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Micrel Inc., (NASDAQ:MCRL)

Q3 2010 Earnings Conference Call

October 21, 2010 16:30 pm ET

Executives

Ray Zinn - President and Chief Executive Officer

Ray Wallin - Vice President and Chief Financial Officer

Andrew Cowell - VP Analog Marketing

Christopher Dingley - VP Worldwide Sales

Analysts

Tore Svanberg - Stifel Nicolaus

Christopher Longiaru - Sidoti & Company

Doug Freedman - Gleacher

Adam France - 1492 Capital Management

Presentation

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Micrel Incorporated 2010 Third Quarter Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions). This conference is being recorded today, Thursday, October 21, 2010.

At this time, I would now like to turn the conference over to Mr. Ray Zinn, Micrel’s President and Chief Executive Officer. Please go ahead, sir.

Ray Zinn

Thank you. Welcome to our Third Quarter 2010 Conference Call. We’re happy to have you with us this afternoon. With me today is Ray Wallin, who is our Vice President and Chief Financial Officer, as well as Chris Dingley, who is our Vice President of Worldwide Sales and also Andy Cowell, who is our Vice President for Analog Marketing Group.

So with that I'd like to turn the time over to Ray Wallin to give you the prepared remarks'. Ray, go ahead please.

Ray Wallin

Thank you very much 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, go to www.micrel.com and click on the link to the third quarter 2010 conference call slides.

We will 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 risks and uncertainties. Forward-looking statements include statements regarding future business results, future levels of sales and profitability, future customer demand, inventory level and economic and industry projections. 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 October 21, 2010 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, 2009.

Listeners who do not have a copy of our quarter earnings press release may view the press release on the company's website at www.micrel.com. We will review the financial results for the third quarter ending September 30, 2010 and then discuss our outlook for the fourth quarter of 2010. Our prepared remarks will then be followed by a question-and-answer session with the financial community.

Let’s begin with our third quarter financial and operational highlights. Micrel generated very strong financial results in the third quarter and achieved record earnings per share. At the top line, revenues of 80.6 million was the highest quarterly level in nearly 10 years and were driven by strong demand in the industrial and communications end market.

On a year-to-date basis, design wins were up more than 40% compared to last year, a record level for the company. This reflects the positive impact of our served available market expansion initiative including our focus on energy efficiency and green power that we began implementing nearly 3 years ago. We also continued to release new products at an impressive rate. In fact, new product introductions are nearly 50% higher than they were just 4 years ago.

Third quarter bookings declined from the second quarter levels, resulting in a book-to-bill ratio below 1 for the quarter. However, our book-to-bill ratio remains above 1 on a year-to-date basis. This reflects the distribution channel bringing their inventories in line with the reduced lead times.

From an operational standpoint, we continue to be pleased with our execution. Gross margin increased for the sixth quarter in a row. In addition, our operating margin expanded once again in the third quarter. In fact, our operating margin has increased sequentially in each quarter during the year, and is the highest since the company’s revenue peak in the fourth quarter of 2000. This is indicative of our focus on controlling costs and our ability to generate profitable growth, and thanks in part to Micrel’s aggressive stock repurchase program. At the bottom line, third quarter earnings per diluted share continued to grow faster than revenues and was the highest level in the history of the company.

Looking at our balance sheet, our ongoing focus on working capital management continues to result in improvement in many of the key balance sheet metrics and we ended the quarter with a cash and short term investment balance of 101 million. Third quarter cash flows from operations are 14.1 million also remains solid, which enabled us to invest approximately 10.9 million to repurchase 1.1 million shares of Micrel’s common stock during the third quarter.

We also maintained a quarterly cash dividend of $3.50 per common share. Since 2001, we’ve repurchased more than 370 million of Micrel’s common stock, which has helped to reduce the diluted shares outstanding during the last decade by 37%. As a company, we remain extremely focused on enhancing shareholder value.

With that, let’s now take a closer look at Micrel’s third quarter financial details. Revenues in the quarter totaled 80.6 compared to 73.9 million in the second quarter of 2010 and 58.9 million in the year ago period. The 9.1% sequential revenue growth in the quarter was driven by strong demand from customers in the industrial and communications end markets. Compared to the same period last year, revenues were higher by 21.8 million or 37% due to higher overall demand from customers in our geographies and end markets. This was attributable to Micrel’s successful initiatives to penetrate new high growth markets. The release of a significant number of new products that are gaining market traction, an expanded sales force, followed operational execution and improved macro economic conditions.

Standard product sales accounted for 98% of total third quarter revenue with custom and foundry sales comprising 2%. The third quarter sales mix by product area was analog 64%, high bandwidth 17%, Ethernet 18% and foundry 1%. OEM for the quarter was approximately 40%. Micrel’s sales remain widely diversified with our top 10 direct customers accounting for 23% of sales in the most recent quarter compared to 20% of sales in the prior quarter. Our third quarter revenue by end market was as follows; wireline communication 31% compared to 32% in the prior quarter, wireless handsets 11% which was unchanged from the second quarter of 2010, computing 16% also unchanged from the second quarter, industrial 39% compared to 37% in the previous quarter, military and other 3% compared to 4% in the second quarter.

Sales by region were as follows; North America 26% compared to 28% from the second quarter of 2010, Asia 61% compared to 60% last quarter and finally Europe 13% compared to 12% in the second quarter. Third quarter gross margin was 57.9%, up slightly from 57.8% in the prior. During the quarter, the gross margin improvement generated by better factory capacity utilization and higher absorption of fixed manufacturing costs from the sequential quarter revenue growth was by and large offset by an increasing reserve for excess inventory.

Our fabrication facility utilization rate in the third quarter increased to the high 60% range from the mid 60% range last quarter as a result of higher volumes to support the higher revenue level in the current quarter.

Moving on to our operating expenses, R&D spending increased slightly on a sequential quarter basis to 11.7 million or 14.5% of third quarter revenues from 11.5 million or 15.6% of second quarter 2010 revenue. We continue to release to the market a significant number of new high performance products that we believe will drive customer demand for the company in the future.

During the third quarter, the Ethernet product line introduced the first members of a new 5-port switch on a chip family leveraging Micrel’s latest green physical transceiver and switch technology. The product family achieved a 50% reduction in power consumption meaning the increasing demands for Ethernet connectivity in consumer and industrial applications. The product family features advanced power management and sophisticated quality of service capabilities.

The high bandwidth product line released 16 products, which included 5 devices from our high performance clock work family. 3 of those are ultra low phase clock synthesizers that offer 10 gigabit Ethernet output frequencies for enterprise switch and server applications. The other 2 products provide low jitter reference frequencies for [48] and 16-bit gigabit fiber channel, which is deployed in storied area networks. This quarter, Micrel released a significant new product family for the datacom and industrial markets, the Super Switcher II high current switching regulators. These products combine the benefits of our hyper speed control architecture with onboard power switches to provide higher power density solutions while minimizing external component size and making a system designer’s job easier. These are just the first products in the family and more are planned for introduction in the coming months.

Micrel also released the mobile industry’s very first USB power maximizer, which maximizes the amount of power possible to be drawn from a standard USB port. At the same time, this product greatly reduces the need for sensors input capacitors by up to 50% or more and completely eliminates the need for a separate USB current control switch in DC to DC converter.

Moving down the income statement, third quarter SG&A spending was 12.8 million or 15.8% of revenues, up from 12.1 million or 16.3% of revenues in the second quarter of 2010. The increase was due primarily to increased sales expenses on higher revenue, higher advertising expenses and increased allocation for profit sharing. Third quarter operating income jumped to 22.2 million or 27.6% of revenues. This compares to operating income of 19.2 million or 25.8% of sales in the second quarter of 2010 and 10 million or 17% of sales in the year ago period. This quarter other income net was 0.1 million. The effective tax rate was 33.3% in the third quarter, down from 35.6% in the second quarter due to a 0.4 million of prior year tax benefits recognized in the third quarter.

Third quarter GAAP net income was 14.9 million or $0.24 per basic and diluted share. This compares with second quarter of 2010 GAAP net income of 12.4 million or $0.20 per basic and diluted share and GAAP net income of 6.8 million or $0.11 per basic and diluted share in the year ago period.

Turning to the balance sheet, our liquidity position remains very strong. Cash and short term investments were 101.3 million at the end of the third quarter. Third quarter cash flow from operations were 14.1 million. Last year, we entered into a $20 million unsecured credit facility with the Bank of the West, consisting of a $15 million term loan facility and a $5 million line of credit for working capital need. As of the end of the third quarter, the balance on the term loan was 5 million, down from a balance of 11.4 million at the end of last year, whereas the credit facility remained undrawn.

Capital expenditures totaled 2.3 million in the third quarter compared to 3.0 million in the second quarter of 2010 and 1.3 million in the year ago period as a result of increasing backend test capacity. During the third quarter, the company also paid dividend to shareholders holding 2.2 million or $0.35 per share. Accounts receivables balances decreased slightly on a sequential basis by 0.5 million in the third quarter to 43.3 million primarily due to the timing customer payments, in spite of the higher sales level in the quarter. Days sales outstanding was 49 days at the end of the third quarter compared to 54 days at the end of the second quarter of 2010 as higher collections more than offset a build up in channel inventory.

Channel inventories have increased approximately 3 weeks since the beginning of the year. Net inventory increased slightly by 0.6 million during the third quarter to 34.2 million primarily due to higher sale. Third quarter days of inventory of 93 days continued to improve and are the lowest levels in 5 years, reflecting our tight manufacturing control and higher sales in the quarter.

The differed income and our sale through distributors was up 6 million from the prior quarter. Quarter weeks of inventory and all distribution channels moved from 16 weeks to 17 weeks and are now at what we consider within normal levels. Third quarter depreciation and amortization, excluding the amortization of stock based compensation was 3.3 million unchanged from the prior quarter. During the quarter, the board of directors approved an increase in the amount authorized for the repurchase of the company’s common stock during calendar 2010 to 30 million from the previously authorized amount of 15 million. As we mentioned earlier during the quarter, we repurchased 1.1 million shares of Micrel’s common stock. This brings the total to 13.1 million of stock repurchased under the current $30 million authorization. The company’s board of directors also maintained the quarterly common stock dividend of $0.35 per share to be paid on November 24, 2010 to shareholders of record as of November 10, 2010.

Now let me turn to the outlook. In order to help the investment community better understand the dynamics of the semiconductor industry, Micrel provides detailed industry economic conditions and outlook. We want to remind you that the following information is not specific to the company and it is with that factor that we will once again provide our industry view and outlook. So turning to slide number 1; this is Micrel’s industry barometer chart. You’ll not that this chart covers the period from the fourth quarter of 2010 to the fourth quarter of 2011. As indicated, over the next couple of quarters, we expect lead times to come in from the current 8 to 12 weeks down to a more normal 6 to 8 weeks, which obviously reduces this delay, looking to notoriously soften in the last half of December as companies adjust their inventories going out to the end of the year. As a result, we expect the book-to-bill ratios will remain below 1 on a sequential basis through the first half of the first quarter of 2011. The global GDP is expected to be in the range of 1.5% to 2% over the next 12 months. Historically, the semiconductor history runs at a rate of 3X to 3.5X the global GDP rate. We believe that the semiconductor growth for 2011 will be in the range of 5% to 7%. The primary reason of this tripling effect of the semiconductor industry relative to GDP is because of the [indiscernible] nature in growth opportunities for semiconductors as more and more products are incorporated in more and more electronics into their design.

The long term trend line of 11% semiconductor growth is based on an average GDP of 3% to 3.5% [indiscernible] significantly as the GDP modulate.

Now, let’s turn to chart number 2 which is Micrel’s semiconductor industry cycle chart. You’ll notice from the chart that we have reached the long term trend line on unit growth and therefore we believe the outlook for the fourth quarter of 2010 and for the entire year of 2011 will follow normal seasonality. As we predicted nearly 2 years ago, the industry will have a recovery growth of about 25% for 2010. We expect for the industry that the fourth quarter will be slightly down, followed by flat to slightly down for the first quarter of 2011 as the chart reflects. It’s important to note that we believe that the overall worldwide demand for semiconductors will continue with the long term trend of 11%, assuming that AFPs remain relatively constant.

Now, let’s turn to chart number 3, which is the semiconductor industry channel inventory chart. Because of the lessons learnt from previous industry cycle, we believe the semiconductor customers are keeping their inventories well in control and do not see any significant inventory build exiting the recovery growth period. We believe that the industry will exit 2010 at approximately 80 days of inventory, which is below the prior peak of 88 days in 2008. We believe that days of inventory will be approximately 77 days in the third quarter, up from the 74 days in the second quarter of 2010.

Now, let’s turn to the outlook for Micrel for the fourth quarter of 2010. Demand from our customers is moderating as the semiconductor industry recovery nears its fruition and the industry approaches its long term trend line. Third quarter bookings declined from second quarter levels, resulting in a book-to-bill ratio of below 1 for the quarter. However, our book-to-bill ratio remains above 1 on a year-to-date basis. In addition, channel inventories have increased during the last several quarters now appear to be within normal levels. Lead times are also approaching a more normal 6 to 8 weeks from the 8 to 12 weeks range experienced during the first half of the year. As the inventory converges on the long term trend line, we expect Micrel’s results to more closely follow seasonal patterns going forward. Specifically, we expect fourth quarter revenues to decline on a sequential quarter basis in the range of 3 to 7%. The [indiscernible] required to hit the midpoint of the revenue guidance is approximately the same percent as in the third quarter. We currently expect gross margin will be approximately 57% to 58%. We expect total operating expenses, including stock compensation to be in the range of approximately 24 million to 24.5 million.

Other income is projected to be above 0.1 million. We estimate that [BAS123R] will result in approximately 1.2 million of pre-tax stock compensation expense in the fourth quarter. The fourth quarter effective tax rate will be approximately 35% on a GAAP basis which assumes that the R&D tax credit will not be extended in 2010.

Based on these aforementioned projections and an anticipated fully [indiscernible] share count of 62 million, we believe fourth quarter 2010 GAAP diluted earnings per share will be approximately $0.19 to $0.23 per share.

Now, before turning the call over for questions, let’s wrap up with a summary of the key financial and operational highlights from the third quarter. First, revenues are at their highest levels in nearly a decade. Design wins remain very strong and reflect the success of our SAM expansion initiative. We believe that our SAM expansion effort is paying off.

Second, we continue to carefully manage our expenses and our operational execution is solid. Operating margin jumped sharply in the quarter and are at their highest levels since reaching peak revenues in 2000. This is indicative of our focus on controlling costs and our ability to generate profitable growth.

Third, earnings per diluted share continued to grow faster than revenue and were at the highest level in the history of the company, and fourth, Micrel remains focused on enhancing shareholder value. Our cash flow remained solid, which enabled us to repurchase more than 1.1 million shares during the quarter and maintain our quarterly cash dividend.

Thank you very much, and we’ll now go to the question and answer portion of our conference call.

Question-and-Answer session

Operator

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions). Our first question is from the line of Tore Svanberg with Stifel Nicolaus. Please go ahead

Tore Svanberg - Stifel Nicolaus

Yes, thank you, and let me congratulate the team on a very nice quarter and especially on the record EPS. A few questions, first of all, could you talk a little bit about bookings just from an industry perspective. I think you had a comment there. You said your book-to-bill will probably still be below 1 for the industry so I was just hoping you could talk a little bit about bookings as we go through the quarter

Ray Zinn

Actually they’ve improved since the last week or so and so they started out the quarter kind of slow but they’ve improved over the last couple of weeks so we’re encouraged by that but as we know, customers when they start exiting the year tend to trend their inventories to keep them in line with what they believe, ongoing demand is relative to where they see lead times so with that backdrop in mind, we still see bookings to be slow relative to or book-to-bill of below 1 primarily because revenues are still growing and our distribution channels are still able to pull from their current inventories. We just met today with one of our large distributors and he confirmed everything, by the way, that we’ve included in our prepared statement so we feel comfortable with our view of what we see not us being as specifically as Micrel but of entire semiconductor industry. So we feel comfortable with our prepared remarks that we did on the industry so it’s our prediction that sometime toward the middle of Q1 of 2011 we expect the book-to-bills to go above 1.

Tore Svanberg - Stifel Nicolaus

Great. If you look at Micrel’s guidance for Q4, the midpoint is roughly 77 million. Would you classify that number as sort of the true consumption level? All the lead stuff aside, is that sort of the accurate run rate for the consumption of Micrel’s products?

Ray Zinn

I guess you could look at it that way. Remember Q4 has a seasonality attribute to it and our customers are reducing their inventories especially at the POP distributors, and we recognized revenue on sell end with a POP distributor so you might be a little interested in what our true demand is just because of the attribute of the POP distributor, who is also trimming inventories to bring them inside of lead times so it’s hard to say what our true run rate is until we actually see a more normal booking pattern. Backlog is still good so based on that, the run rate currently is in that 77-78 million range.

Tore Svanberg - Stifel Nicolaus

Very good, and can you just talk a little bit about how demand has been so far this quarter relative to your end markets?

Ray Zinn

You want to address that Chris?

Chris Dingley

Demand remains stable in our communications segments. We see some reduction in demand in the handset areas due to seasonality but changes as Ray mentioned earlier. However, we do see some Micrel content in some expanding handset models that we would expect to provide some potential growth in that market segment, depending upon the market acceptance of those models. But overall, steady demand through most of our market segments, those being industrial and communications.

Tore Svanberg - Stifel Nicolaus

How about PCs?

Chris Dingley

PCs were not so affected because our content in PCs is not -- we don’t have a major content in that market so we’re not subject to the fluctuation so much of the PC end use

Tore Svanberg - Stifel Nicolaus

So you don’t have a deal on the PC then?

Chris Dingley

I think PC markets will continue to be challenged. There was some slowdown in PCs experienced in Q3, and I don’t see a robust recovery in that area in Q4.

Tore Svanberg - Stifel Nicolaus

Okay, good. And last question, can you maybe also do the same, but now looking at your design wins so Ray Wallin mentioned a pretty hefty increase in design win activity and I was just hoping you could maybe elaborate on some key or bigger wins that you’ve gotten.

Ray Zinn

You want to answer that Andy?

Andy Cowell

Sure. Hi Tore, it’s Andy Cowell. So Tore, yes, across all segments and all business units of the company, design wins have increased, as Ray mentioned, by 40%. Some of the highlights if we look at them Micrel has penetrated the high end tablet and cell phone or handset smart phone market with its new power regulation, the higher end higher ASP products. So that’s going to drive growth into 2011. We’ve also got substantial wins in the computer market in solid state drives. That will be driving us into 2011 with a substantial increase in content in a market that’s growing. We also have broad based design wins in industrial and communication segments across all business unit, and I think that’s reflected in the increased attention of the sales force, the increased products we’ve been bringing out over the last 2 or 3 years.

Tore Svanberg - Stifel Nicolaus

What about automotive?

Andy Cowell

Automotive continues to do well. The Ethernet group being our primary driver in automotive, and we have some new products in the analog side to complement that.

Ray Zinn

Did that help answer your question Tore or?

Tore Svanberg - Stifel Nicolaus

Yeah, that’s very helpful. Thank you very much, and again, congratulations on the strong results. Thank you.

Ray Zinn

Thank you Tore

Operator

Thank you. Your next question comes from the line of Christopher Longiaru with Sidoti & Company. Please go ahead

Christopher Longiaru - Sidoti & Company

Hey guys. Congrats again. This is great results, considering the environment that we're in.

Ray Zinn

Thank you Chris

Christopher Longiaru - Sidoti & Company

My question has to do with the fact that you're guiding down 3% to 7% and you're basically keeping your gross margins pretty much around flat. That doesn't seem to typically what you would see in this environment is some more ASP pressure. You're not seeing that, I guess. Can you elaborate on that a little bit and how you're maintaining those gross margins?

Ray Zinn

Well, we are having a shut down toward the end of December for Christmas so that’s helping, to some degree, our gross margin even with [indiscernible] so actually you could say that we’re trimming our operating costs -- manufacturing expenses are going to be trimmed. So that helps to some degree. Also, if you look at the mix of our products, we tend to get a fairly stable mix of products in Q4 so I think -- it’s staying relatively flat because margins have been improving general anyway as we control expenses so manufacturing has done a good job for us in cutting costs and we’re continuing to see the benefit of that as we improve just in our backend costs as well as in our fab costs. You would actually see an improvement if the revenue if the revenue were back up to what is in Q3 or was in Q3, you’d actually see margins superior to what we’re forecasting for Q4 so I think we’ve brought them down in line with where we think the product pricing is and taking into consideration the time of the year that this is so we feel comfortable with that margin range

Christopher Longiaru - Sidoti & Company

Great. And the other question I had was just you talked a lot about these design wins and we've seen them over the course of the last year. What would be the one, in the short-term, that you're most excited about and expect to kind of add to the revenue mix first and kind of ramp first?

Ray Zinn

Probably the tablets and the high end phones which are just beginning to hit the shelves and so the growth dynamics in those are looking pretty good so on a short term basis, I’d see those as they ramp for the Christmas market

Christopher Longiaru - Sidoti & Company

Okay. That's all I had for now. Thank you guys

Ray Zinn

Thank you Christopher

Operator

Thank you. Your next question comes from the line of Doug Freedman with Gleacher. Please go ahead

Doug Freedman - Gleacher

Great. Thanks for taking my question. And Ray, congrats on pretty much calling the booking slow down, I think it was about two quarters ago.

Ray Zinn

Thanks for remembering that

Doug Freedman - Gleacher

When talking about, I guess focusing in on bookings, can you talk a little bit about your forecasting for turns to be comparable in the forward quarter that you just achieved. Can you talk a little bit about what you're seeing in terms of the orders that are coming in, what percentage of those orders are turns orders right now? And how much do we need that to continue? It does sound like you're factoring in the slowdown that tends to happen at the end of the quarter. I just want to get a sense if we're seeing a real increase in the turns orders that are coming in the door.

Ray Zinn

Not necessarily an increase in turns but they haven’t fallen off so we’re baking in turns of about what we had in Q3 and the primary reduction, if you would, for Q4 is our backlog is down so turns look pretty commensurate with what we experienced in Q3. Certainly our POS sale through is spot on; what we need for Q4 so everything in the bookings now at least in the last couple of weeks have improved and had they not, we might have guided a little lower but not a lot. We might have guided down maybe a percent lower but they’ve come back better and turns are looking very respectable, actually maybe a little better than what we had originally anticipated maybe 3 weeks ago. Thank goodness we didn’t have to do our call at September because we do need a little bit of the color of how Q4 is going to look. I think the biggest thing that all of us have to deal with, not just Micrel, is the fact that lead times have come down by almost 50% so that’s a big lack and that just reduces visibility in a tremendous way so anytime visibility is minimized to make sure numbers are a little more suspect, but we’re baking enough caution. We risk assessed pretty good so we feel comfortable with the guidance we’ve given.

Doug Freedman - Gleacher

Great. Regarding lead times, are there any products in your product catalog that are now at, or still at an extended lead time?

Ray Zinn

We do have a few. We have certain product areas that are ramping and frankly, ramping faster than our customers had forecasted for us. You have to remember the cycle time for our industry is 12 weeks. When you look at starting wafers and then getting them out there into finished goods, so you’re having to go back like July when our customers would have had to give us solid numbers in July and they just frankly didn’t do that. We were getting the numbers forming up more like September and for crying out loud, if I’ve got to start wafers, there’s no way I can get those out in 6 weeks so for our industry to hit 6 weeks, we basically have to have the wafers at die bank and so we do have some shortages in certain areas that -- not across the board but of course you asked me if there was any at all, and I’d say there was certainly -- in the certain areas that Andy referred to where we’re ramping, we’re short and we’re hearing it from our customers

Doug Freedman - Gleacher

Last quarter you mentioned that your mix of product out in distribution was an issue and some [inaudible] had too much inventory, some didn't have enough. Can you give us an update on where your distributor inventories stand now and just relative to where they historically have been?

Ray Zinn

That’s kind of it. 16 to 18 weeks is kind of where they have then and they’re kind of there now and we met with one of our major distributors today and he did indicate that he believes that our channel is looking pretty good so we don’t see any issues. At least with this one distributor and I’m sure -- Chris, you want to speak to that?

Chris Dingley

Any of the mixed issues that we exited Q2 with was out there in Q3 and we believe our mix is well in line as well as the overall levels are right in line with the levels required to support our revenue projection moving forward so no significant issues there at all

Ray Zinn

And that’s why, by the way, we feel relatively comfortable with the POS projections that we’ve made because we believe our inventories are properly placed and I did get confirmation of that today from one of our large distributors, at least for them, the inventories are proper for them. They’re not concerned about excess inventory. Their book-to-bill, by the way, is above 1 and so they’re pulling from their inventories and they’ll probably see them reduced to some degree. That’s why I believe we’re not going to see from our industry perspective, bookings above 1 until the middle of Q1 of next year.

Doug Freedman - Gleacher

Terrific. And my last question is really just an accounting one. When we look at the R&D tax credit, what impacts will that have, if it's renewed on your tax rate in the fourth quarter?

Ray Wallin

We’ll probably keep our tax rate about the same as it was in Q3, maybe a little bit lower.

Ray Zinn

You all know the impact

Ray Wallin

It’s about 2 to 3 points

Doug Freedman - Gleacher

Okay. And there would be no -- would there not be a catch-up impact in the fourth quarter, just to catch up for the whole year, or is it two points for the year, is it two points for the quarter, just so that I'm clear?

Ray Wallin

We would have it for the -- the quarter rate would be that.

Ray Zinn

Would there be a catch up?

Ray Wallin

Yeah, the catch up for the whole year because we haven’t had --

Ray Zinn

Is that going to impact Q4 though?

Ray Wallin

Yes, it will. It will all be reflective in Q4

Ray Zinn

But you gave him a number that reflects just Q4, right?

Ray Wallin

No, it reflects the whole thing

Ray Zinn

Okay.

Doug Freedman - Gleacher

Okay, great. Thank you.

Ray Zinn

You’re welcome Doug.

Operator

Thank you. (Operator instructions). Next question is from the line of Adam France with 1492 Capital Management. Please go ahead.

Adam France - 1492 Capital Management

Yes, thank you for taking my question, here. Could you repeat what you all said about the overall trend in your ASPs?

Ray Zinn

We didn’t speak to -- we just said that we believe the industry would remain on the long term trend of 11% if the ASPs didn’t degrade, otherwise if they remain relatively constant so if you look at our barometer and I don’t know if you still have that chart up or not on your system, but we do show what we think the direction of pricing will be over the next year. All you got to do is go back and look at that chat and that talks about the way we see pricing.

Adam France - 1492 Capital Management

Very good. Thank you

Ray Zinn

You’re welcome.

Operator

Thank you, and gentlemen at this time I’m showing no further questions, please continue.

Ray Zinn

I appreciate everybody coming on the call today. We’re very happy about the results we had for Q3 and even our outlook for Q4 so Micrel is executing very solidly, I’ve got great support here at the company, manufacturing is firing on all cylinders and things look exceptionally bright for Micrel so again, I appreciate your support and thanks again, look forward to talking to you in January.

Operator

Thank you sir. Ladies and gentlemen, if you’d like to listen to a replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030 followed by the access code of 4373029 followed by the pound key. This does conclude the Micrel Incorporated 2010 third quarter results conference call. Thank you for your participation. You may now disconnect.

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Source: Micrel CEO Discusses Q3 2010 Results - Earnings Call Transcript
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