average growth, plus the new licenses the new technology and new licenses are able to do.

So these licenses largely to Microcontroller and smart card customer and foundries who produce Microcontrollers and smart cards and some of the larger products for our competitors and other companies, which could include Microcontrollers, SOC product, custom chips, DSPs, smart cards and some other logic chips.

So the royalty stream of that will largely be similar to really what the industry average is doing because that's the royalty we get.

On the top of that, you have to add the new licenses because we're expanding and getting more foundries and more competitors and more technology into the fall so all that, how I can model it long term, I don't really know yet.

I think it's early.

That's helpful.

And just switching gears here on wireless technology, you now have RF capability from SST.

You have your 802.11 from your ZeroG acquisition and ZigBee -- how do we think about how wireless technology is for you going forward?

Is It like analog where initially it's enabler or it's enabled by your Microcontroller growth, longer-term it's -- becomes a faster-growing part of the business overall?

Or is it integrally tied to certain markets that you're focused on like the smart metering?

First, I commend you're keeping track of how we are accumulating technologies around -- that's elbow-out strategy and you seem to appreciate how we're doing it but I'll let Ganesh answer that question.

Well, I think you're going to find that there are several components to it.

The part of the wireless business that ties with the better control business is very much connected to our Microcontrollers, often the software that is running the system to enable the wireless communication to take place is running on our Microcontrollers and so the solution is not just the wireless product but it's the wireless product, the software and Microcontroller all sold together as a solution.

We also have the RF business from SST that actually has other areas that it plays in, which are not necessarily all tied to Microcontrollers.

It does also connect to Microcontrollers but works with higher speed WI-FI, systems and solutions and those could be going in markets.

Now Traditionally we don't play as much -- for example, cell phones.

So there's different components of the business, some of it will grow with the Microcontrollers.

and some of them will grow outside the Microcontrollers.

Okay, great.

Thank you.

We'll go next to Kevin Cassidy with Stifel Nicolaus.

Thank you for taking my question.

On the 32-bit Microcontrollers, I understand it's lumpy now as it's a smaller portion of the business, but as that grows, what seasonality do you expect there just based on some of the design wins you have?

I don't expect seasonality to be a big function for this product line.

It's small.

The number of designs going to production are going to outweigh seasonality for many, many quarters and years to come.

So right now, I think it just reflects that there are times when a given customer could be farther along in their production, many one quarter, not having to buy every single quarter.

As you have seen in the 16-bit -- and even if you followed us from the days of the analog -- there can be one or two quarters where it is not as strong as the rest of the product line, but the long-term trend tends to be substantially faster growth than the underlying product lines for Microchip.

Okay, thanks for that.

And also you're keeping capex spending the same for fiscal year 2011, even though you're bringing in the SuperFlash and RF businesses.

Can -- is there any expected change in the future?

Is there going to be any moving around of the manufacturing?

Well the SuperFlash and RF businesses largely run in -- at the subcontractors.

That's how SST business was structured.

They were completely fab-less and they didn't do any of their own assembly or tests.

This year, in this fiscal year, it's really -- there is not a lot of capital investment because most of the business really continues to run at the subcontractor.

So no plans of bringing that in-house?

No plan in a large way.

There are certain high reliability requirements around automotive and industrial customers who would require the predictability and quality standards that Microchip's factories has.

So we're putting some capability inside to be able to expand that business into higher margin and more (inaudible) sockets and stuff like that.

Similar stuff we have done with our memory business to improve margins and create stability in our high quality business and complete our Microcontroller solutions so we're doing that.

Those are small capacities and some of those we already have because systems are similar to what Microchip uses and if you need to buy something, it doesn't move the needle.

Okay, great.

Thanks.

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

Thanks for taking my question.

Steve, given your comments earlier that the bookings declined, have stopped and March is looking up, I'm curious -- do you think that materializes itself in sequential growth in bookings in the December quarter-end or book-to-bill of greater than 1?

Or do you think in this environment if March is up, it's just up on the back of a better turn environment?

That's a very good question.

I would really be speculating what the book-to-bill would be this quarter.

I think as the lead times continue to come in, people have to place longer-term backlog less and less and when we say book-to-bill ratio, we look at total bookings divided by billing for the quarter.

So your bookings can be lower for several quarters because people are not placing longer-temple backlogs, so therefore, if you look at some of the prior cycles, we have had less than 1 book-to-bill ratio and yet we had growth for a few quarters.

Perfect.

And then I guess a little bit on the analog business, if you look from the Q3 -- the September 2008 level to today, the business has almost doubled and I'm curious -- I know you don't like to give product-specific guidance for the December quarter.

But is analog still on a growth projectory this quarter and what is the outlook over the next several quarters?

Well analog is doing very well.

As you have seen, it's doubled and should continue to do well next year.

How does it do specifically this quarter as a breakdown, I don't really know.

We don't really break it out.

And then as my last question, I apologize if I missed this, but did you revenue breakdown for the September quarter by geo?

No, we didn't.

But Asia was 58% and the Americas and Europe were both about 21% of sales.

Perfect, thanks, guys.

The geo numbers have changed dramatically as we integrated these $40 million coming from SST so if you're comparing it to any prior numbers you have on record, and you see some geo change in a step function way, then don't interpret that as we're not doing good in America because it went from 25% to 21%, things like that.

SST business was very dominant in Asia and that impact.

Great.

Thanks.

We'll go next to Janet Ramkissoon with Quadra Capital.

Hello, Janet.

Hi, Steve.

Quick question about margins.

This question was asked before but maybe can ask it a different way to try to get some clarity.

If we were to add back the royalty revenues in to the SuperFlash business, without giving us any numbers, could you give us a sense of how close it is to the corporate margins of last quarter?

And if it's low, should you give us a sense as to how many quarters it might be before you're able to do what you normally do, bring the margins up to the corporate level?

Secondly, if you could just comment on business trends in India and China.

Appreciate it.

Thanks.

Well, there were three questions in there.

If you take the licensing business and peel it back out of Microchip because we had consolidated that in the prior quarter already, but if you peel it out and combine it together with SuperFlash and RF business, which was one of your question, then the margins coming out of SST are very comparable.

They're in the range.

They're lower than Microchip but they're in the range.

Okay.

Second part of your question was how long will it take to get above 61%?

You tell me what the environment will be next year, how much we'll be up in revenue --

I was specifically talking about the SST business, when would it -- you basically answered the question.

You said it was pretty close so I just wanted to know how long it would take to get to regular corporate margin.

So I think you basically said it was --

(inaudible) it's lower.

Around records, it's close and will continue to improve.

But there's always two components in improving gross margins.

One is time and the other is revenue because revenue provides the leverage in most things to absorb expenses, to create (inaudible) to do testing and get lower prices and materials and assembly and testing and all that.

So there's always a revenue issue.

Many times I get that question from the street.

They just think it's time-based.

It's time and revenue-based.

Time obviously allows shrink products to get in and projects to succeed which are trying to bring it lower cost but there's always a revenue equation.

If revenue does not grow with any given product line, it becomes margin challenged so here we believe that into the next year we'll have all of those things, the market environment would be better than what we are experiencing in December and with the product shrink, assembly and test and all the Microchip infrastructure and our skills to improve margin -- you will not be displeased with the margin.

You never have been in the past through the cycles and we'll demonstrate that again.

Okay.

Just about any commentary on business conditions in India or China?

You want to take a shot at it?

China is really the larger business for us and China had a growth quarter in the September quarter.

But perhaps not as much growth as we would like to see.

All right, thank you.

We'll go next to Craig Ellis with Caris & Company.

Brad here for Craig.

Most of my questions have been answered but maybe can you talk about your acquisition strategy going forward and how soon you're comfortable looking at companies and would you continue with the seam of building out wireless?

How should we look at that?

Well we never stop looking at any point in time.

At any point in time we have an active funnel and companies come in the funnel and we don't like them or they don't check out or they're not accretive or we don't find them good or we don't like the management or we don't like the financial or whatever reason -- this is a needle in the haystack thing.

We look at a lot of companies and really do very few.

But one result of that is we have done six acquisitions in the last two years or so and we're pleased with all of them.

They're all successful.

There was Hampshire Company, there was R&E International, there was HI-TECH software.

There was ZeroG.

There was SST.

So all these companies, they're all very, very successful.

It is because the rigorous methodology we have in figuring out really when we want to buy something.

If any of the things don't check out, then we do not buy them so we have an active funnel.

Beyond that, we can't signal where it would be and what area it could be and many of them tend to be private companies and many tend to be public companies.

Or that then the price goes up and that's not helpful to the investors or us.

Got you.

Thank you.

It appears there are no further questions at this time.

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

We want to thank all the shareholders and analysts on this call.

We try to detail out for you right in the beginning how the SST business was accounted for because otherwise it makes comparisons more difficult and because of changing the accounting of the SST business, we have restated the fiscal first quarter, which was a June quarter, and the details of all that is on our website, in case you didn't catch it, and it will be helpful to look at it so you understand the fiscal Q1 to fiscal Q2, June to September difference is a little bit better.

There are many conferences we are going to this quarter so we will see many of you on the road.

With that, thank you very much.

Bye-bye.

That concludes today's conference.

Thank you for your participation.