Microchip Technology Inc. F1Q10 (Qtr End 06/30/10) Earnings Call Transcript

Aug. 5.10 | About: Microchip Technology (MCHP)

Microchip Technology Inc. (NASDAQ:MCHP)

F1Q10 (Qtr End 06/30/10) Earnings Call

August 05, 2010 05:00 pm ET

Executives

J. Eric Bjornholt - VP and CFO

Ganesh Moorthy - COO

Steve Sanghi - President and CEO

Analysts

James Schneider - Goldman Sachs

Christopher Danely - JPMorgan

Sumit Dhanda - Banc of America Merrill Lynch

Uche Orji - UBS

Brendan Furlong - Miller Tabak

Terence Whalen - Citi

Tim Luke - Barclays

Doug Freedman - Gleacher & Company

Craig Ellis - Caris and Company

Ruben Roy - Pacific Crest Securities

Neely Matta - Stifel Nicolaus

Operator

Good day, everyone, and welcome to this Microchip Technology First Quarter and Fiscal Year 2011 Earnings 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.

J. Eric Bjornholt

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 release of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations.

In attendance with me today are Steve Sanghi, Microchip's President and CEO; Ganesh Moorthy, Microchip's COO; and Gordon Parnell, Vice President, Business Development and Investor Relations.

I will comment on our first quarter of fiscal year 2011 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environment and discuss our guidance. We will then be available to respond to specific investor and analyst questions.

For today's discussion, I will first present the results for Microchip excluding SST, followed by SST's continuing operations and finally for the combined Microchip and SST continuing operations. We are including information on our press release on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on our Investor Relations page of our website at www.microchip.com, which we believe you will find useful when comparing GAAP and non-GAAP results.

We 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 effects of share based compensation and acquisition related expenses.

For Microchip excluding SST, net sales were a record $302.4 million, exceeding our 300 million revenue guidance for the quarter and we're up approximately 8.8% from net sales of $278 million in the immediately preceding quarter and were up 56.7% from net sales of $192.9 million in the June 2009 quarter.

Excluding SST, Microchip's non-GAAP net income for the first quarter of fiscal year 2011 was $96 million or a record $0.51 per diluted share, an increase of 10.7% from non-GAAP net income of 86.7 million or $0.46 per diluted share in the immediately preceding quarter.

Gross margins for microchip excluding SST were a record 62% in the June quarter compared to 61.6% in the March quarter. The increase in gross profit margin was driven by a variety of factors including higher production activity in our factories and continued cost reduction efforts from our global manufacturing operations.

With the increase in revenue in the June quarter our continued focus on prudent spending, we were able to achieve operating leverage from the business with total operating expenses of 25% of sales for Microchip excluding SST and non-GAAP operating income was a record 37%. SST's continuing operations produced net sales of $18.4 million which was above our quarterly guidance of $18 million.

In the June quarter, the SST continuing operations produced non-GAAP gross margins of 90% and non-GAAP net income of $8.3 million or $0.04 per diluted share. For Microchip and SST continuing operations combined, net sales for the September quarter were a record 320.8 million, up approximately 15.4% from net sales of $278 million in the immediately preceding quarter and up 66.3% from net sales of $192.9 million in the June 2009 quarter.

On a geographic basis, revenue in the America was up 8.6 sequentially, Europe was up 2.7%, and Asia was up 25.4%. All geographies were in line with their expectations for the quarter and delivered growth above normal seasonality. Asia continues to be our largest geographic region representing 53.9% of sales in the June quarter. The Americas were 22.6% of sales and Europe was 23.5% of sales. These measurements are based on where the product was delivered for manufacturing purposes for our customers, but does not necessarily represent where the design activity is taking place or where the end product consumption is occurring.

The combined gross margins for Microchip and SST's continuing operations were an outstanding 63.6% and at the high end of our previous guidance.

Total consolidated operating expenses from continuing operations were 25.7%. This compares to our combined company guidance for the June quarter of 26.6%. Research and development costs were $35.5 million representing 11.1% of sales. Sales and general administrative expenses were $46.9 million representing 14.6% of sales. The Microchip and SST continuing operations produced consolidated non-GAAP operating income of 37.9%.

Combined company's non-GAAP net income was $104.2 million or $0.55 per diluted share compared with our June quarter guidance of $0.52 per share. The after-tax impact on continuing operations in the June 2010 quarterly earnings that have been excluded from our non-GAAP results include $8.3 million in share-based compensation expense, 1 million in non-cash interest expense associated with our convertible debt, and 4.9 million in charges associated with our acquisition activities. The acquisition related charges include the sell-through of purchased inventory costs, amortization of intangible assets and acquisition related expenses.

On a full GAAP basis, the combined results of Microchip and SST's continuing operations were as follows: Gross margins including share-based compensation and acquisition related expenses, which includes the sell-through of written up inventory and intangible amortization, were 62.2%. Total operating expenses were $92.8 million or 28.9% of sales and includes share-based compensation of $7.5 million, acquisition-related expenses of $2.5 million, and $0.5 million in severance charges that are classified as a special charge within operating expenses.

The non-GAAP and GAAP tax rates for the combined companies continuing operations for the June quarter were 12.7%. Our tax rate is impacted by the mix of geographical profits and the percentage of our cash that is invested in tax advantaged securities. We expect our combined forward-looking effective tax rate to be between 13% and 13.5%.

GAAP net income from continuing operations for the combined companies was 89.6 million in the June quarter or $0.47 per diluted share. The discontinued operations of SST were essentially breakeven and includes $6 million in acquisition-related costs primarily related to the sell-through of inventory that was written up to their fair value as of the acquisition date. The dividend declared today of $34.3 per share will be paid on September 2, 2010 to shareholders of record on August 19, 2010. The cash payment associated with this dividend will be approximately $63.7 million.

Moving on to the balance sheet, the combined inventory of Microchip and SST at June 30, 2010 was $128.1 million which represents approximately 96 days and is down one day from the prior quarter level. Inventory at our distributors was 40 days, which is also down one day from the prior quarter level.

At the end of June, the combined inventory on Microchip's balance sheet and at its distributors was 136 days or down two days from the previous quarter. Deferred income on shipments to distributors increased 9.2% sequentially and was up 29.5% year-over-year while Microchip's distribution revenue was up 58.1% over the same 12 month time period. I would like to remind you that Microchip recognizes its distribution revenue on a sell-through basis and its worldwide distribution channel.

During the June quarter we continue to aggressively increase our manufacturing output so we can continue to satisfy the needs of our customers. We expect inventory days on our balance sheet to be about flat in the September quarter and remain well below our internal target of 115 days. Microchip's consolidated balance sheet items have changed materially due to the acquisition of SST.

For the SST businesses that we have classified as discontinued operations, we have included only the fixed assets, inventory and intangible assets for these businesses as assets held for sale. The remaining balance sheet items such as accounts receivable and accounts payable will stay on Microchip's books when the businesses are sold.

At June 30, Microchip's receivables excluding SST were $152.2 million, an increase of 10.4% from the balance as of the end of March. The total receivable balance including SST was $193.5 million and includes the receivables for the discontinued operations which makes the change in the overall receivables balance look abnormally high. The receivables balance will normalize over type as the businesses are rationalized. Receivable balances are in great condition with excellent payments performance continuing from our customers.

As of June 30, Microchip's cash and total investment position was approximately $1.48 billion. Microchip's cash generation from its standalone business excluding the SST acquisition was $95.3 million prior to the payment of a $63.7 million dividend. Our cash generation continues to be strong and our total cash and investment position is projected to grow by approximately $115 million to $135 million in the September quarter prior to dividend payment.

Capital spending was approximately 34.1 million for the June quarter. We are continuing to invest in equipment to support the revenue growth of our new products and technologies and our capital expenditure forecast for fiscal 2011 is about $120 million.

Depreciation expense for Microchip and SST combined in the June quarter was 22.5 million, which was up from depreciation of 21.3 million for Microchip excluding SST in the March quarter.

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

Ganesh Moorthy

Thank you, Eric and good afternoon, everyone. I will now comment on the individual product lines. All three of our product lines, microcontrollers, analog and serial EEPROMs, delivered another quarter of outstanding growth in the June quarter. Our strategy to stay invested in our new product development and demand creation initiative during the global recession continues to pay off handsomely, as you can see from the continuation of our differentiated revenue growth and operating profit results quarter after quarter.

Let's now take a closer look at each of our product lines starting with microcontrollers. Our microcontroller business delivered superb results with revenue up a strong 9.8% on a sequential basis and up 55.3% from the year ago quarter, achieving a new record. All three microcontroller segments, 8 bit, 16 bit and 32 bit also achieved new records for revenue.

Flash microcontrollers represented 84% of our microcontroller business in the June quarter. Our 8 bit microcontroller business had another excellent quarter achieving a new record as all segments of our 8 bit product line again experienced very strong growth. Our 16 bit microcontroller business also achieved another record for quarterly revenue with strong sequential growth of 26% and up 154% from the year ago quarter. New customers and new designs go into production, continued to help drive significant growth as the number of volume 16 bit customers grew by 295 customers to end at 2,868.

Our 32 bit microcontroller product line continues to make excellent progress with an outstanding 86% sequential growth from a small but rapidly growing base and building upon the 36% sequential growth we had in the March quarter. As with our 16 bit microcontrollers, new customers and new designs go into production, are expanding rapidly and we now have 268 32 bit microcontroller customers in volume production, up from the 222 we reported last quarter.

Moving to development tools, we had another record quarter with 49,710 development tools shipped in the June quarter, the fifth consecutive quarter of record development tool sales, obliterating the prior record set just last quarter by a significant margin.

As you've seen from our galloping growth in recent quarters, development tool sales are an excellent leading indicator of continued strong design and activity and an acceptance of our solutions by our customers and the continued strength of record development tool sales should bode well for future growth.

Moving to our analog business, this business also delivered outstanding results with very strong sequential growth of 17.8% and 101.2% growth versus the year ago quarter to achieve another record high for revenue. This marks the fifth consecutive quarter of double-digit growth for our analog business.

After breaking through the $100 million annualized revenue run rate for the first time in the December quarter and breaking through the $125 million annualized revenue run rate in the March quarter, our analog business continued to rocket forward finishing a shade under the $150 million annualized revenue run rate in the June quarter.

Growth was especially strong in the linear, mixed signal, safety, security, and RF product lines. We are very pleased with the design win and revenue momentum our analog business has shown and we continue to introduce a steady stream of innovative new products that we expect will contribute to strong revenue growth in the coming quarters.

Moving to serial EE memory, this business was approximately flat on a sequential basis as we prioritized our capacity to support our proprietary microcontroller and analog product lines. We continue to run the Serial EE business in a disciplined fashion that maintains consistent profitability and serves our microcontroller customers to complete the solutions.

We continue to increase our manufacturing output at a measured rate to support the unprecedented order rates and record backlog levels that we have been experiencing. Our current lead times are between eight and 15 weeks, longer than we would like, but still well below the 15 to 30 weeks that most of our competitors are at. We are capitalizing on the strength to further grow our market share by enabling existing and new customers to better achieve their business objectives using Microchip solutions.

Let me now pass it to Steve for some general comments as well as our guidance going forward. Steve?

Steve Sanghi

Thank you, Ganesh, and good afternoon, everyone. Today I would like to first reflect on the results of the June quarter and then I will provide an update on our integration activities of silicon storage technology acquisition. Finally, I will talk about our guidance. Reflecting on the June quarter it was Microchip's best quarter ever in our history. I want to thank the entire Microchip team including the employees of our SST subsidiary for delivering an outstanding quarter in every respect. We made new records in every aspect of our business.

We achieved record sales in 8 bit microcontrollers, 16 bit microcontrollers, 32 bit microcontrollers and analog product lines. We also achieved record non-GAAP gross margin percentage, record non-GAAP operating margin percentage, and record non-GAAP EPS. All these numbers also exceeded our guidance for the quarter. We have now been profitable for 79 consecutive quarters and the September quarter will be our 80th. That will be 20 years of making profit every quarter in good times and in bad times, a record that is unmatched among our peer companies and is testimony to the resiliency of the business model that we have developed and fine-tuned over time.

I also wanted to highlight the comparison to SIA numbers that were recently released. While Microchip does not participate in SIA and short-term SIA numbers are often suspect, many of the investors and analysts follow those numbers. Based on SIA data, June quarter 2010 industry sales for 8- plus 16-bit microcontrollers were up 4.8% sequentially. During the same time, Microchip's 8- plus 16-bit microcontroller sales were up 9.6% sequentially, growing at exactly two times our industry sales growth for the last quarter and showing significant market share gains.

I will now give an update on the acquisition of Silicon Storage Technology. Microchip completed this acquisition on April 8, 2010. After closing the deal, we moved quickly to identify the core and non-core assets of SST. We identified the licensing business and the 8051 microcontroller business, as the core assets of the company and the results from these operations are being reported in our results from continuing operations. From the continuing businesses of SST, the revenue was $18.4 million with a gross margin of 90% and an operating margin of 52.5%. This business was dominated by the licensing revenue, which is at a very high gross margin. During the June quarter, we sold one division of SST, which contained the non-core assets of NAND drive, NAND Controllers, smart card and some older flash memory products of SST. This transaction was consummated on May 21, 2010 and the results from this division through May 21, 2010, are being reported in our results from discontinued operations.

On July 8, we licensed certain serial NOR-Flash products in certain industry segments and in certain geographies to PCT Limited, a public Company in Taiwan. PCT will start selling these licensed products to the licensed market starting September 1, 2010. We received a license fee from PCT and we will receive ongoing royalties from the sale of license products by PCT.

The results from this segment from the June quarter as well as through September 1, 2010 will be reported in our results from discontinued operations. We are nearing the sale of another division of SST. This business contains a Wi-Fi PA assets, which had also been slated as non-core business and asset held for sale and the results from this business for the June quarter are being reported in our results from the discontinued operations, we will likely consummate this transaction in the current quarter.

The NOR-Flash memory business has several other segments in it, mainly serial flash and parallel flash products. Microchip will continue to hold the remaining NOR-Flash units business units revenue as an assets held for sale and report its results in our discontinued operations as we further rationalize the various pieces. With two deals consummated and a third deal getting closed, we are making great progress on the restructuring.

The R&D expenses associated with the memory business are critical to developing technology and generating the licensing revenue. Therefore the R&D expenses of the memory business will be associated with the licensing segment and are reported in our continuing operations as operating expenses.

Overall, the acquisition of SST was accretive to Microchip's non-GAAP earnings from continuing operations in the June quarter by $0.04 per share, so the consolidated non-GAAP EPS including SST's results was $0.55 per share. We expect that the acquisition will be accretive to our non-GAAP earnings for the full fiscal year '11 by about $0.20 per share.

I will now provide guidance for September 2010 quarter. Microchip's book-to-bill ratio for June quarter was 1.41, and we started a September quarter with another all time record high backlog and this measure is by a wide margin. The bookings rate so far in the quarter has continued to be strong. We are at this point completely booked out for the quarter, so the visibility for the quarter is nearly 100%, barring any execution issues, any push outs in the backlog, or any issues in distribution sell through. We're also being successful in creating some upside capacity with our current backlog to help out our customers in short-term need. Considering all that, we expect our net sales for the September quarter, including SST, to be between $340 million and $343 million, or up between 6% to 7% sequentially. This revenue includes approximately $20 million contribution from the continuing businesses of SST. We expect our non-GAAP gross margin to be about 63.6% for the September quarter and we expect non-GAAP earnings per share to be approximately $0.58.

Now, as we look into the December quarter, our backlog is substantially higher than it was for the September quarter at the same point in time. We continue to see robust demand around the world driven by exceptionally strong new design wins in all of our strategic product lines. We are increasing our manufacturing capacity to meet the projected demands of our customers in the December quarter. Considering all of this, we expect the December quarter net sales to be up approximately 3% over the September quarter in our otherwise seasonally weakest quarter of the year in which we are ordinarily down or best case flat.

Given all of the complications of accounting for a large acquisition, including purchased inventory write-up, amortization of intangibles, and restructuring charges, like many other companies have done, Microchip will provide guidance and track its results on non-GAAP basis. We believe that non-GAAP results will provide more meaningful comparison to prior quarters and we request that the analysts continue to report their non-GAAP estimates for the first call.

With that, Melanie, will you please poll for questions?

Question-and-Answer Session

Operator

[Operator Instructions]. And we'll take our first question from James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs

Good afternoon. Thanks for taking my question. I was wondering if you could help us understand what percentage of your current bookings fall outside the current quarter, i.e. outside September quarter into the December quarter, and then as part of that, your lead times, you gave a range. Can you tell us whether you expect those to move up, down, or basically stay flat in the current quarter? Thank you.

Steve Sanghi

So a great number of percentage of bookings fall outside of the current quarter. As I said, we're largely booked out. There is some small incremental capacity we have been able to create through acquiring additional equipment and expedites and other stuff, but a large amount of bookings that come in will be scheduled outside of the quarter.

In terms of the lead times, I believe that lead time guidance is quite right, 8 to 15 weeks because there are a large number of products, microcontrollers, memory and analog and within the microcontroller 8, 16 and 32, certain products for the lead times are short and other products are long, so there's not really one generic answer but lots of products where we can take additional turns in the quarter, while there are other quarters where the availability is far out. Our lead times at this point in time are not going out. They are basically stable.

James Schneider - Goldman Sachs

Thanks, that's helpful and then can you maybe comment on the geographic nature of the business in the September quarter? Obviously, everything is tracking better than normal seasonality at this point, but can you give us a sense of whether Asia, US, or Europe would be tracking better or worse than normal or which one is the most good?

Steve Sanghi

Are you meaning for June quarter or the September quarter?

James Schneider - Goldman Sachs

September.

Steve Sanghi

Well, September quarter seasonally is a weak quarter in Europe because as we speak right now, a lot of the Europe is in holiday in August, so Europe quarter usually is a weak quarter and September quarter is a weak quarter in Europe. It should be fairly strong quarter in Asia, China, and reasonable one in the US.

Operator

And our next question comes from Chris Danely with JPMorgan.

Christopher Danely - JPMorgan

Thanks guys. Actually just a follow-up on lead times. It seems like this quarter, your lead times maybe extended a little bit but your competitors lead times came in. Can you just maybe talk about when you expect your lead times to come back to normal and what you're doing about bringing on increased capacity to bring down those lead times?

Ganesh Moorthy

So lead times are also a function of how the bookings come in, and what you see is the unprecedented bookings rate at which we have been receiving orders. We're working to increase our capacity as Steve mentioned we have a pretty broad range depending on what product line and how we're juggling between the product lines to bring in that capacity. As every day comes by, we are adding capability to pull in that lead time but I don't have an exact date. Depends on which product, which makes a product they're looking at for that lead time, but I expect as time goes on we're working to improve that lead time from where it's at. We don't like where it's at either.

Christopher Danely - JPMorgan

Got you. And then as my follow-up, Steve you talked about some December revenue expectations, can you guys maybe talk about what you expect the OpEx and gross margins to do beyond this quarter if we're up 3% in December?

Steve Sanghi

Well, with gross margins at 63.6%, I mean they are really all-time high. At this point in time, factories are running full capacity. We're adding equipment and growing further, so the gross margins are essentially in the range. We have said many times before at levels lower than this, the old gross margin model used to be about 61.5% and partially the gross margin is quite high right now because of the SST licensing business so longer term basically we have said that gross margins are in the range.

Christopher Danely - JPMorgan

And how about OpEx?

Steve Sanghi

The OpEx may, depending on the rate at which the revenue grows, we may continue to see a very small amount of accretion like we have continued to see in the last many quarters. So we're not saying that the OpEx accretion would stop here, but I think with overall OpEx now below 26%, they are pretty much near our long term model.

Operator

And our next question comes from Sumit Dhanda with Banc of America Merrill Lynch.

Sumit Dhanda - Banc of America Merrill Lynch

Yes, hi. Steve, a question maybe for you. In terms of the book-to-bill and then the improvement in backlog, on the backlog is it also fair to assume that much of the increase in backlog really relates to the calendar fourth quarter as opposed to the third quarter? I guess my question really relates to your backlog and book-to-bills at a record high but the growth in the core business is only about 3, 3.5% of the September quarter.?

Steve Sanghi

No, I think you didn't hear it right. The guidance for the September quarter is up 6 to 7 and the guidance for the December quarter is 3.

Sumit Dhanda - Banc of America Merrill Lynch

I apologize, sorry, I meant 6 to 7 and then 3 in the December quarter but it seems like with an accelerating book-to-bill, your sequential growth rates are a little lower going forward?

Steve Sanghi

Well, what's your point?

Sumit Dhanda - Banc of America Merrill Lynch

I guess the point is do you feel like the backlog increase that you're seeing is reflective of more related to your extended lead times or in other words why with the acceleration in the backlog you're not able to guide for an acceleration in sales.

Steve Sanghi

Well, it's all of the above. Our June quarter was better than what we guided to so a lot of the bookings filled up the June quarter and backlog continued, bookings continued very, very strong, so people started to give us orders even outside of the June quarter into the September quarter and it's only 5th of August and the September quarter is nearly booked so we got a strong backlog for that and we're continuing to get a large amount of orders where people are placing orders all the way into November and December, because people are just concerned about overall industry conditions and getting their parts or whatever. So we have probably the best visibility we've had in a long time with the September quarter guidance is very narrow because we have full visibility of our June quarter guidance was very narrow and basically gave one number and during the quarter we were able to bring additional capacity and with that we were able to create some upside and we're doing the same thing for September and we currently see the December quarter well above seasonality, where if you do any kind of averages of the December quarter is our best case flat, but we see a fairly strong backlog building for the December quarter.

Sumit Dhanda - Banc of America Merrill Lynch

Okay, and maybe the other line of questioning I had was on the gross margins, last quarter on the base business that were up 40 basis points, this quarter you're essentially suggesting they are roughly flat. So with the incremental capacity coming online and obviously a pretty healthy top line clip, do we not expect anymore incremental leverage off of some defined fixed cost base and a trickle back down to gross margin expansion from current levels?

Steve Sanghi

Well, we're juggling a very large number of things including the acquisition and the businesses from acquisition. Some of those buy wafers from outside so the entire business of SST runs from wafers from foundry and none of that runs into microchip. They also do wafer sort assembly and test everything from outside so the traditional margin accretion that happens when we do inside doesn't really happen from when you do it outside.

Ganesh Moorthy

Secondly, on the business that is ours and we are doing inside, we are essentially spending premium dollars at times to produce upside for the customers and keep the lines running and make the product available to them over a short-term and working overtime and paying premium for the equipment from fab to assembly to test to piece parts to others. So at this point in time, gross margin which is already above a longer term model isn't really what we're trying to improve.

We're trying to obviously keep our focus on serving the customers to make sure we have one of the best suppliers and they are telling us we're one of the best suppliers in terms of meeting their needs, grow the top line and we reported 37% operating profit. Give me a break. I don't think our intent is really to add further to gross margin. If it happens it happens, but that's not where our laser focus is.

Operator

We'll take our next question from Uche Orji with UBS

Uche Orji - UBS

Thank you very much. Steve, let me just ask you a question around analog. I mean it's been growing faster than your microcontroller business. Obviously, that's an element of cross sell within microcontroller and analog but it looks like there's more to it. Can you just talk about the elements of the subsets you've seen in analog and how sustainable that is, and anything you're doing to grow that business on its own right specifically?

Steve Sanghi

Well, the analog business is doing very well. It took a while to get all of the right products in place and position them accordingly but as Ganesh mentioned, we've had five quarters of double-digit growth. It's growing substantially faster than overall microcontrollers because it's a much smaller base than we had $150 million annualized and microcontrollers is a $1 billion analyzed, so you aren't talking about the same scale. The smaller businesses within the microcontroller like the 16 bit and 32 bit are growing similar are very, very strong pace, but analog is growing in its own right. We're not winning analog business only because we got the microcontroller. We're up against traditional strong competition of linear, Maxim, ADI, TI, and others, so when it's microchips, microcontroller socket, yes we have some advantage but we are winning against other peoples microcontroller sockets around STGA's, around ASIC products and the general purpose of analog market also.

Uche Orji - UBS

Okay. Great. I just wanted to, just a question but are you investing more in this business now given the success you've seen with the analog business, because I think the perception has been more like it's been just the fool proof microcontroller but since growing on its own, right now. Is that tend to invest more specifically on its own and grow as an independent business?

Steve Sanghi

We try to take advantage of everything that can help it like the microcontroller attach but also growing sockets where there's no microcontroller, so it's all of the above.

Uche Orji - UBS

Sure. All right, let me ask Eric a question on the aging structure of bookings. I mean as you look at your book-to-bill, obviously you have – with this kind of book-to-bill fairly good visibility, but – when you look at the aging structure of it, are you a little bit concerned that there will be elements of people asking for things they don't necessarily need because lead times are as stretched out as they are. So if that's the case, how do you kind of sanitize that to be sure that the bookings you have are things that you feel very comfortable with?

J. Eric Bjornholt

I guess I would say that it's all of the possibility when things get booked out further in time, that our direct customers or distribution partners can push out, pull in and change that backlog, but what Steve had said earlier is this gives us much improved visibility, allows us to run our factories very efficiently in the short-term and we can't really control the general economy. So we are just continuing to make sure we have the correct capacity in place to support what our customers are telling us that they needed today.

Steve Sanghi

You know, whenever we look at large customers and large distributors. We look at the history, run rate, new design pipeline, major designs that may be coming off from going to the end of life, so it's not like somebody who is buying x million dollars can buy 10x that's in our backlog and we take it to the bank, so we sanitize it continuously, ask questions and look at the run rate and what kind of end product they're building and what's the run rate of that. So our record has been pretty good. I think you can go back in history and look at Microchip has no history of large inventory absolutions. I mean in the last decade, we have had not a single inventory write-off. For the cycle, you know, they never came to you and said we're going to write-off $50 million of inventory.

Ganesh Moorthy

So we know what we're doing and this has been honed over many, many cycles and we are continuously engaged with our customers and distributors in sanitizing the backlog.

Operator

[Operator Instructions] We will go next to Brendan Furlong with Miller Tabak.

Brendan Furlong - Miller Tabak

Good afternoon. Thank you very much. A question for you on your 16 and 32 bit obviously grew phenomenally well in the quarter, but you look at that your 8 bit, it look like it grew roughly 6% sequentially, which seems a little bit below what I would have thought. Are you allocating capacity from 8 bit with the capacity issues to 16 and 32 or what's going on there?

Ganesh Moorthy

Well, first of all, I think I don't know how you calculate it but we don't break out the growth, but I can tell you the 8 bit growth was outstanding. We had a record quarter for 8 bit microcontrollers and we are certainly not allocating capacity away from 8 bit.

Brendan Furlong - Miller Tabak

Okay. And then if I could just follow-up on the previous caller on the analog, appreciate coming off of a low base, but you way out grew the rest of your peers as you kind of commented on the call. Is there anywhere you can point this to in terms of segments of the analog market that you're doing particularly well that's leading to this type of very strong growth rate? Thank you.

Steve Sanghi

Well, as far as the segments are concerned, I think Ganesh and his comments gave you a broad brush, linear mixed signal, safety, security and RF product line. I don't know if that's the granularity you're looking at. Beyond that, we think there's competitive home down because microchip does these things very well, excellent gross margin, 37% operating profit over on the business. So we're always a target, people are always looking at where is microchip succeeding, where are we putting the efforts, what are we doing so we tend to not give a lot of information that could bring competitive home.

Operator

We'll take our next question from Terence Whalen with Citi.

Terence Whalen - Citi

Hi, good afternoon. This first is a little bit of a higher level question. Obviously, you saw tremendous growth from Asia sequentially in the quarter. My question is, did you see anything within your Asian order or revenue patterns that reflected attempts by the government to actually reign in growth? Thank you.

Steve Sanghi

The answer to that is no. I don't know how we would know that. We're getting orders from our customers and distributors and what's the governments hand in that? I don't really how we will know that but I was personally in China. I was personally in Taiwan and Ganesh was in Japan and he was in Korea and other places. So our executives really cover the world, every quarter. Not everybody everywhere but somebody every where. So we have a pretty good feel and we see a major customer, distributors and our employees. So I personally was in China and Taiwan and I don't really see anybodies hand in it.

Terence Whalen - Citi

Okay. And then as a follow-up more product specific question, I believe this quarter you introduced a multi-touch product for small form factor portable application. Just wanted to get an update on progress in the touch sensitive market, how large an opportunity is that for microchip? Thank you.

Steve Sanghi

So yes we did introduce what we call the projected capacity solution. It has while we introduced it in June. We have been working with customers for some time on design. So it's got a very nice pipeline of designs and not only for that, but really the whole portfolio of touch solutions that we have. The touch business for us continues to do very well across the very broad range of customers and applications. So we don't have a single killer application we're trying to go after as some of the other do with their touch solutions. But we're very happy with how the touch business is growing across a broad range of customers and applications and building moment up as another growth driver for us.

Steve Sanghi

We have said before we're engaged with other 500 customers in the touch area.

Terence Whalen - Citi

Appreciate the color. Congratulations.

Operator

We will go next to Tim Luke with Barclays.

Tim Luke - Barclays

Thanks so much. Just in guiding up in the 6 to 7% range and then guiding up against the December, could you give any color in the microcontroller area where you might see the strongest growth and where you believe you may be seeing some incremental share traction in that arena? Thank you.

Steve Sanghi

I think our growth is likely to be very broad based. We'll do another record this quarter on 8 bit, another record on 16, another record on 32, and another record on analog. I mean the backlog shows that already. There's almost no doubt in it. So it will be very broad based. Geographically, as I said, Europe should be weak and Asia and China, and US, all of those will pick up the slack to make that quarter, but from a product line perspective, the backlog in all these product lines will take us to another record.

Ganesh Moorthy

I think we'll gain share in all three segments, 8, 16 and 32s.

Tim Luke - Barclays

Okay. And in guiding the inventory on hand flat through the September quarter, do you have an expectation about how you think the distribution channel is going to run as you move forward?

Steve Sanghi

You know if you look at it for a number of quarters now, our distribution inventory has been flat to down. It was down last quarter. I think the quarter before was up a day.

Ganesh Moorthy

It's embedded in this range.

Steve Sanghi

So it's been in that range for quite a while and there seems to be some extraordinary concern and there has been for a while, with some people on the Street that somehow the distribution inventory is rising and doing something different. You have to look at it in days of sale. It's been largely flat to down, so our feeling is we don't have any excess product to give anybody for building inventory. We can't really meet all of the demand. We will go up for the September quarter, significant on a product we will not ship that the people want and we did not ship in the June that they wanted. And so it's basically everybody's hand to mouth and we don't really have room to build anybody's inventory.

Tim Luke - Barclays

Thanks very much, guys.

Operator

We'll take our next question from Doug Freedman with Gleacher & Company.

Doug Freedman - Gleacher & Company

Steve, we're seeing numbers that are or the industry in a position that's really the best shape we've probably ever seen it. I don't know if you would use those terms but what are some of the early indicators that would trouble you that there's rough waters ahead and what should we be looking at?

Steve Sanghi

I think my feeling is that for our business, I don't really know about the industry. I think that's your job and you guys do it well and continue to do so, but when I look at our business, we model our business really by channel, by geography, by regional manager and even down to by sales person, the funnel bubbles up and with some judgment and we roll up the numbers and by division, by product line, by area, by region, by regional sales manager, by VP, and as we look at it, we see a very large amount of increase in served available market and design wins and I think I took that section out of my comments.

I think I've used that the last couple of times and I maybe should have included it again this time where we said we increased our sales and marketing headcount 28% about four years ago and then kept them through the downturn and these people have produced a very steady stream of new design wins and in our revenue stream I can see how much of the business is there that we didn't do business with those customers, we didn't do business in those regions or whatever and then all the new products we have added we're talking about 300 new products that we didn't have 2, 2.5 years ago and as these products have come out of incubation, so a large amount of revenue is on those products, that three years ago we wouldn't even make them.

All of the growth we're seeing on 16 bit, 32 bit, large amount of analog growth, all these products didn't exist three years ago, so it's not some older products that have come out of nowhere and somebody is building inventory and channel is all stuffed and it's all going to shake out. It's really not that kind of visibility we have. It's very high quality, a high quality backlog; it's a lot of new products, a lot of new designs that didn't exist before. We basically have been unable to build our inventory and unable to build our distribution inventory. For many, many quarters we have been telling you our long term goal for the inventory is 115 days, and we go down every quarter almost because the demand is that strong and we can't really seem to get there. Same thing with our distributors, everybody is screaming for more parts.

So any of the past to shake out that have happened, you could see inventory build up in the channel, at the customers, at the distributors, at the CMs, at the semiconductor manufactures. I'm not seeing that. We have no inventory. Our distributors have no inventory. I saw results when they came out for Arrow, and we'll see when Avnet comes out, their inventory hasn't changed; a day here, a day there, but largely inventory hasn't changed. So I don't think there are any clouds in the horizon. That's why we went out of the way and gave you a feel for the December quarter should be much, much better than seasonal.

I also could take you back to nine months ago in the November of 2009 and you may recall we went to totally – did something unique where we shared with the Street our internal plan for calendar year '10, which we have never done before. On November 4, our earnings conference call, November 4, 2009, we shared our internal plan with the investors for calendar year '10 and our guidance at that time was $1.05 billion, up 26% from calendar 2009, and a lot of people question that number and I have a large number of report saying that that was not doable because they don't estimate for lower in terms of growth.

The way we are we're headed for a couple of hundred million dollar higher than that number for the year and that's without including SST. Approximately 46% growth from calendar year '09 to calendar year '10, earnings per share would be about 33% better. We had guided $1.50. We're looking at well in excess of $2, so there are a lot of skeptics in the Street and that's okay. That's your job, but we have a job to do for our investors and we are continuing to add capacity to serve our customers which will produce the numbers we do the job for our investors.

Doug Freedman - Gleacher & Company

All right. Terrific. Thank you for all of the color. If I could, I hate to do but I am going to focus on the one thing that I see a trend starting to form and I was hoping you could help explain it and that is in the memory space, we're hearing some of the competitor sort of move out of this sector. Your number is sort of pulling down the overall company growth. Is there a transition away that's happening in the marketplace? Can you help us understand what that trend is starting to form there?

Steve Sanghi

Well, you know, we have done this pretty much in every cycle where 90% plus of our business is proprietary, which is microcontrollers, 8, 16, 32 and analog and then we have about 10% or less of the business, which is in the memory and it's a common capacity really on both and when our proprietary product demand is strong where the customer is relying on microchip to give the product and there's no substitute product, you cannot take our product out and pluck somebody else's product in, then we feel we have higher level of responsibility to the customer to provide them the proprietary product they need, so in those times we take the pedal off the memory and allocate more capacity to microcontroller. We are seeing some of our other competitors doing the same but we haven't seen them do that in the past. Either they were not focused on it or the proprietary segments were smaller or whatever the change maybe but certainly it's not the first time for us.

Operator

And we will take a follow-up question from Uche Orji with UBS.

Uche Orji - UBS

Thank you very much. Just one follow-up. Steve, if you look at pricing in the industry, it looks like the industry has had consistently improving pricing power through this recovery. To what extent do you think that has been responsible not just for your growth but also the growth of the industry and we are worried we're getting nor a peak in terms of the pricing improvements we've seen across the industry.

Steve Sanghi

You know, so I heard that kind of thing for Microchip, pricing has been responsible for nothing. We have not changed the pricing on our microcontroller analog products at all. That's the obligation we have to a customer who designs a proprietary product and if we take a customer who designed a proprietary product and then raised the pricing on them, then they have no other choice, there is no other product to go to, then it will have negative ramifications in them wanting to design a product again. They will look for a product that is multi-sourced or whatever else, so we have never done this on microcontrollers. So in our number, there is no revenue which is coming from price increase on over 90% of our volume. The microcontroller, the analog, all 8, 16, 32 bit microcontroller. There could be some in the memory, but it's fairly small and we're not going through memory, our memory business is flat, so really pricing is not playing a part in our performance.

Uche Orji - UBS

I see. And another way we could look at pricing is have you had a historical price cut, where you cut prices – just like you said, out of the agreement you have with the customer. And one way to look at that curve now, has that been more flat in terms of the way it's trended? I just want to understand what the historical pricing pattern has been and what it's been recently?

Steve Sanghi

Yeah, so we were just having a discussion in my staff meeting the other day, talking about one of the larger customers and they got their yearly price decrease, so our business is continuing at that rate.

For the proprietary products you can't be thinking six months. You got to be think of these as platforms that go for many, many years and subsequent designs so it's a much more strategic process rather than a tactical quarter-over-quarter pricing circle.

Our ASP decline year-over-year has typically been in the 3 to 5% range and it just hasn't fluctuated from that in the current environment.

Operator

And we will go next to Craig Ellis of Caris and Company.

Craig Ellis - Caris and Company

Thanks for taking the question, and congratulations on the results guys. You've commented a number of times about adding capacity. Is 90 million still the right way to look at this year's CapEx and if demand winds up being stronger than that plus 3% in the December quarter, would we be looking at a higher CapEx number than that for the fiscal year?

J. Eric Bjornholt

So Craig, in the earnings release and my comments I talked to CapEx being increased to $120 million for fiscal '11, so we are investing in capital to support the growth.

Craig Ellis - Caris and Company

And what's the underlying assumption on that 120 million, Eric? Is it that the business grows and then, how do we think about the risks that there would be upside to the 120 versus that being really the number that settles in for the year?

Steve Sanghi

Well, let me try to answer that. Don't tie the capital to short-term what happens in September, what happens in December. Any capital you're adding is not going to give you anything probably for nothing for September and it may barely give you a little bit for December only if it's in the test area. Any fab capital you add is really for calendar Q1 or Q2. Any test capital you add could give you a little bit in December, but it's largely for Q1, so it's basically investing because we believe there's continued growth in September, December, and then followed by another good March quarter.

Craig Ellis - Caris and Company

Okay, thanks for that, Steve. And then just looking at the growth in the 32 bit business, it looks like you're starting to see a ramp that's very similar to what we saw as the 16 bit business ramped a number of years ago. As that business has started to ramp what have you learned about the customer base, the revenues that you're getting and the different products, can you just share some of what you're learning as that business starts to become more material for the Company?

Steve Sanghi

So your observation is correct. I think as we look at the first nine quarters, that the 32 bit has been in production, its revenue growth rates have been very similar to what we saw on our 16 bit and really you should expect that. It's got the same formula that we've used inside microchip to define the products, develop the products, to take them to market, to have it sold by the sales force, going into an expanding set of customers and applications.

The type of applications that a 32 bit can get us into obviously are at the higher end of what our 16 bit products were capable of and was passed that at this point in time. So it's taking us into newer places, within consideration of customers who were predominantly designing the 32 bit that didn't see us there before, so it's expanding our served available market very much in the way we thought about the product line when we brought it to market.

Craig Ellis - Caris and Company

And Ganesh, anything different that you're seeing with the analog attach rate on the 32 versus 16 and 8 bit? Are you seeing higher level of intensity and analog?

Steve Sanghi

Absolutely. And I think we've said that all along that the more complex the system is, so the higher end of our 8 bit, the 16 bit product line, (inaudible) product lines we have, the 32 bit product lines all go into much more complex applications and they have, an incremental amount of need for analog attach around them and that's very much also helping another leg of how the analog product is growing.

Operator

We'll go next to Ruben Roy with Pacific Crest Securities.

Ruben Roy - Pacific Crest Securities

Thank you. Steve I was wondering if you could give us a little bit more detail on your assessment of what's going on with market share. You guys have clearly been executing well and growing faster than the SIA data that you cited, but at least one of your competitors has as well. And I was wondering if you think that some of the shares are coming at the expense of companies can't meet demand so lead times extended, et cetera. and then maybe those competitors really are on a decline because of that longer term or if it's temporary? Just more detail around market share, thank you.

Steve Sanghi

Well, one thing I would like to clarify is that in the microcontrollers, you can't gain market share just because you got product on the shelf and somebody else's lead time is longer. The product has to be designed in, you got to have the right product, the right features. And if that was the only equation then in the last 20 years, a lot of Asians and others when the DRAM capacity or flash capacity, bus people came, they have microcontrollers that could come in and really we would have achieved the results that we have achieved. And we taught people that through the entire cycle.

At Microchip we're thinking four or five years ahead, it takes two to three years to bring the right kind of products into – when we go into 16 or 32 bit area, it takes about three or four years to bring the right kind of products and it takes another year to two years to really get those products designed into the circuit. And now you're talking four or five years investment and then, the cycle comes where people lead times are long. You only get what you designed in. You don't harvest from the others.

In some low end product lines, low end of 8 bit, yes, some people can switch maybe over shorter term, but even that is very limited. So I think our market share gains are driven by the strategy we put together four or five years ago that I highlighted expanding our server available market, adding these people, changing our distribution network, taking control of demand creation and others. And the competitor you mentioned is doing well. They did similar. They have been on restructuring. We actually identified that opportunity a year and a half ago, tried to buy it and we saw the opportunities, so clearly with the market crashed and our partner backing out, we were unable to execute on that, but we would want to identify the opportunity.

Ruben Roy - Pacific Crest Securities

Yeah, all good points. Thank you for that and then quickly, I guess, you were asked earlier on the call about what analysts should look for, for signs of any type of deterioration in demand yet you guys have been quite innovative in creating ways to look out for that as well, so with things like your housing index, etcetera, have you been doing any of that or discussing any of this type of thing with your customers and if so, what is the feedback then on true end demand that you're customers are seeing?

Steve Sanghi

Well, you know, I mean, we're having a large amount of discussions with our customers and distributors and around the world, like I mentioned. We are seeing very, very strong demand driven by large number of new products, significant innovation going on in all kinds of industries, the content is going in cars, the content is going in consumer electronics, all of the things going on in gaming, 3D glasses, the entire TV industry is going through a major change with first the plasma,. then the LCDs, then the [tin] TVs and now 3D TVs and all that kind of stuff and all of this stuff tends to have Microcontrollers everywhere in each and everything. What's happening in the touch area, what's happening in the low power area, what's happening in green power, what's happening in analog for digital power conversion, connectivity, I mean, we are everywhere and that's one of the things. We're really not focused on one area like touch or something we can tell you we're doing X amount of revenue.

We're involved in 15-20 different thrust, so our business is very broad based. We do not like low margin of some of the areas doing a very large volume business. There's plenty of 40% margin business I can do also, substantially larger. Our operating profits at 37% are close to somebody else's gross margins so we just have a different model. We're not criticizing anybody else's but we're not trying to be anybody else. We know what we're doing and we like our model. It has been successful over time. In good time and bad time this model is profitable and very, very consistent and stays and we're here to run it that way.

Operator

We'll go next to Neely Matta with Stifel Nicolaus.

Neely Matta - Stifel Nicolaus

Hi. Its Neely calling in for Kevin. I just wanted to get the thoughts on the Japanese market. One of your recent competitors bought some [Exco] there and that seems to be like that market is consolidating a little bit. Just wanted to see about your strategy and what your thoughts are about Japan?

Steve Sanghi

So I think you're referring to the Renaissance NEC combination?

Neely Matta - Stifel Nicolaus

Okay. So the way I look at it is, I think it's not just the Japan market but Renaissance and NEC are large players in the microcontroller market. I think their combination presents significant opportunity for Microchip.

First of all, just combining the two companies results in many of the customers looking for another source where Renaissance and NEC may have been the two sources they've had opening it up to Microchip as another possible source.

Second, as they restructure they are going to have to make significant changes and some of which they've announced and some of which are still yet to come with respect to the manufacturing network, with respect to the product line strategy and all of that is going to create further dislocation in their existing customer base. And I think that again represent an opportunity because when you create that dislocation a customer opens it up to say what other choices do I have and with our investment in both products as well as in customer service I think we'll find many, many opportunities that are currently served by Renaissance NEC, some maybe in Japan, but many maybe outside of Japan as well.

Neely Matta - Stifel Nicolaus

What other places outside of Japan might that be?

Steve Sanghi

Well they are global business as well. They operate here in the US, they operate in Europe and they have customers that at which they've had good positions and I expect those customers will open up to and in fact we've had many, many discussions and have gone into varying degrees of helping those customers with another platform choice.

Operator

And that concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Sanghi for any additional or closing remarks.

Steve Sanghi

Well, we want to thank all of the analysts and investors for attending the call, and we'll see some of you on the road, otherwise we'll talk to you next quarter. Thank you.

Operator

That concludes today's conference. We thank you for your participation.

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