微晶片科技 (MCHP) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this Microchip Technology fourth-quarter and fiscal year 2012 earnings results conference call.

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

Now for opening remarks and introductions, I will turn the call over to Microchip's President and Chief Executive Officer, Mr.

Steve Sanghi.

Mr.

Sanghi, please go ahead.

Thank you, Debbie.

Good morning, 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 or results may differ materially.

We refer you to our two press releases regarding earnings and announcement of the signing of definitive agreement to acquire Standard Microsystems Inc., known as SMSC, as well as our recent filings with the SEC that identify important risk factors that will impact Microchip's business and results of operations.

In attendance with me today are Ganesh Moorthy, Microchip's COO; Eric Bjornholt, CFO; and Gordon Parnell, Vice President of Business Development and Investor Relations.

We have two back-to-back conference calls today.

This call is to discuss Microchip's fiscal fourth-quarter 2012 and fiscal year '12 financial results, and fiscal quarter one 2013 guidance.

Followed by that, we will take investors' and analysts' questions on our financial performance, outlook, and performance of our product lines.

During this call, we will not take any questions on the acquisition.

Then, in one hour, at 9.30 a.m.

Eastern Standard Time, we will have our second call, in which we will introduce you to SMSC, explain our rationale for this acquisition, and outline the next steps and a timeline.

In the second call, we will not take any questions about our earnings.

So I will now pass the call to Eric Bjornholt, Microchip's CFO.

Thanks, Steve, and good morning, everyone.

Before I jump into the details, I want to remind you that we are including information in our press release and this 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 website at www.microchip.com, which we believe you will find 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 effect of share-based compensation, acquisition-related expenses, and other nonrecurring events.

Net sales in the March 2012 quarter were $338.9 million, up sequentially 3% from net sales of $329.2 million in the immediately-preceding quarter, and were down 10.8% from net sales of $380 million in the March 2011 quarter.

On a geographic basis in the March quarter, revenue in the Americas was up 1.6% sequentially.

Europe was up 14.5% sequentially, and Asia was down 0.7% sequentially, and was seasonally impacted by the Lunar New Year holidays.

The March quarter is typically the strongest quarter for the year in Europe, and this year has followed that pattern.

Net sales for fiscal 2012 were $1.383 billion, down 7% from the fiscal 2011 levels.

On a non-GAAP basis, gross margins were 58.1% in the March quarter, an increase from the 56.8% achieved in the preceding quarter.

Non-GAAP operating expenses were 26.2% of sales in the March quarter.

Operating income was 31.9% of sales, and net income was $94.3 million or $0.46 per diluted share, which was above the midpoint of our guidance at $0.45.

In the March quarter, non-GAAP earnings per share was favorably impacted by about one penny in the Other Income area of the income statement from the redemption of a previously written-down auction rate security at par value, and some favorable foreign exchange hedging activities.

We are not forecasting that these favorable items in the Other Income area of the P&L will repeat in the June 2012 quarter.

For fiscal 2012 on a non-GAAP basis, gross margins were 58.2%.

Operating expenses were 25.9% of sales, and operating income was 32.3% of sales.

Net income was $383.7 million or $1.89 per diluted share.

On a full GAAP basis on the March 2012 quarter, gross margins, including share-based compensation and acquisition-related intangible amortization, were 57.2%.

Total operating expenses were $100 million or 29.5% of sales, and include share-based compensation of $8.5 million, $1.5 million in special charges related to a patent license settlement, and acquisition-related expenses of $1 million.

GAAP net income was $80.6 million or $0.39 per diluted share, which was above the midpoint of our guidance of $0.38.

For fiscal 2012, GAAP gross margins were 57.3%, operating expenses were 28.6% of sales, and operating income was 28.7% of sales.

GAAP net income was $336.7 million or $1.65 per diluted share.

In the March quarter, the non-GAAP tax rate was 12.6%, and the GAAP tax rate was 12.3%.

Our tax rate is impacted by a variety of factors, including the mix of geographical profits and withholding taxes associated with our licensing business.

On a forward-looking basis, we expect our effective tax rate on a non-GAAP basis to be 13% to 13.5%, and our GAAP effective tax rate to be about 25 basis points lower than that, excluding any discrete one-time events.

To summarize the aftertax impact that the non-GAAP adjustments have on Microchip's earnings per share in the March quarter, share-based compensation was about $0.042, acquisition-related items were about $0.012, the patent license settlement was about $0.07, and the non-cash interest expense was about $0.06.

The dividend declared today of $0.35 per share will be paid on May 31, 2012 to shareholders of record on May 17, 2012.

The cash payment associated with this dividend will be approximately $67.8 million.

Moving on to the balance sheet, Microchip's inventory at March 31, 2012 was $217.3 million or 137 days, flat to the prior-quarter levels.

Inventory at our distributors was 31 days, which is down four days from the prior-quarter level.

As measured in days, our distributors have the lowest level of inventory that they have held in the last 10 years.

We believe that distributors will need to increase their level of on-hand inventory over the coming quarters.

I want to remind you that our distribution revenue throughout the world is recognized on a sellthrough basis.

At March 31, Microchip's accounts receivable balance was $170.2 million, an increase of 14% from the balance as of the end of the December.

The increase in receivables can primarily be attributable to the back-end weighting of shipments in the quarter, due to the Lunar New Year holidays in Asia, distributors not reducing inventory as much as they did in the December quarter, and the increase in revenue.

Receivable balances continue to be in great condition, with excellent payment performance from our customers.

As of March 31, Microchip's cash and total investment position was a record $1.79 billion and was up about $17 million from the prior-quarter levels.

Our total cash and investment position is projected to grow by approximately $100 million to $110 million in the June quarter, prior to our dividend payments and any acquisition activity.

Capital spending was $3.9 million in the March quarter and was $62.5 million for fiscal 2012 -- about $5.5 million less than we communicated on our last earnings call, due to the rollover of some of this capital into the first quarter of fiscal 2013.

We are continuing to invest in equipment to support the revenue growth of our new products and technologies.

Our capital expenditure forecast for fiscal 2013 is about $70 million, including the $5.5 million rollover from fiscal '12.

We expect capital expenditures to be about $18 million in the June quarter.

Depreciation expense in the March quarter was $20.9 million, which was down about $0.5 million from the December quarter.

Depreciation expense for fiscal 2012 was $86.4 million.

Depreciation expense is projected to be about $20.7 million in the June quarter.

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

Ganesh?

Thank you, Eric, and good morning, everyone.

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

Our microcontroller business was up 5.5% on a sequential basis in the March quarter, with both 8-bit and 16-bit product lines up sequentially.

For fiscal year '12, our microcontroller business was down 8.4% as compared to fiscal year '11, due to the broad-based inventory correction, accentuated by the aftereffects of the twin disasters last year, namely the earthquake in Japan and the flooding in Thailand.

Our 16-bit business was up 19.3% sequentially in the March quarter, as our business recovered sharply from the inventory correction many of our customers went through over the last three quarters.

For fiscal year '12, our 16-bit business was up 5.9% as compared to fiscal year '11.

Despite the broad-based market weakness over the last year, our strong design win momentum enabled us to overcome the macro trend and significantly outgrow the market.

After five consecutive quarters of torrid double-digit growth, including a 33.7% sequential growth in the December quarter, our 32-bit microcontroller business took a pause in the March quarter, as some customers digested the inventory they had built.

As a result, the 32-bit business was down 13.7% sequentially, although it was still up 51% from the year-ago quarter.

For fiscal year '12, our 32-bit microcontroller business grew 104.7% as compared to fiscal year '11, the fastest growth of any 32-bit supplier by a long shot.

The number of 32-bit customers in volume production grew to 885, as we continue to build a broad base of customers to grow this business.

Moving to development tools, we shipped over 50,400 development tools in the March quarter, a new record for quarterly shipments.

Cumulatively, we've now shipped close to 1.3 million development tools.

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

Gartner Dataquest just released a general-purpose microcontroller market share report for 2011.

While we remain in the number two position for 8-bit microcontrollers, we continue to gain share versus the 8-bit market at large, and versus our nearest competitors.

We closed the gap versus the number one supplier and increased our distance versus the number three supplier from a year ago.

A year ago, it took the combination of three Japanese semiconductor giants -- NEC, Hitachi, and Mitsubishi, to knock us off the number one spot for 8-bit microcontrollers.

We assured you at the time that we would work relentlessly to gain market share to wrest back the number one spot in the coming years.

We delivered in the first installment of that promise in 2011, with more to come this year.

In the general-purpose 16-bit microcontroller market, we were the fastest growing 16-bit microcontroller supplier among the top 10 suppliers in 2011.

While we remained in the number eight spot in 2011 for 16-bit microcontrollers, we're well within striking distance of the next two spots ahead of us.

In the general-purpose 32-bit microcontroller market we moved from the number 19 spot in 2010 to the number 15 spot in 2011.

And once again, we were the fastest growing 32-bit microcontroller franchise.

Now, Gartner Dataquest report is a backward-looking indicator where we are, of course, performing very well.

Now let's take a look at our forward-looking indicator.

Within the last month, EE Times released the results of their annual embedded market study.

Once again, Microchip was rated by embedded system design engineers as their number one choice for new designs using 8-bit, 16-bit and 32-bit microcontrollers in the segment of the market we serve.

We're honored by the overwhelming preference for our solutions and see this as a positive sign for future growth, especially for our 32-bit microcontroller franchise, where many of you have had questions about our choice of core.

Our 2011 market results, as well as the 2012 design engineering preference results, echo market confirmation of our belief that what customers care about is that we offer a PIC microcontroller solution, with all the attendant brand promises, and that the choice of core is not as important.

Now let's move to our analog products.

Our analog business was up 0.7% sequentially and performed well in the current environment.

For fiscal year '12, our analog business was down 3.8% as compared to fiscal year '11, due to the broad-based inventory correction, although it has performed considerably better than our peer group of competitors.

We remain pleased with the design win momentum our analog business has shown, and have a strong pipeline of innovative new products that we will be unveiling over the next year.

Moving to our memory business, this business is comprised of (inaudible) memory products as well as our super flash memory products.

The business was flat 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 the solutions.

Before I hand off to Steve, I'd like to spend a few minutes on two smaller tuck-in acquisitions of private companies that we completed in the last three months.

Both acquisitions are consistent with our elbow-out strategy, and aligned with our vision to be the very best embedded control solutions company.

Our first acquisition, completed last quarter, was a Munich, Germany-based company called Ident that has developed advanced, gesture recognition solutions.

Gesture recognition, we believe, is a next emerging technology in human interface solutions, and builds upon our strengths in proximity, touch sense, and touchscreen human interface solutions for the embedded market.

Our second acquisition, completed two weeks ago, was a Los Gatos, California-based company Called Roving Networks.

Roving Networks is an innovator in easy-to-use, low-power embedded WiFi and Bluetooth solutions that expands the range of our embedded wireless solutions.

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

Steve?

Thank you, Ganesh.

Today, I would like to first comment on the results of the fiscal fourth quarter of 2012, which I will refer to as March quarter; and then provide guidance for the fiscal first quarter of 2013, which I will refer to as June quarter.

Our March quarter results were consistent with what we had guided during the last earnings call.

The March quarter was a transitional quarter for us, as we returned to growth in revenue, gross margin percentage, and profits.

We went into this cycle one quarter earlier than most, and we had predicted that we would also come out of this cycle a quarter earlier than most.

The December quarter was a bottom for us and we saw growth in the March quarter.

Just one comment on the licensing business that Ganesh did not discuss -- our licensing business was down 7.6% sequentially.

This business tends to trail the semiconductor industry cycle, and our March quarter results reflect some of the broader weaknesses seen by the industry.

With the industry returning to growth as forecasted by foundries and integrated device manufacturers alike, we expect our licensing business to follow suit.

In the interim, we continue to build a strong foundation for future growth with two new significant license agreements signed in the March quarter.

Overall, the March quarter turned out to be in line with our expectations in an otherwise seasonally weak period impacted by the Lunar New Year holidays in Asia.

We grew 3% sequentially in revenue.

Our gross margin percentage improved by 133 basis points sequentially.

Our operating profit was up by 7.6% sequentially, and operating profit percentage was 31.9% of sales.

Not too bad for the transitional quarter and it gets better from here.

I will now provide guidance for the June quarter.

Our guidance is based on the recovery continuing to take place from the bottom of December quarter.

We expect our net sales in the June quarter to be up 3% to 7% sequentially.

We expect another 100 basis points pickup in the non-GAAP gross margin percentage, with the gross margin in the range of 59% to 59.25%.

We expect non-GAAP operating expenses to be about 26.25% of sales.

We expect our non-GAAP operating profit to be between 32.75% to 33% of sales, and non-GAAP earnings per share to be $0.47 to $0.49 per share.

As you compare our June guidance with our peer group, some others' June guidance may look stronger.

But if you compare the results for the March quarter and June guidance as cumulative, our performance is near the top of the growth.

Please keep in mind that individual companies have different end market exposure and distribution sales recognition policies that can affect the trajectory and timing of their revenue decline and subsequent growth.

The industry's distribution inventory is very low.

As that inventory is rebuilt, the selling companies see the revenue immediately, while the sellthrough companies like Microchip will see them delayed.

Therefore, our June guidance should be put in perspective based on these factors.

We still expect to reach 60% gross margin by the end of this fiscal year without the effect of the acquisition announced today.

On a longer-term basis, with the low amount of new capital, continuing to shut off all depreciation and gradual ramp in the production of our factories.

As inventory is burned off, ongoing die streams and other cost reductions, we will start to work the gross margin back up towards the corporate target of about 61% on a non-GAAP basis.

Given all the complications of accounting for the acquisitions, including amortization of intangibles, restructuring charges, and inventory write-off on acquisitions, Microchip will continue to provide guidance and traffic results on a non-GAAP basis.

We believe that non-GAAP results provide more meaningful comparison to prior quarters, and we request that the analysts continued to report their non-GAAP estimates to First Call.

Finally, the March quarter was our 86th consecutive profitable quarter.

Our non-GAAP gross margin of 58.1% and non-GAAP operating profit of 31.9% are the type of results that are not achieved by most of our competitors, even in the best of times.

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

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

(Operator Instructions).

Uche Orji, UBS.

First of all, Steve, thanks for making the time and being first on the warning how the industry is going to be, and being first to see the recovery.

A question for you.

As you see bookings, which you commented on the press release is continuing to be good, are there any areas that are kind of falling behind?

And if you can comment on what you're seeing regionally, especially Europe, where people are always concerned about declining PMI.

So, if you can just give some color regionally what you're seeing.

I know you talked about end markets, but to the extent that you have any insight on end markets as well, maybe you can give us some commentary there.

Our bookings were quite strong last quarter around the world by region, including Europe.

Europe was actually up the most last quarter, if you see.

And that number was --?

14.5%

14.5%.

Europe is seasonal in that way.

We get most of the growth in Europe in the March quarter, and then Europe is seasonally very weak in December quarter, and the summer quarter, September and June, is kind of so-so.

So Europe is very seasonal.

And we're basically seeing that seasonal trend.

And on the top of that, whatever happens in the euro zone, we certainly will not be immune from that effect.

But the business in Europe seems fine right now.

Specifically, let me just ask you on the speculation around MAPS, and it's going to find and buy further your 32 bit is a sign around MAPS.

To what extent is that going to be a challenge as meaning was acquired by a competitor, for example?

Will you continue to support that architecture?

Or is it easy for you to switch from MAPS to something else?

I'm not sure how that works for you.

But any comment here on what the future of that company might have with regards to your 32 bit architectural will be helpful.

We obviously don't want to speculate on what is or is not going on there.

We have always maintained that the core is not the critical element of what the solution we deliver is.

We've always been clear it's a PIC32, which has a substantial number of other benefits to the customer that's defined what value it is to them.

So if and when whatever plays out, we'll play out our hand at that time.

But right now there's no change in our strategy.

Okay.

And can I just ask -- I mean, I know, Steve, we're going to talk about SMS on another call, but as I look at all these small acquisitions you've made, guess your cognition seems a little bit R&D intensive.

How do you see applying that technology to your target markets, obviously imply an expansion into high-volume applications that you have typically shied away from.

And then that space because we're (inaudible) that will use more in consumer devices.

And so how does this fit in with your strategy when you acquire the Hampshire technology and that was going to be focused on less high-volume areas?

Thanks.

So if you look at the history, we have always been able to take this technology and move into the broader market.

So when you looked at our touchscreen and buttons and sliders and touch focus, you saw how we have built substantial business in appliances and automotive, and touch panels and industrial, and on and on in those kind of stuff, without really making a very large portion of our business in consumer devices fast or moving fast lifecycles and all that.

So, similarly, as we acquired these technologies, there is a substantial need for all of these technologies in the broad base of the markets that Microchip serves.

And as Microchip continues to get larger and larger, and we'll get -- talk about the other acquisition in the next hour, there is certainly room for some portion of our business in the high-volume faster markets, without really overall disturbing Microchip's emerging model.

So just the recognition takes the touchscreen experience to the next level.

Later on tomorrow, I'm presenting to a communication meeting to Microchip's worldwide employees.

And the PC that I'm going to be using, I can wave my hand and move the slides forward or backward from a distance.

That's the technology I'm going to be using and introducing to our employees.

And I will try to do the same thing next time I present to the investors.

So you can get a feel for that technology.

Okay, and just finally, certain acquisitions, I mean, ZeroG, you did acquire ZeroG in embedded wireless.

And I'm just wondering where Roving fits?

Would it pass as Row G?

Does that supersede or complement their acquisition and I'm just trying to understand how this wireless technology is going to fit into your strategy.

Thanks.

That's my last question.

It obviously complements what we have with ZeroG.

ZeroG gave us a much lower end product that was in the entry level of where WiFi technologies are at.

We had some higher end technologies.

We have some Bluetooth capabilities now, that come to us from Roving.

And there's some substantial application expertise that comes with it as well.

So all of these continue to build our capabilities in the areas of WiFi and Bluetooth, both of which we believe are ubiquitous and the kinds of building block technologies that are in use in a broad range of applications, across the market segments we serve.

Thank you very much.

James Schneider, Goldman Sachs.

Good morning and thanks for taking my question.

I was wondering if you could talk broadly about the competitive trends you're seeing in the microcontroller market?

I know it's always competitive and there's always pricing pressure, but have you seen any of your competitors be more aggressive, especially on pricing?

And do you see any of your competitors kind of struggling to make it in the market currently?

The microcontroller market has lots of different competitors in 8-bit, 16-bit and 32-bit.

There is a long tail about 20-plus competitors in each of those markets.

There are always a few people gaining market share.

There is never a single person.

And any time you compare people, one could look faster growing for a period of time than the others, but there are a handful of four or five people gaining market share in many of these markets.

But there is a long tail to take market share from.

And especially Microchip, whose business is spread in 70,000 customers, we often gain market share from the tail.

And a lot of the investors' and analysts' focus some time tend to be kind of on the top -- you know, S&L and TI, and SS and ST micro, they're all doing well.

And you can compare them all you like, but if you look at the data year after year after year, when we look at our performance versus the industry average shipments -- whether you look at SIA, where we overall gained the market share last year from 6.5% to 7.5%, or you look at the Dataquest numbers that Ganesh pointed, or you look at the EE Times survey and brand preference, we continue to win in every indicator consistently for 20-plus years, looking back and looking forward.

Microcontroller market has always been competitive.

People comment, though, there is nobody bonding that market, destroying the prices; in microcontrollers, it just does not work.

It's a design win kind of business.

And anybody is fading away, you can just look at the ranking.

There are plenty of people fading away from the bottom.

Thanks, that's helpful.

And then just to follow-up on the geographic color, can you talk about what's happening in Asia?

Clearly, Lunar New Year is a seasonally weak quarter.

But how do you expect that to track in the June quarter?

In June quarter, Asia should be very strong.

It should be the strongest geography, both definitely in China and broad of Asia.

Great, thanks very much.

JoAnne Feeney, Longbow Research.

I just had a question on the order front.

Obviously, with your sellthrough accounting, you're not going to pick it up in revenues.

So perhaps on the order front, that would be a useful leading indicator.

Can you give us a sense on what you think is happening on orders, in terms of end demand versus inventory refill, driving those for you guys?

So, as Eric pointed out, our distribution inventory ended the March quarter with a 10-year low.

And it's just inevitable that distribution will replenish some of that inventory this quarter and in the coming quarters.

So if anybody is concerned about Microchip's internal inventory being high, and last quarter it was flat, but there was a substantial reduction last quarter in the distribution inventory.

And if distribution had not gone down that much, then our inventory would have dropped.

So we always look at the total.

And on a total basis, the inventory dropped.

So as the distribution refills it, it will drop Microchip's internal inventory and the distribution is fairly positive going forward.

So I think that's the trend.

I don't know if that answers your question?

No, that's really helpful.

And then sometimes you're able to give us a sense of what your larger customers are doing that you talk directly with, versus the distributors.

Are you seeing any difference in their behavior right now?

Any difference in order patterns?

Well, so, our -- what we call direct OEM backlog, the customers that we ship to directly and not through distribution was up strongly, starting in the quarter -- for the [second] quarter.

And is there any difference between your analog order pattern versus your microcontroller pattern at this point?

Not substantial, nothing to report.

We don't break it out but it's not something that pops out.

I think we're doing pretty good across the product line.

Okay.

And if I could squeeze in one last -- on the gross margin front.

So obviously that moving up.

Is there primarily utilization or is there mix also that could help gross margins?

It's really a combination of factors.

It's a handful of moving parts.

This continuously depreciation is going down with low capital investment.

It's continuously mix is becoming richer as memory business is getting smaller as a portion of the overall, and microcontrollers and analog licensing have seen more of a growth.

It's -- the die streams and all that kind of stuff, the general cost reduction in the industry.

As inventory goes down, the factories have a gradual ramp, although we have not increased the factory utilization yet.

From December quarter to March quarter, there is some -- there was some natural improvement, because the holidays and all that were not there.

And in the June quarter also, the holidays of early January are not there.

So, there is some improvement in the factory utilization.

So a handful of moving parts.

We're talking about 100 basis points improvement with six factors, probably.

Great.

Thanks so much for your help.

Welcome.

Brendan Furlong, Miller Tabak.

I just want to kind of circle back onto JoAnne's question there a little bit, as she kind of preempted me.

But the 10-year inventory at the -- or excuse me, inventory at a 10-year low, with signs of cycle putting in bottom in the March quarter, I'm just curious what you think was driving that when the cycle was about to turn up?

And when do you think those distributors are finally going to put some orders back on you?

The distributors have put the orders on us, so the backlog is much healthier than it was before.

And it will continue to strengthen.

The bookings are fairly strong, so the backlog is building by the week.

And Brendan, our lead times are very short, have remained short.

Some of the strategic inventory that we had built is there.

So people have been able to place orders and get them in a fairly short period of time.

Okay.

And then I guess the other question is, you made some comments about your analog, but cumulatively, obviously, it compares very well with your analog peers.

I'm just wondering what you're seeing in analog in general, as the cycle begins to turn up here in the June quarter?

So I think analog business should do very well in June quarter.

I do not want to quantify it but I think we should have strong performance in the analog in June quarter.

All right.

Thanks a lot.

Appreciate it.

(Operator Instructions).

Chris Danely, JPMorgan.

Steve, I'd just be curious as to your thoughts or impression as to how you think this cycle will play out?

I mean, clearly, you guys are under shipping in demand, orders shipping in demand across semis.

When do you think we get back to the proper run rate?

And what do you think it's going to take to get us back there?

And any thoughts on the timing of that.

Well, the cyclic part of the recovery is underway.

It's been a classic pattern where we call it first, which we called it back in the June time frame last year.

Everybody jumps in claiming to be an internal microchip problem.

A quarter later, warnings come from everybody and the industry joins, and then the speculation begins, when does the cycle end?

Microchip's bottom quarter was December.

We called that too, that we end one quarter early.

And that is often questioned.

And now it starts to get believed as that becomes a reality, and everybody else called March quarter is the bottom and the June quarter guidance is up.

So it's a very classic pattern.

I think the next couple of quarters, you should see a number of companies, at least good companies, making new hires, in terms of record revenues taking out acquisitions and all the economic activity.

So I think the pattern is pretty much intact.

And you mentioned that you're already seeing the disties having to take their inventory up a little bit.

So are your bookings from the distributors a little bit stronger than the OEM/contract manufacturer?

I think our bookings are really strong across the board right now.

So -- and it's region by region, so I'd be guessing if I answered that right now.

Sure.

And then my last question is probably for Eric.

So you guys are guiding for a nice sequential increase in sales this quarter, but your OpEx looks like it's up about the same amount as sales.

Is that because of the two small acquisitions you did?

And then how are you guys going to get that OpEx down towards the target model as the fiscal year unfolds?

I think -- let me answer that instead of Eric.

If you look at our OpEx, it's near the industry best.

The industry spends several hundred basis points more than we do on an average basis.

We'll be in the top three or four companies, the top echelons.

So we have seen a lot of opportunities in the market with these acquisitions and other internal programs.

People get awfully excited about trying to get another 25 basis points leverage.

I mean, we just reported 31.9% operating profit and it will be higher than that in the June quarter.

And when the opportunity is there, if we did not invest in those strategic investments to gain share with these tuck-in acquisitions and internal programs to accelerate various revenue growth, we'll be making over 32% operating profit, and shame on us.

That's the real answer.

I guess I'd just also point out that our long-term model is 25% to 26%, and (multiple speakers) --

(multiple speakers) Yes.

So with just -- 25 basis points higher than that will be [getting] the range, as the recovery picks up steam.

Got it.

Thanks, guys.

John Pitzer, Credit Suisse.

Congratulations.

Steve, realizing that [32 bits] is still a very small portion of the overall microcontroller market.

Down this quarter, do you expect to see a resumption of growth in the June quarter?

Relative to the 16-bit ramp, is this kind of lumping as kind of typical, as you're starting out a new node?

So, I would predict that we would grow in the June quarter in 8/16/32 analog across the board.

I think if you go back and look at the 16-bit bi-quarter patterns, we haven't had a timeline where -- occasionally, there's going to be a quarter when there is a decline.

And that's there if you go back and look at the first 20 or 30 quarters of how 16-bit did, it's not unusual at this stage.

But you look at the consistent longer-term pattern of the growth, and you're going to find multiple quarters of growth, and there will be a pause somewhere along the way.

And then, guys, as you think about the different segments of microcontrollers, I'm kind of curious, relative to the overall growth in microcontrollers, how do you see 8/16 versus 32?

And I know you're dealing with different basis sects.

But I'm most interested in kind of the 8-bit market and what you think the longer-term growth there is?

It seems like the 8-bit downturn started a little bit earlier than the overall semiconductor downturn.

We have -- in our history, we have really never cared about that.

We always look at whatever our market share is -- if our market share is 15% in a given market, then 85% of the business we don't have.

And we don't let our people think that this particular market is shrinking or this particular market is growing.

If you look at our 20-year performance in the 8-bit market, we have done incredible in the face of markets that analysts have called it for the better part of 10 years not a good market.

16-bit is the same way.

Everybody says, oh, the growth is in 32-bit.

We have doubled year after year after year in 16-bit and grew again last year significantly.

So, it's just a different thinking.

We don't think in terms of market growth.

We think in terms of the opportunities we can have and growing that market.

So, if it grows through market share and the market isn't growing, so be it.

We don't make the difference.

And then, Steve, my last question may be a little bit tangential to the 9.30 call, but the dividend has always been sort of a key part of the Microchip story, and you guys have always been very committed to it.

Just given the size of the acquisition announced this morning, as I run the numbers, it doesn't seem to be any issue with the dividend strategy.

But I thought I'd just like to hear it from you.

So, you're correct and the question is valid for this call too.

There will be no change in our dividend strategy.

We've got a substantial amount of cash and we established a larger credit line last year to really fund this.

So there's no problem here.

Dividend strategy will continue.

Thank you very much.

Welcome.

Chris Caso, Susquehanna Financial Group.

I wonder if you could -- it's a difficult question, given the breadth of your customer line, but give some indication of what you think your customers are doing and the end customers are doing with inventory levels right now?

Do you -- in terms of how lean those inventories may be and their willingness to perhaps start to do some restocking here, independent of what's happening at the distributors?

So if you look at the direct customers, it's quite clear, as I mentioned, the direct customers' backlog started out much stronger, and additional bookings are continuing.

So we feel pretty good about it.

And part of that across the customer base has to be where they are seeing resurgence in their business, or that inventory is too low, or a combination of both.

Right.

I mean, I guess as a follow-on to that, from a bigger picture perspective, you obviously have a lot of customers and I'm sure you speak to a lot of customers.

What are they telling you from a bigger picture standpoint of their confidence through the rest of the year?

Their businesses are doing better.

They have bounced off the bottom.

They are more confident that economic cycle is doing better, but they're not happy that the economic cycle is the weakest recovery that's been seen in many, many recessions.

The latest slowdown in the GDP in the March quarter, which was lower, is not happy news.

So nobody is really pleased with the pace of the recovery, nor are we.

But everybody is still seeing growth.

At least it has turned positive and they're doing better than they were doing before.

Okay.

And just one final -- you had talked a bit about what you're doing with your inventories and such.

I believe the way that you were managing utilization was taking factory shutdowns.

Are you planning on continuing those shutdowns into the June quarter?

No.

We did not have any shutdown in the March quarter either.

Although there is some natural shutdown, the New Year holiday kind of goes a little bit into January, early part of January.

But there are no more factory shutdowns required, because inventory, when you combine it together with the distribution, it's dropping already.

Great.

Thank you.

Harsh Kumar, Stephens.

First of all, congratulations on the acquisition and very good guidance.

First question, Steve, microcontroller business was up 5.5%, which is better.

I understand that you're recovering from some natural disaster kind of issues.

But I'm curious if there was any one market or two markets that stood out that did better than the others?

And I'm also curious if you saw increasing strength in orders?

In other words, how is the linearity of orders?

So, you want to take the microcontroller piece?

Sure.

Our business is very broad-based.

There's no specific market that's been driving the resurgence in the growth.

It's growth across the board.

And I forget -- what was the second question?

Second part was question about the linearity of the orders.

So basically, the business has continued to strengthen through the March quarter.

So bookings are higher every month and we expect that pattern to continue in April.

And then May is just starting, so basically it's a very classic pattern.

The bookings are strengthening.

Very good.

And as follow-up, Steve, last decade -- this is a strategic question -- Microchip, from what I remember covering you guys, was not a very big fan of acquisitions.

This sort of decade so far, we've seen a different pattern.

And I'm curious if there's a change in the way you guys are thinking about running the business going forward, as you get -- are you trying to get more acquisitive?

Or is it a function of what you're able to see in the marketplace that's very cheap?

Just any thoughts.

Kind of thoughtful question.

So if you look at -- the question really depends on what do you do with your cash?

So we produced enormous amount of cash and relatively low capital investment in the business.

The business is very profitable and [throws] a lot of cash

So we spent the last decade building up our dividend to be near 4%, one of the highest dividend in the semiconductor industry.

And that's good.

Giving on the top of that [model] when it's really not helpful; it gets kind of too high and I don't think people start to appreciate beyond that, when it's already the highest.

So the other is the investment in our own business for growth and strategic iniatiatives.

There was an earlier question regarding the operating expenses and I'm not as quick to get it down to 25%, 25.5%, as an opportunity we're investing and we're happy with it when the business is very profitable.

But despite giving all the dividend and despite spending [26.25%] on operating experiences slightly higher than the model, we're still building cash.

We have $1.8 billion record cash, so what do you with it?

So we're looking for where we can find acquisitions that can enhance Microchip's server available market.

Maybe to similar customers where we sell their products that go around our board; things that we could package in with Micro where it can really add to strategic initiatives, either in technology or the market or the products or all of the above.

We didn't have that level of cash in the earlier part of last decade.

We were also building our factory infrastructure at that time.

If you recall, we spent a couple of hundred million dollars buying our Fab four in Oregon.

And subsequently made substantial capital investments for equipment in all that.

We built a factory in Thailand and added significant to that.

So we were building our infrastructure and spending money internally.

All that is now built, and we have substantial factory capacity in our factories plus part of the fab light strategy where we are doing a portion of the business at the foundries.

So business has become less capital-intensive in this decade.

And therefore, we are trying to find use for that money and doing it very judiciously.

We haven't any bad acquisitions.

The record of acquisitions in our industry is terrible.

Ours is great.

You know, acquisition after acquisition, we're very, very pleased with it; it's adding shareholder value.

Great.

I appreciate the color.

So I should think of your strategy for using cash as basically kind of expanding your product line and expanding your footprint.

But that's where you cut off the line, correct?

Yes, I mean, you know, unless there is a fourth element of it -- I mean, there's investment; there is internal growth in operating expenses.

Growth in operating expenses, we don't like.

And [26] versus 26%, I'm not shedding tears.

The capital expense, we are spending what we need to spend and it is low because of our strategy.

So that is fine.

And despite doing all that, we are still building a lot of cash.

So therefore, it -- I hold the management at microchip responsible, and you should hold all of us responsible to make sure we don't blow that cash in bad acquisitions.

A lot of people did at the height of the 2000 bubble, and spending billions of dollars and then writing them out.

We haven't done that at all.

And we will not do that.

And that's our promise to you, that if you do an acquisition, we will deliver tremendous shareholder value.

Thanks, Steve.

I appreciate the color.

We've got time for just probably two short more questions.

That's it.

Yes.

We've got to get on the next call after that.

Kevin Cassidy, Stifel Nicolaus.

Kevin Cassidy, Stifel Nicolaus.

Thanks and I'll have a short question.

Just if development tools are a good indicator of future revenue, can you give a little more of a breakout or at least growth rate of development tools for 32-bit controllers versus 16-bit or 8-bit?

So our development tools are used across 8's, 16's, and 32's.

Yes there are a subset of tools that are unique to 32 only, but there's a much larger number of tools that get used across 8's, 16's, and 32's.

You know I think that the more meaningful indicators to look at, how are the businesses themselves growing?

And if you look at 8's, 16's and 32's, they have continued to outperform the market.

And the development tools that a customer buys can be used on different projects, and today may help an 8-bit, tomorrow may help a 16-bit; day after tomorrow, can help a 32-bit.

But the fact that they're being purchased and used is a good reflection across our microcontroller portfolio.

I would like to add that part of the Microchip PIC brand value proposition is that we are the only company where if you buy a development tool, you can use it on 900 products from 8 to 32.

You cannot do that with any other company.

The product lines are disjointed where one is based on this architecture, the other was designed here; the pin-outs and peripherals and others are not compatible.

They don't match, so you have to buy different tools for different product lines.

For Microchip, one tool set will serve the entire base.

Okay, I guess that supports the reason -- different processors or cores don't really matter as long as the development tools are the same?

Exactly.

Thank you.

Okay, one other quick question and then we'll have to get off this call.

All right.

We'll take our final question today from Craig Ellis with Caris & Company.

Thanks for taking the question.

It's probably a good segue into the call, but Steve, to further clarify the acquisition strategy, it seems like you've been opportunistic in the past with the SST Ident.

A lot of the acquisitions have kind of fallen into that elbow-out pocket that Ganesh just mentioned.

But it seems like you were alluding to the most recent acquisition, SMSC is one that's more Sam expansion.

So, is that the right way to think about how you're looking at your acquisition strategy on a go-forward basis?

So I -- since you named the company we're buying, I'd rather take that question in the next call.

And if it's not asked, I'll answer it anyway in the call.

There are certain rules about trialing and all of that, so I'd rather not take that in this call.

Do I get a follow up then?

(laughter)

Yes.

Alright.

On the licensing business, you mentioned there were two deals that were signed in the quarter, in the March quarter, that were meaningful.

When did those kick in from a revenue standpoint?

And will we see them impacting the growth rate of that business?

Or is the cyclical dynamic that you mentioned just really the overriding factor, in terms of how we think about the way that business rises and falls over time?

So, the new licenses, depending on what kind it is, whether it's an extension of something or some major license where it's a brand-new node and a major foundry, it could have two years to revenue.

But there are milestone payments in between.

There is a payment usually at signing of the contract.

Some of that we will get this quarter when we make our first package delivery.

That technology, no delivery.

But then as they start to install it, there's [many and] various steps.

But then the royalty stream actually is a couple of years away.

But there is a significant revenue in between.

Thanks, guys.

Okay, so with that, we'd like to finish the earnings portion of the call.

And so all of you have to sign into a different call.

There's a different number that was sent out.

And for the second call, I'll also be using a slide set which was posted on the Web as we speak.

So, make sure you get that slide set.

It will be on the webcast.

It will also be on the webcast.

So we'll see many of you on the next call.

Thank you very much.

Ladies and gentlemen, thank you for your participation.

This does conclude today's earnings conference.