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Micrel Inc. (NASDAQ:MCRL)

Q4 2007 Earnings Call

January 31, 2008 4:30 pm ET

Executives

Ray Zinn, Chairman President and CEO

Rick Crowley - VP and CFO

David Schie - VP of Analog Design and Process Development

Analysts

Amit Kapur - Piper Jaffray

Simona Jankowski - Goldman Sachs

Tore Svanberg - Thomas Weisel Partners

Bob Gujavarty - Deutsche Bank

Doug Freedman - AmTech

Krishna Shankar - JMP

Kevin Rottinghaus - Cleveland Research

Operator

Welcome to the Micrel's fourth quarter 2007 Earnings Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Ray Zinn, President and Chief Executive Officer of Micrel Semiconductor. Please go ahead, sir.

Ray Zinn

Thank you, and welcome to Micrel's Q4 2007 conference call. Delighted to have you with us this afternoon. With me today is David Schie; he is the Vice President of Analog Design and Process Development; as well as Rick Crowley, who is our Vice President and Chief Financial Officer.

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

Rick Crowley

Thank you, Ray. In conjunction with this conference call, a number of supplemental charts will be made available on Micrel's website during the following prepared remarks. To access these charts, go to www.micrel.com and click on the link to the Q4 2007 conference call slides.

We will begin today's call with the legal disclaimers. 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 and future customer demand. Various factors could cause actual results to differ materially from what is set forth in such forward-looking statements.

Some of the factors that could affect the Company's results have been set forth in our press release dated January 31, 2008, and are also described in detail in the company's SEC filings, including, but not limited to, our annual report on Form-10K for the year ended December 31, 2006, and our quarterly report on Form-10Q for the quarter ended September 30, 2007. Listeners who do not have a copy of our fourth 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 fourth quarter and fiscal year ending December 31, 2007, and then discuss our outlook for the first quarter of 2008. Our prepared remarks will then be followed by a question-and-answer session with the financial community.

Micrel's 2007 financial performance continued to be strong. Revenues were $258 million compared with $276.3 million in 2006. GAAP net income for fiscal 2007 increased by 15.8% to $44.4 million or $0.57 per diluted share compared with GAAP net income of $38.3 million or $0.46 per diluted share in 2006.

GAAP net income in 2007 was the second highest annual result in the company's history. Included in 2007 net income was $15.5 million pretax gain associated with a first quarter legal settlement, which after income taxes is equivalent to $0.13 per diluted share. Micrel's 2007 gross margin of 57% matched the second highest level in the company's history. Our design efforts resulted in a record number of new product releases in 2007.

Solid cash flows from operations of $67.8 million during the year enabled the repurchase of 5.5 million shares of common stock or approximately 7% of the shares outstanding at the beginning of the year.

In addition, we commenced a dividend payment to shareholders in 2007, representing our confidence in Micrel's operating performance and commitment to enhancing shareholder value. We believe Micrel is the smallest company in the semiconductor industry to pay a dividend.

Now, turning to Micrel's fourth quarter financial results, the uncertain macroeconomic environment in the fourth quarter appeared to heighten our customers' focus on maintaining lean inventories. Our global distributors and a number of major OEM customers informed us that they attempted to minimize inventories at yearend.

As a consequence, customer orders and purchases declined more quickly than usual in the month of December after a strong October and solid November. For the fourth quarter, Micrel's overall book-to-bill ratio was below 1. Order lead times from our customers remained relatively short at 4 to 5 weeks during the quarter.

Micrel's fourth quarter revenues were $64.6 million compared to $65.2 million in the third quarter and $64.5 million in the year-ago period. Fourth quarter 2007 sales were impacted by tight yearend inventory control at certain Korean wireless handset manufactures and China-based communications customers. Standard product sales accounted for 92% of total Q4 revenues with foundry and custom sales comprising 8%.

Fourth quarter sales mix by product area was: analog, 67.5%; high bandwidth, 13%; Ethernet 14%; and foundry, 5.5%. Turns-fill for the quarter was approximately 55%. Micrel sales remained widely diversified with the top 10 direct customers accounting for 23% of Q4 sales compared with 24% in the third quarter.

In looking at our fourth quarter revenue mix, wireline communications sales for Micrel's analog, high bandwidth and Ethernet products made up 24% of Q4 revenues compared with 22% in the third quarter. The increase in communications revenue was driven 25% sequential growth in Ethernet product revenue in the fourth quarter. Q4 sales of analog additional and high bandwidth products to the communications end market declined by about 10% sequentially from third quarter levels.

Fourth quarter sales to our wireless handset customers were flat on a quarter-to-quarter basis, comprising 18% of total company sales. Sales to the computing market made up 17% of fourth quarter revenues, down slightly from the third quarter. Industrial revenues comprised 38% of Q4 revenues, the same proportion as Q3. In running out the revenue mix, sales to customers in the consumers and military end market decreased to 3% of revenues in the fourth quarter compared to 4% in the third quarter.

Geographically, sales were relatively steady quarter-to-quarter with Asian-based customers accounting for 56% of Q4 sales; North American customers, 33%; and European customers, 11%.

Now, turning to the reminder of the income statement, fourth quarter gross margin was 55.8% compared to 57.5% in the third quarter. The company's decrease in gross margin was a result of a less favorable sales mix experienced in Q4, with Ethernet sales up and analog and high bandwidth revenues to the wireline communications end market down, combined with the yearend inventory charges.

Approximately 80% of the 1.7% sequential decline in gross margin was due to mix and 20% was due to higher inventory charges.

Fourth quarter wafer fab utilization was approximately 57%, down from roughly 60% in Q3. R&D spending was $13.4 million or 21% of revenues in the fourth quarter, a decrease of $300,000 on a sequential basis.

During the quarter, Micrel released 17 new products. In the analog product area, we released the world's smallest 4-amp buck regulator targeted at growing digital TV, high-def DVD and server markets. We expanded our industry-leading family of low-noise regulators targeted at portable power applications and added two new members to our best-in-class family of load switches.

In the RF product line, Micrel released its first 900 megahertz QwikRadio product targeted at tire pressure monitoring systems and remote actuation applications and also introduced an easy-to-use low-power RF transmitter for remote keyless entry and garage door opener applications.

Our high bandwidth product group released six high-speed, low-noise silicon germanium based products during the fourth quarter. These products provide 50% lower power consumption in the competition and are targeted at end markets such as networking, video broadcasting, storage and automated test equipment.

Returning to the income statement, Q4 SG&A spending was $10.9 million or 17% of sales flat to the third quarter. Fourth quarter operating income was $11.7 million or 18.1% of sales. This compares to operating income of $12.9 million or 19.8% of sales in the third quarter and $12.4 million or 19.2% of sales in the year-ago period.

Other income net was $1.5 million, down from $1.6 in the third quarter due to lower interest earned on lower average cash balances. The effective tax rate for Q4 was 36.3% and 36% for the full year 2007.

Fourth quarter GAAP net income was $8.4 million or $0.11 per diluted share. This compares with third quarter 2007 GAAP net income of $9.4 million or $0.12 per diluted share and GAAP net income of $8.8 million or $0.11 per diluted share in the year-ago period.

Our balance sheet remained strong. Cash and short-term investment balances were $107.7 million at the end of December, a decrease of $7.9 million from the end of September. The sequential decrease in cash and short-term investment balances was the result of continued share repurchase activity during the fourth quarter.

During Q4, the company generated $20.1 million in cash flows from operations and free cash flows of $13.8 million while spending $20.7 million for the repurchase of approximately 2.3 million shares of Micrel common stock. Accounts receivable balances decreased on a sequential basis by $4.9 million in the fourth quarter to $29.7 million.

Days sales outstanding were 42 days at the end of Q4 compared to 49 days in Q3. Net inventory increased by $2.1 million during the fourth quarter to $35.7 million, primarily in finished goods. Fourth quarter days of inventory increased to 115 days from 111 days in the third quarter.

Deferred income on shipments to distributors decreased by $1.5 million from the third quarter. Inventories in the distribution channel decreased during the fourth quarter from 11 weeks to 10 weeks.

Capital expenditures totaled $6.3 million in the fourth quarter. And Q4 depreciation and amortization, excluding the amortization of stock-based compensation, was $4.5 million. Capital expenditures for all of 2007 totaled $20.2 million and depreciation and amortization was $18 million or 7% of revenues.

To provide a more direct return of the company's cash flow to shareholders, Micrel's Board of Directors has authorized a quarterly dividend payment of $0.03 per share to be paid on February 26, 2008, to shareholders of record on February 11, 2008.

Now, turning to our outlook for the semiconductor industry and Micrel. Please turn to page number 2 in our website presentation, which contains our 2008 semiconductor barometer.

As you all know from the barometer, our outlook for 2008 looks very similar to almost any other year. Q1 starts off a little weak, begins to strengthen in Q2, gets stronger in Q3 and then rolls off in Q4. We are still forecasting the industry will grow 7% in 2008. This is based on a 9% unit grow and 2% degradation in ASP.

This also assumes that the U.S. economy is not weakened to the point of a full-blown recession. We have, however, factored in a slowdown, which will result in a slightly slower growth rate in Q2 and Q3 of 2008 compared to a normal year. We believe that the actions being taken by the Fed and the U.S. Congress will be effective and will keep the economy from entering a recession.

You will probably come to the same conclusion that we have that the semiconductor industry is still quite healthy, with most companies reporting a pretty normal outlook, albeit on the cautious side. We are encouraged by the fact that our current bookings remain strong given the normal Q1 seasonality, including the Chinese New Year effect.

Turning to page number 3 of our webcast, our channel checks indicate all channel inventories are well within normal limits. Lead times continue to remain very short at four to six weeks and beginning backlog are also low. Thus, the industry will have to rely heavily on turns-fill in the first quarter. It is our experience that steep corrections are more a consequence of excess inventory than of global economic anomalies.

Now turning to the Q1 outlook for Micrel, given the macroeconomic and industry backdrop, we anticipate that Micrel's Q1 revenues will be 1% to 4% lower than the fourth quarter. We are encouraged by the relatively normal booking levels we have experienced in January. And to date, we have seen no significant change in our customers' order patterns. The turns-fill required to achieve the projected revenue is approximately 60%.

We forecast Micrel's first quarter 2008 gross margin will be approximately 56% to 57% depending on the first quarter sales mix. Factory utilization is expected to be lower in the first quarter compared to the fourth quarter, and we project that inventory measured in dollars will be lower at the end of the first quarter with the actual being dependent on the amount of Q1 shipments.

We anticipate total operating expenses to be flat to slightly up on a sequential basis in the first quarter. Other income is projected to be about $1 million, and diluted shares outstanding are estimated to be 74.5 million shares for the first quarter.

We estimate that FAS 123R will result in approximately $1.2 million of pretax stock compensation expense in the first quarter. We anticipate that 2008 effective tax rate will be approximately 36% on a GAAP basis. Based on these aforementioned projections, we believe Q1 2008 GAAP diluted earnings per share will be approximately $0.10.

While we know that the investment community believes we may be in for a significant economic downturn, we believe that Micrel will still grow year-over-year in 2008. This is because we are encouraged by the adoption of our new products and by the overall enthusiasm and confidence within the company. Financially, the company is as strong as it ever has been, and we are poised to grow if the economic climate supports this.

Thank you. We'll now move to the question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions)

And our first question comes in from Amit Kapur from Piper Jaffray. Please go ahead.

Amit Kapur - Piper Jaffray

Great, thanks a lot guys. Ray, I think last quarter, you mentioned wanting to build some inventory into Q1. And then in the meantime, it looks like quarter flow deteriorated a bit. Can you remind us of some of the inventory goals you're targeting in 2008 and how that might change if the macro-environment continues to deteriorate?

Ray Zinn

Well, you'll note that we said in the prepared remarks that we're going to try to pull inventory down a little bit in Q1. So, I am thinking anywhere between 118 and 112 days looks like a good target for us.

Amit Kapur - Piper Jaffray

Okay, great. And can you may be talk about some of the goals you have in terms of new product ramps and new product launches in 2008?

Ray Zinn

We're forecasting around average about 20 products a quarter. So, let's say that's roughly 80 products for the year. This is what we expect the average for 2008. Does that answer that question, Amit?

Amit Kapur - Piper Jaffray

Yes, that's fine.

Ray Zinn

By the way, that's about 20% or 30% improvement over what we've done in the past.

Amit Kapur - Piper Jaffray

Okay. And maybe a final question. Can you maybe talk about some of the things you're doing to kind of hold the line on profitability? With the declining revenue visibility, just how flexible is the operating expense structure?

Ray Zinn

Well, we've already taken caution on that by reducing some of our legal expenses and also looking at just sometime off for the fab area because of the low utilization that we expect in Q1. And so, we are in fact mitigating a lot of the normal expenses by just keeping our finger on the portfolio of the income statement just to make sure that all the costs are consistent with the revenue that we are projecting, lower by 1% to 4%. So I think we're pretty confident that that's kind of where we'll come in.

Amit Kapur - Piper Jaffray

Okay, great. Thanks, guys.

Ray Zinn

You're welcome.

Operator

The next question comes from Simona Jankowski from Goldman Sachs. Please go ahead.

Simona Jankowski - Goldman Sachs

Hi. I just wanted to ask you a question on the guidance. It seems like it's a little bit weaker now than what you guys indicated a couple of weeks ago. So, I was just curious if you are embedding increased caution because of all of the macroeconomic commentary in the last few weeks. I know you commented your customer behavior hasn't changed that much and bookings have been looking good so far, but can you just point to other differences and why the guidance is lower?

Ray Zinn

Okay. Well, thank you. That's a good leading question, Simona. When we did the preannouncement the first of the quarter, we were projecting revenue was going to come at around 64. And since it came in a little bit higher than that and if you just subtract 1%, you will see that we're still forecasting 64.

So, I don't think we changed anything if you remember that we'd forecasted Q1 to be at $64 million. So, I don't think that's really a change. With regard to having a little downward slop to it, again, the uncertainties in the fact that we are starting with a little less backlog, a little more uncertainty, certainly some of the feelings on the street do cause us to be a little more concerned, more reserved.

And we frankly are trying to meet or exceed our guidance for Q1. So, give us a little break here, Simona. We are being straight and yet we are giving ourselves a little bit of room.

Simona Jankowski - Goldman Sachs

Okay. Well, that makes sense. Just related to that, it seems like you are also assuming a higher level of turns in the first quarter. I think you commented 60% versus last year, 65%.

Ray Zinn

55%.

Simona Jankowski - Goldman Sachs

55%, yes. Why do you guys think you'll get a better turns-fill this quarter?

Ray Zinn

Well, when we look at how Q1 typically ramps for us, I mean they are coming off of -- there is inventory pull-down in Q4, as we mentioned. And so, just looking over our past 30 years of experience and just how this plays out, the most customers try to trim up inventories to get down to minimum levels, so they got the year at their minimum.

That means then that the turns is generally stronger in Q1. And so, what we have done is we've gone back over the past seven or eight years and looked at Q1 and looked at our turns-fill that we've had in those seven years and just used an average of what we saw in the past seven years for what we expect in Q1.

So, we do a little historical analysis. And then just looking at the kind of the sensitivity of the bookings that will be coming in, the rate they are coming in, that's why we think --

and by the way, generally March is our strongest month relative to Q1 compared to, say, like December, which is typically a weaker month relative to Q4.

So, we do expect that if the booking trends continue like we have had in January, then I think we're going to be definitely going to meet our guidance. But you don't know what's going to happen in February with regard to Chinese New Year and also just how much effect the negative press on the economy is going to have on our customers throughout the world.

So, we're just being a little cautious. We baked in what we think is a reasonable amount of cautious in our number. And yet, the turns number is pretty consistent with what have seen over the past seven years.

Simona Jankowski - Goldman Sachs

I guess it seems so consistent to me, because on the one hand, your are saying you've built in conservatism, but on the other hand, you are assuming that the January bookings phase is going to continue and you are also assuming a pretty typically linearity to the March quarter similar to the average of the last seven or eight years even though this year seems to be a worse year than the last seven or eight years on average.

Ray Zinn

What parts worse now?

Simona Jankowski - Goldman Sachs

This year.

Ray Zinn

Yes, would you say was worse?

Simona Jankowski - Goldman Sachs

Yes, I mean it seems like we're entering a recession potentially.

Ray Zinn

Well, we haven't seen it yet. I mean we've talked to our customers. We talked to our distributors, and we are looking at what our peers are doing out there. And it doesn't look at this juncture anyway. And of course, as I said, January looks real really good. We can't say what February and March are going to look like yet, but we think the Fed is moving in the right direction. We think Congress is going to move to strengthen the economy. And we are believing that it's not going to be as bad as the press would indicate.

And I think if you look at guidance by the rest of our peers, this would substantiate that. So, I don't think we're out of line with what we're seeing or what we're forecasting. Yes, we are just giving you what I believe and we want to meet or exceed our numbers more than ever.

Simona Jankowski - Goldman Sachs

Thanks a lot. I appreciate it.

Ray Zinn

You're welcome.

Operator

The next question comes from Tore Svanberg from Thomas Weisel Partners. Please go ahead.

Tore Svanberg - Thomas Weisel Partners

Yes, thank you. A couple of questions. Maybe on the turns question, could you probably give us an indication how turns were in January. So, I guess with two months less than the quarter, how much turns you still need?

Ray Zinn

We're on track. If I look at January, and again January, as Simona just said, doesn't make the quarter. But if it looks pretty linear if January is an indication in the past in Q1, it's been a pretty linear quarter with March being quite strong, because as you know, we're entering Q2, Q2 is generally stronger quarter than as Q1. So, if the bookings remain linear the way they are, we should hit the high end of our guidance.

Tore Svanberg - Thomas Weisel Partners

Great. And you've got the gross margins to be up in the March quarter, yet utilization would be down, inventories will be down. So are you getting a benefit from mix here? And if so, where does that mix benefit come from?

Ray Zinn

Yes, definitely, Tore. We expect the mix shift to be more analog and high bandwidth than we had in Q4. We are grateful for the revenue we've got from Ethernet, but Ethernet tends to be a lower gross margin product line. And so, we expect the others to be up in Q1 whereas we don't expect Ethernet to be up as strong. So, we do expect the mix shift to come back the other direction for Q1.

Tore Svanberg - Thomas Weisel Partners

Good. And you mentioned you expect to grow this year, especially because of new product. Could you give us a little bit of a flavor of your revenue by new products, how has it trended lately and how should we look at that as we move through the rest of the year?

Ray Zinn

Well, I don't have a revenue number by product, Tore, where we'd average on that. I mean we've made statements before at our Analyst Day conference. So, I am little gun shy on giving projections on what my revenue gross is going to be on my new products, but we do see the momentum off in new products.

So, the new products are definitely, at least I'd say, 10% to 15% better on a revenue run rate than they were in the last two years. And so, we have hopes that 2008 will give us a growth year because of that. So, again, it depends upon the economy and depends on what market are going to remain healthy during the 2008 year would determine really kind of what revenue I am going to get on which products.

So, right now, my wireless business is coming back nicely. And so, we are encouraged by that, because that is a market that we have put a lot of emphasis on from a design point of view. And so, that's helping. Our high-definition TV business is picking up for us, and that's something that is new as far as our market that we are penetrating.

And so, that's new revenue that we expect to help us grow for 2008 and a lot of nice design wins in that market by the way. And so, we just see the upside is going to come from our new products.

Tore Svanberg - Thomas Weisel Partners

Great. And your major handset customers have at least publicly been quite positive on their projections near term and for the year. Based on your conversations with them, what are they telling you about the March quarter, any changes or are they still pretty upbeat?

Ray Zinn

They are pretty upbeat. That's why I know that Simona was not as positive as I am on the industry, but the input we got, we just met with Samsung yesterday, and they were very positive about us. We talked to the production people yesterday, and it sounded very optimistic for us.

Tore Svanberg - Thomas Weisel Partners

Great. Last question for Rick. Rick, should we continue to model buybacks throughout the year?

Rick Crowley

Yes, Tore.

Tore Svanberg - Thomas Weisel Partners

Great, thank you.

Operator

The next question comes from Ross Seymore from Deutsche Bank. Please go ahead.

Bob Gujavarty - Deutsche Bank

Hi. This is Bob Gujavarty for Ross Seymore. Thanks for taking my question. Do you guys have a CapEx forecast for 2008?

Rick Crowley

Yes, I think it would probably be in the $16 million to $22 million range.

Bob Gujavarty - Deutsche Bank

Great. And also, just talking about the growth rate for 2008, when you look at it, do you think about taking share? I mean if the semi-cycles are a little weak this year, you guys have new products and relatively small player, do you think you can take share and grow despite the cycle or is the cycle going to dominate what happens this year?

David Schie

Yes, hi, this is Dave Schie here. Yes, the new products actually are at a point where they are in some really interesting new markets, and they give us a bit of leg up. So, I think we can grow and take share away in some areas. So, I guess the answer is yes.

Bob Gujavarty - Deutsche Bank

Okay. So, even with a modest, maybe even modest slowdown in the industry, do you still think you guys can grow despite that?

Ray Zinn

Yes, there are few trends in the industry that are driving some change. And so, we are well positioned from some of those. And, so those are going to be an opportunity for us we didn't have before. So, in that way, I would say yes.

Bob Gujavarty - Deutsche Bank

And just last question in terms of just seasonality. In terms of your mix, do you think you're more seasonal to kind of consumer trends these days and the cycles more follows the consumer patterns where kind of the third quarter and fourth quarter are going to be the dominant demand drivers and that we shouldn't expect that's where all the growth is going to come? Is that how we should think about your business these days?

Ray Zinn

Well, we typically have a pretty strong first half, primarily in the wireline side. We are seeing some of our wireline business coming back in analog and high bandwidth area. So, I wouldn't really look at us as more of a consumer type. The industry does overall follow kind of a normal weak Q1, stronger Q2 Q3 and then roll off in Q4, mainly because of the consumer that takes place in Q4.

Q4 is more of a consumer related business. In the past, Q4 used to be a lot stronger. Q4 as of late at least for us, we've seen our customers kind of pull back toward the end of the year as they try to mitigate inventory levels that they see as uncomfortable for them.

So, we are going to take that into consideration actually in 2008 Q4, as we are going to back in some slowdown in December just because of what we've seen and what we saw in 2007. But I would say the first half tends to be more of a wirelined. The second half tends to be moving more toward a consumer orientation.

And since we cover such a wide range of markets, in fact, I think one of the widest range of markets in our industry, then we'll see I think less volatility due to either of those markets if wireline tends to be strong in the first half and weaker in the second half, but then we have some consumer that will pick up in the second half.

So, we think that we are a little more recession-proof in that sense because of just the broad base of products and markets that we serve. So, does that help answer of that question for you?

Bob Gujavarty - Deutsche Bank

Yes, it does. And just a final point on the CapEx, a bit of wide range, I guess can I assume that if the growth is there, you'll be closer to 22? And then if things are a little far here because of the 16 and right now, would you be closer to 16 and the 22?

Ray Zinn

I wouldn't say so. A lot of this is due to lead time of the equipment that we're getting. We are trying to reduce the feature size in our fab. And so, some of the equipments are a little more expensive, and so it tends to have some effect on our overall cap spending.

But I wouldn't take from that, 16 to 21 is not so much relative to the revenue, but more relative to just the availability of equipment and the kind of equipment installation base that we see that we can handle. And, so it's just a range, because it doesn't take a much swing from 16 to 21.

One or two piece of equipment can make all the difference in the world. So, with this more expensive tooling that we buy, it does give us more of a swing, if you would, on the absolute dollar amount. Do you seem to understand?

Bob Gujavarty - Deutsche Bank

Yes, I got it. Okay. Thanks, guys.

Operator

The next question comes from Doug Freedman from AmTech. Please go ahead.

Doug Freedman - AmTech

Hi, guys, thanks for taking my question. Ray, if you could talk a little bit about what gets you excited about 2008 from a product portfolio standpoint, and I couldn't help, but notice your open market purchases that you've been making lately.

Ray Zinn

Okay, so you're done, Doug?

Doug Freedman - AmTech

Yes.

Ray Zinn

Okay.

Doug Freedman - AmTech

No, sorry.

Ray Zinn

Okay. So, you're wondering why I am in the market buying.

Doug Freedman - AmTech

Clearly, I would think it's got something in 2008 --?

Ray Zinn

Sure, absolutely. I mean got David Schie here now. So, we've got a lot of enthusiasm in our analog group, the highest level of enthusiasm I have seen at Micrel in probably 10 years. And so, I see lot of great products that we are bringing out. I see our customers are really excited about these products. We don't have to bang on and take to them anymore. They are willing to work with us. So, we got a lot of partnership going with the companies that we didn't have in the past.

[Rim] is one notable company that we have had great partnerships with. And we see others coming that are going to I think really benefit the company as we now get ourselves in gear and start moving to next level of business.

So, I think 2008 is going to be a great year for Micrel. And granted I am taking advantage of the lower stock price, but I have a lot of stock already. So, it's not like I am herding for stock, but I just can't -- there is a pass of a good deal. And so, I am grabbing while the grabbing is good, as you would. And of course, I have a lot confidence in 2008. As Rick said in prepared remarks, we do expect to grow year-over-year.

Doug Freedman - AmTech

All right. Two things happened recently in the quarter. You've talked about few things more recently that I would like to touch on if you could. I was wondering if you guys are seeing any benefit from sort of a realignment of analog supplies over Arrow. I noticed that you guys used Arrow as one of your broad-line distributors. And Maxim recently moved away from them. Are you guys seeing any uptick in interest or ability to help Arrow out with your analog offerings?

Ray Zinn

Absolutely. I mean we just met them this morning on that subject. Bill Mitchell was there, the President of Arrow. And yes, they are very much counting on us for stepping in and filling that void.

Doug Freedman - AmTech

All right, terrific. And then lastly, during the quarter, you guys announced that there was a deal made on solar concentrators. Can you give a little detail on your outlook for that business?

Ray Zinn

Yes, we are actively pursing that area. There are going to be some interesting things coming up, but we are not ready to talk about it yet. Obviously, the moment we support one of the most efficient solar cell technology through our foundry business, but the foundry business isn't the limit of solar expertise or what we hope to do in that area.

Doug Freedman - AmTech

Is it something that we think could become a material piece of revenue, something of north of 10%?

Ray Zinn

Could be. I mean, again, we are trying to figure how we can take advantage in our products with our solar cell technology. We have patents on that. And so, it's just that we are not [quoting] the solar cell manufacturing business. We make solar cell wafers. We process them, but we actually haven't gone out and looked at what we should be doing and actually manufacturing solar cells.

Those are our customers that are currently using our technology to produce their solar cells. So, again, our business is primarily ICs. And so, we haven't decided to actually become a solar cell manufacturer.

Doug Freedman - AmTech

All right, great. Thank you.

Ray Zinn

You're welcome.

Operator

The next question comes from Sumit Dhanda from Banc of America Securities. Please go ahead.

Unidentified Analyst

Hi, guys. Thank you for taking my call. This is [Mark Schoze] coming for Sumit Dhanda. Could you give any color in regards to whether you see kind of some more normal return patterns order patterns from your Chinese wireline communication customers and if that's baked into your first quarter guidance?

And another question I would have would be on your expectations for the industrial segment in the March quarter and if you could speak to some possible new product offerings you would have in that particular segment. Thanks.

Ray Zinn

Okay. In wireline side, primarily in Asia, we are seeing a pick-up. So, business has improved for us in our wireline business in China. That's kind of expected though, so that is baked into our estimates for you guys. So, that is in our numbers, and we are delighted with the fact that that's coming back as we has had hoped.

Regarding the industrial sectors, certainly with Maxim moving away from Arrow, this give us an opportunity to step in, because we are a major analog supplier for Arrow. And of course, we are going to give a lot of attention now as you can well imagine, and we are going to be working together with them on some products that we have.

We are definitely coming out with a line of switchers as well as our super LNR family, which is a real ideal industrial product that we're getting a lot of excitement on. In fact, in Q4, that was our leading interested product. In other words, that had the highest customer interest was in our super LNR. And that's an industrial application again. So, we are very upbeat about these new products that are being created for the industrial sector.

Unidentified Analyst

Okay, great. Thanks for the color. Thank you.

Ray Zinn

You're welcome.

Operator

The next question comes from Krishna Shankar from JMP. Please go ahead.

Krishna Shankar - JMP

Yes, Ray, I don't know whether you touched on it, but what's your outlook for the analog market growth in 2008 and do you hope to outperform that growth rate?

Ray Zinn

Okay. Krishna, we are not separating out analog from the rest of industry. We can do that. It's just that we've primarily just looked at the overall industry, mainly because we serve both, as you know, the analog as well as the digital side with Ethernet and high bandwidth. And so, we've been characteristically more general, as you would, as opposed to analog specific.

The analog growth, if you partition it out, will be a lower than the overall industry by about 2% or 3% for 2008, even though we don't break it out for your guys on a normal basis. And yes, we do expect to beat the analog industry.

Krishna Shankar - JMP

And in terms of handsets, you are seeing renewed business at both your key Korean customer, Samsung, and as you come back here.

Ray Zinn

That's correct.

Krishna Shankar - JMP

Okay. And any progress with some of the other customers outside Korea.

Ray Zinn

Sure. I mean absolutely. Sony Ericsson and Rim continue to do well for us.

Krishna Shankar - JMP

Okay. And what about a lot of the gross margins that kind of dipped down here a little bit in Q4 come a bit down here a little bit in Q4. How do you see sort of the competitive environment there? I mean in past calls, you've talked about redesigning some products to be more competitive, which would perhaps give you higher volumes, maybe a little lower gross margin. So, can you sort of give us an update on your longer-term gross margin outlook and sort of the pricing environment?

Ray Zinn

Well, we still expect our gross margins to be in the 58% range. That's still kind of where we expect to be. We did introduce and actually we do have production orders now on that one part that you are referring to where we did go in and redesigned it for higher volume. I am not sure that the gross margin is lower on it. I think the gross margins are pretty normal.

It's just that we've had to take a different tact with regard to how we feature set and so forth. And we normally, as a company, tend to be more feature rich. And so, we just went with a less feature rich configuration and are entering more of the lower-end systems, so that we can get the volume that heretofore we would have just left on the table.

So, we definitely are going to go after the less feature rich products. And as I just mentioned, we just released our first product, and we are now having production orders on that product from our major customers.

Krishna Shankar - JMP

Okay. And my final question, in the industrial market, through the first month of the year here, how are you seeing your distributors here in the U.S. in the industrial market, any signs of the macroeconomic uncertainty trickling down to what you are seeing in the distribution channel?

Ray Zinn

Well, what we are hearing from all three of our distributors is that they are cautious, but they don't really see any change, I mean the book-to-bills are still above 1, and they are seeing pretty normal activity at their locations, regional offices.

So, frankly, the projections they are giving us is that our distribution business is going to be up in Q1 based on the forecast that we are getting from them. And we've asked them the same question, well, don't you guys see kind of the recession kind of building that you're hearing from the investment community. And they said, no, we haven't see it, but we're looking. You will be the first we'll let you know.

So, they are very cautious and somewhat concerned, because we can kind of talk ourselves into a recession. Back there, there was a comment that Bill Mitchell said that we're going to talk ourselves into a bloody recession.

So, we are concerned about that. Obviously, it would self-fulfilling prophecy, and the news media can do excellent job of auguring us into the ground if we let them. But right now, based on what I hearing from my customers anyway is that things look pretty normal.

Krishna Shankar - JMP

And even though communications is sort of off to a slow start, do you expect some of its revenue flattish or slightly down here in Q1? Do you expect that to be sort of compensated in Q2 where you may have stronger guidance for Q2 than seasonal to make up for this somewhat flattish profile here in Q1? I know you give guidance --.

Ray Zinn

Micrel or for the industry? Chris, are you speaking of Micrel or the industry?

Krishna Shankar - JMP

Micrel. It's a big revenue outlook for Q2 and beyond?

Ray Zinn

We don't give forecast beyond the current quarter. So, I feel reluctant to give you a number. We did that we are going to grow for the year. And so you can kind of scale that yourself that way. But definitely, Q2, in our view, even though disability is still as bad as it's been for a while, we still see Q2 as a stronger quarter for Micrel, and we do expect Q2 up relative to Q1.

Krishna Shankar - JMP

Okay. Thank you.

Ray Zinn

You are welcome.

Operator

The last question comes from Kevin Rottinghaus from Cleveland Research. Please go ahead.

Kevin Rottinghaus - Cleveland Research

Thanks for taking my questions. First off, the gross for 2008, are there any areas that would highlight maybe the most important drivers of the best drivers by end market for 2008?

Ray Zinn

Well, certainly, ACTV is one of the highlight markets for us. And also just the continued proliferation of these portable handheld devices are looking still quite strong for us. Of course, those tend to be more of consumer related.

And industrial is just I think the fact we've had so many new products that we've now introduced into the industrial sector that we do expect industrial side to grow for us just because we have now focused energy and development timeline on industrial kind of products, more ubiquitous universal typical distribution kind of products. So, that's kind of where we see our strength building is more in the industrial side and then in the two consumer sides that I just mentioned a second ago.

Kevin Rottinghaus - Cleveland Research

Okay. On the turns business, I don't know if you have this in front of you or not, Rick, the 60% turns, did you achieve that in 3Q, or if not, when was the last time you had 60% turns?

Rick Crowley

Yes, we've been bouncing around 58% to low 60s really through the last couple years. So, 60% is eminently doable in my view anyway, and we have achieved that. I think Q4 actually was probably 55% on of the lower turns-fills we had in the last four or five quarters.

Ray Zinn

Kevin, I don't think of a quarter that we've had that Rick and I have not spent on analyzing this than we have for Q1, because again, we are tired of coming at the low end of our guidance.

Kevin Rottinghaus - Cleveland Research

Okay, all right. And then just last question on the handset side. Did anything change through the course of the year? I mean were there delayed model launches or anything? At the start of year, you had a real strong design win backlog. Have there just been delays in the model introductions or anything that's kind of maybe pushed that business out a bit or kind of what change versus maybe what you expected in handsets at the start of 2007?

Ray Zinn

I've been asking that question of my guys for the last four quarters. So, the answer is that the model got delayed. The focus on the lower-end handsets hurt us. And the fact that we've had kind of vacated the low-end handset business hurt us. But that was intentional. What we thought though, which turned out to be false, we thought that the high-end handsets were going to do better, because people don't change phones all the time and why would they change phones for lower end and why won't they go to a higher end.

So, our view was with all the replacement handsets out there that the higher end were going to do better. And that's exactly what our customers were telling us. Unfortunately, it turned out not to be true. So, the low end, they tend to be still the growth area and the high ends they did not happen.

So, it's the ying and the yang. I mean we went one way and the market went the other way. So, that was just a mistake on our part by betting on the high end and vacating the low end. We are not going to make that mistake again, though.

Kevin Rottinghaus - Cleveland Research

Are you comfortable with your market share and with those key customers? You don't think anything changed there?

Ray Zinn

Not from that standpoint, no. I mean you have the rotation that takes palace, but that's already factored in. We do that as a regular basis, the rotation we have to do. But what I told you is correct. I mean we've been on the high end. You guys can go back and check this, go back and look at that the builds done and there was sales through those wireless channels, and you can see that the high-end phones just did not do as well as they had forecasted. And we felt the brunt of that.

Kevin Rottinghaus - Cleveland Research

Okay. And maybe just one last quick one. The Ethernet business maybe a little bit more foundry, if the industry starts to pick up a little better and some of your new products come to market, should we expect you to maybe not participate in those businesses as much as the year goes through or --?

Ray Zinn

It is because of what now, Kevin?

Kevin Rottinghaus - Cleveland Research

The Ethernet business, I guess I am asking did you pick up more of that business because the industry was weaker this quarter and should we expect you to walk away from that if the industry starts to strengthen?

Ray Zinn

Am I going to walk away? That doesn't sound like me right now, walking away. So, I don't know what I'm going to do. Right now, I am going to grow my revenue. So, chances of me walking away are not very high. It may affect my gross margin a little bit, but I am not going to walk away per se. So, right now, we are focused on growing revenue.

Kevin Rottinghaus - Cleveland Research

Okay. Thank you very much.

Ray Zinn

You bet.

Operator

There are no further questions at this time. I will turn it back to management.

Ray Zinn

Well, thank you. I appreciate your joining our call of this afternoon. I know there is a lot of other calls you got to listen to today. And the fact that you took time to listen to ours, we appreciate it. So, thanks again and look forward to seeing you in April.

Operator

Ladies and gentlemen, this concludes the conference call for today. You may now disconnect your line and have a great day.

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Source: Micrel Inc. Q4 2007 Earnings Call Transcript
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