微晶片科技 (MCHP) 2014 Q1 法說會逐字稿

Good day everyone, and welcome to this Microchip Technology first quarter fiscal year 2014 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.

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 will 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, and Ganesh Moorthy, Microchip's COO.

I will comment on our first quarter fiscal year 2014 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 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 June quarter were a record $462.8 million, and were up 7.6% sequentially from net sales of $430.1 million in the immediately preceding quarter.

Revenue by product line was $300.3 million for microcontrollers, $103.2 million for analog, $34 million for memory, and $22.5 million for licensing, and $2.8 million of other.

Revenue by geography was $86.9 million in the Americas, $101.2 million in Europe, and $274.6 million in Asia.

I remind you that we recognize revenue based on where we ship our products to, which tends to skew some of the revenue towards Asia, where a lot of contract manufacturing takes place.

On a non-GAAP basis, gross margins were 58% in the June quarter, and above the high-end of our upwardly revised guidance provided on June 3 of 57.25%.

Non-GAAP operating expenses were 27.5% of sales.

Non-GAAP operating income was 30.5% of sales and net income was a record at $120.4 million.

This resulted in earnings of $0.57 per diluted share, which was $0.03 above the midpoint of our upwardly revised guidance and $0.05 above the midpoint of our original guidance.

On a full GAAP basis, gross margins, including share-based compensation and acquisition-related expenses, were 57.6% in the June quarter.

GAAP gross margins included the impact of $2 million of share-based compensation expense.

Total operating expenses were $168.2 million, or 36.3% of sales, and include acquisitions, intangible amortization, and special charges totaling $29.4 million, and also includes share-based compensation of $10.7 million.

The GAAP net income was $78.6 million, or $0.37 per diluted share.

In the June quarter, the non-GAAP tax rate was 11.1% and the GAAP tax rate was 13%.

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

Excluding any one-time events, we expect our longer-term, forward-looking, non-GAAP effective tax rate to be about 10.5% to 11.5%.

To summarize the after-tax impact that the non-GAAP adjustments had on Microchip's earnings per share in the June quarter, acquisition-related items were about $0.138, share-based compensation was about $0.053, and non-cash interest expense was about $0.006.

The dividend declared today of $0.354 per share will be paid on September 4, 2013, to shareholders of record on August 21, 2013.

The cash payment associated with this dividend will approximately be $70 million.

This quarter's dividend will be our 44th consecutive quarter of making a dividend payment.

We have never made a reduction in our dividend.

And in fact, this quarter's increase marks the 38th occasion we have increased the dividend payment and our cumulative dividends paid is over $2 billion.

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

Moving on to the balance sheet, consolidated inventory at June 30, 2013 was $256.1 million, or 119 days.

The mix of our inventory between internally produced and externally sourced product is in better alignment than it was at the end of March, and our inventory position is within our target model.

We expect days of inventory at the end of September quarter to be relatively flat to the June quarter levels.

Inventory at our distributors increased by two days during the June quarter to 32 days, and remain at very low levels compared to where they had been historically.

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

At June 30, the consolidated accounts receivable balance increased to $232.3 million, driven by the increases in quarterly revenue and the inventory build by our distributors.

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

We had strong free cash flow generation in the June quarter of a $138.9 million prior to our dividend payment.

As of June 30, the consolidated cash and total investment position was approximately $1.9 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 September quarter.

During the June quarter, we executed a new, $2 billion revolving credit facility that has a five-year term.

The new facility replaced the $750 million facility that was previously in place.

The new facility provides us with additional flexibility to pursue our business objectives with minimal, immediate income statement impact based on our current level of borrowing activity.

Capital spending was approximately $27.8 million for the June quarter and included rollover capital from the March quarter and a $12.5 million R&D building purchase in India.

We expect about $27 million in capital spending in the September quarter.

We expect overall capital expenditures for fiscal year 2014 to be about $90 million, as we are adding capitals to support the growth of our business.

Depreciation expense in the June quarter was $21.4 million.

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

Ganesh?

Thank you, Eric, and good afternoon, everyone.

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

Our microcontroller business grew a strong 8.9% sequentially in the June quarter, to achieve an all-time record of $300.3 million in revenue.

Microcontroller revenue was also up 24.8% versus the year-ago quarter.

All three microcontroller segments grew significantly with 16 bit and 32 bit achieving new records and 8 bit within a hair's breadth of achieving a new record.

We fully expect that 8 bit microcontrollers will set a new record in the September quarter.

Microcontrollers represented 64.9% of Microchip's overall revenue in the June quarter, and in April, we shipped our 12 billionth cumulative microcontroller.

Additionally, we shipped a record number of development systems in the June quarter, which bodes well for future growth.

Our 16 bit microcontroller business was up 10.1% sequentially in the June quarter, achieving a new record for revenue.

16 bit microcontroller revenue was also up 71.7% versus the year-ago quarter.

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

Our 32 bit microcontroller business was up 26.3% sequentially in the June quarter, coming back strong after a pause in the March quarter to set a new record for revenue.

32 bit microcontroller revenue was also up 362% over the year-ago quarter.

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

Despite the questions that some analyst have had about our choice of core, our consistent growth provides market confirmation of our belief that what customers care most 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.

Moving to our analog business, our analog business grew 6.2% sequentially in the June quarter to also achieve a new record, and continues to perform exceptionally well.

Analog revenue was also up 119% versus the year-ago quarter.

Analog revenue represented 22.3% of Microchip's overall revenue in the June quarter, and at a $413 million annual sales run rate, it has quietly become one of the larger analog franchises in the industry.

We are continuing to develop and introduce a wide range of innovative and proprietary new products to fuel the future growth of our analog business.

Our memory business, which is comprised of our Serial E-Squared memory products as well as our SuperFlash memory products, was up 3.7% sequentially.

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.

Our memory business was down to 7.3% of Microchip's overall revenue in the June quarter.

With that, 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 reflect on the results of the fiscal first quarter of 2014.

Then, I will provide a guidance for the fiscal second quarter of 2014.

We were very pleased with our execution in the June quarter.

In early June, we raised our guidance from what we had provided in our earnings conference call in May.

Our actual net sales exceeded even the higher end of our revised guidance.

The gross margin percentage was 163 basis points better than March quarter and exceeded the high end of our revised guidance by 78 basis points, as we increased factory output to meet the increased sales.

Our operating profit percentage once again exceeded 30%, and we're making good progress towards our long-term goal of 32.5% operating profit.

Non-GAAP earnings per share also exceeded the high end of our revised guidance and beat our original guidance by $0.05 per share.

We made several new all-time records in the quarter.

Our total net sales, microcontroller net sales, and analog net sales all achieved new records.

Individually, 16 bit microcontrollers and 32 bit microcontrollers also achieved new all-time records.

Our 8 bit microcontroller revenue came within 3% of its all-time high, further validating what we had been saying, which is that our 8 bit microcontroller business is very healthy, growing and very profitable.

Our 8 bit MCU business has continued to gain share from competitors, who have either moved away from 8 bit or otherwise are uncompetitive and cannot make money on the 8 bit MCU.

We're also continuing to gain market share in 16 bit and 32 bit microcontrollers and analog.

I want to thank all the employees of Microchip for their contribution in making this an excellent quarter in every respect.

Last but not the least, the March quarter was our 91st consecutive profitable quarter.

Regarding SMSC, I would like to comment that for the June quarter, the SMSC divisions delivered an impressive $0.10 accretion, which was in the high end of our $0.09 to $0.10 range that we had provided.

The accretion was up from $0.085 in the March quarter.

SMSC's operating profit in the June quarter was about 27% of sales, up from 12% in the last full year prior to the acquisition.

SMSC business is a now a very well integrated and intertwined with Microchip and the breaking out of the numbers is increasingly difficult and not worth the effort.

Therefore, this is the last time we will comment on it by saying that we have more than delivered on the promise of SMSC acquisition, and there is more to come from the longer-term synergies in manufacturing on the cost side and the revenue from the sales side.

Near the beginning of the month of June, we completely reversed the rotating time off in our factories and recalled all employees to full-time work.

During last month, we also reversed the pay cut of our 2,500 employees who had volunteered for a 5% pay cut last November.

These employees also received an extra bonus last quarter as a shared reward for their shared sacrifice.

This continues to exemplify the strength and uniqueness of the Microchip culture.

Now, I will provide guidance for the fiscal second quarter of 2014.

We have continued to see very strong bookings and expedited growth in our business, driven by strong demand in our design win pipeline.

The book-to-bill ratio was strongly positive in the June quarter.

The starting backlog for September quarter was significantly higher than the starting backlog for the June quarter.

However, we continue to have lead time challenges, mainly driven by longer lead times from our foundries.

We are getting good visibility from our customers, but many new bookings will still be scheduled beyond the end of this quarter.

Taking all these factors into account, we expect Microchip's total net sales in the September quarter to be up between 2% and 6% sequentially.

Several investors and analysts have asked what explains the significant growth that Microchip business has experienced in the last two quarters and going into the current quarter.

The answer lies in which sectors Microchip does business.

In the last calendar year, smartphones and tablets were very strong, while the other sectors were struggling in the weak economy.

This year, the smartphone sector is weak, as evidenced by the [pulse] of several semiconductor companies with strong exposure to that market.

This year, the strong sectors are housing, industrial and automotive, the three sectors that Microchip has very strong exposure to.

While we do not break out our business by these sectors, just looking at some sample customers, we see significant strength in customers that sell products for housing, industrial and automotive.

We believe that in general, investors and analysts may have overlooked Microchip's outsized exposure to these markets.

Our internal inventory is now fully corrected, and we are ramping our fabs as well as backend facilities to meet the increased demand.

Last quarter, our finished goods inventory went down significantly as we shipped the product into strong demand.

Our facilities have now switched from lowering finished goods inventory to rebuilding finished goods stock to reduce lead times and meet the increased demand of our customers.

On a non-GAAP basis, we expect our gross margin to be between 58.1% to 58.7% of sales.

We expect operating expenses to be between 27% and 27.5% of sales.

We expect operating profit to be between 30.6% to 31.7% of sales.

And we expect non-GAAP earnings per share to be between $0.58 and $0.62 per share.

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.

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 inventory write-up on acquisitions, Microchip will continue to provide guidance and track its results on non-GAAP basis.

We believe that non-GAAP results provide more meaningful comparison to prior quarters, and we expect that the analysts continue to report their non-GAAP estimates to first call.

With this, Angela, will you please pull for questions?

(Operator Instructions)

Chris Caso, Susquehanna Financial Group.

With -- first, start with a high-level question.

And understand your comments with regard to some of the strength and some of the broader segments, such as housing, industrial and automotive.

As you talk to your customers and your distributors, perhaps you could tell us what gives you confidence that the orders that you are seeing do, in fact, reflect real demand?

And perhaps you could talk a little bit about the inventory levels to the extent you have visibility into your customers?

Well, our expedite activity is very high.

We are just expediting products on multiple fronts and multiple markets for customers in multiple geographies and multiple sectors.

There's very little inventory at the end customer.

The distributor inventory is lower compared to any historic norms.

Was up two days last quarter, but still on the very low end of really historical norms.

So, that's really what gives us confidence that the orders are real.

We are not getting any net push out activity or anything like that.

There are always moving parts and somebody scheduled a few parts out, somebody else pulls it in.

The net-net demand continues to be very strong.

The backlog is very healthy.

And we are actually struggling to meet all the demand we have in the current quarter.

Okay.

As a follow-up to that, obviously you mentioned you are increasing production now, in response to the order rates that you have and the inventory levels.

Could you remind us the impact that the increased production would have on your gross margins?

What improvement can we expect going over the next couple of quarters?

And as you talk about the 60% long-term gross margin target, is that tied to a particular revenue number?

And if so, would you care to share that with us?

It isn't -- it is tied to a particular revenue number, but we cannot share that.

They did internal modeling on it.

But if you look at it, at the bottom of the cycle, do you recall what the gross margin was?

I think was 55-point-somethig?

Yes, I think that's right.

Something in that area.

So the gross margin has continued to come up every quarter.

Going into this quarter, at the last conference call, our guidance for the gross margin for the coming quarter was 57%, and we delivered 58.04% or something.

Actually, I just got the number.

The gross margin of the bottom of the cycle was 56%.

So I can see that we have come up substantially, and it's come with a high utilization, recalling all the employees back for our fabs for full production, and we are currently increasing wafer starts further.

So the impact of the gross margin is very positive.

We're guiding another increase in gross margin this quarter, from 58% last quarter to a midpoint of about 58.4%.

And depending on how the quarter goes, if there is further strength in it, there can be upside to that.

And gross margin will continue to increase.

Long-term target is 60 and there's another 200 basis points to go.

Okay, great.

Jim Schneider, Goldman Sachs.

I was wondering if you could address some of the longer dated backlog you referred to in your opening commentary?

Say, some of it was out past the end of the September quarter.

Can you maybe give us some context?

How much of the bookings are scheduled past the end of the quarter this quarter versus last quarter or the quarter before?

The bookings have been strong now for a couple of quarters.

I think this is the repeat comment we made last quarter, also.

So from that standpoint, there is not really a substantial change in that.

I think what's more important is how much of the backlog customers are requesting in the current quarter, but we are giving them few days out.

We are getting significant visibility.

So there is a fair amount of backlog into next quarter already.

But that is a [request] in the next quarter.

We are delivering in the next quarter.

That's business as normal.

The problem is where certain portion of the backlog, customers will take it in September and we are just scheduled out, one week to two weeks out, and we are struggling hard to pull it in and will be successful in some and not in some other.

That's helpful color.

As then a follow-on, could you maybe talk about how much your internal factory utilization has increased over the past several quarters from, say, trough to the current levels?

In other words, if you can express it in points, that would be helpful.

We don't like to give that numerically.

But with the rotating time off, we had taken the production down significantly.

And a lot of that has come back.

And we have increased production even beyond that to really meet the current demand, and we will continue to increase it.

But neither I don't have the numerical numbers in front of me, nor would like to share that.

It's a mix between our wafer fab and our assembly and test.

And assembly and test is cranking out a lot of product today.

It's fully utilized.

So there are two other factors.

One is the assembly and test, which we have been ramping it all last quarter and before, because a lot of inventory we had built during slow time was being held at the dye level.

So the demand came back, we can immediately crank up the back end to start to produce more output.

The fab second time takes longer to improve the output.

So that's one factor.

The second factor is, as we mentioned in the last conference call, 40% of dye production now comes from outside foundries, where we do not produce them internally.

And there we are dealing with foundry lead times and queue times and others, and we don't really have -- under our full control, where we can expedite our own stuff.

That's helpful.

John Pitzer, Credit Suisse.

Just a follow-up on the gross margin line.

Steve, given that you guys started to re-ramp, it sounds, more aggressively at the beginning of June, I would have thought that you would have gotten a better utilization hit, maybe in the September quarter, not that the absolute number is a bad number at all.

I'm just curious, when you look at the revenue mix in the September quarter, is more of it coming from the 40% that's now outsourced?

And that's why you are not getting that leverage?

Or can you help me understand the incremental gross margins in September versus June were very strong?

We started improving output in the -- probably the middle of the quarter, and the quarter peaked a little bit later as the line got filled up.

So we got more than probably just demand.

Secondly, we got a very large increase accretion out of the backend, which we were expediting the entire quarter, because the dye was healthy.

So this quarter we don't really get as much incremental out of the back end, because the back end we had to fill last time.

And you add a little bit more of the fab.

When you average it, that's the result we get.

Perfect, helpful.

And then Steve, on the top line, when you look at the strength both in June and September, if you're -- how much of that do you attribute to just the inventory level being a lot leaner than a lot of us recognize, versus perhaps Microchip gaining share, versus even a third bucket of maybe some revenue synergies that you are starting to get with the SMSC acquisition?

There are several questions in there.

Bunch of moving parts.

But I am [linking] customers -- end customers using whole lot of inventory these days.

Inventory really gets all pushed down to OEMs and distributors and eventually the semiconductor manufacturer.

But the end customer inventory was just totally dried up in the slow time, because all the lead times were very, very short.

So as the demand strengthened, the first step we see is a significant increase in the expedite activity, and we rush to provide the product to them.

And then it snowballs and it catches on.

And the customers start to give you longer-term orders, because they see lead times going long.

So we don't really see as much change in the end customer inventory that they are holding.

It's mostly the pipeline that we have -- we are getting much better visibility today than we got it in January.

Steve, relative to perhaps Microchip getting share and/or revenue synergies with the recent acquisition?

Share gains are obvious.

You can just do the math.

We grew, I think, 3.4% in the March quarter.

Add the current quarter growth to that.

You are dealing with over 10% growth in the just first two quarters.

And add the one we are guiding to for the September or so, for the December quarter, the September quarter, you will see growth somewhere in the 14% plus range, cumulatively more than that.

So that's a significant growth.

Obviously, the markets and economy are not going that strong.

So some of -- a lot of that is growth.

A lot of that is new products.

A lot of them are exposure to stronger sediments and combination of all those.

And it is some part of that which is the third comment you made, getting some revenue accretion from SMSC.

Yes, we got in some of that.

But that's longer-term.

Much of that is still at the design win stage, and we will continue to comment in the year, this year, next year, and the year after.

But some of it is there.

Very helpful, and congratulations on the strong results.

Harsh Kumar, Stephens.

Congratulations.

Very nice number and guidance.

Steve, I had a couple of questions.

Microchip always does very well when coming off of periods and bad markets.

You guys always end up taking a bunch of share.

This happened in '09, it's happening again.

I'm curious, what drives that?

It's got to be more than just having a strong balance sheet relative to your competitors.

I'm wondering if you could give us some color on that?

During the down cycles, we continue to stay invested in our product road maps.

We continue to stay invested in our customers and the support that they need to design in with our products.

And we continue to work on our internal operational efficiencies.

And that's what the shared sacrifice approach takes.

Is it keeps our people intact, keeps our systems intact.

We get the expense reductions we need.

Positions us for strength as we come out of these.

That's exactly what happened in the '09, '10 timeframe, and exactly what we're doing here between 2012 and 2013.

And in all of that, we are able to do -- outperform people with the investments we've made as well as with our operational improvements we've made.

Great, guys.

Thanks for that color.

And then second question as a follow-up.

Steve, I think your touched upon this a little bit earlier.

Gross margin of, call it 58% and change, a long-term goal of 60%.

What's the biggest factor in getting there?

The biggest factor in getting there is really getting the production higher.

We are not at the peak production from our factories yet.

When we have had higher gross margins, the peak production from our factories was higher.

More of the product is now running outside foundries for various different reasons.

We're ramping production inside, but we're not at the peak production yet.

Sp I think that's the biggest factor.

Then there are a lot of the secondary effects.

Whole bunch of SMSC, probe assembly tasks, there's lean volume to Microchip factories which will continue to have accretive effect in the coming year.

There is cost reduction, some conversion to new technologies.

But those are a bunch of moving parts that happen in our business all the time.

I think the two different changes that are not always known normally is number one, getting back to a higher production and number two, completing some of the longer-term accretion items in the SMSC acquisition.

SMSC integration is complete, so only has one company to fully intertwine.

But some of the longer-term items are transferring some of their assembly tests pro-production to inside a longer-term items which are continued.

Congratulations again.

Christopher Danely, JPMorgan.

Can you just give us a little more color on the (inaudible) situation.

What percentage of products that have seen any increased lead times, but that are normal.

Where have they gone to now and when or what it depends on?

Do think you get those lead times back to normal level?

There's no such thing as a fixed lead time.

It's a pretty broad range.

There are products in which the lead times are as small as three or four weeks or available off-the-shelf in some cases.

But others, where lead times are going to be north of 12 to 16 weeks, in that range.

It's a function of what source they come from.

What the inventory position on them is, what the demand picture looks like.

We have so many line items that are spread across that there's not a single lead time thing.

We are continuously working on the improvement of the supply to meet our customers' requirements and bring the lead times in.

And that's an ongoing challenge, obviously, for some of it that's inside Microchip, it's an easier approach.

We have more control on being able to affect change.

For some of the things that are outside, we work with the foundries and do the normal things that our people who use outside fabs do to try and get our own fair share.

I can give you two extremes.

The shortest lead time is a product we can build in our fabs and we can full assemble and test it in our factory, then ship it.

And end on a product where there are thousands of customers, hundreds of thousands of customers, a very broad, high-volume product with just lots and lots of customers buying it.

Because on that product, we can build it inside, plus we can build inventory because it has a broad usage.

That will have the shortest lead time, most likely on the shelf.

You go to the other extreme, and you take a product that runs at a foundry, gets full assembled and tested outside.

Hasn't been brought in yet, either as an SMSC product or could be one of our product that runs outside.

And if you add on the top of that, especially a product that has a very narrow customer base, one or two customers buy it.

And it doesn't really have a broad-based usage in consumer industrial communication, PC -- like a lot of Microchip products.

Then we cannot build a lot of inventory, because inventory can go obsolete and some of that product is largely based or built on a specific customer demand, either on an order or understanding with the customer.

So, that will have the longest lead time.

Those two are the extremes.

And you have -- and that extreme could be 18 weeks.

The lowest to that is build inside is off-the-shelf.

And then there are products all over the place that are maybe fabbed inside, tested outside, or fabbed outside, tested inside.

Small customer base, large customer base, and all over the place.

We sell over 100,000 SKUs.

Okay.

And another -- I guess my follow-up question is just on cash and cash management.

As you guys have talked about, and now you're demonstrating, you have got some of the best margins and some of the highest dividend yields in the space.

There is a good problem you have, your cash and growth continues to outpace dividend growth.

And you've also have a little bit of share count creep as of the last several quarters.

I'm just wondering, as you think about having some sort of regular token buyback?

Or do you think about maybe increasing the dividend a little more?

And then if you could also address why you increased the revolver to $2 billion up from $750 million?

Okay.

From a cash basis, obviously, we've been very committed to the dividend program and that's where our priority is over any share buyback.

It's pretty clear, in our public documents, and how we talk to investors, that we have a lot more cash offshore then we have onshore.

And so we want to be selective in how we use that cash and returning it to shareholders to the dividend program.

And so stock buyback is not something that we are considering any time in the near future.

We would consider it if the market did something crazy with the stock.

That will be something that we would have to revisit with the board.

So that's primarily where we are focused on.

The facility that was put in place in late June with the new revolver was essentially an expansion of what we had before.

We had a $750 million line of credit before.

We've expanded that up to $2 billion.

We were borrowing roughly $600 million on that revolver at the end of the quarter, $610 million.

That is essentially dry powder for us for any expansion requirements that we see in the US through acquisition or any other strategic need.

He also had a question on share creep.

Share creep.

The share creep is driven by just ongoing equity programs that we have.

But our -- the largest factor there, is the convertible debt that we have outstanding, and the dilution that comes into that with additional shares outstanding as the stock price increases.

And so, if a stock price is out, obviously gone up over the last quarter, and what we factored into our guidance here is about a $40 average stock price, not knowing where else to peg that for the September quarter.

Got it.

(Operator Instructions)

Sumit Dhanda, ISI.

Couple of questions, guys, on -- mainly on geographic trends.

First one on that, Steve, have you seen anything that suggests that the China business, especially from white goods or appliance perspective is seeing any slowdown or perturbation, given all the concerns around the economy there?

And then as a look into the September quarter, are there particular geographies you expect to outperform versus the others?

Or is that mainly a seasonal pattern as relates to the individual geographies?

Our China business is very strong.

And at the first blush, would not jive with the stuff you keep reading.

We read the reports from both sides.

And things are good and things are slowing down in China.

But our results don't speak for that.

So either it could be a significant market share gain, it could also be the segments we are in, sectors we are serving.

It could also be that the China market is on the lower end of a big scale.

There isn't as mature (inaudible) at 32 bit over there.

There's a lot of 8 bit and 16 bit market.

And our product lines are very, very healthy.

We are getting a lot of share, 8 bit and 16 bit.

We have got nearly 1,000 product in those segments.

And as other competitors may have miscalculated that transition, and have maybe consolidated all the resources in 32 bit, very much supported by analyst viewpoint, I must say.

Probably didn't serve them well.

Got you.

And then in terms of the outlook in the September quarter, is there something you expect from a geographic perspective that's different or outside the norm of seasonality?

No.

This is a -- September quarter is usually a weak quarter in Europe.

And a normal quarter in the US and Asia, and we won't expect anything different.

All the sentiment from Europe is that Europe is on the mend.

When Europe was in recession, the business in the (inaudible) countries is very, very small, especially for our kind of products.

Germany is very, very strong, and the sentiment is very good in Germany in al the reports that we are getting.

And the activity we are seeing in Europe -- Europe is on the mend.

In fact, Europe would have a seasonally stronger summer than they historically have relative to the June quarter.

And then just one more question.

Steve, you mentioned that bringing some of back end operations for SMSC in house will help the gross margins.

Is that fully comprehended in your 60% target?

Or do you think that could be a source of additional upside to the long-term target?

That I choose not to be granular about.

I -- there are lots of moving parts in trying to get there, and I want to leave some room there.

So I don't really know.

And I -- we have an internal model, but I don't want to share the total parameters of that model.

Okay.

Terence Whalen, Citi.

Steve, I think you referred to there being some longer-term areas of integration of SMSC that have not yet been realized.

With accretion being $0.10 a quarter, and the fiscal year target being, I think, $0.40 to $0.45, I wanted to understand if this longer-term accretion opportunities were factored into that $0.40 to $0.45 accretion for this fiscal year?

Or if you are talking about some opportunities with levels beyond that?

Some of that is factored into going from $0.10 where we are at, to trying to get to the $0.40 to $0.45 for the year.

But especially the sales part of the synergies are beyond that.

We are getting a lot of newer designs into automotive and audio and the computing segment, with microchip products next to SMSC products, and set-top boxes, and USB, and internet, and LAN, and other places.

A lot of those are 1-year, 1.5-year design cycles.

So that's not all going to be in here this year.

Some here, some not.

You see stronger growth, and that stronger growth and market share gains are driven by our -- a lot of our core growth, but also getting some help from having a broader platform with products -- next to each other.

That will continue for several years.

The manufacturing piece that brings accretion, we will not be completed with all the manufacturing transfers inside Microchip at the end of this year, either.

So with that, we will go into fiscal year 2015.

Very helpful.

My follow-up question is regarding projected utilization.

Specifically, if, under a scenario that revenue, let's say, were flat, in the seasonally softer December quarter.

Would that warrant you taking utilization up further in the December quarter from your planned September levels?

If December quarter is seasonally flat, the September quarter, then -- we'd probably would ramp the fab a little bit on some specific leading edge technologies where the demand is very strong.

And those technologies are more complex so they require more steps.

But there will not be a meaningful change if the underlying business was flat.

Right.

We are projecting inventory to be relatively flat in the current quarter.

It's within our model.

So I agree with that.

Okay.

Maybe I can ask the question a different way.

What's the ramification of now having a higher outsourced model?

Are you going to experience lower utilization declines in seasonally weaker periods?

Or is this not going to be necessarily used on a small quarter-to-quarter basis, just an larger cyclical corrections?

Having 40% of our business at foundries, what it gives us, I believe is, if 100% of the business came from inside, when the downturn comes, we have to absorb it all inside.

Cut production and it has a deeper impact.

When 40% of business come from foundries, it's easier to cut production in foundries without having a negative impact on it, because the foundries are absorbing negative utilization, essentially.

So actually, the model gets better, slightly.

It has some other negative ramifications.

You have less control and longer lead times and all that.

But in the slow time, it helps you to predict the inventory much more rapidly.

Best of luck,

Kevin Cassidy, Stifel.

This is Dean Gromlose calling in for Kevin.

In the 32 bit controller market, there appears to be a wider to bright of architectures and approaches like multi-core processors and more complex schemes.

Can you provide your view on the extent to which the 32 bit market may be different?

Or do you think these type of complex schemes really are not relevant in that space?

32 bit market is a large market.

There are lots of opportunities for Microchip as the push into a broader range of 32 bit products.

I don't want to comment on any specific architectural or other improvements we are heading towards.

But clearly, we are aware and paying attention to the customers and markets that we either serve or plan to serve, and have a road map consistent with being able to push the different parameters, performance, features, cost and otherwise in the 32 bit market.

As a follow-up on a different tactic, can you please provide us with an update on your onshore/offshore cash position?

Sure.

Our onshore cash is somewhere between $50 million and $100 million.

We obviously have our credit facility that we can tap into, and the less of the credit facility that we are using in the US, the lower our costs are.

And so we manage that as low as we can.

But the vast majority of our cash is offshore.

That's driven by the acquisitions that we've done that have been US-sourced, taking up US cash, and 80% of our business being offshore.

So we've got a lot of our profits that are earned offshore.

That's very helpful.

Ray Rund, Shaker Investments.

I was wondering, as you have mentioned, you've already got 40% of your business in foundries.

And as you evolve towards more complex products, such as the 32 bit, as that becomes a greater percentage of your run rate, have you given any thought to your process technology road map?

Are you considering increasing your capabilities so you might be able to maintain your foundry reliance at 40%?

Or do you see this going up over time?

The reliance on the foundries has largely been driven by acquisition.

The internal shift has been a smaller and slower portion of it.

Because, while in some advanced technologies, in 32 bit and others, we have gone out, but we've also advanced the state of the technology inside, where some of the products that were built outside several years ago are now built inside.

So we have more ability to keep picking from it and keep that mix more reasonably stable.

What has driven this number is really adding $400 million-type of business at SMSC, which is all driven outside, and prior to that, SST acquisition where 100% of the business was outside.

Plus, some of the small transactions we have done, we are moving that [focus] in the networking area and other number of small transactions we have done in the last few years.

That has been the primary reason why they are outside.

When you don't have your own fab, you have a tendency to just go down (inaudible) and find the smallest technology you can find.

And sometimes, it's not the best technology, but that's what progress companies seem to do.

Congratulations on a good quarter.

And it appears there are no further questions at this time.

Mr. Sanghi, I would like to turn the conference back to you for any additional or closing remarks.

Okay.

We want to thank everyone for attending this conference call.

Microchip Management, myself, and Eric Bjornholt will be at the Citibank conference in early September.

Also be at the Jefferies conference in August.

Jefferies conference in August.

So we will see some of you at those conferences.

Thank you.

Ladies and gentlemen, this concludes today's conference.

We thank you for your participation.