微晶片科技 (MCHP) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology first-quarter and fiscal year 2012 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 Chief Financial Officer, Mr.

Eric Bjornholt.

Good afternoon, everyone.

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

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

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

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

I will comment on our first quarter of fiscal year 2012 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environment, and discuss our guidance.

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

We are including information in our press release and conference call on various GAAP and non-GAAP measures.

We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our web site at www.microchip.com.

We believe you will find this useful when comparing GAAP and non-GAAP results.

I will now go through some of the operating results.

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.

Net sales in the June quarter were $374.5 million, and were down sequentially 1.4% from net sales of $380 million in the immediately preceding quarter and up 4.9% from net sales of $357.1 million in the June, 2010 quarter.

On a non-GAAP basis, gross margins were 59.5% in the June quarter, and non-GAAP operating expenses were 25% of sales, both in line with our preliminary results that we shared with the Street on July 11.

Operating income was 34.5% of sales, and net income was $111.4 million, or $0.55 per diluted share.

On a full GAAP basis, gross margins including share-based compensation and acquisition-related intangible amortization were 58.7% in the June quarter.

Total operating expenses were $102.9 million, or 27.5% of sales and include share-based compensation of $7.6 million and acquisition-related expenses of $1.6 million.

GAAP net income was $99.3 million, or $0.49 per diluted share.

In the June quarter, the non-GAAP tax rate was 12.9%, and the GAAP tax rate was 12.8%.

Our tax rate is impacted by the mix of geographical profits, withholding taxes associated with our licensing business, and the percentage of our cash that is invested in tax advantaged securities.

We expect our combined forward-looking effective tax rate on both the GAAP and non-GAAP basis to be about 12.75% to 13.25%.

To summarize the after-tax impact that the non-GAAP adjustments had on Microchip's earnings per share in the June quarter, share-based compensation was about $0.038, acquisition-related items were $0.015, and non cash interest expense was about $0.006.

The dividend declared today of $0.347 per share will be paid on September 1, 2011, to shareholders of record on August 18, 2011.

The cash payment associated with this dividend will be approximately $66.3 million.

Moving on to the balance sheet, Microchip's inventory at June 30, 2011, was $202.5 million or 119 days, up 12 days from the prior quarter levels.

Inventory to our distributors was 43 days, which is up 3 days from the prior quarter level.

We see an increasing trend of large OEM customers using distribution to hold bonded inventory on their behalf, in order to achieve zero lead times without having to carry inventory on their balance sheets.

This has resulted in a general increase over time in the amount of inventory our distributors carry.

However, I'll remind you that our global distribution revenue is recognized on a sell-through basis.

At June 30, Microchip's accounts receivable balance was $196.3 million, an increase of 8.8% from the balance as of the end of March.

The increase in receivables was driven by the shipment linearity in the quarter.

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

As of June 30, Microchip's cash and total investment position was approximately $1.72 billion, up $9 million from the prior quarter levels.

In the June quarter, Microchip had a $16 million tax payment that will not repeat in the September quarter, and we also made our semi-annual payment of interest on our junior subordinated convertible debentures of $12.2 million.

Additionally, our accounts receivable and inventory positions grew during the June quarter, impacting our overall cash generation.

Our total cash and investment position is projected to grow by approximately $90 million to $100 million in the September quarter, prior to our dividend payment.

Capital spending was approximately $27.2 million for the June quarter, and depreciation expense in the June quarter was $22 million, which was down from depreciation of $22.8 million in the March quarter.

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

Ganesh?

Thank you Eric, and good afternoon everyone.

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

Our microcontroller business was down 2% on a sequential basis, but was up 4.3% from the year-ago quarter.

Our 8-bit microcontroller business delivered a solid performance, but did not escape the impact of the broad base slowdown we experienced.

Despite this, our 8-bit business was up from the year-ago quarter.

Our 16-bit microcontroller business was down 3.1% sequentially, but was up 43% from the year-ago quarter.

We continue to see many new customers, as well as additional designs of existing customers going to production.

Our 32-bit microcontroller business had another strong quarter of growth in the June quarter and was up 18.7% on a sequential basis, and up 108.5% from the year-ago quarter to achieve a new record.

12 quarters after we started shipping 32-bit microcontrollers, the revenue growth and momentum continues to compare favorably versus our 16-bit microcontrollers at the same point in time.

The number of customers and volume production grew sequentially from 584 to 657, as we continued to build a broad base of customers to grow this business.

We expect 32-bit business to grow in the September quarter and achieve another record.

Moving to development tools, we shipped approximately 44,000 development tools in the June quarter, roughly flat with what we shipped in the March quarter.

Development tool sales remain an excellent leading indicator of continued strong design and activity and acceptance of our solutions by our customers.

Development tools get used by our customers for multiple projects over several years, and as such the continued trend of strong development tool sales bodes well for future growth.

Finally, sometime later this month, Microchip will ship 10 our billionth cumulative microcontroller.

It exemplifies the trust placed in us by over 70,000 customers world wide as we endeavor to enable their innovation.

It will be another historic milestone in our journey to be the very best embedded control solutions company ever, and marks the collective contributions by a worldwide team over many, many years.

Now let's move to our analog products.

Our Analog business was down 7% sequentially, but was up 2.4% from the year-ago quarter.

We remain pleased with the design win momentum our analog business has shown.

And we continue to introduce a steady stream of innovative new products, which we expect will contribute to strong revenue growth in the future.

Now moving to our memory products.

Our memory business, which is comprised of our [serial E-squared] memory products as well as our super-flash memory products, was up 0.6% on a sequential basis.

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.

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

Steve?

Thank you, Ganesh, and good afternoon everyone.

Today I would like to first comment on the results of the June, 2011 quarter, and then provide guidance for the September, 2011 quarter.

The majority of my comments on the June quarter were made during the pre-announcement conference call on July 11.

We essentially saw a broad-based demand in bookings weakness across multiple market segments and multiple customers in each segment.

In the conference call on July 11, I said, -- we believe that our June quarter reserves reflect weak overall market conditions, which we believe will impact the broad-based semiconductor industry in the June or September quarter, depending on the individual market exposures and revenue recognition practices of the companies.

-- Since then we have seen this sentiment reflect through the earnings season with weak guidance coming from Linear, Freescale, Texas Instruments, Silicon Labs, ST Microelectronics, Intersil, Micrel, NXP Semiconductors, IDT, Power Integration, and others.

The semiconductor supply chain is confirming the same sentiment with weak guidance, from TSMC and UMC on the wafer foundry side, Teledyne from the test equipment side, KLA Tencor and Applied Materials from the fab equipment side, and Arrow Electronics from the company in distribution.

There could be some companies that are exceptions due to a particular product transition or momentum in a given application segment, but we continue to believe that most companies will see the weakness manifest itself as the quarter progresses and their guidance is likely to be too aggressive.

The broad-based global weakness seen has also been reflected by large multinational industrial conglomerates like Emerson Electric Company.

Last week's durable goods report also cited that new numbers for durable goods fell unexpectedly in a weak June quarter GDP report, and a very weak ISM index this week caps it off.

Our long-term investors and analysts have seen Microchip experience these industry events first.

Microchip tends to see changes in business conditions earlier than most of our peers, due to a number of factors.

Number 1, we recognize distribution revenue on a sell-through basis worldwide.

Number 2, we run very short lead times, which gives customers more time to make purchasing decisions based on more current business conditions.

And number 3, we have a large number of small and medium-size customers who tend to be quicker in adjusting their inventories.

I will now provide guidance for the September, 2011 quarter.

Nothing that we have seen in the month of July changes our view that we have presented in our pre-announcement conference call.

Our view has now been confirmed by a large number of industry players, many of whom have fairly broad-based businesses.

The overall market environment continues to be weak.

Therefore, we are maintaining the guidance that we provided on July 11.

We expect our net sales to be down from low to mid-single digits percentage.

We expect a non-GAAP gross margin percentage to be between 59.3% and 59.7% of sales, with the mid-point being even with the June quarter.

We expect non-GAAP operating expense to be about 25% to 25.5% of sales, and we expect our non-GAAP operating profit to be between 33.8% to 34.7% of sales, and we expect non-GAAP earnings per share to be $0.50 to $0.54 per share.

We expect our inventory in the September quarter to be in the range of 130 days.

While this inventory is higher than what we experienced in our recent past, we believe that short lead times is one of our competitive strengths.

We, therefore, believe that the inventory is acceptable, and we will bring it down over time without any harsh actions in manufacturing.

Our products have very long lifetimes, and we have a history and track record of managing inventories without one-time write-offs and selling them over the business cycles.

One of the immediate benefits of higher inventory is a substantial reduction in our capital expenditures.

We again reaffirm that we have lowered our CapEx forecast from $125 million that used to be, to $75 million for fiscal year '12.

Given all the complications of accounting for the SST acquisition, which we completed last year, including amortization of intangibles and restructuring charges and sales of non core businesses, like many other 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 comparisons to prior quarters, and we request that the analysts continue to report their non-GAAP estimates to first call.

Finally, while our overall results for the June quarter are disappointing, we did manage to make it our eighty-third consecutively profitable quarter.

Our non-GAAP gross margin of 59.5% and our non-GAAP operating profit of 34.5% are the type of reserves that are not achieved by most of our competitors, even in the best of times.

We feel very positive about the long-term prospects in our business, and we are continuing to invest in our strategic initiatives to drive growth.

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

(Operator Instructions)We'll pause for a moment to assemble the queue.

We'll take our first question from Mark Lipacis with Jefferies.

Thanks for taking my question.

A question for Steve.

When you think about the weakness that you're seeing now, can you give us a sense of how much you think it is real end customer weakness out there versus your distributor customers concerned about the macro environment, and taking inventory levels below normal, what would be normal levels.

The distributors were simply taking inventory at below normal levels.

That will have no impact on our revenue, because we recognize revenue 100% on sell-through worldwide.

That would affect the impact the revenue of other companies who have a selling revenue recognition, but it wouldn't affect our revenue because of sell-through.

Understand, Steve.

I guess what I really meant was your distributors' customers.

So the OEMs or contract manufacturers getting more nervous about, you know, what they're seeing in the macro environment and whether or not you have a view on if you think they're taking their inventory levels below normal levels.

You know, that's basically demand weakness.

It's really hard to really make the differential.

A large number of customers have logistics programs with their distributors where the inventory is actually held up at distributors, and they draw the inventory as they need the product.

That's more and more trend going in that direction, which is also one of the reasons that I think distribution inventory grows over time, and the end customer inventory actually comes down.

I think it's all weak demand.

There's lack of confidence in the economy, lack of confidence in consumers, lack of confidence in businesses.

People aren't building products.

Fair enough.

Question for Eric.

I think you mentioned that account receivable DSO is trending up.

Is that a positive signal for the linearity during the quarter?

If you could give some color on that I'd appreciate it.

Thank you.

Really, that's just a function of when product was scheduled to be shipped to contributors.

I don't think you can make too much of that as a positive sign.

We think that accounts receivable balance will come down in the current quarter.

Receivables remain in good shape.

Fair enough, thank you.

Welcome.

We'll take our next question from Christopher Danely with JP Morgan.

Thanks.

Steve, you've been through quite a few of these cycles.

How do you compare this versus what happened in '08?

Do the customers act as scared as they do back then?

Do you think it's garden variety demand correction?

I'd appreciate your views on what you think is happening out there.

The 2008 cycle was more episodic.

It was very fast contraction of the economy and the credit.

Globally just very, very quick contraction that took the semiconductor industry down almost I think 36% to 40% over 6 months.

Clearly nobody's expecting that sort.

I think, you know, a double-dip recession has either already started or is right around the corner.

You made the call in 2008, 2009, the government didn't confirm the recession until 9 months after it already finished.

So however they measured these numbers, it's clearly visible in the economy, in the stock market.

After a wonderful day today in the stock market, I think market is already discounting a recession.

And I believe we may already be in one.

Got it.

As my followup, what signs are you looking for besides the obvious customer orders that were bottoming, and what would it take for you guys to get a little more aggressive on the buyback?

On buyback, we don't really buy back stock that often.

Except in unique circumstances in the past.

We're largely trying to give investors returns through a dividend program and long-term stock price growth.

So I'm not really looking at any buy-backs short term.

We also have been acquiring a number of small and one large company last year.

So we need cash for that, too.

But in terms of your first question, what kind of signs we'll be looking.

We have ability internally to pick any large customer in any market.

We have so many customers so it's hard for us to say X% of business is industrial and Y% is consumer, and we don't do that.

But we can take a basket of X number of customers in any given market and look at the buying pattern quarter over quarter over a given design, and as that run rate of a given product starts going up in consumption on a consumption basis, that would be my sign that the economy's returning.

And I'll tell you so.

Thank you.

We'll take our next question from James Schneider with Goldman Sachs.

Thanks for taking my question.

Steve, just to follow on the previous questions.

It sounds like from your commentary you think that, you know, over the next couple of quarters all things being equal from what you're seeing from customers today, that orders are going to continue to decelerate from here even further.

Is that a fair assessment?

The order deflation has more to do with the lead times contracting rapidly, because the inventories are healthy, as you saw ours and many of our competitors.

When the inventories are healthy and business is down by small single digit percentage/ but the orders are down much more.

Most of the orders down are the reflect of shrinking lead time.

People don't have to place orders out in time.

Understand.

Since the last call, with respect to the automotive market, which is one area of weakness you specifically called out, have you had any more time to kind of assess what you think is going on with the automotive supply chain?

Is that geographic specific, is it customers just taking down inventories, or is it just auto makers not producing, finishing units?

Basically what happened the last quarter in automotive is pretty clear now.

The hindsight is always 20/20.

The automotive customers pulled in some orders in the March quarter after the earthquake, which happened on March 11.

So in fact, we had beaten the March quarter, and when we look back at the automotive shipments to a given customer, they had pulled some orders in.

Last quarter there was a little bit of correction of that inventory because they had pulled the orders in.

Secondly, every single automotive supplier has built less cars.

Substantial contraction in Japan and companies like Toyota and Honda and others.

But there was similar impact on US and European automotive, which had either Japanese engine controllers or other parts.

So the entire supply chain was disrupted, and the actual number of cars built data is available.

We have it, and you should have access to it from various places.

One place I can send you is, look at Gentex's publicly announced earnings report.

It's a public company listed on NASDAQ under GNTX.

They make the mirrors, the chromatic mirror which dims when the light comes from the back.

It also has three buttons by which you can program your garage door.

That company has listed a table that shows what were prime forecasts, what are the current forecasts for the number of cars built.

That's one place I can send you.

But there are many other automotive reports available.

So clearly less cars got built last quarter, and in the remaining year, they're all expecting recovery of that, as the Japanese supply chain becoming healthier.

Will it be completely healthy by the end of this quarter?

I don't know.

We are already starting to see more bookings and some recovery in the automotive business.

But with two months to go, it is not totally clear that it will be completely done by the end of this quarter.

So I expect it to actually linger into the following quarter, but by the end of the year, likely the same number of cars will get built.

That's what the forecast shows.

Which means what we lost earlier we should see significant recovery in our automotive business.

So there's a chance -- and I'm not forecasting right now, but there's a chance that, you know, third quarter, our fiscal third quarter, December quarter, is un-seasonal.

Usually that quarter's a weak quarter, but that could be un-seasonal this time.

That's very clear.

Thank you very much.

And we'll take our next question from Kevin Cassidy with Stifel Nicolaus.

Thanks for taking my question.

You've reduced your CapEx to $75 million.

If this linger on longer, can you reduce that further?

Or is this maintenance level?

It is not maintenance level.

But we spent a fair amount in fiscal quarter 1, the June quarter.

And we're also spending a fair amount in the September quarter, largely driven by non cancelable orders that were in place and the equipment is coming in as we speak.

We couldn't cancel it.

In some cases we slipped it some.

The capital is very, very low in the December and March quarter.

So if the environment lingers on, yes, it could go lower, but not for the fiscal year because it was forward -- the spending was up front a little bit.

Okay.

Maybe could you just remind us what the spending was on.

All sorts.

Fab equipment, test equipment, assembly equipment, R&D, everything.

Okay.

Thanks for taking my questions.

(Operator Instructions) We'll go next to Chris Caso from Susquehanna.

Thank you.

I wonder if you could address some of the comments you made on production levels.

It sounds like you're not making drastic changes on production which I guess is keeping -- helping the gross margins to hold in.

What sort of outlook needs to hold with respect to demand for you guys to be able to maintain those levels and not build some more inventory here?

You have to go back in our history where we have managed through lots of different industry cycles.

And our strategy, with the exception of what happened in 2008, when demand went down 35%, where you had to do something different.

But when normally there's an inventory correction, a minor demand weakness of low single digits, sort of mid-single digits we're seeing right now, our strategy always has been to keep the production stable and allow the inventory to fluctuate rather than fluctuate the production, and try to keep the inventory stable.

We are able to produce a product today with the equipment we have.

And if we don't produce the product and let the equipment be idle, the depreciation continues.

And later on when you have to produce the product, you have to add more equipment to do so.

And it's a high fixed cost business in the fab's, and we can only save about $0.20 to $1 by not making the product.

So for our investors' money and for our own money, it's a good bet if you believe the inventory's good.

If you make SOC product or, some product that will become obsolete, or in fast-changing designs where the customer goes from one product to the other, that strategy will not work.

For long life-cycle products like ours, we should utilize the capacity when it's available because if I build a $10 million lower inventory, I'll have $10 million more cash on which I earn 0.01%.

Okay, and I guess as a followup to that, maybe you could remind us what sort of flexibility you have on the OpEx side in the event that this downturn persists longer than we might think.

So on the OpEx side, as we demonstrated back in 2009, we were able to cut 24% of the OpEx out, and even without laying off anybody else.

We managed it through zeroing of bonuses.

We took a lot of the discretionary costs out, and in that extreme event, we had the entire company on a 10% pay cut.

Which in the current environment we don't expect it to get that bad that we have to resort to any such measures, although bonuses would be smaller and employees already know that.

So our guidance for OpEx has been in the 24% to 26% range for a long period of time.

And in the height of the upturn, we operated very near 24%.

And our current guidance is 24% to 25.5%.

If things get worse, we actually have more room still to stay within our guidance.

And if you start to go outside of that, then we'll have to resort to some other measures if necessary.

I want to clarify, for the current quarter the guidance is between 25% and 25.5%.

The long-term model is between 24% and 26%.

And what you're saying is your expectation is under a wide range of scenarios you stay within the long-term range?

To be able to stay within that band, because we still have more flexibility in the expenses.

Even where we are at.

Thank you.

We'll take our next question from Sumit Dhanda with Citadel securities.

Yes, hi.

A couple of questions.

Steve, could you talk about what's baked into the assumptions that you have in the September quarter, either in terms of the trajectory of sales or bookings that you anticipate from now through quarter end, and if there's a book-to-bill number that you'd care to share.

No, we stopped sharing book-to-bill ratio a couple of quarters ago.

It just confuses everybody and has never correlated.

In fact, if you recall, we told you that the book-to-bill ratio was pretty good going into June quarter, and it did not again correlate because the number turned negative.

The actual results were negative while the book-to-bill ratio going into June was pretty good.

So it really -- it just has no correlation.

It just really basically does not make sense.

Or as some earlier question was, how are the bookings.

Bookings are not good.

But booking are not good predominantly driven by very short lead times when all the product is available.

But we're getting the turns, so people are placing short-term orders for the product they need.

And we believe the product is available, and we believe that the demand should be there to get to where we need to get to.

Okay.

I guess my question was, are you expecting a material tick-up in material bookings from current levels to get to where you need to be?

Is that not part of your expectation --

The bookings don't need to pick up, they just need to be healthy turns complementing that.

The bookings don't have to pick up.

The bookings result would only be next quarter, backlog would be weak.

Next quarter turns have to be good again.

Usually turns are good when the lead times are short.

I got it.

The other question I had was -- you know, you guys have done such a good job of maintaining such low lead times, but when I look at, for example, your total inventory, your channel and your internal inventory combined it's now coming up on 6 months, why do you feel like you need to carry that much inventory when your lead times are so short?

Lead times are short because of the inventory.

Cause and effect.

Our lead times were, you know, when our internal inventory was 95 days, just about 6, 8 months ago, and the dist inventory was probably 5, 6 days lower, we were having significant trouble, the lead times were longer.

We have a high mix in our product line.

So inventory's never perfect for what the demand comes in at, some of that inventory is to help satisfy the demand mix that comes in.

We have over 2,000 mask types and over 80,000 SKU.

That's a very, very large mix serving 70,000 customers.

If you ship to a large customer one type product, a Dynamogram 64 gigabyte or something in one product, then yes, you can live with low inventory.

We got lot of products and lots of SKUs.

Okay.

Great.

Thank you very much.

Welcome.

We'll take our next question from John Pitzer with Credit Suisse.

Good afternoon, guys, thanks for letting me ask a question.

Steve, I guess I'm trying to find a silver lining, my first question -- given that guidance hasn't really changed from four weeks ago, implicit in that is there a stabilization going on, or is it just that the June-July month deteriorated at the rate you thought it would?

And if the latter, is that an early sign of things bottoming?

Well, things haven't changed since July 11, because we probably appropriately predicted what the quarter might shape up to be, and we put that in a July 11 call also.

You know, has the environment further deteriorated?

You could see by most of the reports, the people who were not seeing that before are seeing it now.

Many of the reports came out after our July 11 call, citing it to be a specific Microchip issue and the other channel techs are not showing that.

You can go back and read some of those reports and now everybody's saying that.

I think it has caught up to everybody.

And the environment has gotten weaker.

But we had put that in our forecast already.

I guess, Steve, my question is -- is being able to predict accurately the rate of deterioration kind of an early sign that you've got your hands around the situation?

As we think about how this bottoms out and the bottoming process, is this an early sign of the bottoming process or not?

Well, I'm not an economist.

You know, my job is not always forecasting longer term on anything like that.

We just basically give you a quarter guidance at a time.

With over 1,000-points drop here in Dow, 1,500 points now in the last few weeks, 2, 3 weeks, how much money has been lost and what does it do to the consumer confidence and spending and investments and, you know, I don't really know all those derivative effects.

Do things get better, you know, does this economy go into a tailspin?

Not quite the 2008 style, but, you know, it actually really goes into a double dip.

My sense is it already is in one.

But I can't tell you yet, when does it recover and how deep it gets.

Although I did say that I see automotive recovery on the horizon.

Then Steve, as my followup, I understand and agree with the strategy of kind of managing inventory and not throttling down utilization.

But in the '08- '09 time period you did hit a pain point where you took utilization down pretty hard and you saw gross margins for a quarter drop I believe below 50%.

I'm kind of curious what's the pain point this time around, and what would you need to see to make the decision that, yes, dropping utilization is the right near-term strategy?

Well, like I said, in 2008 from September, 2008, to March, 2009, Microchip business was down 35%.

Industry was down a little more than that.

That's what triggered it back then.

We're talking single digit drops here so I don't think it's going to make us change anything.

Great.

Thank, guys.

Welcome.

Operator.

We'll take our next question from Brendan Furlong with Miller Tabak.

Good afternoon, thank you.

A question for you on China.

You have a decent exposure to the Chinese, you're selling to China.

Just wondering what your send is from that market in terms of demand and order rates.

So our China business in the June quarter was up.

We don't break it out specifically from Asia, but our China business was up.

Overall Asia was down, but the China business was up.

Is it slowing down, yes.

Did it also miss what we had expected to do in China, yes.

But it was still positive.

But we had expected it to be a lot more positive.

Thank you.

Then you said on the December quarter if the auto rebounds like your OEM customers are predicting, that you could have an un-seasonal, up quarter in December.

Is auto a big enough part of your business in proportion of your business to drive your total revenues up?

We don't know.

We don't know if any other sector will join that.

I see auto largely driven by the supply chain disruption going away, and the number of cars coming back.

Now could you have another effect if the economy weakens and confidence weakens and you can't get car loans and other -- the car demand weakens.

So therefore then the car manufactures do not build all the cars they're planning to build.

You know, that is not in the forecast.

Right now the forecast that I have seen which I referred to you in Gentex's Press Release is we get back to the same number of cars for 2010.

What they lost in Q2, they'll make up in Q3 and Q4.

But if the demand isn't there for that Q3 and Q4, then the numbers go down.

But either way you put it, there should be some recovery in the automotive.

Will it be strong enough to make that much difference in our overall numbers?

I don't know yet.

Okay.

Then my last question is what was the super-flash, the SST revenue in the quarter?

Thank you.

We don't break that out by -- I think we have a memory reporting segment which is super-flash and [fleur-de-lis E squared] combined.

Which, if you do the work, it was up 0.6%.

Okay.

Thank you very much.

We'll take our next question from Uche Orji with UBS.

Thank you very much.

Steve, let me just so I understand a little bit what's going on with the disti's.

Given the way things weakened, how much of the guidance reflects a destocking going on within the business?

I don't know how easy it is for you to quantify or describe to us a little bit more what's going on disti's.

Are they destocking, and from your experience, how much longer do you think that could last?

What do you mean destocking going on with the disti's?

I mean, you know, so are they holding --

Disti's buying less product?

Exactly because of the macro that they have right now.

How many times we have to explain?

That does not affect our revenue.

You know, I think street really needs to understand what is selling, or what the sell-through recognition means.

We do not recognize revenue when we give the product to distributors.

So if there's a destocking in distributors, that does not affect our revenue.

Right.

It's not necessarily yours.

I mean, you're talking about other companies, as well.

In your opening remarks.

My question is not just so much now, it's what else from your conversations with them, you know, is there something that you think the fear that the disti's will have will last beyond not just the September quarter.

I'm trying to understand what in your conversation with them is the psyche of a disti right now.

The psyche of the distributor is that they are seeing weak demand from their customer.

They're seeing similar to what we're seeing.

Atto's guidance was relatively weak.

AvaNet numbers haven't come out yet.

So my feeling is that disti's would be destocking, they would be buying less product.

So I think the companies that have sell-in revenue recognition, I can rattle them off.

But I'd rather than not, I think you should find those out.

I believe will have to take that correction at the distributor inventory.

Microchip would not have to.

Something else, Steve.

I mean, back in 2008 when we had all the housing-related issues, you gave us some numbers as to how much of your exposure was to the US, and specifically housing.

Now I know we talked about automotive as one sub-segment.

Is there anything else?

I know housing hasn't improved, I don't know whether that is related much more that you're seeing.

Any comments you can make to us as to, A, your US consumer exposure, and whether housing-related products are an area where we've seen quite a variation of your business mix.

Well, it didn't do me any good giving you that index back a few years ago.

Well, you gave it so I don't know if you are able to give us point --

We don't have it anymore, and it didn't do any good.

You know, nobody bought it.

People thought it was just a Microchip-specific problem and it didn't work at that time so there's no reason to repeat it.

Okay.

One last question.

In terms of your 2 bit products, I mean, that has been growing quite strongly.

And are we at a point where we can -- you know, we haven't broken out what the size of that business is, so at first it may feel very small.

As you sell that product how much of this response you're getting that's reflected in the growth is a function -- I'm going back to the issue of arm business in choice of nibs, obviously your subsidiary base -- I'm trying to understand how much of this substance you had is dependent on the parole package that Microchip possesses, customers, the design tools and all that, and how much of it is a different station that your choice of base at the core, you know, brings to your offerings to your customers.

I don't know if you understand what I'm trying to ask here.

You made a choice to use nibs and obviously that doesn't seem to -- that was different from everybody.

I just want to understand, you know, if you can explain to me what has, you know, brought this level of success you're seeing here to the front.

I'll have Ganesh try to answer that question.

You know, I don't think there's a nibs versus arm discussion.

We sell pic micro controllers, that has a set of attributes that customers expect with respect to our tools, software, compatibility, the migration capability.

The product is doing well because it meets what the customers' expectations are and exceeds it in more cases than not.

It's still growing off of a smaller base.

That's why you can see the faster growth rates.

But I think the argument of nibs versus arm doesn't come into the equation, people are buying pic micro controllers.

Thank you very much.

(Operator Instructions)We go next to Craig Ellis with Carris and Company.

Thanks for taking the question.

In your guidance for down 1% to 6%, what is it that will distinguish between the lower end of that range and the higher end of that range in the business?

Is it just overall turns activity in the quarter, or is it more a function of what happens in individual end markets like automotive that you called out earlier?

If I knew that then I would have given a closer guidance, closer to minus 1 or closer to minus 6.

I don't.

You know, I think it just depends on turns, we still have to get turns, backlog, what happens this automotive recovery, do any other sectors get worse, do any sectors recover, do better?

A lot of moving parts.

And that's just a broad range of guidance.

Okay, fair enough.

And then switching more to product-related questions, Ganesh.

It look like the 8-bit business, at least sequentially has been flat or down over the last 3 to 4 quarters.

You have had good growth in the 32-bit business and the 16-bit business.

What do you think is happening in 8-bit that's causing the divergence in trends between that part of the portfolio and the other?

So first of all, I think it's an incorrect assumptions that 8-bit has been declining over many quarters.

The last quarter was the only quarter in which we provided some information in terms of trajectory.

8-bit, as you've seen -- if you look at our 2010 results, which gives you a fair amount of data as compared to 2009, had good growth year over year.

Has continued to have growth as we've gone into 2011, and we feel very good about 8-bit, its prospects for growth and how it's doing.

It has nothing other than the current broad based weakness that we're seeing incorporated into the last quarter's results.

Fiscal 2011 was a record year in 8-bit Micro.

In revenue, Steve -- and are you talking flash and non-flash or just the flash products?

In total 8-bit Microcontrollers.

A know a lot of models don't reflect that.

We can't seem to get to that number, derive that number.

But 8-bit Microcontrollers were record in 2011.

And we said that on our earnings conference call with the March results.

Thanks, guys.

We'll take our next question from Mark Lipacis with Jefferies.

Hi, thanks for taking a followup question.

Ganesh, could you be so kind as to repeat what you said about the 16-bit business, the growth?

I missed that.

And 2 questions on products.

The license revenue, how should we think about that?

Is that a faster than core growth business for you guys or slower?

And then metal on cap touch controllers, you talked about that last quarter.

Could you give us a sense about how big that is and whether or not that's above your corporate growth rate or below?

Thank you.

Let's divide the three different questions there.

So on 16 bit what I said is for the business, sequentially was down 3.1%, but was up 43% from the year-ago quarter.

I'll let Steve talk about the licensing piece.

The licensing business was up sequentially 1.3%.

That's when actually we break it out.

It was $20.6 million for the quarter, up significantly year over year, I don't have that number handy.

It was up quite significantly because it continued to grow faster than Microchip so far.

And with respect to metal over cap, metal over cap is only one of multiple solutions we have that go into the touch market.

It's hard to track exact revenue that goes into touch because it's a standard Microcontroller that utilizes software either from us or from our customers, so it's pretty broad, there's over 1,000 different customers who are using our products in touch-related solutions, all in deeply embedded applications, and it continues to perform to our expectations.

Thank you for that clarification.

Can you give us a sense how big the total touch business is for you guys?

We don't have a good number that I can give you and stand behind.

We know it's broad based, it's across a broad base of applications.

We can share perhaps some applications.

We often get asked, you know, we're not in Smartphones or something, where are we, making out with lots of customers?

So, you know, here's some examples.

In consumer electronics, we are in LCD TVs, computer monitors, gaming, set-top boxes, laptops, some tablet PCs in the buttons, remote controls, optical disc drives, audio components, stereo and hi-fi, industrial applications like automatic milking machines, popular in China, copier/printer buttons, home appliances, washers, dryers, microwaves, coffee makers, espresso machines, inductive cookers, stove tops.

In automotive we are in overhead controls, dashboard controls, lighting controls, climate controls, proximity detection.

In industrial applications we are in access controls, keypads, LED lighting controls, dimmers and switches, so it just gives you a broad sampling of the large number of applications.

And that's really where our Microcontrollers also go That's the flavor of our business -- we'd rather do business with 1,000 customers buying $100,000 each rather than one customer buying $10 million.

The gross margin is a lot higher, they appreciate our business model and so on and so forth.

That's helpful color.

Thank you.

We'll take our next question from Gil Alexander with Darfil Associates.

Thanks for taking my question and congratulations on your ability to project.

Question -- when you take a look at your 8-bit programmable Microcontrollers, can you tell us your market share there?

And over a cycle what the sort of unit growth is in that business now?

Gil, basically, if I give you that market share, it breaks out the numbers for 8-bit, and from there, one could record the 16-bit because 32-bit is relatively small.

And for competitive reasons we can't get the numbers from TI, we can't get those numbers from Cypress, Silicon Lab, Atmel, and others.

Therefore we cannot provide those.

I think you can get color from -- I think we give enough information that you can deduct some.

There are some industry reports that can give you some idea.

Most of the analysts' split is wrong.

So that doesn't work.

But there are some other reports which are closer, but we can't give you that market share.

And you can't comment on the programmable Microcontroller growth in the 8-bits?

Programmable Microcontroller growth in the 8-bit?

Yes, sir.

The overall 8-bit business does not have a high growth total industry.

But we have continuously gained share over the last many, many years.

And the programmable sector has gained share over the nonprogrammable sector.

I don't have any recent numbers by any published reports what portion of the business now is programmable versus nonprogrammable.

I think it's very high percentage programmable now.

So programmable and 8-bit growth are really, you know, starting to converge now.

That was not the case 5 years ago.

Thank you.

My last question -- when you take a look at your inventory, you basically stay comfortable with up to 140 days of inventory?

I'll be comfortable even beyond that.

I think it will basically depend on choosing what to build.

We have 2,000 mask types.

I can always choose to build inventory on those products which are a sure shot, very long lifetime, I'll be selling them 5 years from now, 10 years from now.

And then if I build those products ahead of time, then I'm utilizing the equipment which will otherwise go unutilized, and therefore it will help me to lower the capital expenditure in the coming cycle.

Thank you for your help.

Thank you.

We'll take our next question from Harsh Kumar with Morgan Keegan.

Hi guys, thanks for squeezing me in.

Question for you, Steve.

Steve, on the last call I think you had mentioned that your industrial business was still holding up relatively well.

I gather listening to your commentary today that, that has changed.

If you can provide any color, we'd appreciate it.

You're probably right.

I think many other companies have confirmed also the industrial businesses probably cannot be taken out as any different than the others today.

Okay.

Fair enough.

And then Steve, we value your macro opinion.

Based on your conversations that you might have had with OEMs, do you think the OEMs are really getting worried about growth here, or is it a game of chicken, than based on short lead times such as yourself as well as inventory that is abundantly available at distributors they simply are not ordering or they don't feel like they have to order quickly?

No.

The OEMs are people, you know, they are people making decisions, they're not machines.

They are humans.

And they watch the same TV, they see the same stock market.

They see the same reports.

There's lack of demand, there's lack of confidence, there's lack of willingness to invest, there's lack of job creation.

You know, on and on and on.

We basically -- I think it's that macro environment.

It's very lethargic.

Fair enough, Steve.

Thanks.

We'll take our next question from Suji De Silva with Thinkequity.

Thanks for taking the question.

On the Touch products, are they a separate set of SKUs, or Steve, is the touch feature a function of feature in your broader products that you have very broad adoption there.

I'm curious which way you go with the market there.

We have some resistive screen-touch controllers which have a special part name.

Those are especially for resistive screen-touch controllers.

They still use our standard Microcontrollers, but they sell as special products for the touch market.

But the majority of the rest of the capacity of touch products in all these applications that I talked about, the customer buys a standard microcontroller from Microchip just like they buy for any other application.

They simply program that software in it, either they program it in their factory or they ask us to burn it in and we can burn them in.

In many cases, touch is one of many things that, that Microcontroller is doing.

So it is providing other functions in the application and adding touch as one more function that it does.

Okay, that helps.

This question might be hard to answer now.

In terms of the September quarter, are you expecting typical linearity in this environment, or are you guiding to perhaps a more back end loaded September quarter than usual?

I just can't get that far.

In this kind of environment, I just don't know about December.

I can only make comment on the automotive that I made before, that I think recovery should continue and it should be a reasonable quarter from the automotive perspective.

For the rest of it, I think it's too early to be starting to call December.

Okay, thank you very much.

You're welcome.

We'll take our next question from Christopher Danely with JP Morgan.

Thanks, guys.

Steve, I just had 2 quick followup questions.

The first, if you could just take us through your top three or four end markets and maybe give us your take where you think they are in the correction.

Are they all bad, getting worse, it sounds like auto is improving a little bit but industrial is starting to weaken.

If you could give us 30 or 45 seconds on your take on each of your end markets.

I think the summary you had and you started with.

We know that automotive is starting to show the best signs of beginning to recover.

I think industrial has weakened.

I think consumer was weak, and remains weak.

And those are some of the larger segments that we're in.

We're not as much into office automation, although that has been a weakness that we showed -- talked about in July.

We don't see anything changing there of any consequence.

Sure.

For my followup, a clarification on inventory.

Not just the inventory but the channel inventory.

Steve, is it your sense that channel inventory is low going to even below normal?

Is it normal now, going below normal?

I guess what is your sense on channel inventory out there for your products?

The channel inventory was, what, 43 days.

43 days

And it grew by

3 days.

3 days last quarter, and it has been growing about a day or so every quarter.

The channel inventory is not high.

It's slightly high, but not very, very high.

There's a significant trend going on where a large number of customers are starting to build a logistics program with the distributors where they want the distributors to carry the inventory and have that inventory be drawn at a moment's notice for them.

Therefore, the customers are trying to keep less inventory which means the distributor has to keep more inventory.

And we have to keep more inventory.

So the distributor inventory may be up by a few days and may correct over the next couple of quarters, but it's not exceptionally high.

And as the distributor inventory corrects, I have to keep saying that it does not affect our revenue.

We got that.

Thank you very much for the color on channel inventory.

We'll take our next question from Blayne Curtis with Barclays Capital.

Hey, guys.

Just a question for you, Steve.

I don't deny that this is a weak market, but when you look at your June quarter, I think out of the semi companies you mentioned, you're the only one that is seeing a decline.

When you look at the 3Q guidance, I think only Linear guided worse.

When you look at the make-up of your end markets, maybe could you highlight, is it more just the exposure that you have or, do you think it's a timing issue, or you maybe saw it first and people see a weaker Q4?

Any color would be helpful, thanks.

This music, this record has to repeat how many times?

I mean, I think it happened in 2004, 2006.

(technical difficulty) who has been in the stock for 18 years, it will walk you through how we see this first.

And I explained it a couple of times already, why we see it first.

(technical difficulty) first, and they'll come out later.

When you cumulatively look at it over three quarters, we'll be equal or better than many of these competitors in share.

We have demonstrated it many, many times.

Yet, every time it happens, it's a new question because there are new players and new analysts.

It's a large sham.

I don't have that problem when I talk to somebody, even large investors, moving in there for a long period of time.

And obviously if you had questioned it on July 11, if you're still questioning it after all these companies have said that their guidance is weak for this quarter, why is this 3 or 4 weeks ago (technical difficulty.) Just 3 or 4 weeks ago, a number of reports we've had basically said that the other companies were not confirming that there's a problem on the horizon.

Channel checks we're saying that the rest of the companies were doing fine, it was a Microchip problem.

4 weeks later it's not true.

If you're still questioning it, I can't change your mind.

I guess what I'm saying is on a relative basis.

I'm not disagreeing that things are weak.

Clearly, you saw Atmel last night -- they have Touch, but even outside of Touch, it's not as weak.

I'm trying to figure out the timing, and then when you look at December, do you think you're coming out of it first?

And some of these other company have to catch up.

Yes, so, you know, every company has different seasonality and different markets, and so Linear said down 6% to 8%.

So they were worse than us.

You have to accumulate it over a period of time.

I can't pick just one company.

But you look at the industry, you look at -- I rattle off lots of different companies.

And you know, they're all seeing similar.

Look at their prior guidance, look at the current guidance.

They're all staying similar.

Silicon Labs said down 5% to down 10% with a middle point of 7.5%.

They have Microcontrollers and they're a competitor, too.

You can always pick somebody who's better, look at TSMC's guidance, Look at UMC's guidance.

UMC said down 20% I think --

Down in the low teens.

Low teens.

And TSMC said what?

7%.

7%.

And they are suppliers to the industry.

So I think tea leaves are here to read.

The rest is your interpretation.

And I'm not the analyst, you are.

Blayne, I think the way to think about this is we will see this on both sides of the cycle.

So we're on the early side of the cycle.

But I think when this bottoms out and turns you'll see that we're among the early people to see it on the upside, as well.

Got you.

Thanks, guys.

And that concludes today's question-and-answer session.

I'll turn it back to our moderators for any closing remarks.

That's all we have for you today.

We'll be going to some conferences, I think Gordon's going to a conference next week --

Morgan Keegan.

Morgan Keegan conference.

There will be a chance to interface with him and go deeper into some of these things if you like.

Then we'll see you, some of you, on the road later in the quarter.

Thank you very much.

That concludes today's conference call.

We appreciate your participation.