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Microchip Technology Inc. (NASDAQ:MCHP)

F1Q10 (Qtr End 06/30/09) Earnings Call

August 6, 2009 5:00 pm ET

Executives

Eric Bjornholt - CFO

Steve Sanghi - President and CEO

Ganesh Moorthy - EVP and COO

Analysts

Brendan Furlong - Miller Tabak

Kevin Cassidy - Thomas Weisel partner

Ruben Roy - Pacific Crest Securities

John Barton - Cowen

Boyd Jim - JPMorgan

Gil Alexander - Darphil Associates

Craig Ellis - Caris & Company

John Pitzer - Credit Suisse

Operator

Good day everyone and welcome to this Microchip Technology first quarter and fiscal year's 2010 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 Mr. Eric Bjornholt, Chief Financial Officer. Please go ahead, sir.

Eric Bjornholt

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

We wish to caution you that those, such statements are predictions and actual events or results may differ materially. We refer you to our press release of today as well as our 10-K for the fiscal year ended March 31, 2009 and our 8-K current reports that we have filed 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, President and CEO, Ganesh Moorthy, Executive Vice President and COO and Gordon Parnell, Vice President, Business Development and Investor Relations.

I will comment on our first quarter fiscal 2010 financial performance and Steve and Ganesh will then give their comments on the results, discuss the current business environment, discuss our guidance for the September quarter and update other pertinent matters regarding our business. We will then be available to respond to specific investor and analysts questions.

Net sales for the June quarter were $192.9 million up approximately 11.4% from net sales of $173.3 million in the immediately preceding quarter, and down approximately 28.1% from net sales of $268.2 million in the prior year's first quarter.

On a geographic basis, revenue in the Americas was up 4.7% in the June quarter. Europe was down 7.4%, and Asia was up 29.5%. Asia continues to be our largest geographic region representing 48.7% of sales. The Americas are 25.6% of sales, and Europe is 25.7% of sales.

These measurements are based on where the product is delivered for manufacturing purposes for our customers, but does not necessarily represent, where the design activity is taking place to where the end product consumption is occurring.

We are continuing to include information in our press release on various GAAP and non-GAAP measures. Management believes that the non-GAAP measures are useful to investors because they enhance the understanding of our historical financial performance and comparability between periods.

Non-GAAP results exclude share-based compensation expense, gains and losses on trading securities, acquisition related expenses, costs to acquire patent portfolio licenses, non-recurring events and the impacts from a tax basis of these excluded items.

We have posted a full GAAP to non-GAAP reconciliation on our Investor Relations page of the website at www.microchip.com, which we believe you will find useful, when comparing GAAP and non-GAAP results.

Non-GAAP net income for the first quarter of fiscal year 2010 was $35 million, or $0.19 per diluted share, an increase of 25.4% from non-GAAP net income of $27.9 million or $0.15 per diluted share in the immediately preceding quarter, and down 57.6% from non-GAAP net income of $82.6 million, or $0.44 per diluted share in the prior year's first quarter.

The aftertax impact on the June quarterly earnings that have been excluded from our non-GAAP results include $7.8 million in share-based compensation expense, $3.4 million in gains from trading securities, a $1.1 million charge associated with the acquisition of a patent license, $1.1 million in charges associated with our acquisition activities, and $0.9 million non-cash interest expense associated with our convertible debt. GAAP earnings per share for the June quarter were $0.15 per diluted share.

I will now go through some of the operating results for the June quarter. I will be referring to gross margin and operating expense information on a non-GAAP basis, prior to the effect of share-based compensation, acquisition related expenses and the acquisition of a patent license.

Gross margins were 51.4% in the June quarter compared to 49.3% in the March quarter. The quarterly increase in gross profit margin was driven by a variety of factors including higher production activity in our factories, continued cost reduction efforts from our global manufacturing operations, and a favorable product mix from the sale of our proprietary products.

With the increase in revenue, we were able to achieve operating leverage from the business with total operating expenses of 29.2% of sales in the June quarter, compared to 30% in the prior quarter

Research and development costs were the $24.6 million representing 12.8% of sales. Sales and general administrative expenses were $31.8 million representing 16.5% of sales. Operating expenses continue to be managed appropriately based on the overall economic environment.

On a full GAAP basis, gross margins including share-based compensation, and acquisition-related expenses were 50%. Total operating expenses were $65.3 million or 33.8% of sales and include share-based compensation of $7.3 million, acquisition-related expenses of $0.3 million, and an expense associated with the acquisition of a patent license of $1.2 million.

On a non-GAAP basis, the tax rate for the June quarter was 13%. The GAAP effective tax rate for the March quarter was 16.2%. The difference in the GAAP and non-GAAP tax rates was driven primarily from the higher tax rate that applied to the gains on our trading securities and the non-cash interest expense on our convertible debt.

Our tax rate is impacted by the mix of geographical profits and the percentage of our cash that is invested in tax advantage securities. The dividend declared today of $33.9 per share will be paid on September 3, 2009 to the shareholders of record on August 20, 2009. The cash payment associated with this dividend will be approximately $62.2 million.

Moving on to the balance sheet, in the June-quarter, Microchip adopted FSP APB 14-1, accounting for convertible debt instruments that maybe settled in cash upon conversion. The adoption of this pronouncement required Microchip to record some significant balance sheet reclassification during the quarter, and retrospectively apply the accounting change to our prior GAAP financial statements.

The major impacts of adopting this new accounting pronouncement in the June quarter were to reclassify $813 million of debt to equity record a $313.2 million deferred tax liability, for the debt that was reclassified to equity, to record non-cash interest expense to reflect the accretion of the remaining debt on balance sheet to the par value of the debt over the life of the convertible, and to adjust retained earnings by 4.4 million for the retrospective adoption of this accounting pronouncement.

Microchip recorded $1.5 million of non-cash interest expense in the June quarter, and we will continue to have a charge for non-cash interest expense for the balance of the term of the convertible.

The non-cash interest expense will be about $1.6 million in each of the remaining quarters of fiscal 2010. Although our financial statement presentation related to our convertible debt was changed significantly due to the adoption of this new accounting pronouncement, the overall economics and the cash flow have not changed.

Microchip's inventory balance at June 30, 2009 was 113.9 million, representing approximately 108 days. Inventory on Microchip's balance sheet was reduced by 17.6 million or 26 days in the June quarter. At June 30, 2009, our distributors were holding about 38 days of inventory, which is similar to the levels that they were holding at the end of March.

With combined inventory days of 146, we have right sized our inventory position allowing our factories to increase their production output in the September quarter, and produce higher gross margins.

At June 30th, our receivables were 98 million, an increase of 9.5 million or 10.8% for the balance as of the end of March. Receivable balances continue to be in excellent condition and we haven’t seen any material deterioration in the payment performance from our customers. We continue to closely monitor customer activity to insure we are protecting the receivable assets on our balance sheet.

As of June 30th, Microchip cash and total investment position was $1.438 billion, a decrease of $2.6 million from the March balance including a $61.9 million dividend payment and a $12.2 million payment related to interest on our convertible debt. With interesting payment on the convertible debt made quarterly instead of semi annually, our cash balance would have grown during the June quarter.

Our cash generation continues to be strong and we fully expect our cash and total investment position to increase in the September 2009 quarter. Capital spending was approximately 4.1 million for the June-quarter and our fiscal 2010 capital expenditure forecast is currently $20 million.

The fiscal 2010 capital forecast represents a reduction of 80% from the fiscal 2009 levels, and we are selectively investing in equipment to support the revenue growth of our new products and technologies. Depreciation expense for the June quarter was $21.7 million, compared to $23.2 million in the same quarter last fiscal year, and $22.9 million in the March quarter.

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

Ganesh Moorthy

I will comment on the individual product lines. Let's start with microcontrollers. Our microcontrollers business was up strong 11.9% on a sequential basis. Flash Microcontrollers represented approximately 80.5% of our microcontroller business in the June quarter.

Our 8-bit microcontrollers business had an excellent quarter, as all segments of our 8-bit product line experienced strong growth. Our 16-bit microcontroller business also had a strong quarter, with 15.7% sequential growth, and 33.3% growth from the year ago quarter, as well as another record for quarterly revenue.

New customers and new designs going to production continue to help drive growth, as the number of volume 16-bit customers grew by 145 customers to 1,842. Our 32-bit microcontroller product line meanwhile continues to make good progress with the number of customers and volume production approaching 100.

Moving to Development Tools, we had a record quarter with 35,608 development tool shipped in the June quarter. We also passed another key milestone, during the quarter with the shipment of our 800,000 cumulative development tool. Both milestones are indicative of continued strong design and activity and acceptance of our solutions by our customers and should bode well for future growth.

In April, Microchip introduced industry's lowest power microcontrollers with the announcement of our XLP or extreme low power microcontrollers. The combination of high functionality and low power offered by Microchip is unparalleled among microcontrollers suppliers and capitalizes on an increasing trend of battery power and power-constrained applications.

Since that announcement customer interest as well as our design win momentum has been strong and we have continue to press our advantage with the introduction of a steady stream of additional new XLP microcontrollers. We now have over 50 microcontrollers with extreme low power technology in production.

Microchip is also continue to make significant strides in establishing our leadership in the growing area of touch technology with the touch sensing and touch screen solutions. We now have over 100 customers in volume production, using our touch technology solutions including marque names like General Electric, Siemens, Samsung, LG, Toyota, JVC, Panasonic, Toshiba, Activision, Logitech and NCR among them.

We also have over 500 other customers, who are actively designing with our MTEC solutions. We are very pleased with the market interest, the customer acceptance, the design win momentum and revenue growth of our broad range of MTEC solutions and are existed by the potential to drive growth.

Moving to an Analog products, our Analog business was up a strong 12.2% sequentially. Here too pleased with the design win and revenue momentum this business has shown and we continue to introduce a steady stream of innovative new products and expect continued strong revenue growth for our analog business in the coming quarters.

Finally on serial [E2] memory, that business was up 5.5% sequentially and we continue to run this business in a disciplined fashion and maintain consistent profitability and serves our microcontroller customers to complete their solutions.

With that let me now pass it to Steve, for some general comments as well as our guidance for the September quarter. Steve?

Steve Sanghi

First of all we are getting a feedback that the webcast was started a few minutes late apparently someone forgot to push the button and some of the information that Eric gave especially geographic information was missed by the ones, who are listening to the webcast. So, I will give that information again.

On a geographic basis, revenue in Americas was up 4.7% in the June quarter. Europe was down 7.4% and Asia was up 29.5%. Asia continues to be our largest geographic region representing 48.7% of sales, the Americas at 25.6% of sales and Europe is 25.7% of sales.

These measurements are based on where the product is delivered for manufacturing purposes and it doesn't necessarily represent, where the design activity maybe taking place. That was the part that was missed.

Today I would like to first reflect on the results of the June quarter, and then I will talk about our guidance for our September 2009 quarter. The June quarter saw a strong rebound from the bottom established in the March quarter. We originally set our internal plan for the June quarter at up 5% sequentially.

In early June, we guided up to between 8% and 10% growth, and I am pleased to report that we exceeded the high end of that guidance, by achieving a sequential revenue growth of 11.4%. We also exceeded the gross margin guidance, beating the high end of the gross margin guidance by 70 basis points. The strength of our gross margins continues to validate the strong proprietary value embedded in our products and our franchise.

Our earnings per share both GAAP and non-GAAP exceeded the high end of our guidance on the strength of strong revenue growth, strong gross margins, and excellent cost control on the operating expense side.

Our inventory came down to 134 days at the end of March quarter, came from 134 days at the end of the March quarter to 108 days at the end of June quarter. The inventories now below our target of 115 days, therefore we have started to grow the wafer starts in our fab, the increased manufacturing utilization will have a positive effect on our gross margins. We expect gross margins for September quarter to be up a between 250 to 350 basis points above June quarter.

From a product line perspective, our increased focus in two areas of microcontrollers is paying off. Ganesh discussed both of them and I will summarize them again. First, we have introduced an industry-leading extreme low power microcontroller product line. That is making waves throughout the industry. We have 50 products in production on this XPL product line and we are gaining significant design activity on the new products, displacing the competition in most cases.

Secondly, we have a leading technical solution on touch-sense microcontrollers. We are currently shipping volume silicon to over 100 customers and have over 500 customers that are designing with our MTECH solution; our design wins span a variety of industrial, consumer, automotive, medical, PC and communication applications.

Our financial results clearly indicate that our business model is working and was profitable even at the bottom of this deep recession, while a majority of our competitors lost money, Microchip just posted over 22% operating profit, a testament to the resiliency of our business model, the loyalty of our customer base, the hard work of our employees worldwide, and the competitive advantage of our company culture. We have been profitable for 75 consecutive quarters and the September quarter will be our 76th.

I also wanted to highlight the comparison to SIA numbers, Semiconductor Industry Association numbers that were recently released. While Microchip does not participate in SIA and short-term SIA numbers are often suspect and later revised, many of the investors and analysts follow those numbers.

Based on SIA data, cumulatively over the last two quarters, SIA’s 8 plus 16-bit microcontrollers were down 18.5%, while Microchip's 8 plus 16-bit microcontrollers were up 1.2% over the last two quarters, showing significant market share gain.

Microchip in the first half of 2009 had its highest market share of 8-bit microcontrollers ever. For those who have predicted market share losses for our 8-bit microcontrollers, I hope this data puts your concerns to rest and we steadily and continuously keep gaining market share in 16-bit achieving record sales in the June quarter.

From a competitive standpoint, our product line is one of the strongest in the history, with the broadest coverage from low end 8-bit to high end 32-bit, from lowest power XPL product line to high performance MCUs and with the broadest set of peripherals in touch sense, motor control, digital power supplies, connectivity, analog and RF, our microcontroller product lines continues to be the compelling solution for the market. We have significantly broadened our served available market and we are getting a large number of design wins outside of our traditional core group of customers.

Regarding specific competitors, we are already getting customer inquiries and design wins due to concerns about the pending merger of NEC and Renesas, other competitors like Freescale and STMicroelectronics are in significant restructuring mode, Freescale’s microcontroller business was down 3.3% sequentially versus Microchip being up 11.9% sequentially.

Freescale blamed it on the weakness of automotive business. We did an analysis of our top direct automotive customers. Microchip's automotive business was up 17.5% sequentially. Our automotive business was sequentially up in all geographies with US automotive up 10.6%, clearly evidencing market share gains for Microchip.

Investors and analysts have also been concerned about our consumer business, with the similar top direct customer analysis, the home appliances part of our business was up 10% sequentially. We cannot differentiate between what someone called it as the correction of the inventory correction and market share gains to new design. We believe that there are some of both, but the performance relative to competitors clearly points to market share gains.

Regarding Atmel, Atmel has lost momentum on microcontrollers as seen by the results in the last two quarters. It was clear to us that Atmel’s prior year's growth was inflated due to the acquisition of Quantum, that distorted year-over-year numbers and due to the reclassification of significant microcontroller business from prior years to ASIC.

Let's be mindful of the similar tactics going forward and watch for the reclassification of ASIC business back to microcontrollers to show higher growth for MCUs. Overall, Microchip sees plenty of opportunities for continued market share gains and we are boldly making new investments in product lines, people, customer training and distributors and we see continued market share gains ahead.

Now I will discuss our guidance for the September quarter. Our book-to-bill ratio for June quarter was 1.18, and our starting backlog for the September quarter was significantly higher than our starting backlog was for the June quarter. So, the visibility is improving significantly, the bookings rate so far in the quarter has been strong, on the other hand, we are now in August, and Europe is sure to go on summer vacation.

Considering all that, we expect our net sales for the September quarter to be up between 7%and 11% sequentially. We expect our non-GAAP gross margin to be between 54% and 55%, which is 250 to 350 basis points improvement over the June quarter. This improvement in gross margin percentage is primarily driven by higher factory utilization.

Our inventories are now fully corrected and are actually below our target. We will continue to ramp our factories to meet the increase in demand, the gross margin percentage through the balance of fiscal year '10 will dependent on revenue increases in subsequent quarters. We currently expect about 100 basis points in improvement in gross margin percentage in each of fiscal Q3 and fiscal Q4.

Regarding earnings per share guidance for the September quarter, we expect non-GAAP earnings per share to be between $0.23 and $0.26 and we expect GAAP earnings per share to be between $0.18 and $0.20. Both GAAP as well as non-GAAP earnings per share assume no effect of mark-to-market considerations on public securities owned.

As you can see from our balance sheet, we produced very strong cash flow last quarter, and were nearly able to cover our dividend and the interest payments on the convertible without dipping into cash reserves.

Starting the September quarter, we actually expect to build cash even after paying our dividend. The coupon payment is every six months. We are glad to have demonstrated to investors our strong commitment to the dividend, unlike many S&P 500 companies; we did not cut our dividend even through the deepest part of the recession.

I want to take this opportunity to thank our customers, investors, analysts and employees, for their support through this very difficult period and assure them that their support is never taken for granted.

With that operator, would you please poll for questions?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Brendan Furlong from Miller Tabak.

Brendan Furlong - Miller Tabak

Quick question on the SG&A, should we think about it, running in the 32% to 33% for the foreseeable future here for the next three, four quarters at least?

Eric Bjornholt

Well, you can see from the information in the press release and the outlook section that we have actually, the range is to be flat to down up to about 75 basis points. It will depending on what revenue that we can see some incremental leverage there.

Brendan Furlong - Miller Tabak

I’m looking more into Q3 and into fiscal '11, should we consider more or less around the same percentage of revenues?

Steve Sanghi

It will largely depend on how much revenue growth is there beyond this quarter and we don't have visibility, but with revenue growth you should continue to see some operating leverage.

Brendan Furlong - Miller Tabak

Okay. My other housekeeping question, then just on the tax rate going forward, you are guiding 12% next quarter. Should we consider that the run rate on the future quarters?

Eric Bjornholt

Yes.

Operator

Our next question comes from Kevin Cassidy from Thomas Weisel partner.

Kevin Cassidy - Thomas Weisel partner

On the automotive side, what's your exposure to Europe and Asia and US, as you compare the three markets?

Steve Sanghi

Our exposure every time we have looked at is really nearly a third, a third, a third.

Kevin Cassidy - Thomas Weisel partner

Okay. So, your US was up 10%. So, were you stronger in any one of them, Europe or Asia?

Steve Sanghi

You have to be.

Kevin Cassidy - Thomas Weisel partner

Which one of, which one?

Steve Sanghi

We don't have the info.

Eric Bjornholt

Both of them were strong.

Kevin Cassidy - Thomas Weisel partner

Okay. Is it analog products along with microcontrollers, or is it just the microcontrollers, that you are selling into automotive.

Steve Sanghi

We sell all of our products, but the dominant really are microcontrollers. That's the majority of our business. The analog portion in automotive will be relatively small.

Kevin Cassidy - Thomas Weisel partner

Okay. I guess just as we were talking about the different markets and as you are gaining back market share. Do you think some of it is related to the markets you addressed growing faster than some of the other markets or is it a complete swap out of one microcontroller for your microcontroller?

Steve Sanghi

Well, Kevin, you used the word gaining back market share. Our data does not show that we lost any market share. It was a direct correlation to the consumer segment and housing basically leading the downturn, and it was so strong that it took the global financial system into a melt down, but when that was happening and we were seeing a substantial fall from it.

Other companies were not as exposed to it and no matter how much we explained it, I don't think it ever got through and we were winning a large number of design wins. We were doing record number of development systems quarter after quarter. The 16-bit growth was strong, and you are seeing the result of many of this design going to production.

So, there really not any dislocations from our standpoint, we had a heavy concentration in consumer and automotive and consumer clearly led the decline and automotive then joined later. So, during that time, yes we had largest fall than some of the competitors, but as we have said our 8-bit market share is the largest we have ever had 8-bit market share.

Operator

Our next question comes from Ruben Roy from Pacific Crest Securities.

Ruben Roy - Pacific Crest Securities

Hi, Steve, I don't think you talked too much about the industrial market. Can you give us an update on what's going on there and what your outlook is for industrial?

Ganesh Moorthy

This is Ganesh. The breath of what we are seeing in the market is, across all the segments that we participate in. So, clearly not only have we seen it in automotive and home appliances, as Steve talked about, but the other segments including industrial have shown strength and many of those are designs we have been incubating and working on. Some of them are older designs, as they come back into a higher level of consumption. So, industrial has been good.

Ruben Roy - Pacific Crest Securities

Okay. Ganesh, do you have a 16-bit development tool number for the quarter?

Ganesh Moorthy

I don't have it, off the top of my head, but we will get one to you.

Ruben Roy - Pacific Crest Securities

Okay and then just I guess for Eric, there was a question on OpEx maybe I’ll ask a little bit differently. We are seeing some stabilization here and then Steve talked a bottom being established in March. It is an improvement in the environment, how are you going to start thinking about potentially getting more aggressive with investing in the business?

Eric Bjornholt

Well, we feel that we are investing in the business as appropriate. We still think that our operating expense as a percentage of sales compared to others is really quite good, but we are not under-investing in the business to make sure that we continue to have success with future design wins and new products.

Steve Sanghi

Remember through the downturn we did not do any layoff. So, all of our sales and marketing and design and product resources have been fully invested. So, product line is just absolutely awesome and fully trained people going to take it to market. So, we have essentially been ready more than ever before very, very, strong recovery trough the downturn as we came out, product line is very strong, lots of new products.

We are not hiring now to really build back because we let whole bunch of people go. We cut expenses largely through pay cuts and zeroing of the bonuses and as the businesses recovering now; we are giving some of the pay cuts back to the employees. So, that’s adding little bit to the operating expense, but the revenue is growing faster than that. So, we are getting operating leverage at the same time, we have all these trained employees doing an awesome job of improving everything in the company.

Ruben Roy - Pacific Crest Securities

Great and then just last question. Can you give us a utilization level for the June quarter and then the outlook for September?

Steve Sanghi

All we can say is the utilization will be higher this quarter than last quarter. We have stopped giving the numbers because we have found it to be very confusing. There are many technologies, some have less number of steps and some have larger numbers of steps, portion of the business comes from foundries and you can't really plug from point A to point B and based on the revenue, calculate the gross margin. It does not work and we have found that’s an extrapolation by the analysts to be highly confusing and misleading.

Basically giving you the guidance, we gave you the guidance for the gross margin for the September quarter, and we also gave you guidance for the following couple of quarters with about 100 basis points improvement in each quarter.

Ruben Roy - Pacific Crest Securities

All right and then sorry, Steve just one last one, I think historically the September-quarter has been back end loaded. Do you expect linearity to be any difference in this quarter for any reason?

Steve Sanghi

The backlog is very strong for September quarter. Usually it slows down quite a bit and usually you get a lot of the orders in September, but this time it’s different. This time we had very strong bookings in July, August can seem to be very, very strong. The backlog is filling very nicely and that's why we reverted from giving you a internal target back to giving guidance. For the last two quarters we gave you internal target, we didn’t give you guidance. We gave you guidance and we also gave you fairly narrower guidance compared to many of our competitors because our backlog is very strong.

Operator

(Operator Instructions). Our next question comes from John Barton with Cowen.

John Barton - Cowen

Steve you highlighted the fact you have customers coming to you because of some of the challenges that your competitors are having, some economic-driven M&A etcetera. How od you see that over the next several quarters? Do you think as the economy stabilizes, you won't have that same trend? How are you feeling about that?

Steve Sanghi

I’d expect it to increase because the merger hasn't happened yet. So, as the merger happens and as we start to rationalize product lines and architectures and combine sales offices and distributors and one salesman stays and the other one goes and all of these changes. So, we are simply seeing the front end of really what people maybe concerned about, but the restructuring is not only and you see in the assets, as you can see everyone of our competitors essentially is restructuring significantly, most of the competitors.

So, there is a lot of continuation. Over the years, in the last 20 years or so, we have not seen customers largely concerned about whether their supplier makes money. If a customer is getting a good product at a good cost, they don't really care, whether the supplier is financially profitable or not.

First time ever through the cycle, we are seeing people really concerned because some of the people have not received the support through very large layoffs and other lot of companies have lost the support they used to get from the suppliers, maybe technical support, maybe customer service, maybe a specific sales people or the samples or whatever it maybe. People are experiencing significantly lower support. One company that hasn't cut back on that support at all is Microchip.

John Barton - Cowen

Any response to previous question about OpEx? You alluded decidedly a bit issuing out of bonus, pay cuts I think what I heard you say, just want to clarify this. You have already started to return some of those cuts, we saw some of it in the June quarter, you will continue going forward, but you will do it at a rate that’s slower than the revenue growth. We don’t have to worry about the step functional up OpEx, impacting the bottom line in the foreseeable future. Did I interpret your statements correctly?

Steve Sanghi

Yes, correctly. You should continue to see operating expense leverage.

John Barton - Cowen

Last question if I could, last quarter you talked about the fact that M&A’s strategy was pretty much limited to small technology tuck in type affairs, still looking at it that way does the stabilization of the end market change your view of that?

Steve Sanghi

It does not change the view of that.

Operator

We will now go to Christ Danely from JPMorgan.

Boyd Jim - JPMorgan

This is Boyd Jim for Chris. I want to get a sense of which you think relative to growth rates in your MCU analog memory businesses for the next few quarters, but the some of the drivers (Inaudible) say for that.

Ganesh Moorthy

I don't want to break out the growth rates at that level of fineness, but the drivers that are going to be producing that growth. We expect 8-bit will grow. It is the largest piece of the microcontroller business. The 16-bit will grow at an even faster rate, than that. We expect the 32-bit growth to be as good a better than, where 16-bit is at so. All aspects of microcontrollers we expect will grow, but the newer product lines having much faster growth.

We expect analog for several quarters here is going to have very good growth. The product line has had an excellent acceptance and designs wins. You have seen that already in the last quarter with over 12% growth. You are going to see that for several quarters here. So, those are the fundamental drivers. It’s our microcontroller business 8, 16s, 32s and is a analog business.

Boyd Jim - JPMorgan

Just another question around your memory business, how your prices trending in that business? In the past quarter and going forward?

Ganesh Moorthy

Memory is a competitive market. We play in the aspects of those business that are important for us to be in. We are not trying to chase revenue at the expense of gross margins in that business. Our ASPs have been trending down at a historical rate, but nothing that is of concern to us.

Boyd Jim - JPMorgan

Just one last question, it sounds like your auto business did really well. How is your auto compared to your peek historically? Is it how much down is it in comparison to the peek?

Ganesh Moorthy

I don't have a percentage of where it’s going to be. Obviously it went down as a percentage as automotive had its decline, but it’s not that easy for us to be able to track at a fine detail of every automotive account. I think what Steve gave was a sense of a representative sample of our large automotive customers that we have direct insight into.

Steve Sanghi

62% of our business it’s from distribution, where we do not get a break down, whether they are consumer, industrial, automotive or what. So, these can vertical market analysis, we hardly ever do, and we internally see no value because our products are standard to go into all five markets.

So, once in a while, when there is a lot of noise on Wall Street, we can do a simple analysis like we have done this time, but routinely we are not run by vertical markets. We run horizontally by producing very feature rich productions that sell horizontally across all markets to 70,000 customers.

Operator

Our next question comes from Gil Alexander from Darphil Associates.

Gil Alexander - Darphil Associates

Could you give us an idea of what the market share is in the field programmable 8-bit market?

Steve Sanghi

Well, I can say that it is very high, when we used to track that and used to break these numbers out, our market share was about a third of the entire market.

Gil Alexander - Darphil Associates

Right.

Steve Sanghi

Since then significant additional portion of the market has converted from non-field programmable to field programmable. Everybody else, who wasn't making field programmable microcontroller is now making field programmable, and a lot of the competitors have converted their non-field programmable customers to their field programmable.

So, majority of the market is field programmable. So, market share of the overall market is like I said it’s a record in the first half, and market share of field programmable market is even higher than that, but we don't know what the number is.

Gil Alexander - Darphil Associates

I know we're in recovery state, but is there a way of judging what the 8-bit programmable market should grow over the next few years. It’s tough to do. Because you are in a recovery state, but should it be something like 5% to 7%, if you took out the recovery of the market?

Steve Sanghi

We don't really know how to put numbers on them, when various market analysts are $1 billion apart on the $5.5 million market on the size of the 8-bit market, then 5% differential analysis is not meaningful. That has been the main issue that, unlike SPGAs unlike microprocessors, microcontroller market is highly fragmented with large number of competitors having significant internal consumption especially in Japan and Europe and the overall size of the microcontroller market that we hear from SIA never jives with what we hear from any of the other market analysts, which give a break down by company, like data processing and others.

So, this has always been a big challenge. So, you pick your target either look at Dataquest or look at SIA or look at somebody else and consistently watch them and you can see a trend, but if you jump around and try to figure out what the size of the market is, you get a number of plus or minus $1 billion. So, by consistently watching the number we are telling you that our market share for 8-bit microcontroller is the highest we have ever had.

Gil Alexander - Darphil Associates

Just for housekeeping, what’s your depreciation estimate for the year?

Eric Bjornholt

It is about $88 million.

Operator

Our next question comes from Craig Ellis from Caris & Company

Craig Ellis - Caris & Company

Steve, you provided some commentary on potential gross margin met in the second half of the year. Obviously there was some underlying revenue assumptions around that. I am wondering you can provide some color there, whether it’s just normal seasonality, something north or south of normal and whether you think there is any channel inventory build that might be occurring there, as we think about those parameters.

Steve Sanghi

It is north of normal. That's really all I can say.

Craig Ellis - Caris & Company

Okay and then switching gears regionally, Europe was down in the June quarter, no surprise it seems like everybody just talked about Europe is seeing weakness there, but as you have moved into the first fiscal quarter, are you starting to see that geography stabilized or what you are seeing out of Europe, as you start to move through the quarter?

Steve Sanghi

Europe seasonally is the weakest in the summer quarter, which is the quarter, we are in right now. We are not seeing it this year, and it could just be driven by usually they're very strong in the March quarter and this year they were not. There was the depth of the recession for them.

Usually they are okay in June quarter and they were not. They were down. So, you are getting some effect now in the current quarter, where they usually down this quarter and this quarter it doesn’t look like. So, seasonalities all screwed up by geography. I think as this business recovers in another year or so, we are going to have to almost establish what the cyclicality of each geographies and what the cyclicality of the business is.

Craig Ellis - Caris & Company

Okay. So, you have started to see an improvement in your European business.

Steve Sanghi

Yes.

Craig Ellis - Caris & Company

Okay and then lastly from me, you mentioned that you see plenty of opportunity for share gain out there, can you pin point some of the opportunities that you see?

Steve Sanghi

Broadly we are gaining share in every single market, 8-bit, 16-bit, 32-bit and analog. You could break it out by vertical markets. We don't have that tracking, but it seems like we are gaining share in automotive, in industrial, in medical and by applications. We serve thousands of applications. We are in everything you own or everything you see that has power connected to it.

Operator

(Operator Instructions). Our next question comes from John Pitzer from Credit Suisse.

John Pitzer - Credit Suisse

Steve, just wondering, when you look at the September revenue guidance, what’s the expectation for just the inventories? You expect September to be a quarter, where inventories stay flat, go down, build a little bit?

Eric Bjornholt

We would project that in terms of number of days that inventories are going to hold that would be about flat.

John Pitzer - Credit Suisse

About flat sequentially?

Eric Bjornholt

In day, in dollars we would expect it to be up to maintain that level of days with increasing revenue.

Steve Sanghi

Then Steve is there any way to quantify the dollar opportunity with NEC- Renesas merger as far as what’s you can potentially pick up and what timeframe?

Steve Sanghi

I don’t know how to do that.

Eric Bjornholt

It’s a target rich environment. They have a lots business so.

John Pitzer - Credit Suisse

Steve if not a dollar amount, what kind of time line would you expect to start to see any potentially share gain start run in to the P&L?

Steve Sanghi

It’s a usual start. Certain fast moving application the design cycle can be faster than six months, but majority of that is, year, year and half and slow moving not even longer. So, it just you don't really know. People are in all different stages, when the design is going to finish. When the design comes up for renewal, everybody just doesn't get up one day and say okay let's move. They move because there is a platform change coming up or an upgrade design coming up or buys no longer available, and there is just nowhere to speculate anything like that right now.

John Pitzer - Credit Suisse

Steven, just given the book-to-bill number for June of 1.18, the guidance for revenue to be up 7% to 11%. My understanding as you would expect that the September quarter would actually be stronger linearity in the first half and then slow because of Europe, its seasonality in the second half of the September quarter. Is that the way to think of it?

Steve Sanghi

If you are trying to talk about book-to-bill and the revenue growth in the breadth is never worked and we have told you that many times before. There is no correlation. There is no correlation historically between a book-to-bill ratio and revenue growth. Book-to-bill ratio is simply function of whether the customer is placed the orders early or placed it orders in the quarter.

John Pitzer - Credit Suisse

Okay. If I take book-to-bill, at the questions you just linearity in the September quarter front half loaded and then slowing in the second half around normal seasonal or?

Steve Sanghi

For the shipments are not linear. The visibility has improved. So, we have very strong backlog, the quarter is normal in terms of linearity. So, we are going to have no shipments in July and no shipments in August and all the shipments are in September. It is fairly linear and it is linear because the backlog is very healthy.

John Pitzer - Credit Suisse

To my last question, is around geographic break down of revenue. I understand it is where you ship not where the end product finally gets consumed, but if you had to take a guess of your exposure to Asia from a consumption standpoint. What would be the right ballpark to think?

Steve Sanghi

I don't have a number that I can backed by analysis. It will be just bring it out of the air.

Operator

Now we will go to Brendan Furlong with Miller Tabak.

Brendan Furlong - Miller Tabak

Thank you for the follow through question. On the 16-bit 33% growth year-over-year, obviously impressive growth rate there, I don’t know if you can tell me what end markets, what products or what is driving that growth rate in your 16-bit?

Eric Bjornholt

We never had particular end market strategy to drive growth. There is a lot of hard work that has gone in over the years to create the products to create the support infrastructure from both our own field sales team as well as our partners. It is a very broad range of customers and application that is driving that growth and we have consistently worked on the building the revenue pipeline, and what’s you are seeing is a fruits of hard work that have been done over many, many years to build it and we expect that to continue for a long time.

Brendan Furlong - Miller Tabak

I guess my last question. I know you probably not going to go there and just one, but. On your touch sensing you have 100-customer shipping in volume, any ballpark in terms of percentage of revenue or dollar value?

Eric Bjornholt

No, we don't break out by customer or market segment that way.

Operator

There are no further questions. I would like to turn the conference back over to our presenters for additional or closing remarks.

Steve Sanghi

We want to thank you everybody for attending the conference call and our apology again for some rough start especially on the webcast side. Hopefully you have the information you need and if you don't, just call us and we will give it to you. Thank you very much and we will see many of you on the road this quarter. Bye, bye.

Operator

This concludes today's presentation. Thank you for your participation.

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Source: Microchip Technology Inc. F1Q10 (Qtr End 06/30/09) Earnings Call Transcript
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