微晶片科技 (MCHP) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology third quarter fiscal year 2014 earnings results conference.

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

At this time, I would like to turn the conference over to Microchip's President and CFO, Mr. Eric Bjornholt.

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 Company.

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

We refer you to the 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 are Steve Sanghi, Microchip's President, and CEO, and Ganesh Moorthy, Microchip's COO.

I will comment on our third 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 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 December quarter were $482.4 million, and were down 2.1% sequentially, from net sales of $492.7 million in the immediately preceding quarter.

Revenue by product line was $313.3 million for Microcontrollers, $108.9 million for analog, $32.5 million for memory, $24.1 million for licensing, and $3.6 million of other.

Revenue by geography was $90.7 million in the Americas, $95.4 million in Europe, and $296.3 million in Asia.

I remind you 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 the contract manufacturing takes place.

On a non-GAAP basis, gross margins were 59% in the December quarter, non-GAAP operating expenses were 27.1% of sales, non-GAAP operating income was 31.9% of sales, and net income was $132.9 million.

This resulted in earnings of $0.61 per diluted share which was $0.01 above the midpoint of our guidance.

On a GAAP basis, gross margins including share based compensation and acquisition related expenses were 58.6% in the December quarter.

GAAP gross margins include the impact of 1.8 million of share based compensation.

Total operating expenses were $165.8 million, or 34.4% of sales, and include acquisition intangible amortization of $21.8 million, share-based compensation of $11.9 million and special charges of $0.8 million.

The GAAP net income was $105.4 million or $0.48 per diluted share.

GAAP net income includes non-recurring favorable tax events of $6.2 million, and a one-time gain of $2.4 million on our acquisition of ecologic for which GAAP accounting required us to write up our previous ownership of 18.3% to its fair value.

Ganesh will discuss the ecologic acquisition later on in this call.

In the December quarter the non-GAAP tax rate was 11%, and the GAAP tax rate was 6.4%.

The GAAP tax rate was favorably impacted by the $6.2 million of non-recurring favorable tax events I mentioned before.

Our tax rate is impacted by the mix of geographical profits, with holding taxes associated with our licensing business, and the tax effective areas nonrecurring items.

Excluding any non-recurring 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 the non-GAAP adjustments had on Microchip's earnings per share in the December quarter, acquisition related items were about $0.103, and share based compensation was $0.056.

Non-recurring favorable tax events were $0.028.

The one time gain on the ecologic acquisition was about $0.011, and non-cash interest expense was about $0.007.

The dividend declared today of $0.355 per share will be paid on March 7, 2014 to shareholders of record on February 21, 2014.

The cash payment associated with this dividend will be approximately $70.7 million.

This quarter's dividend will be our 46th consecutive quarter of making a dividend payment.

We have never made reductions in our dividend and, in fact, this quarter's increase marked the 40th occasion we have increased the dividend payment and our cumulative dividend paid is approaching $2.2 billion.

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

Moving on to the balance sheet, consolidated inventory at December 31, 2014(sic-see press release-"2013"), was $274.6 million, or 126 days.

We expect days of inventory at the end of March to be down between one and seven days, based on our revenue guidance range.

Inventory at our distributors stayed flat in the December quarter at 33 days, and remain at low levels compared to where they have been historically.

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

Excluding dividend payments we expect our total cash and investment to be approximately 135 to 155 million in the March quarter.

Capital spending was approximately 24.3 million for the December quarter.

We expect about 30 million in capital spending in the March quarter and overall capital expenditures for fiscal year 2014 to be about 115 million, as we are adding capital to support the growth of the business and to bring in house more of the assembly and the test operations that were outsourced by SMSC.

The depreciation expense was 22.2 million.

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

Ganesh?

At December 31, the accounts receivable balance was $224.3 million, and decreased by $6.2 million on a sequential basis.

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

Free cash flow generation in the December quarter was $110.3 million prior to our dividend payment.

As of December 31, the consolidated cash and total investment position was approximately $2.03 billion, and we had $650 million in borrowings under our revolving line of credit.

Excluding dividend payments, we expect our total cash and investment position to grow by approximately $135 to $155 million in the March quarter.

Capital spending was approximately $24.3 million for the December quarter.

We expect about $30 million in capital spending in the March quarter, and overall capital expenditures for fiscal year 2014 to be about $115 million, as we are adding capital to support the growth of the business and to bring in house more of the assembly and test operations that were outsourced by SMSC.

Depreciation expense in the December quarter was $22.2 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 take a closer look at the performance of each of our product lines starting with Microcontrollers.

Our overall Microcontroller revenue declined 2.4% sequentially in the December quarter.

However, Microcontroller revenue was up 17.8% versus the year ago quarter reflecting a year of excellent market share gain in calendar 2013.

Microcontroller's represented 65% of Microchip's overall revenue in the December quarter.

As we projected during our last quarter's conference call, we shipped our 13 billionth cumulative Microcontroller in November, just seven months after we shipped our 12 billionth Microcontroller back in April.

Our 16-bit Microcontroller business was down 2.7% sequentially in the December quarter.

However, 16-bit Microcontroller revenue was up 27.9% over the year ago quarter, as we gained significant market share in calendar 2013.

This business continues to be an important engine of ongoing growth for us and we continue to find and serve new customers and new applications with our expanding portfolio.

Our 32-bit Microcontroller business was down 0.8% sequentially in the December quarter.

However, 32-bit Microcontroller revenue was up 29.5% over the year ago quarter as once again we gained substantial market share in this segment.

During the December quarter, we hit two blockbuster announcements.

First, the feature rich PIC 32-MZ family of products which has the highest computational performance of any Microcontroller in their category, as well as the best software efficiency.

And second,

The MP Lab Harmony integrated software platform, the industry's first software framework to integrate both internal and third party middleware, drivers, peripheral libraries, and real time operating systems, thus simplifying and accelerating the 32-bit software development process, which is one of the larger challenges customers face.

Both of these solutions have received broad industry accolades and customer acceptance.

We are continuing to rapidly expand our new product portfolio, win new designs, and expand into new fields of play like the internet of things, to enable further growth in revenue and market share.

Our overall Microcontroller results, as well as each of our eight bit, 16 bit and 32 bit results, are clearly outperforming the market.

With year-over-year growth rates, well above the market, and what we have seen reported by our competitors and their results.

We are gaining significant market share, and have the new product momentum and customer engagement to continue to gain even more share as we further build the best performing Microcontroller franchise in the industry.

Now, moving to our analog business, our analog business bucked the trend and grew 0.4% sequentially in the December quarter.

The ninth consecutive quarter of sequential growth to achieve a new record, and continues to perform exceptionally well.

Analog revenue was also up 16.7% from the year ago quarter, reflecting significant market share gains.

Analog revenue represented 22.6% of Microchip's overall revenue in the December quarter, and we continue to have one of the best performing analog franchises in the industry.

In November we announced the acquisition of Ecologic, a Brussels based, early stage company who has innovative, equaliser and coax transceiver products and technologies which are important to our automotive and other embedded networking initiatives.

Ecologic's leadership Equaliser technology enables the effective recovery of high-speed signals that may degrade as they transmit over longer distances.

In an automotive (inaudible) network for example, this technology enables substantial system level cost reduction as OEMs can switch from expensive optical fiber networks to much more cost effective coaxial cable networks.

Even though the signals degrade more in a coax cable network as compared to an optical fiber network.

Last but not least, in our core analog business, we are continuing to develop and introducing a wide range of innovative and proprietary new products to fuel the future growth of our analog business.

Now, moving to our memory business, our memory business, which is comprised of memory products as well as our super flash memory products, was sequentially down 7.1%.

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 represents 6.7% of Microchip's overall revenue in the December quarter.

Now, let me 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 first like to reflect on the results of the fiscal third quarter of 2014, and then I will provide guidance for the fiscal fourth quarter of 2014.

We are very pleased with our execution in the December quarter.

All of the non-GAAP financial metrics like net sales, gross margin percentage, operating expense percentage, operating profit percentage, and earnings per share, were at, or better than, the midpoint of our guidance.

Our operating profit percentage is approaching 32% and we are making excellent progress towards our long-term goal of 35% operating profit.

Non- GAAP earnings per share exceeded the midpoint of the guidance by $0.01 per share.

Our overall net sales in December quarter were up 16%, versus a year ago quarter, marking an excellent year of market share growth compared to a low single digit growth for the industry.

Our analog business made a new all time record in December quarter, with sales up 0.4% sequentially, and up 16.7% over the year ago quarter.

All of the major segments of the business were sequentially down a bit, based on the seasonally weakest quarter of the year.

The end of December quarter also marks the completion of the 2013 calendar year, which was an excellent year for Microchip in every respect.

Last but not the least, the December quarter was our 93rd consecutive profitable quarter.

I want to thank all the employees of Microchip for their contribution in making this an outstanding year for Microchip.

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

The March quarter is seasonally a middle of the road quarter for Microchip, not as strong as June and September, but not sequentially down as December.

It does not feel any different this year, and we expect this to be a seasonally normal quarter.

Europe is normally very strong in this quarter.

America is in the middle, and Asia is down due to Luna new year holidays.

Taking all of this into account, we expect the March quarter net sales to be flat to up 3% sequentially.

On a non-GAAP basis, we expect our gross margin to be between 59% and 59.2% of sales, which is a slight improvement from December quarter.

We expect operating expenses to be between 26.8% and 27.2% of sales.

We expect operating profit to be between 31.8% and 32.4% of sales.

And we expect non-GAAP EPS to be between $0.59 and $0.63 per share.

Our EPS is getting slight negative impact by the addition of about 3 million shares to the share count.

This is because of significantly higher average stock price in the current quarter, versus the last quarter, the rising stock price makes our $1.15 billion convertible transaction more in the money and results in a higher effective share count.

Given all the complications of accounting for the acquisitions of 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 request that the analysts continue to report their non-GAAP estimates the first call.

With this, Operator, can you please poll for questions.

Operator?

Thank you.

(Operator instructions.) We will pause for just a moment.

We will hear first from Kevin Cassidy, with Stifel.

Yes, thank you for taking my question.

In the automotive market, there's been talk of ethernet coming into the automobile.

Are you seeing that trend and are you preparing for that?

Ganesh.

So there are many standards that come into the automotive marketplace.

In automotive networking, for infotainment, the most network is the dominant standard today.

There are alternates in any given market and ethernet is one of them that is in consideration.

We believe we have a strong position in the marketplace, and a position that customers have validated with their choice of our network.

Okay.

And maybe just talk a little more about automotive.

Are there many opportunities for 32-bit Microcontrollers and what's your traction there?

So the answer is yes, there are many 32-bit applications in automotive.

As you know, we have been on the journey for 32-bit for not as many years as some of incumbents who play in that space, but we are starting to make in roads in 32-bit applications in car makers just as we have previously with the 16-bit and the 8-bit along the way.

We fully expect as time goes on, you will see our Microcontrollers across the spectrum of 8-bit, 16-bit, and 32-bit, will play in many automotive applications.

I would like to add to that, when you come up with a brand new product line, whether it's 8, 16, or 32, if the first products you make are for the automotive market, which means they have all the can bus and the all protocols and everything the automotive needs, then your first revenue is three or four years away.

Right.

And, you know, that's not the best way to launch a brand new product line.

So just like we did that with 8 or 16, we originally come up with the product line that would be quicker time to market in other applications, industrial, consumer, and all the others, and then as the product line gains momentum, and the architecture is accepted, we have, wrung out any other issues, any of the errors, then you add the automotive features and start to work with automotive.

So that began three years ago or so.

And now we have designs in automotive and we are moving, but, the large portion of the revenue is not automotive yet.

Okay.

Thank you.

Congratulations on the solid quarter.

Thank you.

Thank you.

We'll hear next from Jim Schneider, with Goldman Sachs.

And Mr. Schneider, your line may be on mute.

Your line is open if you still have a question.

Go to the next one.

Okay hearing no response, we will go to Gil Alexander, with Darfil Associates.

Can you remind me, what are your gross margin goals, long term model?

So our long-term model for gross margin is 61.5% plus/minus half percent and we are certainly making progress.

The middle point of the guidance for us in the current quarter is 59.1%, so we are moving towards it and continue to make fairly good progress.

I thank you.

Thanks.

Moving on to Craig Hettenbach, with Morgan Stanley.

Yes, you noted the strong growth in 16 bit and 32 bit year over year.

Can you provide any color or context from a new product introductions?

What you are doing on those product lines, and anything from a design win perspective?

So in any given year, we have anywhere from 100 to 125 brand new products that we bring to market, a substantial portion of that continues to be 16 bit and 32 bit because our portfolio there was not as rich as we did in the 8 bit.

I don't have the exact numbers but we are well over 100 products in our 32 bit and we are well over 400 in our 16 bit portfolio.

Got it.

Thanks and as a follow-up, on the SMSC transaction.

A very strong margin expansion early on, can you talk about just the revenue synergies and opportunities that you see, over the next 12 to 18 months on that side?

The revenue synergies are building over the last year.

We have spent time in looking at how our customers' application boards where Microchip prior to SMSC did not play but SMSC customers could use our products and how that could be brought to bear on new designs.

And likewise, where SMSC products could be brought into the Microchip customer base.

These are long design cycles.

They take 18, 24 months to get to the point where they get the revenue.

There are many in the pipeline, and some of the early one have gone to production but we are very optimistic in terms of how the two product lines combined play a stronger role at many end customers and what each of us individually could have played.

I mentioned this in the last conference call in November, I believe, that I spent a week with all of our Asian distributors collecting them all in one geography, nearly 80 or 90 of them, and reviewed the last calendar year and had them put some plans together for the current calendar year.

It was quite surprising to see see that Microchip's distribution which was not SCMS distribution before, how much cross selling opportunity they had identified on SMSC products into the Microchip customer base.

There was, in fact, the highlight of the conference that just very, very significant opportunity they have identified in all of the consumer industry accounts with USB and ethernet and all of the other SMSC products.

So they will take some time to go to production, but the opportunity is significant.

Got it.

Appreciate the update thanks.

(Operator Instructions).

At this time, we will move back to Jim Schneider, with Goldman Sachs.

Thanks for taking my question.

Sorry about the difficulty before.

Steve, I was wondering if you could address, again, your new higher, longer term margin model.

It seems like the biggest place where you have to improve to get there is in the gross margin line.

Can you talk about some of the utilization or cost structure measures in the cost of goods sold, or mix and what the time frame would be to help you to get up to that 61.5% model.

Well, I can lead you there qualitatively but not quantitatively breaking down the impact of each of the other things.

So some of the qualitative factors are, obviously, fab utilization.

Our internal fabs are not at the capacity they were yet at the peak.

For a number of reasons, as a couple years go by, some of technology migration happens and we are producing parts at a better nodes.

Therefore it just produces large number of dye and wafer and therefore cutting the number of wafers.

Some of the products are made in outside foundries, where it was more cost effective or more feasible, or we didn't have the technology inside.

So, for a number of reasons, we are not at that full capacity.

So there's a significant accretion still coming as that goes towards the peak production.

The acquisitions are not 100% integrated.

We are fought into it, but if you look at both from an assembly and a test perspective, and the wafer pro perspective, we are still moving a lot of the SMSC products into Microchip and if we were to guess what portion of the test is converted, 25% test is converted.

So, it takes a wile to get the momentum but now we have the testers and the load boards and the programs, but the first thing takes longer.

So there's a lot of accretion coming from that also.

And then there's a continuous margin improvement on our smaller product lines which are newer in nature where it takes a while for the products to wring out and build the next generation products which are more cost effective and high yielding and are new technologies.

So the number of things are playing a role in it, and combination of all of that gets there.

We could get there on paper with the margin to give.

Okay.

That's helpful.

Thanks.

And then as a follow-up, in terms of the environment in Asia, you talked about that being a little bit weaker in the quarter and maybe that's just a seasonal thing but clearly, there's been a lot of concern whether that's real or not real, about China and the emerging markets.

China PMI was down a little bit.

Can you talk about just the overall order environment and what your customers are telling you out of Asia, and what you are seeing from Asian distributors in particular?

Well, Asia goes through about 10 days of holidays and driven by that in the current quarter forecast, Asia is down just about as much as it historically is, just by the number of days there are so that's why we called the quarter pretty seasonally normal.

Booking patterns are normal.

There's nothing abnormal to call.

There's no crisis or disaster in the work.

The products are also very ubiquitous, though.

They go in the areas where, as Chinese are building more and more consumer ism, a lot of them acquire these products, where are products are in.

We're in the things, and people buy things.

Great.

Thanks very much.

You're welcome.

We'll hear now from Susquehanna Financial Group's, Chris Caso.

Just a question about production levels and I think last quarter, you suggested the plan was to keep production fairly constant as you went through this quarter and your comments suggested that the inventory levels internally come down as a result of that.

If you hit those inventory targets by the end of this quarter, should we expect the production levels to start increasing as we go into the June quarter?

And if you could give some sense of the effect of that on gross margins.

Well, I think, it depends on where we are within the guidance, which is really narrow flat to up 3%.

We have not put together a plan.

We are in the middle of our annual operating plan process.

We don't really have an official fiscal 2015 plan yet to really see what production will be running.

But if we grow production, that will improve gross margin.

The inventory is not exactly where I want to be.

I think it needs more improvement.

We will get some this quarter.

Whether we need some more next quarter or we could completely improve production.

We don't know yet.

It depends where it will end.

Did you have something to add?

I was going to say, there's ongoing gross margin improvement from the backend from assembly and test as we bring more of that in house as well.

So you may get some gross margin improvement from the back end, but the front end is obviously better on the revenue levels and where the inventory goes?

That's right.

We expect improvement in June quarter in gross margin, correct?

No question about it.

The June quarter is usually very strong quarter for us and higher absorption and there should be a gross margin improvement in the June quarter, no question.

And just looking out.

As you say you are in the planning process for fiscal 2015.

What do you expect your strategic priorities to be as you are looking at fiscal 2015 and assuming the demand environment stays stable as it is now.

SMSC, the integration, seems to be, I would guess, I would characterize it as late innings now.

Where does the management focus turn to as you go into fiscal 2015?

Well, you know, we are not a one trick pony.

At the current quarter guidance, we are almost a $2 billion company, just slightly shy of that.

We run 12, 13 divisions inside the company.

So, we continue building out 16 bit, and 32 bit and analog, and there's still a lot of products in 8 bit.

We continue to gain share in 8 bit as other people can't compete or don't want it or whatever.

So all of the strategic product lines have a very strong road map and they are all showing significant growth the in the initial analysis.

Then if you look at from an end market or an application perspective, we are getting very significant acceptance and growth in the Internet of things, motor control, digital power, lighting, medical.

Touch.

Touch.

Automotive.

There are just way too many.

We show a chart in the presentations but 14 different segments that we have significant focus in.

Now, the other thing that we have been telling you for years, Microchip as one company recognizes before many of the others in the industry, that the semiconductor industry has matured and saturating, and if you look at the overall semiconductor growth, they are in the low single digits year after year.

We have done well.

Our December quarter was up 15% year-over-year, 16%, but we also understand that there's a significant industry growth headwind that every company faces, and therefore, we also are trying to supplement Microchip's growth by a constant stream of small and some large acquisitions to bring in overall growth to a reasonable number where it would be acceptable to Microchip's management and its board.

So it's a combination of internal and external growth.

It's not only one or the other.

We are not doing acquisitions to mask any risk of the internal growth.

We are doing it to enhance on the top of the internal growth.

You have seen us now for several years.

That's helpful.

Thank you.

You're welcome.

We'll now go to JoAnne Feeney, with ABR Investment Strategy.

Hi, thanks.

Congratulations on a nice quarter.

I have a follow-up question on the issue of the guidance for the current quarter.

This is the first round of the March guidance we have seen since the acquisition was fully integrated and I'm wondering if what we are picking up here is a little bit of a shift in your seasonal pattern given the different end markets that are now weighing in and as you said, China, you are seeing probably some of your stuff go into more consumer oriented products.

So look at the last ten years of data and throw out the two that were outliers, you typically saw around 3% to 3.5% growth in the March quarter.

So do you have a sense of this, whether you are seeing a little bit of a shift in your seasonal pattern because of the different end market mix than before the acquisition?

Well, JoAnne, you are always very astute and smart in your analysis and I think you have answered your question.

There are two shifts in the seasonality.

Minor ones but they are definitely worth noting.

One is that with the acquisitions and all that, we have little more of a business in the computing segment, which sees a significant decline in the calendar first quarter than we had in the Microchip's core business.

The second impact is Asia is becoming a larger and larger portion of our business.

China is a huge portion of the business.

We break those out in the Q as you can read them.

So as that becomes larger and larger portion of the business, then you have a larger portion of overall Microchip that takes a drop in the calendar first quarter, because of the Chinese new year.

And, if there's enough shift in the business, in Asia, then that starts to be material.

So I think those combined two things together, this is probably the new normal.

But it also means that you will pick up that gap on other quarters.

Right.

Either stronger quarters for Asia or they are stronger quarters for SMSC business.

So, overall hasn't shifted but there's a slight impact in the calendar first quarter because of those two reasons.

Okay.

Perfect.

And then as a follow-up, just looking longer term at your opportunities for continued share gain.

It's been quite impressive in 16 bit and 32 bit, but, one might expect that that would naturally slow down, as you pick off the low hanging fruit.

Could you give us some sense of what you expect over the next year or so, and how you expect, if, you do to continue to gain share and what you think the pace of that will be?

That is, the growth of those two segments relative to the industry.

The current estimates aren't saying that it slows down.

If it does, it's really minor in nature, but then you pick up the difference by newer applications where we can now do a very good job with maybe historically with the high performance 16 bit and 32 bit lines, lightning the digital power and the Internet, and the Wi-Fi connectivity and all that kind of stuff.

So we are opening additional large amount of served available market.

If you look at the Internet of things, our revenue on Internet of things is hundreds of millions of dollars.

If you look at the overall definition of what some of the others are calling as overall Internet connectivity, or machine-to-machine connectivity, and it's the fastest growing segment of the business.

There are always pluses and minuses and something saturates but then the new opportunities emerge and how well positioned you are.

You want to talk about IOT a little bit?

As Steve mentioned, this as one of the exciting areas of opportunity presented to us.

And the broad adoption of tablets and SmartPhones are one of the catalysts, that are accelerating the demand for more things to be connected and accessible by these mobile devices.

We've historically had a strong presence in the broad range of things in our home and some of our other areas where we interact.

We think we have a pole position as these things get connected, our solution is in the center of how they are connected.

There are four things that we know, four areas that we have to bring to bear to win in the Internet of things market.

One is the strong portfolio of Microcontrollers in analog, which we have and you are continuing to strengthen.

Two, is a strong portfolio of wireless and wired connectivity.

Three, is a suite of the software and the firmware requirements for the different protocol and security that will be required any time you have connectivity.

And finally, the fourth is a set of partners who can provide both cost effective and scalable cloud infrastructure because most of them are really not IT experts and don't have any IT infrastructure.

And when you put it all together, it's at the center of where we have played, we have customers that we know very well, and we have technologies to enable them and we are seeing many, many of them taking advantage of that capability.

It sounds like you are looking at some adjacent sockets in products where you are already appearing in dishwashers and other white goods, for example.

We are in tune, now we are helping customers connect those things.

Selling additional content, whether it's an wireless module or another module, we are helping them do more things.

And then continuing with the answer to your question, we talked about, all the cross selling opportunities, with SMSC products into our socket, so think about how many cars today have a USB charger socket in the car.

Every time I do an analysis, the ten people I'm talking to the number comes out to 20% or 30%.

20% or 30% of the cars people have a USB charger.

You can always charge through the cigarette lighter but I'm talking about the actual USB charger.

Now, fast forward three or four years, don't you think 100% of the cars would have a USB charger, because that's what's becoming the life.

And, who is getting in all of these cars?

Whose USB chargers is in most of the cars?

Yours truly.

There are always areas that are growing significantly faster where there's a significant opportunity.

When you look at USBs.

So we have proprietary technology where you plug in a SmartPhone into the USB charger of the car and the phone can become the host and whatever you have on the phone, it will display that, whether it's navigation or whatever on the screen of the car which could be extremely beneficial.

Everybody uses navigation on their phone.

As they travel, and get rental cars, and everybody uses the phone.

I know how to use it on my phone.

I don't even know how to use it in my car.

Next time, I will not get one in the car, because I have it on the phone.

You plug it through the USB charger and it displays what's on your phone in your car.

So, we were showing that at CS show in Las Vegas, an actual demo of that working.

So there are tremendous opportunities coming up with this connectivity.

There are lots of design wins and opportunities.

So those things will grow faster, and some of the material business could slow down a little bit.

But the overall opportunity has not decreased.

Thank you very much for the detailed answer.

I appreciate it.

We go now to Harsh Kumar, with Stephens, Inc.

A questions for Ganesh.

Steve and Ganesh, congratulations on pretty impressive Microcontroller growth as a category.

I was wondering if you could provide some color on maybe between 8, 16, and 32, which one you took the most share in, if you rank order them or just talk qualitatively, I would appreciate the color.

I think if you want to look at the dollars, we took the most share in 8 bit.

That's the rank order of the revenue is 8 bit is the largest business, followed by 16, followed by 32.

But if you look at the growth rates, you will find that, compared to where the base line grew, 16 and 32 bit is where we outgrew and 8 bit will have outgrown but not quite the same magnitude.

We will know in two or three months and all the official numbers will be put together but I'm expecting we will see large gains across 8, 16 and 32.

Fair enough, guys.

That's helpful.

I wanted to ask you, in press release, Steve, you talked about MP Lab Harmony integrated software platform.

I was struggling to understand how that will work in terms of you being able to sell chips.

Maybe you could take a couple of minutes to explain how that flows through on your P&L.

Well, so the most difficult thing for the customer in a 32 bit is development of the software and the firmware.

If you have a piecemeal solution, where the chip comes from one party, the stack comes from another party, the library comes from another party, the development tool comes from somebody else, then you've got to put all of those things together, then you don't have a very good experience because when something isn't working, you don't know whether it's architecture or the chip or software or the development tool or whatever.

So what Microchip has done, the entire PIC 32 solution comes from Microchip but it's much more like an Apple kind of experience, where the product, the architecture, the software, the development tool, the libraries, the stacks, everything is coming from Microchip and already cross-checked and functional.

So what we have done on the top of that now, with the Harmony software is really integrated the entire ecosystem.

We also integrated the third party software, the middleware, the stacks and everything all pre-checked out and customers are telling us up to 40% to 50% productivity.

This development of the software is about 75% of the total cost in adopting a 32-bit Microcontroller in the application.

And on that 75% of the cost, if we can provide that much productivity, the industries accolades are coming in like crazy.

So how we essentially monetize this, winning more designs, accelerating time to market, and selling more 32-bit chips and all the software and all of that, you always have a version of it which is free, essentially, anybody can use it.

So, there's a wide acceptance of it, but then you have premium versions and you have software support, and upgrades and all that for which you charge, it becomes a product.

But that's not where the big money.

The big money is really still selling the chip.

Got it.

Very helpful, Steve.

Thank you.

You're welcome.

And next from Credit Suisse, we'll hear from John Pitzer.

Thank you.

I apologize I have been jumping back and forth across a couple of calls, Steve so if you addressed this, I apologize.

It's been my perception that the environment over the last couple of quarters has given you guys perhaps a little more visibility than normal.

I'm curious, notwithstanding the seasonal issues in the March quarter, as you think about lead times and just the rate at which customers are placing orders, how would you characterize visibility today and, I guess as you answer the question, Steve, you always had a better view than most on the economy and the macro.

As you think about 2014, is the macro a tailwind, a headwind or a neutral factor as we think about your growth?

The best guess would be neutral.

And then just relative to visibility today versus let's say 30 days ago.

How are you seeing customer activity and order?

Is it tracking around normal seasonality and we have to wait until after Chinese new year to have a better assessment?

Yes, it hasn't changed, basically, there's a lot of positioning and jockeying for position for Chinese new year and even for December.

Some people have year end in December.

They are trying to lower the inventory.

Some distributors have fiscal year ending at some other times or they adjust inventory at different times.

Some people want the product before the Chinese new year so they can participate in the surge afterwards, and some place the order and want to take the delivery afterwards.

And so there are all of that the cross currents.

The good thing is the Chinese new year is early and it's beginning now.

And, two months of the quarter are left after that, and then usually every time that happens, or the Chinese New Year is early, it usually has been a positive result.

And, Steve, as my follow-up, at our conference in December, you gave a pretty informative presentation about the positioning at 32 bit and what you are doing at the software level on the ecosystem.

The argument was you are hitting an inflection point where 32 might start to show even more meaningful gains in the strong growth you are seeing.

Is that how I should think about the 32-bit growth prospects for 2014?

And, I also noticed in the quarter you announced an arm-based Microcontroller.

Should I think about that as another arrow in your quiver, or is there something more strategic behind that?

Several questions in there.

Number one, yes, the point I made on 32 bit is we went over 100 products last quarter.

And 100 products is the magical, critical mass.

If you have fewer products in a Microcontroller, then you have engagement issues with the customer where the customer engages and does all of this work, and says yes, I like the architecture and I will use your product, but then they need more memory or the interconnectivity, they need a Wi-Fi or an RF on the chip, and you don't have that version of the product, then their work is wasted and they have to go choose a different architecture.

So, customers often look for having sufficient critical mass of products where there's very high probability that the product they need is in the portfolio and at 100 plus products that becomes really real.

So we hit that number.

So we think that's a reasonable inflection point.

And the second is the two main things that I talked about at your conference, and Ganesh talked about it today, one is the announcement of the 32MZ product line which is really industry's the highest performing Microcontroller in its class, and secondly is the Harmony software development tool which is absolutely productivity giver to the customers.

We think all of those things combined, it's a game changer.

And we are starting to see it in the feedback we are getting.

Thanks, Steve.

Appreciate it.

We'll hear now from Craig Ellis, with B. Riley & Co.

Thank you.

I wanted to follow up on a different product segment, the analog product group.

The business has performed very well in the last year.

And how should we think about the way you are looking at growing that business as we think about calendar 2014 and beyond, whether it be from a product group standpoint, where do you feel like you can add products or whether it be just from taking that product to market, whether it be channel management strategies what have you.

We have described over the years where we had a three-pronged strategy in analog and early on at the start of the century our analog strategy was largely attaching analog to our own Microcontroller's for the first few years because we had no name recognition in analog, we didn't know Microchip makes analog.

We had a great name recognition in Microcontroller's and we would position and attach and those type of products to go with a Microcontroller socket, and at one point, at the peak, well over 70% of our analog business was attached to our Microcontroller.

But that strategy was quite successful.

Then we went into the Phase II, where we said, well, our an analog products are so well designed and architected, to work in a Microcontroller environment, why would we limit ourself to only Microchip's Microcontrollers?

Back then we had 4% or 5% of market share of Microcontroller because we didn't make 16 bit or 32 bit at that time.

Why would we not position this to any Microcontroller, whether it's Freescale or XP or ST or anybody else?

We don't have the Microcontroller but we still compete with the analog because the architecture works very well next to those designs.

That was Phase II of the strategy and it was very successful a few years ago.

It accelerated our growth rate on the analog.

And then, in the last few years we said Phase III, why would we now limit it to only to the Microcontroller sockets?

What about to FPGA and SOC, silicon chip, or any kind of socket and that put us in direct competition with TI, ADI, Linear, Maxum and some of the big companies and we have, what, over 2,000 products on analog now?

About 1100 to 1200 analog products.

So a broad portfolio and positioning it really head on in any kind of sockets and it has worked very well.

We are growing.

We have the best performance of analog in the industry compared to look at the year growth rates compared to anybody.

And it's not just last year, right, if you go back and look at it, it's now been for several years the analog has performed exceptionally well and outgrown the analog industry and the semiconductor industry both.

And people had some sort of this myth that analog is black magic and all the analog engineers worked for these other companies and you can't find them and that's just not true.

We were able to attract them and we had lots of analog engineers in the Microcontroller groups because 95% of the Microcontroller revenue was a large amount of revenue on the same dye.

We were able to package some of that functionality standalone and some of it together with the Microcontroller but really we were able to amass a fair amount of resources.

Some through acquisitions, and some ourselves, and created one of the best performing analog franchises in the industry.

I was going to summarize it by saying, it seems like what you are saying is the recipe for growth is to continue to execute on the strategy that you have in place.

As I look back at some of our past comments, I think it was two quarters ago, maybe it was even three, where you said based on the successful completion of the SMSC deal, you were ready to do another mid-sized deal.

Subsequent to that, there hasn't been such a deal.

Is the issue that there are no good targets or are there good targets but with the market going so much higher that the valuations are not where you would be comfortable?

Where do you stand with respect to growing through acquisition at this point?

Well, like I said early on, I don't know whether you were on the call yet or not, but I mentioned in fiscal 2015, and going forward, we continue to have a strategy of significant internal growth and then further beefed up by continuous small or occasionally large acquisitions.

Beyond that I couldn't really give you any signal for timing or what area or whatever.

We are active constantly.

Thank you.

And we'll take a follow-up from Kevin Cassidy with Stifel.

Thanks for taking my follow-up.

I just wanted to see if you could give a few comments around the licensing business?

Do you have more contracts on the way?

And how does licensing play into the Internet of things?

The only way licensing plays in the Internet of things is really enabling our superflash technology to build low power, Microcontrollers in the industry, which will then go do the Internet of things.

Otherwise it doesn't really have a direct play.

What we have successfully done is really, essentially licensed, every major foundry, is licensed on our superflash technology.

The largest big foundries, and any foundry you name, the one in Taiwan, the one in China, the ones in Singapore, the ones in Malaysia, the ones in Europe, they all have a license to superflash technology.

Some are in production and some are proceeding towards the production with the licensing happening the last year or the year before.

These are complex technologies.

So it takes a couple of years to go to production.

So there as a significant revenue growth ahead as three additional foundries go to production, and they are rolled in again.

We have more than doubled the business since we bought SST.

When we brought it, it was doing $40 million business.

We are doing about 90 now.

And there's further growth ahead, as many more ever these foundries go to production.

Okay.

Thank you.

Welcome.

And gentlemen at this time, I will turn the call back to you for closing remarks.

Well, thanks for attending the conference.

Our next conference to go to is February 11th.

We will see some of you there, otherwise we will talk you to next quarter.

That will conclude today's conference.

Again, thank you all for joining us.