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Micrel, Inc. (NASDAQ:MCRL)

Q4 2013 Earnings Conference Call

January 30, 2014 4:30 PM ET

Executives

Raymond D. Zinn – Chairman, President and Chief Executive Officer

Robert E. DeBarr – Chief Financial Officer and Vice President-Human Resources

Mansour Izadinia – Senior Vice President

Analysts

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Christopher Longiaru – Sidoti & Company, LLC

Timothy Sandel – Wells Fargo & Co.

Bill J. Dezellem – Teton Capital Management LLC

Operator

Greetings and welcome to the Micrel Semiconductor Fourth Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Ray Zinn, President and CEO for Micrel. Thank you Mr. Zinn, you may begin.

Raymond D. Zinn

Well, thank you to you. And welcome to our fourth quarter 2013 conference call. We are delighted to have you on line with us today. And with me I have Robert DeBarr our new CFO and Vice President of Finance as well as Mansour Izadinia who is our Senior Vice President for the company.

So with that I would like to turn the time over to Robert to give you the prepared remarks. Okay, go ahead Robert.

Robert E. DeBarr

Thank you, Ray. In conjunction with this conference call, a number of supplemental charts will be made available on Micrel’s website during the following prepared remarks. To access these charts please go to Micrel’s website and click on the link that will take you to the fourth quarter 2013 conference call slides. We’ll begin today’s call with the Legal Disclaimers and Safe Harbor statement.

All material contained in the webcast is the sole property and copyright of Micrel Incorporated with all rights reserved. Certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risk and uncertainties. Forward-looking statements include statements regarding future business results, future levels of sales and profitability, product and technology development, future customer demand, inventory levels and economic and industry projection.

Various factors could cause actual results to differ materially from what is set forth in such forward-looking statements. Some of the factors that could affect the Company’s results have been set forth in our press release dated January 30, 2014 and are also described in detail in the Company’s SEC filings, including but not limited to our annual report on Form 10-K for the year ended December 31, 2012 and quarterly reports on Form 10-Q after the 10-K.

Listeners who do not have a copy of our fourth quarter 2013 earnings press release may view the press release on the Company’s website. We will first review our financial results for the fourth quarter ended December 31, 2013 and then discuss our outlook for the first quarter of 2014. Our prepared remarks will be followed by question-and-answer session with the financial community.

Let’s now turn to an overview of Micrel’s fourth quarter and fiscal year financial and operational result. The fourth-quarter was an exceptional quarter for the Micrel’s with revenue up 3.2% to $60 [ph] million. The fourth-quarter has typically been a down quarter for the company in the past few years. Operationally, fourth-quarter gross margins held steady compared to the prior quarter at 50.7%. And at the bottom line non-GAAP earnings per diluted share was $0.08.

These fourth-quarter results wrapped up a solid earnings for the year for Micrel. Despite the economic uncertainty facing our industry and the slow phase of the recovery that persisted throughout the year, bookings during 2013 yielded a book-to-bill ratio of around one. We remain pleased with the new products we introduced during the past year. Design wins in 2013 were up compared to the prior year and we are happy with the traction that our products are generating in the marketplace.

Micrel continues to operate from position of financial strength. Cash flow from operating activities was nearly $5 million in the fourth quarter and nearly $27 million for the full-year. During 2013 cash flow from operations was 11.4% of revenue. At year end our cash, cash equivalents and short-term investments balance was approximately $88.6 million or $1.54 per diluted share. Our strong balance sheet continues to provide Micrel with significant financial flexibility to invest in our business.

During the year Micrel $23.3 million to repurchase approximately 2.4 million shares of common stock, at year end Micrel still had $25.8 million remaining under our current repurchase authorization. Since 2001 the company had spent $453 million repurchasing Micrel common stock. These repurchases helped to reduce the diluted shares outstanding over this period by more than 50%. We believe that Micrel’s stock repurchase program is one of the highest for its size in the industry.

Combining the stock repurchase program and the dividend, the company has distributed back to shareholders over 120% free cash flow for the year and over 200% in the fourth quarter. We believe that Micrel has one of the highest rates of return of free cash flow back to its shareholders.

Pursuant to our focus on returning value to the shareholders, we are pleased to announce that Micrel’s Board of Directors has once again authorized a quarterly dividend of $0.05 per share of common stock to shareholders of record as of February 13, 2014. The payment of the dividend will be made on February 27, 2014 reflecting a dividend yield of approximately 2% based on the current stock price. Since the dividend program began in 2007 we have paid out approximately $64 million in dividend.

Let’s now take a closer look at Micrel’s fourth-quarter financial results. As noted, we record revenues in the fourth quarter of $60 million up approximately $1.8 million from $58.2 million in the third quarter of 2013. Our fourth-quarter sales mix byproduct area was as follows; Linear and power 56%, timing and communication 22%, LAN 20% and other 2%.

Micrel sales remain widely diversified with our top 10 direct customers accounting for 70% of sales for the fourth quarter and 60% for the full-year 2013 with no direct customer accounting for greater than 10%. Micrel believe that it has one of the most diversified product lines and markets for its size in the industry. This is the hallmark of Micrel has delivered low risk strategy for managing the business. This year 2013 was the 34 out of 35 years of profitability on a GAAP basis, which we believe is a record in the industry.

Revenue by end market for the fourth quarter was as follows; industrial 51% compared to 50% in the third quarter, communications at 17% unchanged from the third quarter, computing at 16% compared to 15% in the third quarter and wireless at 12% compared to 14% in the third quarter and others was 4% unchanged throughout the third quarter. Fourth quarter sales by region were as follows; Asia 68% compared to 60% in the third quarter, North America 20% compared to 26% in the third quarter and Europe 12% compared to 14% in the third quarter.

Continuing with our income statement, SG&A spending for the fourth quarter was $11.3 million or 18.9% of revenues compared with $11.2 million or 19.2% of revenues in the third quarter. Research and development expenses for the fourth quarter were $14.5 million or 24.2% of revenue compared to $14.1 million or 24.2% of revenue in the third quarter.

Micrel continues to invest heavily in research and development and as we continue to bring world class products to the market. In the fourth quarter we took a one-time restructuring charge of $1.4 million equivalent to approximately $0.02 per share primarily to reduce cost in our wafer fab, fabrication operation. We believe that this cost reduction will further enhance Micrel’s competitive advantage as we reduce wafer fabrication expenses.

Operating income for the fourth quarter [indiscernible] was up 3% of revenues compared to operating income of $4.2 million or 7.3% of revenues for the third quarter of 2013. Micrel recorded tax benefit of approximately $0.1 million in the fourth quarter due to a federal R&D credit of $1.1 million for the years 2010 through 2012. We expect our tax rate to revert to more normal statutory levels in 2014 or approximately 30%. Finally, GAAP net income was $3.4 million or $0.06 per diluted share this compares to a third quarter GAAP net income of $4 million or $0.07 per diluted share.

Now turning to the balance sheet, our liquidity position remains strong. Cash and short-term investments were $88.6 million at the end of the fourth quarter compared to $98.2 million at the end of the third quarter and a $103.6 million in the prior year period. The $10 million reduction in cash is primarily associated with the $10 million stock repurchase program that took place in the fourth quarter. Cash flow from operations for the quarter was $4.7 million compared to $12.4 million in the prior quarter and $6 million for the fourth quarter of 2012.

We continue to expect capital expenditures to be in the $1 million to $2 million per quarter range for 2014. Accounts receivable balances decreased by $2.5 million in the fourth quarter to $29.4 million, in days sales outstanding were 45 days at the end of the fourth quarter down from 50 days in the third quarter. The company does not have any significant collection issue.

Net inventory decreased approximately $1.9 million during the fourth quarter to $43.2 million and days of inventory on hand reduced to 134 days from 145 days in the third quarter. Four days of the inventory is attributed to a last time buy for a particular process at a third-party foundry. Overall inventory has moved down from 140 days to 130 days net of that last time buy.

Micrel is running the wafer fab at a relatively low level in an effort to drive inventory down to our target level below 120 days, this is having a negative impact on gross margins. At the end of the fourth quarter, total channel inventory weeks of supply were 14.2 significantly down from the third quarter and at the lowest level in over two years. Distributor inventories were down in all regions with Asia down close to 19%, fourth quarter deprecation and amortization was $3.3 million up slightly from the $3.2 million in the third quarter.

Before turning to our outlook for Micrel and the industry, we would like to provide some highlights of the new and exciting products that we’ve introduced. Our linear and power solutions group recently introduced a family of advanced high-voltage MOSFET drivers for brushless DC motor applications targeting power tools, remote controlled vehicles boats and planes. These ICs reduce the overall system cost while increasing the batter run time for these applications. Some of these applications require several micro MOSFET drivers per system.

In addition, the linear and power solutions group continues to expand the switching convertive product line for high performance applications such as cloud computing and data communication market. We introduced our first fully digital controller with monitoring and diagnostics reporting capability, our customers are developing advanced power systems requiring converters that are capable of monitoring and communicating with their systems. With this product introduction we can now offer both analog and digital power solutions to our major networking customers.

The acquisition of Discera places Micrel at the forefront of MEMS-based timing solution, the MEMS technology is well suited for the automotive markets where high reliability temperature and shock resistance is critical. The MEMS timing technology enables the company’s bring to market, timing solutions with a compelling combination of smaller size, wider operating temperature range and high reliability and shock resistant compared to traditional quartz-based solution. These advantages provide tremendous benefits in growth markets such as mobile, smart grid, security and surveillance, data centers, as well as automotive infotainment.

The company will continue to leverage and build upon its MEMS technologies to bring to market innovative timing solutions further expanding MEMS-based timing solutions for consumer, communication and automotive markets.

The LAN business unit released a new generation of 5-port switch products, which offer advanced feathers such as energy efficient Ethernet, Wake-on-LAN and gigabit uplink capability. This product family targets embedded and industrial Ethernet application.

Now, let’s turn to the outlook for the semiconductor industry in Micrel for quarter one 2014. In order to help the investment committee understand the complex and changing dynamics of the semiconductor industry, Micrel frequently provide data relevant to industry economic conditions in outlook. But we want to remind everyone that the following information is not specific to our company. It is with this backdrop that we once again provide our industry view and outlook.

Let’s first turn to chart number one, which is our semiconductor parameter chart. You will note that we have updated the chart to include the next four quarters. And that we expect improvement in the metrics beginning in the second quarter of 2014. We believe bookings will pick up in February, following the Chinese New Year and continue at an improved rate throughout the quarter.

We anticipate that the book-to-bill ratio for the industry can be above one exiting quarter one. We don’t mean to refer that the industry is back to the races because the global economy still remains relatively sluggish. As evidenced by the recent semiconductors companies earning calls that indicate that quarter one still remains a challenge.

Most economists are forecasting that 2014 GDP growth rate to be in the range of 2.5% to 2.7%. As we have mentioned in previous conference calls, we believe the U.S. GDP growth rate needs to exceed 4% to generate a multiplier effect for semiconductor industry growth primarily because industry demand appears to be sensitive to changes in discretionary income. However, we expect that the gradual improving world economies should result in an overall improving market for the semiconductor industry through 2014 and 2015.

Now let’s turn to chart number two, which is our semiconductor industry cycle chart. As we have been saying for years, the number of units shipped is the most appropriate measure of demand for the semiconductor industry.

As you will note from the graph, unit shipment still remain on a long-term growth trend line of 10% annually. This means that the long-term demand for semiconductor still remains intact. An issue which significantly impact semiconductor industry revenues has been price erosion. Unfortunately, over the past few years, price erosion has mostly raised revenue growth for the industry, even though unit volume has remained roughly on the long-term trend line.

Despite the question as to what the ASPs are going to do through 2014 and how they might impact overall revenue growth for the industry, we are predicting that unit volume will remain on the trend line at 10% for 2014 and that price erosion will be 3% to 5%. This would then result in revenue growth in the 5% to 7% range for 2014.

We have observed that as lead time has dropped below six weeks, ASPs erosion accelerates. When lead time stretch beyond six weeks, it appears to be a signal to customers that product is not is readily available indicating that seller’s market as opposed to a buyer’s market. Thus, we have the dilemma that the industry has been facing for the past few years, which is short lead times or in other words, the buyer’s market.

We are predicting that lead time should begin to stretch out sometime in the second quarter of 2014. We have [ph] got the price erosion will begin to subside and may even stabilize towards the end of the year.

Now with that backdrop, let’s turn to Micrel for quarter one 2014. Micrel ended the first quarter of 2014 with slightly less backlog and we did that during the fourth quarter of 2013. This is not unusual as customers tend to trim their inventories at the end of the year.

So far in the first quarter, we have seen strengthening in bookings, as well as an increased number of expedite requests from customers. That covered with the strength of our revenue coming out of the fourth quarter gives us confidence that revenue in the first quarter of 2014 could be in the range of from down 1% to up 3%.

Gross margins are expected to be approximately 51% resulting in a GAAP earnings per share of within the range of $0.05 to $0.08 per diluted share. We are constantly optimistic that Micrel has turned the quarter and has improved its growth trajectory. With unit volume at record high, we believe that the demand for Micrel’s products is strengthening.

In addition, we are thrilled with the number of new products that are gaining great traction with our customers. With the acceleration of the so-called Internet of Things trend, our LAN, timing and analog products are performing well. While our penetration into the automotive markets remain on track and is expected to be a growth driver for Micrel going forward.

We will now turn to the question-and-answer session of the conference call.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Tore Svanberg form Stifel. Please proceed with your question.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Yes, thank you and congratulations on the results in Q4. Let me ask a few questions on the industry first and then I’ll have some Micrel specific ones. So you said you expect lead times to potentially start stretching in Q2. I was hopping you could elaborate a little bit on that. Is that mainly because inventories are too low and bookings start to improve seasonally in Q2 or help me understand what’s behind that comment, please?

Raymond D. Zinn

It’s a combination of both, Tore, that the fact that inventories, we believe, when always hadn’t done will show they’ve decreased and we know this because in almost every market in the semiconductor industry and also hearing comments from our channel partners that inventories are very lean and then coupled with the fact that Q2 tends to be seasonally one of the strongest quarters as we get in toward the summer pre-Christmas build, so this is the logic behind that.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Very good. And you mentioned you expect ASPs to be down 3% to 5% in 2014, this is for the industry obviously. Would that sort to be a direct result then of the lead time stretching meaning ASPs will probably would be down a little bit more in the first half, but then potentially make some of that back in the second half?

Raymond D. Zinn

Exactly. So again, without knowing exactly where the lead times are going to go, we put a range on it just and because we are not sure. And so we think it will be no worse than 5% in 2014 on average. And as we indicated in the script that we believe to have this happen towards the end of the year, it’s got to almost go to zero as far as the change in ASP. So that is what we are accounting on. So if it stretched down a little longer then it can be more towards 5%. If it happens earlier, it would be more 3%. And so, that’s our logic behind the range of 3% to 5%.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

That’s very helpful. And then turning on to more Micrel-specific questions, the first question is on your backlog, you said it was down sequentially. How much turns would you require in the March quarter to get to the mid-point of your guidance?

Raymond D. Zinn

Just about the same as we did for Q4. We are not, things are looking pretty good. The only unknown is the Chinese New Year impact. And so, we are hoping that when they return back after Chinese New Year that bookings will pick back up again because we expect a little bit of a turn for this week of Chinese New Year. So, but just based on the bookings up to this point, they look like on track like we could, well the turns is by the way is happening where our turns are actually for this period are exceeding what we had in Q4, so, and lined up to January. So we are on track. So it doesn’t take a lot to hit the guidance we have.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Very good. And you mentioned you expect inventory days to, your target is to get them below 120 before you potentially see high utilization in your fab and potentially gross margin expansion. Would you expect to get to 120 by Q1 or will it take a little bit longer than that?

Robert E. DeBarr

Hey, Tore, this is Bob. Yes, it’s going to take a little bit longer than that as you saw we moved down nine days this past quarter. And we are, we do lowered the wafer fab here a little bit lighter each quarter in order to drive that number down, but it would take a couple of three quarters to get down to those numbers.

Raymond D. Zinn

If we pull it down too hard, too fast and of course margins will suffer, I think, too much. So we are being very, we are managing it, so we are kind of managing it down, our goal is to get it under 120 exiting at least Q2, I mean Q3 sorry, Q3 of 2014. so we are not going to precipitate just precipitously not build anything just so we can get the inventory down, but one thing we do see a mix shifts and also improves business for us and so we just cant, I cant drive it down in one quarter, but we are certainly being very discreet and how we are doing, our objective is to continue running the fab at a more lean area right now until we see the inventory days keeping kicking on down. So you should see them come on down even in Q2.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Very good, one last question for Bob and then I’ll go back into queue. Just the way I read your EPS guidance Bob should we model OpEx to be fairly flat sequentially?

Robert E. DeBarr

Yes, yes. I would continue to model OpEx flat.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Very good, very helpful, thank you very much I’ll go back in queue. Thank you.

Operator

Our next question comes from the line of Christopher Longiaru from Sidoti & Company. Please proceed with your question.

Christopher Longiaru – Sidoti & Company, LLC

Hello can you hear me?

Raymond D. Zinn

Hi Chris. Hello Chris.

Christopher Longiaru – Sidoti & Company, LLC

Yes, hi. Congratulations on the results and the guidance.

Raymond D. Zinn

Well we are very pleased Chris.

Christopher Longiaru – Sidoti & Company, LLC

This is a little bit better than simply those seasonality, was there an area that was stronger for you, specifically?

Raymond D. Zinn

More of the industrial I would say was where we say most of the strength, communications was stringer especially in China, so probably a combination of industrial and communication is where we saw the improvement.

Robert E. DeBarr

And you actually saw the distribution of the revenue.

Christopher Longiaru – Sidoti & Company, LLC

And you mentioned that the 14.2 weeks of inventory at the low end of the curve was that, is that across the board or I would think that you would have a little bit more visibility in industrial, can you comment on that and as you know…

Robert E. DeBarr

It’s just a class of board.

Raymond D. Zinn

It’s a class of board Chris, our POS our POP all of them have pulled their inventories way down.

Christopher Longiaru – Sidoti & Company, LLC

And so are you going to have to tie or ramp up your inventor a little bit, do you expect to have to do that to meet this demand that you see coming down the pipe?

Raymond D. Zinn

Well we hope so, but we are being cautious right now, we are trying to get our day down, more towards our target area of 120 as we mentioned to Tore we don’t expect that to happen till Q3, so its, so therefore we are just going to keep the inventory in line, keep, we are hoping that the lead times will stretch out a little bit which will give us rise to maybe increased fab utilization.

Christopher Longiaru – Sidoti & Company, LLC

All right, you have mentioned pricing pressure, now that these inventories or where they are do you expect to get a little bit of the least from that pressure as some of these orders come in and the inventories are as lenient they are?

Raymond D. Zinn

Yes, that’s what we said actually, that was the comment that we made in our prepared remarks that we do expect that to be the case as we exit Q2, we do expect lead times to start stretching out and as they do then it moves more to a sellers market as appose to buyers market, this obviously helps stabilize pricing.

Christopher Longiaru – Sidoti & Company, LLC

Okay and I’ll jump out. Thanks guys.

Raymond D. Zinn

You are welcome, thank you Chris.

Operator

Our next question comes from the line of David Wong from Wells Fargo. Please proceed with your question.

Timothy Sandel – Wells Fargo & Co.

Hi, gentlemen. Thanks for letting me ask the questions. This is Timothy Sandel dialing in for David. Ray, could you set some light on the progress you are making in terms of your high voltage modules targeted towards the industrial end markets? Or most of those modules you are ruling out targeting high power applications? Or are they more lower power applications at the moment?

Raymond D. Zinn

I’m going to let Mansour to go ahead and answer since he is here.

Timothy Sandel – Wells Fargo & Co.

Okay. Hi.

Mansour Izadinia

Actually our portfolio of products is pretty diverse, but they’re under development. We have products all the way from, let’s say, 12 volts, up to 75 volts, anywhere between 1 amp to of course of 25 amp. It means we have a very diverse portfolio both for the communication segment and industrial, as well as computing.

So, very diverse set of products coming out of Micrel and in fact even though we haven’t introduced some of these modules, I do want to point out that over the last year or so, we have had actually product and that we are working with our customers. So a lot of them are alpha customers have already been sampled and we have products that’s our, what I was calling, the designs win phase. So many times we don’t actually announce the products to the general market that we are working with our alpha customers already. So yes, we have a very diverse set of product.

Raymond D. Zinn

Yeah, a lot of the interest I mean is coming from the higher voltage side. So if I were to say, where is the most interest is probably on the higher voltage zone, anything north of 40 volts is where we are getting a lot of interest.

Timothy Sandel – Wells Fargo & Co.

Okay. Thank you. Thank you so much for the color. And then, Bob, how should we think about free cash flow trends going into 2014, relative to 2013? And I guess if you could discuss what your cash priorities are for 2014 in terms of share repurchases and dividend payouts that would be great?

Robert E. DeBarr

Okay. First the free cash flow we are modeling is to be a bit higher in 2014 than in 2013. It’s just a little bit in 2013. So the trend is a little bit up there. As far as what we will be doing with that free cash flow is we still have, as we mentioned on the script there, we still have over $25 million left as part of our repurchase authorization, so we will continue to move forward on that. And our dividend, as we announced today, we announced the same dividend, we will continue to move forward on that. So, I would say that you are going to continue to see close to 100% of free cash flow distributed back to the shareholders much in the same way that it went back to the shareholders in this past year, 2013.

Timothy Sandel – Wells Fargo & Co.

Okay, great. Thank you so much, gentlemen.

Operator

Our next question comes from the line of Bill Dezellem from Tieton Capital Management. Please proceed with your question.

Bill J. Dezellem – Tieton Capital Management LLC

Thank you. A couple of questions. First of all, the U.S. revs as a percentage of revenue pulled back and the Asian revs that were up this quarter. Would you discuss and otherwise and what for is behind that please?

Raymond D. Zinn

Yes, most of it comes from communication segments in the China market. So we had a real boost there and that’s what accounts for this shift from the U.S. percentage to China. So as opposed to U.S. revenues having a weakness component along with strength in the Asian component really its Chinese com is really just creates the swing.

Robert E. DeBarr

Yes, so U.S. is basically stable I mean it’s not gone down. It’s just didn’t move up. And so, but when the revenues from China moved up and so that’s why that percentage went up and it made U.S. look a little lower as well as Europe look lower.

Bill J. Dezellem – Teton Capital Management LLC

Is there something interesting happening within the Chinese com market for you that we would want you to expand on?

Robert E. DeBarr

I just think it’s the design wins that we have and the products that are currently in production, they just increased. I don’t know if any specific design wins unless you do Mansour, do you know any specific thing that happen.

Mansour Izadinia

Well, I mean we have been working with the number of large Chinese communication companies.

Robert E. DeBarr

Because of the design wins.

Mansour Izadinia

Yes, that’s basically design wins that largely because of the gaining traction.

Robert E. DeBarr

Okay. So, I guess we do have some products that are through our design wins that we’ve had in the last several months have now started ramping a production with our Chinese customers.

Bill J. Dezellem – Teton Capital Management LLC

So, given that is and you’ve given that you have been working for some time with these several Chinese perspective and actual customers, is this the beginning of a trend that we can keep our eyes out on?

Robert E. DeBarr

I would say so, yes.

Bill J. Dezellem – Teton Capital Management LLC

And is that something that you would anticipate to be somewhat linear in terms of the build rate or would you anticipated to be more lumpy on a quarterly basis?

Robert E. DeBarr

Well communications thus tend to be lumpy just like consumers so strength usually comes in the first half of the year on communications and then consumer goes stronger in the second half. So is lumpy in that perspective, there is some seasonality to it.

Bill J. Dezellem – Teton Capital Management LLC

And yet curiously the com was strong in the fourth quarter which is a little bit counter to the normal seasonal, so is that, I guess its right?

Robert E. DeBarr

As Mansour mentioned we’re gaining to see some ramping. You asked me a generic question, I was answering the generic question about is a linear lumpy and I am saying is that from a generic, from a general point of view we tend to see more strength in communications in the first half than into our we do in the second half with what you are noticing in the fourth quarter, is as Mansour mentioned is the ramping of our new designs.

Bill J. Dezellem – Teton Capital Management LLC

That is very helpful. Thank you. And that may actually answer the second broader question I had which was that you referenced early on that you really believe that the demand for your products is improving and I was hoping to get a little bit more detail and perspective behind that. So anything more you can add there would be appreciated.

Robert E. DeBarr

Well I mean without becoming two promoters here or promotional I just see as we are training the corner. And so without getting too specific about these products in these markets as I think safe to say that these changes that you’re seeing in the momentum of Micrel, is speaking to the fact that we are feeling much more optimistic about our strategies that we’ve implemented over the last few years.

Bill J. Dezellem – Teton Capital Management LLC

Thank you.

Robert E. DeBarr

You’re welcome Bill. Thank you.

Operator

(Operator Instructions) Our next question is a follow up question from the line of Tore Svanberg from Stifel. Please proceed with your question.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Yes, thank you. So you mentioned you returned 120% of your free cash flow generation last year. And it sounds like that sort of going to be around target, while 100% is going to be around the target in 2014. Is there a company policy or anything that we should assume when it comes to the amount of free cash flow that you will be returning?

Robert E. DeBarr

Well, I think we are trying to return almost all of our free cash flow back to the investors. So I think we’ve proven that as you’ve noted in your previous reports that over the past five years that we returned greater than 90% of our free cash flow back to our investors. And so obviously that speaks for itself that, well not stating an exact percentage amount. I think our history speaks for itself - is the only thing?

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Yes, that’s fair. The other four questions I had one segment that those will get discussed very often with my colleagues is your LAN business and from my perspective I think there is a lot of exciting things going on there especially on the automotive side. I was hoping maybe you could talk about what are going to be some of the key growth drivers of the LAN business going forward.

Robert E. DeBarr

Well, you are spot on I mean that’s the heart of our automotive growth is associated with the LAN. And we are going to continue building upon that strength and it just gaining momentum every quarter. So we are very pleased with our wire technology is being adopted by the automotive company. So, we are very pleased and very optimistic about this automotive market, and it’s a lot of drag along for analog and primarily analog in some timing, but primarily analog.

So that’s giving us some drag along that we get from our LAN business, so we are not slaking off at all. The other area that we are getting some traction now is on our Voice-over-IP from the LAN group and that’s beginning to, we are going to start seeing some I think some reasonable numbers in the second half of 2014. So that’s beginning to move for us, so I did mean to understate what LAN is doing certainly the amount of emphasis we are giving to that and what we are accomplishing I think speak highly to the good group that we have over there on our LAN division. So that’s where we are very optimistic about what we are seeing coming out of our LAN group.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Very good, and last…

Robert E. DeBarr

Internet of Things, with this whole thing about Internet of Things.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Yes, I mean my last question was actually going to be on Internet of Things. So I mean it’s a very broad term, very broad category. But obviously your technology portfolio fits well within the market. I was just wondering what are going to be some of the main sub segments or areas where Micrel would get traction there or we talking home automation or variables or just trying to understand where Micrel would get the initial sort of ramp if you will in the Internet of Things markets.

Robert E. DeBarr

We are mainly in the home automation, but not as much in variables, I don’t think, but certainly in home automation and also in automotive. Remote cameras, remote temperature sensing, temperature controls anything that is currently being considered for a wireless communication would certainly benefit. So…

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Okay really helpful, thank you again.

Raymond D. Zinn

Hey Tore, I mean are you relaxed.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

I’m relaxed Ray.

Raymond D. Zinn

Okay.

Tore E. Svanberg – Stifel, Nicolaus & Co., Inc.

Relaxed. Thank you.

Operator

Our next question is a follow-up question from Bill Dezellem from Tieton Capital Management. Please proceed with your question.

Bill J. Dezellem – Teton Capital Management LLC

Thank you. This question comes from a point of ignorance, so I apologize in advance, but you had mentioned comments that you have been having success with higher voltage products and in a general sense I had thought as a world is moving towards lower power rather than higher power. Would you kind of discuss that phenomenon that you are experience and educate me please?

Raymond D. Zinn

Well there is a second derivate associated with that so power is voltage time current, so its, the higher the voltage that you could get as much power out with a little current so its, I’m not sure what part I need to explain to you, but the work where customers need higher voltage is where they need protection, so at least what is its called spikes and the power line or the power source, you get these spikes of voltage and so the higher the voltage your product can sustain the less problems it causes your customers.

So they do like high voltage even though they might be operating as say 12 volts or less , or say 20 volts or less we still need that for a spike reading you need to have a higher voltage and so our customers are asking for these higher voltage parts for just reliability and sustainability purposes. So a lot of these port less devices like these power tools there is huge spikes on those, as you can imagine because the amount of torque that they get and so they do like these higher voltages and by the way these batteries for these power tools are going up, they are and not going down. I mean I’m hearing going up even they are 40 volts on these power tools. So that a real, that’s a new solid area for us.

Bill J. Dezellem – Teton Capital Management LLC

Thank you for the education.

Raymond D. Zinn

You are welcome Bill.

Operator

There are no other questions in the queue at this time, I would like to hand the call back over to management for closing comments.

Raymond D. Zinn

Well thank you all for joining us today, as you can probably tell we are very pleased and delighted with the turnaround that we are seeing on our business and the strength of our products and their acceptance in the marketplace. So thanks again, we look forward to talking to you in April. So see you then.

Operator

Ladies and gentlemen this does conclude today's teleconference, thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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