微晶片科技 (MCHP) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to this Microchip Technology fourth-quarter and FY2014 financial results conference call.

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

At this time I would like to turn the call over to Microchip's Chief Financial Officer, Mr. Eric Bjornholt.

Please go ahead, sir.

Good afternoon, everyone.

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

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

We refer you to our press releases 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 fourth-quarter and full FY2014 financial performance.

And Steve and Ganesh will then give their comments on the results, provide some additional information on our April 1 acquisition of Supertex, and discuss the current business environment as well as 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 March quarter were above the midpoint of our guidance at a record $493.4 million, and were up 2.3% sequentially from net sales of $482.4 million in the immediately preceding quarter.

Revenue by product line was a record $326.4 million for microcontrollers, $107.5 million for analog, $33.1 million for memory, $23.2 million for licensing, and $3.2 million of other.

Revenue by geography was a record $92.8 million in the Americas, a record $115.9 million in Europe, and $284.6 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 the contract manufacturing takes place.

On a non-GAAP basis, gross margins were above the high end of our guidance at 59.3% in the March quarter.

Non-GAAP operating expenses were below the low end of our guidance at 26.6% of sales.

Non-GAAP operating income was above the high end of our guidance at 32.7% of sales.

And net income was a record $141.3 million.

This resulted in record earnings of $0.64 per diluted share, which was $0.03 above the midpoint of our guidance.

For FY2014, on a non-GAAP basis, net sales were a record $1.931 billion, and up 20.2% year over year.

Gross margins were 58.8%.

Operating expenses were 27.1% of sales.

And operating income was 31.8% of sales.

Net income was a record $531 million, or $2.45 per diluted share.

On a GAAP basis, gross margins, including share-based compensation and acquisition-related expenses, were 58.9% in the March quarter.

GAAP gross margins include the impact of $1.7 million of share-based compensation and $0.3 million of charges associated with the sell-through of written up inventory from our acquisition of EqcoLogic, which closed in the December quarter.

Total operating expenses were $164.5 million, or 33.4% of sales, and include acquisition intangible amortization of $21.3 million, share-based compensation of $10.7 million, $0.9 million of acquisition-related expenses, and special charges of $0.5 million.

The GAAP net income was $111.5 million, or $0.50 per diluted share.

GAAP net income includes non-recurring favorable tax events of $5.8 million.

For FY2014 GAAP gross margins were 58.4%.

Operating expenses were 34.7% of sales.

And operating income was 23.8% of sales.

Net income was $395.3 million, or $1.82 per diluted share.

In the March quarter, the non-GAAP tax rate was 9.8%, and the GAAP tax rate was 5.7%.

The GAAP tax rate was favorably impacted by the $5.8 million of non-recurring favorable tax events that I mentioned before.

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

Excluding any non-recurring events, we expect our longer-term forward-looking non-GAAP effective tax rate to be about 10% to 10.5%, which is lower than our previously communicated model.

The tax rate will be slightly higher than this in Q1 of FY2015, as we will not have integrated Supertex into Microchip's tax structure.

To summarize the after-tax impact that the non-GAAP adjustments had on Microchip's earnings per share in the March quarter, acquisition-related items were about $0.101, share-based compensation was about $0.05, non-recurring favorable tax events were about $0.026, non-cash interest expense was about $0.006, and other items were $0.002.

The dividend declared today of $0.3555 per share will be paid on June 3, 2014, to shareholders of record on May 21, 2014.

The cash payment associated with this dividend will be approximately $71.1 million.

This quarter's dividend will be our 47th consecutive quarter of making a dividend payment.

We've never made a reduction in our dividend.

And, in fact, this quarter's increase marks the 41st occasion we have increased the dividend payment.

And our cumulative dividends paid is over $2.2 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 March 31, 2014, was $262.7 million, or 118 days, compared to 126 days at the end of the December quarter.

Excluding Supertex, we expect days of inventory at the end of the June quarter to be down between 7 and 11 days based on our revenue guidance range.

Inventory at our distributors stayed flat during the March quarter of 33 days, and remains 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.

The combined overall inventory position of Microchip and its distributors is in great shape.

At March 31, the accounts receivable balance was $242.4 million, and increased by $18.1 million on a sequential basis, due to the back-end weighting of the quarter due to the lunar New Year holidays.

Receivable balances remain in great condition.

The increase in Microchip's net cash and investment balance in the March quarter was a record $183.1 million prior to our dividend payment.

The cash generation was favorably impacted by tax refunds received in the quarter of $28.6 million.

As of March 31, the consolidated cash and total investment position was approximately $2.14 billion, and we had $650 million in borrowings under our revolving line of credit.

Excluding dividend payments and our acquisition activities, we expect our total cash and investment position to grow by approximately $140 million to $160 million in the June quarter.

Capital spending was approximately $34.7 million for the March quarter, and was $114.3 million for FY2014.

We expect about $40 million in capital spending in the June quarter, and overall capital expenditures for FY2015 to be about $125 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 are currently outsourced.

Depreciation expense in the March quarter was $23 million.

I want to remind our investors and analysts that as Microchip's stock price rises, there is dilution from Microchip's outstanding convertible debt that come into the Microchip's diluted share count.

There is a table on the supplement financial information section of Microchip's investor relations site that walks through the level of dilution at various stock prices that you may find helpful.

The diluted common shares outstanding presented in the guidance table in today's press release assumes an average Microchip stock price in the June 2014 quarter of $48 per share.

However, we make no predictions as to what our actual share price will be for such period or any other period.

I will now ask Ganesh to give his comments on the performance of the business in the March quarter, and provide an update on the Supertex acquisition.

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 grew 4.2% sequentially in the March quarter, and was up 18.3% versus the year-ago quarter, achieving a new revenue record.

For FY2014, our microcontroller revenue was up 20.8%, as compared to FY2013, also achieving and all-time record.

All three microcontroller segments, 8-bit, 16-bit and 32-bit, experienced sequential growth in the March quarter.

And all three microcontroller segments achieved record revenue in FY2014.

Microcontrollers represented 66.2% of Microchip's overall revenue in the March quarter.

Our 16-bit microcontroller business was up 16.4% sequentially in the March quarter, achieving a new record for revenue.

16-bit microcontroller revenue was also up 38.3% versus the year-ago quarter.

And for FY2014, our 16-bit microcontroller business was up 44.2%, as compared to FY2013.

FY2014 marks the ninth consecutive year of revenue growth, and new revenue records for our 16-bit microcontroller business.

We now have over 400 16-bit microcontroller products in our portfolio.

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

Our 32-bit microcontroller business was up 7% sequentially in the March quarter, also achieving a new record for revenue.

32-bit microcontroller revenue was also up 66% versus the year-ago quarter.

And for FY2014 our 32-bit microcontroller business was up 73%, as compared to FY2013.

FY2014 marks the fifth consecutive year of revenue growth and new revenue records for our 32-bit microcontroller business.

We now have well over 100 32-bit microcontroller products in our portfolio.

And 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.

Gartner Dataquest just released their microcontroller market share report for 2013.

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

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

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

Post their merger, Renesas' 8-bit business in 2010 used to be 41% larger than our 8-bit microcontroller business.

In 2013 this lead had shrunk to less than 0.5%.

I fully expect that we will wrest back the number one position in 8-bit microcontrollers in 2014.

In the 16-bit microcontroller market, we were again the fastest growing 16-bit microcontroller supplier among the top 10 suppliers in 2013.

We also moved up to the number five spot in 2013, and expect to continue to gain share and move further up the rankings in the coming years.

In the 32-bit microcontroller market, we moved up to the number 11 spot in 2013.

And we were the fastest-growing major 32-bit microcontroller franchise among the top competitors.

Gartner Dataquest's report is a backward looking indicator where we are performing very well.

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

In early April, UBM Tech, which is the parent company of EE Times, released the results of their annual embedded market study.

Once again, Microchip was rated by embedded system design engineers as their number one choice for new designs using 8-bit, 16-bit and 32-bit microcontrollers in the performance range that we compete in.

We are humbled and gratified by the overwhelming preference by engineers for our solutions and see this as a positive sign for future growth, especially for our 32-bit microcontroller franchise where some have had questions about our choice of core.

Our 2013 market results, as well as the 2013 design engineering preference results, echo market confirmation of our belief that what customers care about is that we offer a PIC microcontroller solution with all the attendant brand promises.

And the choice of core is not as important.

Our overall microcontroller results, as well as each of our 8-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 in their results.

We have gained 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 let's move to analog products.

After nine consecutive quarters of sequential growth, our analog business took a pause and was down 1.3% sequentially in the March quarter.

However, analog revenue was up 10.6% from the year-ago quarter.

And for FY2014, our analog business was up 32% as compared to FY2013.

Easily one of the best-performing analog franchises in the industry.

Analog revenue represented 21.8% of Microchip's overall revenue in the March quarter.

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.

Moving to our memory business, this business is comprised of our Serial E-Squared memory products, as well as our SuperFlash memory products, and was sequentially up 2%.

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 represented 6.7% of Microchip's overall revenue in the March quarter.

Now a short update about Supertex and where we are in the integration process.

Since the announcement of the acquisition on February 10, we have spent considerable time understanding Supertex's business, organization and systems.

We have developed a detailed integration plan that we have begun to execute starting April 1 when we closed the transaction.

Supertex will run as one of our analog product groups, otherwise known as divisions, focused on markets and applications that value high-voltage analog and mixed-signal capability.

We believe a number of Supertex' current products and future road map have broader market appeal than how they have been marketed.

And we are taking steps to capitalize on this opportunity.

In regards to manufacturing, Supertex does have a leased 6-inch fab, but had already started to move many of their products to foundries for better competitiveness.

We are evaluating whether some of the products planned for movement to the foundries can be redirected to Microchip's fabs instead.

Supertex subcontracts 100% of its assembly and over 60% of its test volume.

We are doing a make versus buy analysis, and evaluating whether some of the products currently outsourced by Supertex can been brought into our internal assembly and test operations.

Microchip will transition all Supertex back-end manufacturing systems, like wafer ordering, assembly and test management, shipments, and warehouses to our systems.

We estimate that this transition will be complete sometime in the third calendar quarter of 2014, at which time all Supertex products will be shipping from Microchip's manufacturing systems.

Regarding sales and field applications, we are planning to keep Supertex's sales and application engineers, and we'll cross-train them, as well as our existing sales force, so that we can find revenue synergies.

We also plan to combine the distribution network for the two companies.

Some distributors for the two companies are the same, while some are different.

Our goal is to achieve expanded distribution capabilities for the products of both companies.

Now, let me pass it to Steve for some general comments about our business, more specifics about the Supertex acquisition, 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 fourth quarter of 2014 and the whole of FY2014.

Then I will provide guidance for the fiscal first quarter of 2015.

We are very pleased with our execution in the March quarter as well as FY2014.

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

Our operating profit percentage was 32.7%.

And we are making excellent progress towards our long-term goal of 35% operating profit.

Non-GAAP earnings per share was a record $0.64, and was $0.03 better than the midpoint of our guidance.

We made the following new all-time records.

Total net sales, total microcontroller sales, 16-bit microcontroller sales, and 32-bit microcontroller sales, all made fresh all-time records in the quarter.

Geographically, our net sales in the Americas and Europe made all-time new records in the quarter.

In the non-GAAP financials, our gross margin dollars, operating profit dollars, net income dollars, and earnings per share all made fresh all-time records in the quarter.

On a full fiscal year basis, our overall net sales in FY2014 were a record $1.93 billion, and were up 20.2% over net sales in FY2013, marking an excellent year of market share growth compared to a low single digit growth for the industry.

In FY2014 we achieved new records on every strategic product line, 8-bit MCUs, 16-bit MCUs, 32-bit MCUs, and total MCUs, analog, as well as licensing.

They all made records in FY2014.

Yes, we shipped a record 8-bit microcontrollers also in FY2014.

We also made new records in each of the geographies of Americas, Europe and Asia, also.

Last, but not the least, the March quarter was our 94th consecutive profitable quarter.

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

On April 1 we closed the acquisition of Supertex.

I will provide more guidance on Supertex a bit later when I provide the overall guidance.

So, now, the fiscal first-quarter 2015 guidance.

The June quarter started with a good backlog position.

There is usually sequential growth coming out of Asia because of the effect of lunar New Year in the March quarter.

Taking all this into account, we expect the June quarter net sales to be up 5.3% to 8.3% sequentially.

This includes about $16.5 million of sales coming from Supertex.

Without Supertex, Microchip classic business is expected to be up between 2% to 5% sequentially.

On a non-GAAP basis, we expect our gross margin to be between 59.3% and 59.5% of sales.

Classic Microchip gross margin is expected to improve to about 59.5% to 60% of sales.

But the short-term gross margin is slightly negatively impacted from the consolidation of Supertex.

Supertex took the underutilization of their fab and capitalized it in their inventory.

Microchip does accounting more conservatively and will charge the under-utilization in the current quarter.

Longer-term, we expect to improve Supertex' gross margin to Microchip levels.

We expect operating expenses to be between 26.6% and 27% of sales.

And we expect operating profit to between 32.3% and 32.9% of sales.

Again, slightly negatively impacted by Supertex short term.

Longer-term we expect Supertex' operating margins to be similar to those of Microchip's.

We expect non-GAAP EPS to between $0.64 and $0.68 per share, including the accretion from Supertex.

Regarding Supertex, Ganesh provided you an update on where we are on the integration process.

Supertex will provide about $0.01 accretion in the June quarter, which we expect will grow to about $0.02 accretion by the fiscal fourth quarter.

We expect the accretion by the end of the second year to be at a rate of about $0.03 per quarter, or about $0.12 per year run rate.

These numbers are non-GAAP and they depend on the pace of integration and general market conditions, which will impact Supertex' and Microchip's business.

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

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

(Operator Instructions)

John Pitzer, Credit Suisse.

Hi, this is Andrew Paik on behalf of John Pitzer.

Thanks again for providing us the expected accretion levels from Supertex.

I was wondering if you could help us understand what kind of gross margin and operating margin you are embedding in your calculation relative to the $0.02 accretion you are expecting, exiting the second full year.

Thank you very much.

Is the question short term, or what are we embedding longer term a year out?

The longer term.

Relative to the $0.02 accretion you provided for exiting the second full year after the acquisition.

Very much similar to Microchip's gross margin levels, 60%-plus kind of range.

Got it.

Thank you.

As my follow-up, I think it would be helpful if you could provide us -- if you saw any strength, better-than-expected strength in any particular end market during the March quarter?

You have an outside exposure to auto, industrial and housing.

So, perhaps it would be helpful if you could help us understand how those end markets performed in the March quarter relative to your expectations heading into the quarter.

Thank you.

The answer is really all of the above that you mentioned.

Housing, auto, industrial -- they have all been small markets.

We have heard commentary from other manufacturers and ours was similar.

We do not track our business by end markets.

We are not organized that way.

We have a very broad customer base of 80,000-plus customers.

So, we can just basically say that generically those are the stronger end markets today, and our business has really benefited from those exposures.

Got it.

Thank you.

Chris Caso with Susquehanna Financial Group.

Thank you.

Good afternoon.

For the first question, I wondered if you could talk a little bit with regard to the Supertex accretion.

And as you get to the final $0.12 a year that you expect, how much of that contribution do you expect from cost synergies, improving the margins, getting the margins up to Microchip levels as compared to some of the improved revenue growth?

Because I think you are looking to make progress on both fronts there.

That is correct.

We are planning to make progress on both fronts.

It has only been one month.

We closed the deal on April 1, so in such a short time we are really not able to provide you further breakdown of really where some of the synergies could come from.

There are synergies out of wafer manufacturing, synergies out of assembly and test, synergies out of OpEx, overhead, and synergy out of increased sales at the existing and new customers.

We have already seen and evaluated that Supertex products were marketed to a relatively narrower group of customers.

And they have tremendous high-voltage expertise.

Some of the products have a much broader reach and will win designs into broad Microchip 80,000-plus customers with many of the broad-based products.

So it is really all of the above.

Okay.

And with regard to the results and guidance, if you could go into a little detail about why there was a divergence between the analog and the microcontroller business in the March quarter.

I suppose, perhaps, that is some of the seasonality of some of your acquired businesses.

But if you could go into a little bit of detail there, and what your expectation is for analog versus microcontroller as you go into the June quarter?

We don't break out our guidance by the various product lines.

But looking back at the March quarter, analog has grown now straight for about nine quarters.

Cumulatively over that period, actually analog growth has been a little higher than microcontroller.

Not every quarter always perfectly falls in its place.

The large number of moving things and seasonality of different business lines, different customers are different.

Somewhat also impacted by the acquired businesses which have slightly different seasonality than our own, like you mentioned.

Those were the numbers in March and we don't break it out going forward.

The analog business historically is very strong in the fiscal first quarter.

So, this quarter you should see positive analog results.

If you go back in our history, you will see there have been quarters where 16-bit has taken a pause or 32-bit has taken a pause.

Over the long run, as you look at it fiscal year over fiscal year, they all look very good.

But in any given quarter we can have a pause for any of the segments.

Yes, and I would just point out that analog in the December quarter was at an all-time record revenues.

So just backing off just slightly from that.

Okay.

Thank you.

Harsh Kumar, Stephens Inc.

Hi, guys.

Steve, we have always valued your commentary on the end markets.

There was a question asked earlier.

I'm curious if you have a mid- to longer-term prognosis based on what you are seeing or your views on the semi cycle at this time.

I'm surprised you value my commentary on end markets because [we don't get any].

(laughter)

He's talking about just semiconductor.

Yes, Harsh, I think you are talking about the general semiconductor cycle, correct?

That is correct.

I think cycle is still on the way up.

There are no major cyclical headwinds visible today.

You are seeing strong Europe recovering, all the peripheral countries are doing better.

Europe was up huge for us in the March quarter.

US is doing well.

We made record revenue both in the US and Europe in the March quarter.

And on a year basis, all geographies were record -- US, Europe and Asia.

Asia was down in the March quarter largely because of the lunar New Year.

And Asia would make another record in the June quarter.

So I think geographies are doing well, end markets are doing well, our business is doing well.

We are gaining share.

The inventories in the channel as well as at Microchip are very reasonable.

We had 118 days of inventory.

We are guiding down inventory by another 7 to 11 days.

So, I think things are in reasonably good shape.

There will eventually be a cycle, but I don't it's in the next quarter or two.

Got it.

Thanks for that color.

And then if I can ask a question.

You briefly touched on the Internet of Things, IoT.

That's like a new big buzz word now.

I am curious if your strategy of getting into that market and growing your business your beachhead will it be the microcontroller business, or the analog business, or something else?

We are not getting into the business.

We have been in it for a long time.

Let me paint how the business looks to us.

Many of these devices that are trying to be connected to the Internet are products in which we have designed in our standard microcontrollers and our analog products for many years.

The four major components that enable our customers to achieve connectivity to the Internet and be part of the Internet of Things are: the computing capability, which is our microcontrollers; the analog functionality, which goes hand in hand in many of their systems; the wireless connectivity and the associated software and firmware that goes with it, which establishes the connectivity through different medium; and, finally, the ability to get onto the cloud, which is really where we partner with external partners who bring that capability so that there're scalable cloud services that are available to these same customers.

So, a lot of the people who are achieving connectivity to the Internet are the people who we have dealt with for many years, have their designs, and are winning their new designs as they take the next step of getting to Internet connectivity.

Great, guys.

Thanks for the color.

And congratulations on setting numerous records in the March quarter.

Thank you, Harsh.

I would like to add one other comment.

I think Microchip fights and defends a very broad beachhead.

Our $2 billion business doesn't tend to be dependent on neither a single vertical market or single stuff like Internet of Things or anything like that.

We are in hundreds and hundreds of appliances, thousands of applications.

As a result, any one given thrust doesn't get as much air time.

But if you look at today the connectivity of thermostats to washing machines, to laundry equipment, to garage door openers, to security systems, Microchip is providing the backbone -- the microcontroller, the analog, the WiFi, the connectivity, the software, and everything to connect these things to Internet.

And we have a substantial business in that area.

But we don't go out there and say we are a pure play in Internet, because that is neither true nor is it something we would like.

Our business is very broad-based.

Got it, Steve.

Thank you.

(Operator Instructions)

Kevin Cassidy, Stifel Nicolaus.

Thanks for taking my question and congratulations on all the records.

Can you talk about your cash position, how much is onshore and how much is offshore, and what is the trend?

Is there a -- Supertex helped bring more cash onshore?

Sure, I can answer that.

The vast majority of Microchip's cash is offshore.

You know we have our line of credit that is outstanding, which is about $650 million.

We tapped into that line of credit for our strategic opportunities, specifically the SMSC acquisition in the past and now will be the Supertex acquisition in the current quarter that we are in.

But the vast majority of our cash is offshore.

Supertex, we don't expect to really improve the onshore cash generation.

It will improve the overall cash generation but their business profile in terms of how much is offshore versus onshore, is similar to what Microchip's is.

So, it should really maintain that structure.

Is there any other strategy to bring cash back onshore?

No, there is not another strategy at this point in time.

The domestic cash generation that we have supports the dividend program, it supports the investments that we need to make in our ongoing business.

But the strategic activity for acquisitions, we'll continue to look at ways to do those things in a cash-effective manner.

Each acquisition is different, but that is something that is evaluated with each one.

You can call the White House to give us a helping hand.

(laughter)

I'll see what I can do.

JoAnne Feeney, ABR.

Thanks and congratulations on a very nice quarter.

I had a question for you, though, about the sequence of revenues into this quarter.

Traditionally when you look at your seasonal patterns over the last several years, even the last couple of years, we have seen a stronger uptick in the June quarter.

And it seemed like that might even have been bigger this year because of the steeper drop you faced in March because of the new exposure to China New Year and Asia consumer electronics.

Do you have a sense for, or do you see any drivers as to why we didn't see that stronger bounce-back in the organic growth of Microchip, excluding Supertex?

Or if there were any order pull-ins that explain your above guidance results last quarter that could help us understand that sequential softness here in June.

We are not looking at June, we are not interpreting them to be soft.

If you, in fact, take the March to June results for the last three years, you will see that the average growth in net sales that we have experienced in the June quarter over the past three years is right in line with the 3.5% guidance.

And then add Supertex to that, about $16.5 million, and that is really the formation.

So, it is not really weaker than the prior.

The case you are making is why is it not stronger.

I seem to recall, that same industrial, auto, and consumer were in the play last year also and they were quite strong.

Our last June quarter was pretty good, too.

So, I think it has been about a year that these end markets have been stronger.

It is really not a new thing.

In addition, not really any pull-ins, but we beat the March quarter from the original midpoint of guidance of 1.5%, so we are starting with a higher base.

That is helpful.

Thanks.

Then on the order pattern or the pace of business, can you give us any color on how orders might have evolved over the last few months over the course of March and the beginning here of the June quarters, whether you are seeing any expedited orders or any pushouts?

And whether that's prompting you to increase capacity utilization at your fabs.

That is a good question.

Our order pattern is very strong.

Noticeably the overall total backlog has a steep slope upward.

But the backlog is not aging all in the June quarter.

We are getting more longer-term orders, somewhat related to -- just overall strong orders.

So, the lead times are not short on many of the products.

With the environment being stronger in industrial, auto, consumers and others, pretty broad-based from all geographies, we are seeing customers willing to place orders more out in time than they historically are.

Partially because customers have also got to know that June, September are stronger quarters, and they have seen in the previous years when I was writing these letters and posting them on the web to customers all the time leading up to this time, asking the customers to place their longer-term backlog.

And they always saw the orders or the lead time push out.

Some customers were stranded with very short inventory.

This time I didn't write the letter because we were basically getting very strong orders and with a very good outlook in the future.

Some of the orders are going all the way into October, November, December.

So, order patterns are very strong and we should have good visibility, which will stage for a good June and a good September.

And on capacity utilization, is that moving higher?

Capacity utilization is moving higher.

We have increased the wafer starts in our fab and that is reflected in our guidance where I said the core Microchip or the classic Microchip without Supertex, gross margin midpoint is about 59.7%, which is substantially higher than the March.

But we had a slight negative effect of the Supertex integration in the first quarter because their gross margin is lower.

By the end of the year or so we will get them pretty good but there is a short-term impact.

Our capacity utilization is increasing quite a bit in back end, all the way from wafer on in probe, assembly and test.

And we're adding substantial new equipment in all stages in fab, probe, assembly, test, which is reflected in our $40 million of capital expense budget we have forecasted for the current June quarter.

That is very helpful.

Thank you for the details.

Craig Hettenbach, Morgan Stanley.

Yes, thank you.

On the 32-bit market, the Company continues to see steady share gains from a small base.

Can you just update us on just the positioning within MIPS?

And I know you also have an on license with the SMSC deal, and just how you see that 32-bit market for you evolving.

We don't position our products to be MIPS or ARM or anything else.

We position it to be PIC 32 microcontrollers.

We have our standard microcontroller portfolio of PIC 32 products, with well over 100 products in the portfolio.

Its breadth of solutions available has been growing, contributing to a higher number of opportunities that we can serve.

As we told you back in November, we have some of the highest performance microcontrollers, some of the best code efficiency microcontrollers, and a whole software platform that we have called MPLAB Harmony to enable that.

And the success is coming from focusing on customers and applications rather than focusing on cores and architectures.

Got it.

Appreciate the color there.

And, Steve, if I could, on the SMSC deal, it has been highly accretive.

Any thoughts on just what the biggest positive surprises, as you've digested that deal, have been?

And any other things you are still working on that you see as opportunity going forward?

We pretty much nailed it in that case.

We highlighted significant accretion that we were going to get from various operating expenses.

Their operating expense was over 40% of sales compared to, really, what Microchip numbers have been.

Their gross margin was a lot lower.

And therefore, combined together, their operating margin was about 12% in the full year before we bought them.

And they're now, really, in the Microchip range.

So, we have gotten improvement from gross margin, we got an improvement on operating expenses.

And we've gotten also improvement from taking some of their products that they were largely positioning them only in the vertical market.

Like, USB was mainly in the computing market, and Ethernet was mainly in the computing market.

And with the Microchip broad customer base we have been able to take them more broadly into set-top boxes and industrial and appliances and other stuff.

So, a lot of that has happened.

There is still some more accretion to go by the consolidation of assembly and tests into Microchip facilities.

I think we are only about half done.

Half done.

We're only about half done.

That basically has slowed down because the environment recovered very strongly and we got more busy really ramping the core Microchip stuff, microcontrollers and analog, to our probe, assembly and test facilities, which was more important because it was incremental business.

And now we have Supertex on our plate, so we are really trying to transfer some of the Supertex assembly and test also to our facilities.

So, there is a lot on our plate.

There is plenty of opportunity to transfer the rest of SMSC, to transfer the Supertex, and to keep growing our own business.

That is a good thing.

There is a lot of opportunity but we haven't been able to fully complete it because the environment turned strong and we got busy growing our own business.

Okay.

Appreciate the color there.

Thanks.

Rajvindra Gill with Needham & Company.

Thank you for taking my questions and congrats on another excellent quarter.

If you could update us a little on the competitive dynamics in the microcontroller market.

As you know, there are other companies, flash vendors that have moved into the microcontroller market through acquisitions.

I'm wondering what your thought process overall of the competitive landscape in that market.

And along those same lines, do you anticipate that there could be some consolidation in that market over time, because it is fairly fragmented?

I will make some comments and maybe Ganesh can add something to it.

I think the competitor you are mentioning is the one that bought a business from Japan.

We are seeing zero competition from this manufacturer.

We never competed with their Japanese business before.

A lot of noise being made, but there is really not in our customer base, we are really not seeing it.

It's a memory company -- it has been, and they bought some microcontroller and analog business.

It may do well over time, but more likely they are going to compete with some of the other Japanese companies, like Renesas and Toshiba and others.

But we are really not seeing any competition from them.

So, they have not changed the dynamics of either the microcontroller or the analog business even one iota.

And could you talk a little bit about the penetration of ARM in the microcontroller market?

Do you see that accelerating at a faster rate, or is it in line with the previous thinking?

We almost don't care.

We are not focused on what the core is.

We are focused on what our customer needs.

What are applications we can focus on?

How do we serve it with a PIC 32 microcontroller?

How do we provide the entire ecosystem to enable that customer to grow?

We are really not fixated on what the core should be, nor do we find the key customers we are working with fixated on that.

Do we use an ARM core for some of our specialized microcontrollers?

Of course.

They came that way through the acquisitions we made.

We left them there because that made sense, not because it was an ARM core but because it was the most effective way that we could serve those customers.

So, our whole focus begins and ends with understanding customer needs, and positioning and providing solutions that satisfy those needs cost effectively and competitively.

And just last question on that 32-bit.

If you look at the market share data -- and maybe we need to update it -- but I think you are number five or number six, in that range.

Number one is Renesas, NEC, and then I think, number two is Freescale.

What are the plans to try to move up that market share scale?

Thank you.

You just saw what we did in the last fiscal year.

You named Renesas and NEC.

They are really one.

Yes, I'm saying Renesas/NEC is one.

So Renesas is one, and Freescale is two.

In the Dataquest chart I think we were number four.

And we were $6 million away from number three.

And we have come from way behind.

So, unless you are new to Microchip, and if you look out over 10 years, a company that has gained the most share really would be us.

And if you look at our microcontroller business, it grew 20%-plus in the last fiscal year.

Take a look at the entire list of microcontroller players and see if you can find anybody anywhere close to that in the top of the list.

So, we are gaining significant share.

We have been every year.

And we move up relentlessly through the charts in each of 8, 16, 32, and in totality for all microcontrollers.

The [SA] data just came out yesterday, and I had a chance to analyze it.

I didn't dial it in my commentary because it was long, because we combined both quarterly results and the annual results, so I didn't speak about it.

But our 32-bit microcontroller, 16-bit, as well as 8-bit, all three of them outgrew the industry growth.

Our 32-bit microcontroller business blew away the growth of the industry.

I think we keep saying that in answer to question after question, that we don't really care about the core.

Our customers don't buy the parts because of the core.

They buy the parts because they are looking for a microcontroller solution, and a PIC 32, it doesn't matter what core it is based on.

It provides them a set of performance and peripherals and software ecosystem, FAEs and system and support, that they require to complete their parts and go to production.

Great.

Thanks for the insight.

Craig Ellis, B. Riley & Co.

Thank you for taking the question.

And congratulations on the operating and financial performance.

Steve, I just wanted to clarify some of the points you made on the manufacturing side.

It sounds like, as you've talked about consolidation opportunities off of the deals that you have done, and with Supertex, that it is really more on the back end with assembly and test to bring things in-house.

One, is that true?

And is there more of an opportunity than what I thought I heard to consolidate more on the front end, as well?

And if so, what would that do to the percent of insourced versus outsourced front-end work for you?

I think the back end coming inside comes a little easier.

They're easier qualifications and all that.

Bringing the front end often requires bringing process technologies you may or may not have inside.

Depending on the lithography, it requires much larger capital investment in equipment.

So, in the case of SMSC, their products were much more bleeding-edge lithographies, and we have not brought any of the SMSC in-house on the front end.

There are a few products we can, and over time we might, but there we haven't.

As fas as Supertex is concerned, they were a much more high-voltage company.

Their products were not on bleeding-edge lithographies.

They've got a lot of 0.5-micron, 1-micron, 2-micron, even 3-micron products.

So, much more high-voltage oriented rather than push the lithography.

Many of the Supertex products are being evaluated for bringing into our fabs, and many of them they will come into our fab.

But Supertex from a revenue standpoint was smaller acquisition.

So, I don't think it moves the needle that much inside versus outside.

But yes, a lot of their products will.

They are inside today, they're in their own fab.

But it is a smaller 6-inch fab and we are evaluating bringing some of those products to a Microchip 8-inch fab.

Thanks for that.

The follow-up question is more on the growth rate of the business.

And I'll throw in a clarification with that.

Given all the changes to the portfolio, both constructive organically, given the growth of the 32- and 16-bit businesses, and the acquisitions that you have done, how do you think about the growth rate of your business now relative to the broader analog industry?

And just a clarification on the revenue side.

Eric, should we expect that the Supertex business really goes into the analog commentary that you typically provide quarterly, or is some of that in some of the other segments that you had commented on?

The Supertex acquisition will be reported as part of our analogs products group in the public reporting.

Steve, I don't know if you want to address the other question.

But he's asking about our growth versus industry growth and what projections could be.

If you take out the Supertex acquisition, year-over-year results at the midpoint of our guidance is about 10.3% up in the June quarter, which is absolutely in front of what the industry is doing.

Craig, did you have a longer-term question?

Yes, it was more of a longer-term question and whether or not the acquisitions that you have done have really altered the growth rate of the portfolio and enhanced the growth rate of the portfolio sustainably versus industry.

But you're also growing on a larger and larger base.

Business now last year was $1.93 billion.

The current quarter guidance puts us at $2.1 billion.

So, you are growing on a much larger base.

I can't really comment on the longer-term growth rate.

I think this question has constantly been asked for a decade.

Without answering the question, you could look back and do any kind of analysis and we have beaten the growth rate of the industry, over the short term, long term, or over any horizon, in market share gains, organically, and in addition with the acquisitions.

We recently -- that's our goal, to continue to do so.

Good luck with it, then.

Thanks, Steve.

With no further questions in the queue, I would now like to turn it back to today's speakers for any additional or closing remarks.

Thank you, everybody, for joining the call.

Some of you we will see Eric Bjornholt at the JPMorgan conference in Boston.

That is the next conference we go to.

Thank you very much.

Bye-bye.

Ladies and gentlemen, that concludes today's conference call.

We thank you for your participation.