微晶片科技 (MCHP) 2013 Q3 法說會逐字稿

Good day everyone and welcome to this Microchip Technology third quarter and fiscal year 2013 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.

Please go ahead, sir.

Good afternoon, everyone.

During the course of this conference call we will be making projections and other forward-looking statements regarding future events or the future financial 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 press release of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

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

I will comment on our third quarter or fiscal year 2013 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.

I want to remind you that we are including information in our press release and in this conference call on various GAAP and non-GAAP measures.

We have posted a full GAAP to non-GAAP reconciliation on 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 including net sales, gross margin, and operating expenses.

I will be referring to these results on a non-GAAP basis prior to the effects of our acquisition activities and share-based compensation.

Net sales in the December quarter were a record $416 million and were up 2% sequentially from non-GAAP net sales of $407.8 million in the immediately preceding quarter.

Revenue by product line was $266 million for microcontrollers, $93.3 million for analog, $32.5 million for memory, $21.3 million for licensing, and $2.9 million of other.

Revenue by geography was $77.3 million in the Americas, $84 million in Europe and $254.7 million in Asia.

On a non-GAAP basis gross margins were 56% in the December quarter and at the high end of our guidance provided on November 8. Non-GAAP operating expenses were 30.6% of sales and near the low end of our guidance.

Non-GAAP operating income was 25.4% of sales and net income was $84.5 million.

This resulted in earnings of $0.41 per diluted share which was at the high end of our guidance.

On a full GAAP basis gross margins including share-based compensation and acquisition related expenses were 48.2% in the December quarter.

GAAP gross margins were negatively impacted by the sell through of $30.8 million of written up inventory costs associated with our acquisition.

Total operating expenses were $183 million or 44% of sales and include intangible amortization and special charges of $42.3 million and also includes share-based compensation of $12.3 million.

The GAAP net income was $10.2 million.

In the December quarter the non-GAAP tax rate was 15.5% and the GAAP tax expense was impacted by the acquisition related items and several nonrecurring events.

Our tax rate is impacted by the mix of geographical profits, withholding taxes associated with our licensing business, and the tax effect of various nonrecurring items.

Our tax rate in the March quarter will be impacted by the retroactive reinstatement of the R&D tax credit that we expect will provide a benefit of about $5.6 million related to calendar 2012 and results in a non-GAAP tax rate of between 8.5% and 9%.

Excluding any one-time events we expect our longer-term forward-looking non-GAAP effective tax rate to be about 13% to 15%.

To summarize the after-tax impact that the non-GAAP adjustments had on Microchip's earnings per share in the December quarter acquisition related items were about $0.32, share-based compensation was about $0.056, nonrecurring favorable tax events were about $0.018, and non-cash interest expense was about $0.006.

The dividend declared today of $0.353 per share will be paid on March 7, 2013 to shareholders of record on February 21, 2013.

The cash payment associated with this dividend will be approximately $69 million.

This quarter's dividend will be our 42nd consecutive quarter of making a dividend payment.

We have never made reductions on our dividend.

In fact this quarter's increase marks the 36th occasion we have increased the dividend payment.

And this program continues to be an important component of how we return value to our shareholders.

Moving onto the balance sheet, consolidated inventory at December 31, 2013(sic) was $261.6 million or 111 days.

I want to walk you through how the inventory days calculation is impacted by the purchase accounting associated with the SMSC acquisition because it can be confusing.

The accounting rules require us to first write up an acquired company's inventory to its fair value as of the acquisition date causing a huge increase in the inventory balance.

This effectively values inventory at selling price less cost to sell.

Secondly when the inventory is sold the inventory balance is significantly reduced with the written up inventory costs flowing through cost of goods sold.

The written up inventory coming off the balance sheet and flowing through cost of goods sold in the December quarter reduced the days of inventory calculation significantly.

Lastly in the March quarter the cost of goods sold will not reflect any significant amount of sell through of written up inventory and the inventory balances will be clean so the days of inventory calculation will return to a more normalized level.

We expect days of inventory at the end of March to be in the 123 to 129 day range so we are making progress in reducing the inventory balances with the action we implemented in our factories in the December quarter.

Inventory at our distributors are at their all-time lowest levels of 27 days.

We believe that distribution inventory will increase in the March quarter.

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

At December 31, the consolidated accounts receivable balance was $177.5 million.

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

We had strong free cash flow generation in the December quarter of $123.2 million prior to our dividend payment.

As of December 31, the consolidated cash and total investment position was approximately $1.77 billion and we had $610 million in borrowings under our revolving line of credit.

Excluding dividend payments, we expect our total cash and investment position to grow by approximately $110 million to $130 million in the March quarter.

Capital spending was approximately $9.9 million for the December quarter.

We expect about $24 million in capital spending in the March quarter as we prepare for the upturn.

We expect overall capital expenditures for fiscal 2013 to be about $60 million.

Depreciation expense in the December quarter was $23 million.

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

Ganesh?

Thank you, Eric and good afternoon, everyone.

Let's now take a closer close look at the performance of our product lines.

Our microcontroller revenue grew 1.8% sequentially in the December quarter to achieve an all-time record of $266 million in revenue.

Microcontroller revenue was also up 22.6% versus the year-ago quarter, and as you will hear in Steve's remarks later, we gained market share in all microcontroller segments during 2012.

Microcontrollers represented 63.9% of Microchip's overall revenue in the December quarter.

Our 16 bit microcontroller business was up 12.6% sequentially in the December quarter, achieving a new record for revenue.

We continue to expand the breadth of 16 bit solutions that we're offering and customers that we are serving as we continue to gain market share in this segment.

Our 32 bit microcontroller business was up 17.4% sequentially in the December quarter.

We are continuing to win new designs and expanding into new applications to enable further growth in revenue and market share.

Now moving to our analog products, our analog business grew 7.7% sequentially in the December quarter to achieve a new record and continues to perform exceptionally well.

Analog revenue represented 22.4% of Microchip's overall revenue in the December quarter, the highest proportion of our revenue ever.

During the quarter we launched two new families of analog products.

The first in a portfolio of high-efficiency discrete power MOSFETs specifically tuned for power applications.

The second is a family of analog power controllers that offer higher voltages and enable significant energy efficiency improvement in power conversion applications.

Both product families expand our served available market for existing customers and applications as well as enable us to penetrate new customers and applications and nicely complement our DS PIC digital signal controllers which already have a leadership position in the power conversion market segment.

Now, onto our memory business, this business is comprised of our Serial E memory products, as well as our SuperFlash memory products and was down 11.2% on a sequential basis.

While this business has had some drag on our growth, our memory business is becoming a smaller percentage of our overall business and was down to 7.8% of Microchip's overall revenue in the December quarter.

We continue to run our memory business in a disciplined fashion that maintains consistently high profitability, enables our licensing business, and serves our microcontroller customers to complete their solutions.

Before I wrap up, a quick update on a couple of elements of the SMSC integration.

All SMSC products started shipping from Microchip's operational systems on December 1, 2012 a month ahead of the planned we had last communicated to you.

We have begun implementing actions to exploit our packaging and testing infrastructure in Thailand to extract operational synergies.

This will however be a multi-quarter effort as we systematically prioritize and execute the plans we have developed.

We expect this will result in incremental EPS accretion and will be a component that drives us to our long-term business model.

So to summarize, the SMSC integration is going well and we're on or ahead of our integration plans.

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 fiscal third quarter of 2013, then I will provide guidance for the fiscal fourth quarter of 2013.

We are pleased with our execution in the December quarter, despite a very challenging macroeconomic environment.

Our net sales, gross margin, operating expenses, and earnings per share were all better than the midpoint of our guidance.

We made new all-time records in net sales for several of our product lines.

Microcontrollers with $266 million of net sales posted a new record.

Our 16 bit and 32 bit microcontrollers each posted a new record in revenue.

Analog products also posted a new record.

Our licensing business also performed very well in the quarter and achieved a 6% sequential growth.

Last but not least, the December quarter was our 89th consecutive quarter of profitability.

December quarter also had several other highlights.

First our non-GAAP earnings per share at $0.41 were at the high end of our guidance.

Number 2, we achieved $0.065 accretion from SMSC, which was well above our guidance of $0.04 to $0.05 for December quarter.

Number 3, during the quarter we instituted a rotating time off program for our fab employees and substantially reduced the wafer starts in our factories to reduce inventory.

Because of SMSC acquisition and the write up of SMSC inventory to market value, the inventory calculations are very complex and can be confusing.

TJ Rodgers of Cypress Semiconductor's calls it wacky purchase accounting.

I happen to agree.

Eric Bjornholt went through a three-step process on inventory after an acquisition.

In step one, the inventory is written up to the fair market value so the inventory balloons and the inventory days go up.

In the second step, the written up inventory is sold so the inventory drops and the cost of goods sold balloon up.

So the inventory days dropped significantly.

In the December quarter, you saw this impact of step two.

In step three, the inventory returns to normal as the written off inventory and the higher cost of goods sold are purged from the system.

Then inventory days go up again because of lower cost of goods sold.

So you will see that in the March quarter when we expect the inventory days to be about 123 to 129 days.

As I have said before, inventory calculations are complex after a major acquisition.

Please let me worry about the inventory.

We're making significant progress in reducing Microchip inventory.

Our longer-term goal for inventory continues to be 115 to 120 days.

We also instituted a 5% pay cut for all executives and then requested other employees of the Company to join the executives in a voluntary 5% pay reduction through June 30, 2013.

I'm happy to report that approximately 2,400 employees voluntarily stepped up to take a 5% pay cut.

We call it shared sacrifice.

This helped in reducing the operating expenses and avoided a broad-based layoff to cut operating expenses.

This also allowed us to remain committed to our investments and will help lead to a stronger recovery for Microchip.

I want to thank all the dedicated Microchip employees who volunteered for this pay cut.

The participation level exemplifies the strength and uniqueness of Microchip culture.

I would also like to comment on the calendar year 2012 results.

I had a chance to compare Microchip's microcontroller results with the Semiconductor Industry Association data for 2012 that was just released last week.

We are pleased that Microchip gained market share in each of 8 bit, 16 bit, 32 bit, and overall microcontrollers.

For calendar year 2012, our total microcontroller revenue was $997 million which was up 3.8% from calendar year '11 revenue of $961 million.

We don't break out the individual numbers by bit work, but overall, microcontroller market share increased from 7.37% in 2011 to 8.25% in 2012.

This market share in December quarter was even higher and ended up at 9.34%.

There's no secret about these numbers.

Our microcontroller revenue in December quarter was $266 million and the industry microcontroller revenue as reported by SIA was $2.849 billion.

So $266 million divided by $2.849 billion is 9.34%.

Which was our market share in December quarter.

We expect the market share to increase further as we are guiding better than the average of the industry.

Now I will provide guidance for the fiscal fourth quarter of 2013.

We are starting to see exceptionally strong bookings and expedite requests in our business driven by strong demand in our design win pipeline.

The backlog is starting to strengthen for this quarter and the bookings activity into the June quarter is exceptionally high.

We believe that December quarter marked the bottom for this cycle for Microchip, a number of our product lines are showing significant momentum and will grow in the March quarter.

We have also accounted for the effect of Lunar New Year in Asia this quarter.

As you have seen numerous times before we are likely to see the effect of an industry recovery a quarter ahead of the rest of the industry.

Taking all these factors into account, we expect Microchip's total net sales in the March quarter to be up between 1% to 4% sequentially.

We will maintain the rotating time off in our fabrication facilities to continue to reduce inventory, this strategy of rotating time off worked very well during 2009.

It reduces factory output, but at the same time keeps our staff employed for reduced work hours and gives us the flexibility to ramp rapidly when the need arises.

For the time being we have sufficient inventory at the die inventory level that can provide surge capacity but we will continue to evaluate the timing of any actions related to our wafer fab this.

We are ramping our back end facilities in assembly and test to meet the increased demand of our customers, our backend facilities have switched from lowering finished goods inventory to now rebuilding finished goods stock, to maintain short lead times and meet the increased demand of our customers.

On a non-GAAP basis, we expect our gross margin to be between 55.75% to 56.25% of sales.

We expect operating expenses to be between 29.25% to 30.25% of sales.

And we expect operating profit percentage to be between 25.5% to 27% of sales.

And we expect non-GAAP earnings per share to be between $0.45 and $0.49 per share which includes about $0.027 favorable impact from the reinstatement of the R&D tax credit.

This EPS includes about $0.07 to $0.08 accretion from the acquisition of SMSC, which is up from $0.065 in December quarter.

For the June 2013 quarter, we expect the accretion to increase to about $0.09 to $0.10 per share, which is above the full range of accretion that we had guided on August 2, 2012 at the close of the transaction.

During fiscal '14, we expect the accretion from SMSC to be between $0.38 to $0.42 per share.

These numbers remain subject to the health of the underlying economy in general.

So as you can see, we're progressing very well in the integration of SMSC.

We are now guiding accretion to be higher than what we had originally guided for fiscal 2014.

We have already made significant progress in transforming SMSC's business model.

SMSC's gross margin, operating expenses, and operating profits are already significantly better than what SMSC achieved during its full fiscal year prior to the acquisition.

SMSC's operating profit in the December quarter was 21%, well above the 12% operating profit that SMSC reported in fiscal year '12.

We expect that significant improvements in SMSC financial metrics will continue.

Our long-term model for the combined company remains a gross margin of about 60%, plus or minus 0.5%.

Operating expenses of about 27.5%, plus or minus 0.5%, and operating profit of about 32.5%, plus or minus 0.5%.

All of these numbers are non-GAAP.

This long-term model will continue to be a premium model in the semiconductor industry and will drive substantial shareholder value.

This, together with one of the highest dividends in the semiconductor industry, will continue to generate excellent shareholder value.

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

We believe that non-GAAP results provide more meaningful comparisons to prior quarters.

And we request that the analysts continue to report their non-GAAP estimates to first call.

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

(Operator Instructions)

Chris Caso, Susquehanna Financial Group.

Hi, thank you,.

I wonder if you could give a little more color on some of the business improvements that you've seen, where are you seeing that, is it broad-based, is it in any particular customers?

And in particular, I was interested in the comment about the expedites that you are seeing.

I don't think that's something we've seen -- we've heard from your competitors.

Why do you think your customers expediting -- I would assume given the inventory levels that the lead times are pretty low right now.

So, Chris, thanks for the question.

Basically, the inventories have run down very low.

At the customers as well as at the distributors.

And the customers were probably accounting for either a much deeper cycle in December or not as much recovery in this current quarter so we are seeing a fairly strong expedite activity which is driven by customers not having inventory and them not being able to find that inventory in distribution either.

The strength is pretty broad-based.

We are pretty much seeing it from all geographies including Europe.

And we're seeing it in direct as well as distribution.

And there doesn't seem to be any specific market segment, vertical market or anything where it is happening.

We have pretty strong bookings across the board.

Okay.

That's great.

And with respect to the fab loading, you had earlier talked about running that at lower levels through the June quarter.

Is that still the plan?

Has some of the improvement you've seen caused you to change that?

Perhaps you can remind us how we should expect as that fab loading increases we should start to see benefits on the gross margin line?

So that's a very good question, Chris.

We're asking the same question to ourselves.

At this point in time, we still have inventories higher than what we would like.

Total inventory, and the majority of the excess inventory is sitting in the die banks.

So at this current time, we are ramping our backend facilities to move that inventory from die bank through assembly and test into finished goods to keep the lead times short.

Meet the expedite requests and meet the increasing needs of the customers.

We do not feel yet that we need to take any action in the fab, because the die banks are quite healthy.

As those did banks start to correct, and overall inventory starts to adjust, we will be watching it on a monthly basis even more often.

And the rotating time off is very flexible.

It allows us on a moments notice to be able to increase the wafer starts by simply asking the production staff to work more hours than what they're working today.

And that's the beauty of it.

We don't have to hire people.

We haven't laid off the people.

They're all working, they simply are taking some furlough days off.

And they just simply come to work more hours which they would love it anyway.

So as we start to make those changes, we'll communicate to the investors and analysts today, we're not prepared to really make any decision on it.

Okay.

Great.

We'll wait to hear from that.

Thank you.

Jim Schneider, Goldman Sachs.

Good afternoon, thanks for taking my question.

I was wondering if we can maybe talk about the expedited orders or the increased backlog.

Maybe a different way I think you talked about bookings into the June quarter as well.

Can you give us some kind of metrics about the longer dated order backlog into the June quarter?

Either in terms of how many more weeks further extended backlog that you're seeing now that compared to normal or some other kind of metrics indicating coverage?

It's a more qualitative assessment we're giving you at this point in time.

Clearly as we look at how far into the quarter are we booked?

At this time in the quarter we can see we are significantly higher booked into this quarter and we can see backlog starting to fill into the next quarter as well.

I don't have a precise number to give you to say how far in that we are for next quarter.

Okay.

And then maybe if you could give us any kind of color on the end markets and which ones you expect to be up stronger or maybe less strongly into the March quarter?

That would be helpful.

As I earlier mentioned, when Chris asked the question, I don't think we are seeing any difference by end market, nor do we track them really as well as you would like to.

Our business is largely horizontal.

We're serving to a lot of customers and lots of customers through distribution.

So we're seeing pretty broad-based strength, but some large customers where we do business directly, whether they're in the consumer segment, or industrial segment, or automotive segment, or computing segment, we're seeing really pretty strong business bookings across the board.

That's helpful.

Thank you so much.

Welcome.

Kevin Cassidy, Stifel Nicholas.

Thanks for taking my question.

Just along those same lines as gross margin you're guiding for flat quarter-over-quarter, can you say what the dynamics are there if you had said that inventory write-down was a drag on gross margins in the third quarter, just wondering why it's not going up a little more in the fourth quarter?

So, Kevin, I think maybe it's being confused, the -- we didn't talk about an inventory write-down.

We talked about an inventory write-up associated with purchase accounting and that only impacts our GAAP gross margins which you saw were down pretty significantly at about 48%.

But that does not impact the non-GAAP results so that is not something that's impacting quarter-over-quarter activities.

Steve talked about the activities in the wafer fabs remaining with these rotating time off schedules at this point in time.

And really just ramping on the back end.

So that's really what's happening on the gross margin line.

There isn't anything that is going to improve the gross margins in the March quarter significantly.

Okay.

Thanks for clarifying that.

And also how long did the employees agree to take the 5% cut?

It's through end of June.

Okay.

There's no other metrics along with that, just through June?

Well, so it's basically voluntary in nature, so 2,400 employees voluntarily stepped up and saying we'll help the Company when the operating expenses need to be brought down rather than doing a layoff.

We're saving money that way.

Therefore, committed to the programs which will otherwise have to readjust or slip out.

Now, if the business environment continues to strengthen, as it is looking, we'll certainly look at it again as we talk to the employees.

We could reduce the 5%, we could terminate it early, also options are there.

The numbers just became public today, so that conversation hasn't happened with the employees.

Okay.

Thank you very much.

Welcome.

Sumit Dhanda, ISI Group.

Couple questions.

The analog business did exceptionally well in the quarter.

Just curious I know you've been doing well in analog for some time, but was there any specific factor that really helped drive that 8% growth, which was so much better than the rest of the industry?

Analog has been doing really well, Sumit, for many quarters as you say.

We have been able to take advantage of our analog business not only being attached to microcontrollers but also extending its reach into other areas of analog capability.

Certainly as we've extended into 16 and 32 bit microcontrollers the opportunity has improved.

And we've been able to take advantage of that.

Our design win funnel is performing very, very well.

And we're very bullish on the capabilities that we have in analog.

And how we've been able to grow that business.

Steve, maybe just a follow-up on that, if you have to take a stab at, not that we are going to hold you to this, but by how many points you think your analog business can outperform the broader analog business this year?

Do you think it's five points, more or less?

Just your thought process given the design wins funnel?

Sure.

You will hold me to it, Sumit, so I'm not going to answer it.

Okay.

Well, maybe I can ask a different question.

You will be the one.

On the bookings, any color you can provide, Steve, on when you started to see the pickup?

Was it just in January?

Was it November, December?

Has the bookings trajectory strengthened only lately or was it strengthening through the course of the fourth quarter?

Because the data is all over the map depending on which company you talk to this earnings season.

So I think it's been strengthening along.

The late part of last quarter was pretty good, but around the Christmas time frame, lots of people are off and all that so the data gets very muddy.

Whether you're getting a high amount of bookings and shorter number of days, because purchasing managers wouldn't be working certain days so you cannot decipher the data as well in that timeframe but then as we came to January, post the new year, bookings continued to strengthen.

And the last several weeks have been just very, very strong.

Okay.

Thank you very much for that.

Welcome.

(Operator Instructions)

John Pitzer, Credit Suisse.

This is Andrew Pegge calling in for John.

Thanks for taking the question.

I was just curious if you now have a better sense of normal seasonality including SMSC?

And historically you have been a good indicator of the cycle so I was curious what your current view is with respect to the channel inventories and lead times.

It seems like lead times are low.

Would this lead to a rather muted recovery in your opinion?

Well, so two or three questions in there.

First one was regarding the cyclicality.

I don't think we have any better handle on cyclicality in general.

I think if you look at the last several years in semiconductor industry, there's just no cyclicality.

Just like things are all over the place.

If you take the average of a given quarter for five or six years, it doesn't really tell you much about where the current quarter could perform.

So we could go back to our historic seasonality where June and September are good, strong quarters and March is a reasonable quarter.

December is usually very weak.

But I'm not sure if that's good right now.

March quarter's looking pretty good and December quarter -- sorry, June quarter should strengthen further.

The second part of your question was what?

I was curious, your current view of the cycle given that you have been a good indicator in the past.

It looks like lead times are pretty low these days.

I was curious if that could possibly lead to a rather muted recovery in the near-term?

Well, when the lead times are low, it doesn't lead to muted recovery, it leads to strong recovery, because when the lead times are low, the customers usually have no inventory and slight disturbance or uptick or demand drives what it is driving right now, huge expedited growth, strong bookings, because when people can't find certain parts, lead time shorts doesn't always mean 100% of products are just available today.

Usually it's on majority of products and whenever a customer needs some parts, if they don't find it for a week, the factory's down for a week that's very, very expensive.

So usually when the lead times are short, people don't hold any inventory.

And that's when there's any sign of recovery, huge orders come in like we are seeing today.

And then the recovery is actually fairly strong I would say.

Okay.

Thanks.

As a quick follow-up, just given the pay cuts through the June quarter, how should we think about the OpEx trajectory for the post -- through June and then after the June quarter?

So we haven't dollarized for you, I don't know if you have the number but the March quarter is in our guidance that we're giving you.

And then we can further give you guidance for past the June quarter as those pay cuts reverse.

There's also a chance that they reverse early or the pay cut is lessened from 5% to a smaller number as I mentioned earlier based on if we see that recovery strengthening in the June quarter will be very strong, then we're unlikely to stay through the pay cut through the end of June.

That just wouldn't be fair to the employees at that point in time.

So that's something we have to give you guidance as we go along.

Okay.

Thank you very much.

Welcome.

Steven Eliscu, UBS.

Similar question on the cycle, but want to ask it somewhat different way, just based on your experience, strength you're seeing this quarter and already indicating further strength in the June quarter.

Is there any chance that we're getting a restocking cycle that potentially pulls from the June quarter, which has historically been seasonally strong, or do you believe that we're perhaps at the front end of a multi-quarter restocking cycle?

What would history tell you?

The history tells me that not all customers, not all purchasing managers telephone each other and lineup together to really go do something.

And there's always a multi-cycle.

We always see too many moving parts across a large customer base.

There are customers pushing out orders and there are many customers pulling in orders and expediting, so this usually always happens in a multi-cycle way.

Multi-quarter way, not in one quarter.

Okay.

That's helpful.

And then more strategic question, just we've seen a number of recent announcements from your competitors on low to midrange 32 bit controllers that are using 90 matter nanometer or 65-nanometer technology and even the one competitor talked this past week about 300-millimeter wafer manufacturing.

Is there something that -- do you believe there's something that's changed where now advanced process technology for low-end 32 bit is now being brought to bear?

Potentially with the risk to you that some of that may squeeze your 16 bit price stack, what is your view on how to address that threat?

It's nothing new.

There have been 32 bits at specific price points that you've been on calls where have been brought up for five years ago, this market has many different factors upon which decisions are made.

Platform decisions, there are many competitive expectations beyond price that customers work with.

And as you can see in our results we have continued to outperform the market on our microcontrollers, on our 16 bit microcontrollers, on our 32 bit microcontrollers, and as time goes on we're not standing still.

We continue to evolve our product lines.

We know what the competitive issues are and where they're coming from and you'll continue to see responses from us to address any competitive threats we see.

Steve, how is this question different than the one for the last 15 years where Freescale will do XYZ and TI has a 300-millimeter fab and Samsung has excess capacity and they will lower the price and blah, blah, blah?

Just rattled off some names.

It's the same thing over and over.

Microcontroller market is very complex.

It takes thousand plus mask sets for Microchip to completely serve that market.

Somebody wants low-power, somebody wants high-power, somebody wants low current, somebody wants high current, somebody wants high-performance, somebody wants low price.

It's a very complex market and we know how to serve it very well.

Our 8 and 16 bit business did very, very well last year.

The 16 bit business was up very substantially year-over-year and our 8 bit business gained significant share from the market as we compare it to the SIA data.

So everybody has their strategies but our strategies are working very well.

We gain share by bit width and overall substantially.

And as we go to the conferences we'll show you some graphs on it.

The overall market share growth went from about 7% to a little over 9% going out of the year.

And if I could just ask one last quick question, last quarter you guided for SMSC sales of $87 million to $94 million.

I realize you're not reporting that going forward, but can you at least tell us what you did relative to that guidance?

We did near the high end of that.

Great.

Thank you.

JoAnne Feeney, Longbow Research.

Thank you.

I'd like to go back to the OpEx questions earlier.

Hopefully you can give us a little bit more detail on the breakdown of the savings that you saw last quarter, clearly some of those are salary cuts, but I'm wondering what kind of progress you're making in pulling efficiencies through from the SMSC acquisition and what we might expect going forward.

Is this going to be linear improvements and perhaps in explaining you might shed light on why the accretion levels have come up for you guys?

So I think if you see in my commentary we had $0.038 accretion in September quarter.

We did $0.065 per share in December quarter.

We're guiding to $0.07 to $0.08 for March.

And what was it, $0.09 to $0.10 for June.

So that increasing amount of accretion is really a result of systems getting combined and then people becoming redundant, reducing costs, renegotiating stuff based on combined microchip and SMSC activity combining offices, looking down leases, those tend to be smaller items.

But there's across-the-board -- this is what we did with SST.

We are very good at these consolidations.

And it's really coming as a result of that, so SST -- sorry, SMSC's operating expenses were well in excess of 40% when we started.

And they just made 21% operating profit.

And we're not breaking out the gross margin but you could get a feel for -- I told you that operating profit number.

You can get a feel for how much improvement has been made.

The prior-year when they were standalone the operating profits were 12%.

And on higher revenue.

Because it was part of the downturn.

How much more can you pull out in terms of efficiencies?

Are we near the end of that or in the middle?

I'm just trying to think about when those salary increases come back into play whether it's in the September or quarter or earlier.

The salary increases are minute.

They don't even make an impact of $0.01.

Okay.

And then do we still expect to see more savings from SMSC as we go forward on the OpEx line?

Yes, we do.

Because this quarter we're guiding to $0.07 to $0.08.

And then we're seeing $0.09 to $0.10 next quarter and then $0.38 to $0.42 for fiscal year '14, so you can see we're in the middle of it.

Okay.

Perfect.

So that's driven by the savings.

And if I could switch gears for a question on the revenue side, it seems like 16 bit and 32 bit did quite well.

8 bit less well.

Can you perhaps explain what's going on on the 8 bit side of the world?

Is this a different composition of end markets perhaps or is 16 to 32 being pulled by technology upgrades whereas 8 needs to wait until there's more of a broad general macro recovery?

8 bit is more economically sensitive.

And it's much larger business for us than 16 and 32, so smaller businesses can outsmart, number 1. Number 2 there are a lot many newer products on 16 and 32 in any given segment of 16 and 32.

There's much larger incremental business coming from new designs where the 8 bit is a much larger business, less number of newer products, less number of newer designs.

And so when there's a macroeconomic headwind, you have the larger mature business gets more impacted.

Perfect.

Thanks.

Brendan Furlong, Miller Tabak.

Good afternoon, thank you very much.

One very quick question.

Unfortunately going back to the OpEx in June, understand the 5% pay cuts and all the rest of it, but do you normally see stock comp accrual and the usual annual increases in OpEx bump into June quarter because it's the first fiscal quarter of the year or will you see it in the December quarter in terms of a calendar year?

So really, no change in stock comp.

Our stock comp program does not, you don't see spikes in it from that standpoint.

It's a quarterly program.

Right.

And from a normal payroll standpoint, we make changes as the business can afford them, so it's not consistently tied to a specific quarter.

Got you.

Okay.

Thank you.

Cody Acree, Williams Financial.

Thanks.

Steve, on a high level, the pickup that you've seen, do you believe that this is really economically based, you're gaining share, you've got excessively low inventories in the channel.

Can you maybe just talk about what you think is the driver if not from an end market standpoint just maybe on a high level?

It's really all of the above.

You had more of the answer to the question than the question itself.

It's all those and we cannot decipher, there is some recovery in the works.

There's very low inventory, so there is resurgence coming out of that, we're gaining share.

Lots of new products, new design wins that have been in the incubation and usually customers don't launch their new products in a very bad environment.

And I think lots of new products are getting launched.

And we're getting customer schedules for products going into a lot of new products.

And there are short term bookings coming from there for customers who launch their new products, so it's a combination of all that.

Excellent.

Thank you.

Raji Gill, Needham and Company.

Thanks for taking my question.

Sorry if this was asked before but I jumped on late.

With respect to the trends of the microcontroller market it appears that some of your competitors are starting to integrate low-power Wi-Fi into the microcontroller and starting to go after the internet of things.

Just wondering if you have thoughts on that particular market or that particular strategy.

Well, the competitor you're mentioning is behind because they are just starting to hear about it now and we've been doing it what, several years?

Three or four years.

Yes.

You can go back and look at as we did acquisitions along the way, we had NOG as the first acquisition that brought us into the internet of things space, between that, the microcontrollers, the software that's required, and this is a pretty fragmented market where it takes more than just a product, it takes a significant amount of other collateral to enable small medium-size customers to be able to get into this, so we've been at it for some time.

I know you're ahead.

I was just wondering if you -- how do you look at the market in terms of the size and the future of it going forward?

It's a good market.

It's growing.

It's not going to be like a cell phone market.

It's going to take time to build across a broad swath of customers and applications.

And in that sense I think it will be a nice good sustainable business over the long term.

This last question on the automotive side, can you describe some of the cross-selling opportunities that you're seeing now with SMSC and how do you think that positions you to gain share in the 32 bit market relative to say, Freescale or Renaissance and just wondering what your thoughts are on the ARM-based controller versus the MIPS-based control in that market?

Thank you.

Again, we have never thought in terms of ARM versus MIPS and that's really not what the solution the customer buys is so customers are looking for infotainment solutions which is what came to us through the SMSC acquisitions.

Customers are looking for analog and other memory microcontroller kind of solutions to go into the applications they have.

The opportunity with SMSC has given us deeper relationships in certain accounts where they had a much larger position than we did.

There's certainly deeper relationships that the SMSC automotive business had with the automotive OEMs giving us more insight into where platforms are being -- what direction people are taking and what some of the future technology requirements are.

I wouldn't say there's any immediate change that has happened in revenue.

Things take a long time in automotive but we're getting substantial insight on where the future of automotive platforms from an electronic standpoint are going and where there are opportunities to potentially work with the combined portfolio of products at customers where either one of us are not having as high of a content.

There is cross-selling synergy coming out on a more shorter-term basis, but it's not in the automotive market because it takes longer.

We're seeing it in other industrial and consumer and other markets like set-top boxes, and various USB hubs, and computing segment, and docks, and speaker docks, and all that kind of stuff, digital audio and other things.

So the premium markets where we're seeing attach opportunities with either microcontrollers or analog products.

We're also seeing those opportunities in automotive but automotive will be longer time to market because they have to be designed in.

I see.

Excellent.

Very good.

Thank you.

Welcome.

That concludes today's question and answer session.

At this time I will turn the conference back over to the presenters for any additional or closing remarks.

We want to thank everyone for attending today.

We'll be at the Morgan Stanley conference on February 27 in San Francisco and we'll see some of you there.

Thank you very much.

Ladies and gentlemen, this concludes today's conference.

We appreciate your participation.