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Micrel, Incorporated (MCRL)

Q1 2008 Earnings Call Transcript

April 24, 2008 5:00 pm ET

Executives

Ray Zinn – President & CEO

Rick Crowley – VP, Finance and CFO

Andy Cowell – VP, Analog Marketing

Dave Schie – VP, Analog Engineering and R&D

Scott Ward – VP, Analog Business Unit

Analysts

Craig Hettenbach – Goldman Sachs

Bob Gujavarty – Deutsche Bank

Tore Svanberg – Thomas Weisel Partners

Doug Freedman – AmTech Research

Ian [ph] – Banc of America Securities

Kevin Rottinghaus – Cleveland Research Company

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Micrel first quarter 2008 earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the call will be open for questions. (Operator instructions) Today's call is being recorded.

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

Ray Zinn

Thank you and thanks for joining us this afternoon. With me today is Rick Crowley, our Vice President and Chief Financial Officer, and I've also asked my new analog senior management team to join me. So here with us also is Scott Ward, who's the Vice President of our Analog Business Unit; Andy Cowell, who is our Vice President of Analog Marketing; and David Schie, who's our Vice President of Design and Process Development.

So at this time, I'd like to turn the time over to Rick Crowley to give you the prepared remarks. Rick, go ahead please.

Rick Crowley

Thank you, Ray. In conjunction with this conference call, a number of supplemental charts will be made available on Micrel's web site during the following prepared remarks. To access these charts go to www.micrel.com and click on the link to the Q1 2008 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 Inc., with all rights reserved. Certain statements in this conference call which are not historical facts may be considered forward-looking statements that involve risk and uncertainties. Forward-looking statements include statements regarding future business results, future levels of sales and profitability 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 April 24, 2008 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, 2007. Listeners who do not have a copy of our first quarter earnings press release may view the press release on the company's web site at www.micrel.com.

During the first quarter, the company became engaged in its first proxy contest since going public in 1994, with a small activist hedge fund. However, during this conference call, we are not going to address questions related to the proxy contest and instead are going to focus on the first quarter results and second quarter outlook. We do not believe this is the proper forum to debate the proxy issues.

Let's get started. In the first quarter, the company's revenues increased sequentially, coming in 3% above the high end of our guidance. Solid execution produced sequential improvement in gross margin and earnings per share. The company's new product momentum continued with the release of 23 new best-in-class products during the quarter. Customer demand for Micrel's products rebounded in the first quarter. Q1 bookings were the highest quarterly amount recorded by the company since the first quarter of 2006. Aggregate first quarter bookings increased sequentially in all geographies and channels of sale, led by strong orders from customers serving the industrial, wireline communications, and wireless handset end markets. The book-to-bill ratio was significantly above 1 for the quarter.

First quarter order lead times, as measured by customer requested delivery date, remained the same as Q4 at approximately 5 weeks. In a challenging macroeconomic environment and generally seasonally weak first quarter, Micrel posted the second highest Q1 revenue since the 2001 recession. First quarter revenues of $66.1 million were 2.3% above fourth quarter revenues of $64.6 million and 4.7% higher than the $63.1 million recorded in the year ago period. The growth in revenues was led by stronger demand from the wireline communications, digital TV, industrial and Wi-Fi Voice-over-IP end markets, combined with record sales to the company's global sell-through distributors. Standard product sales accounted for 93% of total Q1 revenues, with foundry and custom sales comprising 7%. The first quarter sales mix by product area was analog 66%, high bandwidth 14%, Ethernet 15.5% and foundry 4.5%. Turns-fill for the quarter was slightly above 60%. Micrel sales remained widely diversified with the top-ten direct customers accounting for 21% of Q1 sales compared with 23% in Q4.

The industrial end market represented the largest segment in the first quarter sales mix for Micrel. Industrial revenues represented 38.5% of Q1 revenues. Micrel sales to the industrial end market have grown at a compound annual rate greater than 15% over the past three years. Sales to the wireline communications market for Micrel's analog, high bandwidth, and Ethernet products comprised 26.5% of Q1 revenues, up from 24% in Q4. The 13% sequential increase in Q1 communications related sales was led by a ramp in Ethernet sales to Wi-Fi Voice over IP customers and higher sales to major network infrastructure and fiber optic module customers. Sales to the wireless handset and computing end markets declined seasonally in the first quarter. Wireless handset revenues made up 16% of first quarter sales compared to 18% in the fourth quarter. Even though sales to the handset market declined sequentially due to seasonal trends, we are encouraged by the recent resurgence in orders we have seen for our products designed into higher-end handset models. We are also seeing design win traction from our handset customers for our lower-cost power management products, which we began introducing in Q3 2007. Sales to the computing end market declined seasonally by about 10% and made up 15% of Q1 sales compared with 17% in the fourth quarter.

Completing the Q1 revenue mix, consumer and military market sales were 4% of total company sales, up from 3% in Q4. The increase in consumer market revenue was due to continued penetration of the digital TV and set top box customers in what is usually a seasonally slow period for these end markets. Geographically, sale to Asian-based customers accounted for 54% of Q1 sales compared with 56% in Q4. Sales to North American customers were 32% of first quarter revenues versus 33% in Q4 and sales to European customers grew sequentially, comprising 14% of Q1 sales, up from 11% in the fourth quarter.

Now, turning to the remainder of the income statement. First quarter gross margin increased to 56.5% from 55.8% in the fourth quarter. This increase in gross margin occurred at the same time we reduced net inventory. R&D spending was $14.1 million or 21% of revenues in the first quarter. The $700,000 sequential increase in R&D spending was due to seasonally higher payroll taxes, stock compensation expense and incremental costs associated with a greater number of new product releases.

During the quarter, Micrel released 23 new high-performance products. In the analog power area, we expanded our industry-leading family of portable, high-efficiency, DC to DC, switching regulators for extended battery life applications; released two high-output EL drivers for mobile devices; and added two new ultra-low RDS(ON) products to our best-in-class family of load switches.

One of the questions that have been asked by the investment community is whether or not Micrel will compete aggressively in the price-sensitive Asia Pacific region. Our answer is a resounding yes. In Q1, we released a new family of low-cost LDOs which are targeted at high-volume, low-priced applications such as wireless handsets, MP3 players, and other portable consumer products. These devices will allow Micrel to compete in price-sensitive applications with a high-quality product offering while meeting our profit margin targets. In the communications product area, the company introduced five Ethernet switch products targeted at industrial and embedded networking applications and four ultra-low voltage, high-bandwidth products targeted at metro and enterprise networking applications.

Returning now to the income statement. Q1 SG&A spending was $12.3 million or 19% of sales. The sequential increase in SG&A spending was due to higher profit sharing expense, increased variable selling expenses, and approximately $350,000 in incremental costs associated with the company's ongoing proxy contest.

First quarter operating income was $11.8 million or 18% of sales. This compares to operating income of $11.7 million in the fourth quarter and $11.3 million in the year ago period. Other income net was $1.1 million, down from $1.5 million in the fourth quarter due to lower interest income. The effective tax rate was 34.7% in the first quarter.

First quarter GAAP net income was $8.4 million or $0.12 per diluted share. This compares with fourth quarter 2007 GAAP net income of $8.4 million or $0.11 per diluted share and GAAP net income of $17.9 million or $0.23 per diluted share in the year ago period. Included in last year's first quarter 2007 net income was a one-time $15.5 million pretax gain associated with a legal settlement with the company's former auditors, which after income taxes was equivalent to $0.13 per diluted share.

Our balance sheet remains strong. Cash and short-term investment balances were $78.5 million at the end of March compared to $91.1 million at the end of 2007. The $12.6 million decrease was primarily due to the company's ongoing share repurchase. During the first quarter, $17 million was spent to repurchase 2.6 million shares of Micrel common stock. Accounts receivable balances increased by $4.1 million in the first quarter to $33.7 million. Days sales outstanding increased to 46 days at the end of Q1 from 42 days at the end of Q4 due to strong shipments in March relative to weak year-end shipments in December 2007. Net inventory decreased by $800,000 during the quarter to $34.9 million. And days of inventory decreased to 110 days at the end of Q1 from 115 days in Q4. Due to the record resale level in the first quarter, the days of distribution channel inventory declined by about one week during the quarter. Capital expenditures totaled $3.4 million in the first quarter and Q1 depreciation and amortization, excluding the amortization of stock-based compensation, was $4.6 million.

Micrel's Board of Directors has been and continues to be focused on returning a portion of the company's cash flows to shareholders through the stock repurchase plan and quarterly dividend payment. Today, Micrel is announcing that its Board of Directors has authorized an increase in the quarterly dividend payment of 17% to $0.035 per share. The dividend is to be paid on May 22, 2008 to shareholders of record on May 6. The company would like to note that since 1998, it has paid out 95% of its free cash flow to shareholders through its share repurchase program and payment of dividends. We believe this rivals the best in the semiconductor industry.

Now, turning to the outlook for the semiconductor industry and Micrel. What we have currently is a mixed bag for the industry as a whole. As you probably have been noting in the various company reports that have come out thus far, the industrial and communications sectors remain relatively strong in spite of the challenging economic environment. We see potential weakness coming primarily from the consumer-related end markets. This is somewhat related to the seasonality that is typical in the consumer-related markets in Q1 and Q2. Although current media reports indicate that the U.S. is going through a significant slowdown and perhaps even a recession, we still believe that semiconductor industry growth should be better in 2008 than it was in 2007.

Let's turn to page number two of the webcast which is our semiconductor barometer. You will note that Q1 came out pretty much as we had predicted when we did the chart back in Q3 of 2007. The most important metrics that we want to point out are lead times and inventories. You will note in Q1 that lead times were flat and inventories were up slightly, but remained well in control. We believe that the disciplined approach taken by our customers in controlling inventories has, to a major extent, stabilized the volatility of our industry. Even though bookings in general appear to be very good for the industry in Q1, we believe what is also reflected here is strength in the industry when compared to Q1 of 2006, when we had similar booking levels yet the inventory shot up. In Q1 2008, the consumption appears to be about the same as the booking level.

Looking forward to Q2, we believe it should be a good quarter for Micrel and the semiconductor industry with the exception of those companies whose primary focus is on consumer-related markets. We believe the consumer-related end markets will experience more seasonal challenges and will be impacted more by the economic slowdown, at least during the first half of the year. The industrial and communication end markets should show reasonable growth going into Q2 and if history repeats itself, will slow down to some degree in the third and fourth quarter. We would expect an improved demand environment in the consumer-related end markets going into the seasonally stronger holiday period in the second half of 2008.

Please turn now to our cycle chart on page three of the webcast. Because of the weakness in the U.S. economy, primarily in fact in the consumer sector, we have slightly lowered our 2008 industry growth projection from up 5% to 8% to up 3% to 6%. Overall, we are encouraged with booking levels we have seen in the industry and therefore believe that 2008 will be stronger than 2007 in spite of the weaker U.S. economy.

Turning to our outlook for 2009, we are projecting industry growth of 7% to 10%. We believe that ASPs will remain relatively stable through 2008 and going into 2009. We do not see ASPs expanding unless we have strengthening in the U.S. economy and a stretching out of lead times to about seven to eight weeks from the current level of approximately five weeks.

Now, turning to Q2 for Micrel. As most of you know, two of Micrel's main focus areas have been the industrial and communication end markets. The improvement in these two markets that we experienced in Q1 bodes well for the company where our book-to-bill was well above 1 in the first quarter. In 2006 and 2007, we began to focus on some of the more exciting, higher growth, consumer-related market opportunities such as digital TV and set top boxes. We should see the results of those design wins in the third and fourth quarter. The company continues to introduce a large quantity and broad range of new products which are being well accepted in the markets that we serve. The current booking levels we are experiencing in the first part of Q2 remain robust and on par with Q1. We are monitoring the bookings carefully to ensure that demand is consistent with consumption and that we won't just be building inventory.

Based on a higher beginning backlog and continuation of solid booking trends so far in April, we anticipate that Micrel's Q2 revenues will be 2% to 7% higher than the first quarter. To achieve the high end of the projected revenue range requires approximately 50% turns-fill, which is 10% less than was recorded in the first quarter. We forecast Micrel's second quarter 2008 gross margin will be approximately 56% to 57%, depending on the second quarter sales mix. We anticipate total operating expenses will increase on a sequential basis in the second quarter by approximately $2 million to $3 million due to significant incremental cost associated with the ongoing proxy battle. Excluding these expenses, we expect ongoing R&D and SG&A expenses to be relatively flat to Q1.

Other income is projected to be about $1 million and diluted shares outstanding are estimated to be 71.5 million shares for the second quarter. We estimate that FAS 123(R) will result in approximately $1.2 million of pretax stock compensation expense in the second quarter. And we anticipate the effective tax rate for the remainder of 2008 will be approximately 37% on a GAAP basis due to the termination of the R&D tax credit. Based on these aforementioned projections, we believe Q2 2008 GAAP diluted earnings per share will be approximately $0.10 to $0.11 after taking into account expenses associated with the ongoing proxy contest, which are projected to reduce second quarter GAAP earnings by $0.02 to $0.03 per share. Excluding the proxy contest expenses and share-based compensation expenses, the company estimates second quarter non-GAAP earnings per share will range from $0.13 to $0.15 per diluted share.

In spite of an uncertain economic environment, Micrel is getting off to a good start in 2008 with a strong first quarter, which is usually a seasonally weak period for the company. We are excited about our prospects for the second quarter and the remainder of the year.

We will now move to the question-and-answer session. And again, we remind you that we are not going to address questions related to the proxy contest during the Q&A portion of the conference call. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) The first question comes from Craig Hettenbach from Goldman Sachs. Please go ahead.

Craig Hettenbach – Goldman Sachs

Thank you. Question on the handset market, can you just discuss your outlook for handsets into Q2? And then some of the low-power products that you mentioned were introduced Q3 last year, when do you expect the timing of revenue for some of those products?

Andy Cowell

This is Andrew Cowell, VP of Analog Marketing. The products introduced were very low-cost, low-power LDO family plus some low-cost, targeted DC-DC converters to more power [ph] a lot of the ancillary market in all the low-end, medium and high-end handsets. They were introduced in Q3 and we have already got a significant number of design wins and we expect that revenue to kick in middle to end of Q2 into Q3.

Ray Zinn

What kind of growth do we expect in Q2 in handsets? Do you have any feel for that?

Andy Cowell

Based on the current design wins, I expect Q2 to still be up from Q1 maybe by about 5%, but then I expect Q3 to ramp higher. As we get more traction, not only from the LDOs but if, more importantly, we get more traction from the socket that we previously haven't held, which is the DC-DC converters, because that's just additional revenue.

Ray Zinn

Does that answer it, Craig?

Craig Hettenbach – Goldman Sachs

It does. Thank you, Ray. And just saying on the handset, can you just update us just in terms of dollar content, so some of the low to mid-end phones that you're now targeting as well as the high-end phones, just maybe a range of dollar content that you have available per handset?

Andy Cowell

Right now, in the high-end phones, we've quite a lot of dollar content available probably in the $1.50 to $2.00 range. In the low-end handset, we've got probably around about $0.50 maybe to $0.60 level. Just kind of depends on the mix.

Craig Hettenbach – Goldman Sachs

Thank you. And then, Rick, on the gross margin front, going forward, can you just discuss kind of the biggest lever of margins, whether it be product mix, utilization, or potential for increasing foundry business? Just a little color on gross margin outlook.

Rick Crowley

I think all three of those, obviously, are going to positively impact the gross margin. I think, right now, we have the wireless handsets and the Ethernet ramping in Q2, sort of kept the gross margin at 56% to 57% range. But, as the growth continues, I would see added benefit from ramping this up, lowering the overall cost for products, moving in and back up on our – continue up on gross margin curve that I think you've seen in the past Craig.

Ray Zinn

So, Craig, what I've decided and this is based on just not wanting to wait around anymore, and it is I'm going to fill that fab one way or another. So, we'll either do it with foundry or we're going to do it with our own products. And we see potential with some of the new products we have currently coming out, one of them Andrew Cowell addressed in the low-end handset area, could be hundreds of millions of units. And that will use of lots of wafers. So, even though there lots of dye on a wafer, it still will use lots of wafers. So we do anticipate our fab utilization going up as we now go after – aggressively go after some of this lower cost, higher volume products in the Pacific Rim area.

Craig Hettenbach – Goldman Sachs

Great. Thanks for the color.

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. You just mentioned fab utilization. Can you tell us where it is right now?

Ray Zinn

I think we're on the 60%, 55% to 60% range.

Bob Gujavarty – Deutsche Bank

Okay. And the gross margin improvement in the quarter, was it mostly related to mix or is it – was better utilization related?

Ray Zinn

It's probably –

Rick Crowley

Mix and ongoing cost reductions.

Bob Gujavarty – Deutsche Bank

Okay, great. And just some quick housekeeping items. Could you give us a CapEx in the quarter and is there any change to your full-year number, and could you give me the full-year number?

Rick Crowley

Sure. The CapEx was $3.4 million in the first quarter. We still see somewhere around probably $17 million to $20 million in the year.

Bob Gujavarty – Deutsche Bank

Great. And final question, can you talk a little bit about the orders in the quarter, given the accounts receivable went up a little bit and clearly you guys did a great job on exceeding your revenue range, can you just talk about how it progressed in the quarter?

Ray Zinn

You're talking about now how the revenue looks in April?

Bob Gujavarty – Deutsche Bank

No, how the revenue and the orders pattern progressed in 1Q?

Ray Zinn

I see. Okay we did– we saw kind of a bumpy one. We saw, of course, prior to Chinese New Year, we got quite a few orders in and then it went kind of silent. And during Chinese New Year, then it started picking back up again and we did have an acceleration in March and that's why the DSOs went up.

Bob Gujavarty – Deutsche Bank

Would you say March was stronger than January?

Rick Crowley

A little bit, yes.

Bob Gujavarty – Deutsche Bank

Okay.

Rick Crowley

January was pretty strong.

Bob Gujavarty – Deutsche Bank

Okay. Great, thanks guys for the color.

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 and congratulations on the results. First of all, I recognize that you have relatively high common industrial exposure, but you do seem to be outperforming the markets right now. So, could you just explain that to us? Is it new products? I'm just trying to understand where the performance is coming from.

Ray Zinn

It's just design wins that we've got some time ago that's now ramping into production like the Wi-Fi Voice-over-IP is one area where we're seeing some traction. Also, in the set top box area, we're getting some traction, which is I'm not sure that's communication, though it's more consumer. Let's see, also some of our Chinese (inaudible) now are – their product lines are beginning to ramp back up communications. And so through our distributors and other partners, we did see a big increase in the comm type products for those end markets. So, like fiber optic modules and let's see enterprise-type market areas. So, I think I see more or less a resurgence of the comm business, not necessarily just for Micrel, but for the entire space. So, our comm customers I think are doing better in addition to the fact that we are getting some traction because of some new products like we mentioned in the Voice-over-IP.

Tore Svanberg – Thomas Weisel Partners

Great and on your outlook for the June quarter, you mentioned 10% less turns, bookings so far being quite strong. I'm just wondering where the conservatism comes from? Is it just macro related or just help me understand where the conservative outlook is coming from.

Ray Zinn

Well, I think it's an honest outlook. I believe that there's some unknowns. I mean, we're somewhat reading the tea leaves and hearing what everybody else is saying. Hopefully, we're not just following behind the sheep here and believing that there's going to be some kind of a macro downturn. But we're being somewhat conservative because just a lot of unknowns. Okay, I mean right now, business looks pretty good, but we don't know how it's going to hold up through May and June. So, we're just being – I think we're just making sure we're a little bit reserved and covered on what we think we can do in Q2. So that's just a posture we're taking right now and if things improve dramatically, of course, so should our revenue. But, we're just watching things, keeping things closer to vest, Tore.

Tore Svanberg – Thomas Weisel Partners

That's very fair. And thanks for bringing in the analog team. Maybe a question here. Some analog companies have more of a general purpose product strategy; others have more application specific. Maybe we can just hear from your team what the company's strategy is in relation to those two.

Andy Cowell

Sir, this is Andrew Cowell, VP of Marketing. So, what we do for when we target the products, we look at the market, and then from the – once we targeted the markets, then we look at the top customers. Then we drill right down into what they use in their system block diagrams. And then we almost do a kind of a socket attack. So, we look up which sockets we can take and then we plan the best-in-class products, so the customers will use it. And we've been utilizing that strategy for a while. And this is what's just coming through on some of the applications you're seeing now and that will continue. So really the strategy is pick the market, really understand what the end customers, your big end customers need and use, and then make products that are benefits to them and then you design them in.

Ray Zinn

And we do have a couple of ASIC products that we're doing because of their huge volume. And so, we are going to get some traction off. Those are huge – what's that one ASIC roughly, what's the value of that one ASIC for us?

Andy Cowell

That's around 30 – it's around $0.30, $0.35 but pretty big volumes.

Ray Zinn

What kind of dollars are we talking about?

Andy Cowell

It's around 20 million to 30 million – 20 million, 25 million units.

Ray Zinn

Okay.

Andy Cowell

A year range.

Ray Zinn

A year, okay. So that's a pretty big ASIC opportunity that we do. So we are not doing only the general purpose. We do some ASIC type products. But, by and large, we try to do as much general purpose and that's why you're seeing our industrial markets grow as nicely as they are because we are trying to feed that general market. They tend to have higher margins, a little bit longer longevity product wise. And so, we're opportunistic when it comes to some ASIC opportunity. So I don't want to say we don't do ASIC type products because we do. We have a big program we're working right now. That's going to generate some decent revenue for us, probably over the next say 6 to 12 months.

Tore Svanberg – Thomas Weisel Partners

Great and just finally, looks like you are benefiting more and more from TV and Voice-over-IP. These seem to be two more new markets for you. Could you just elaborate a little bit on your opportunity in both markets? How do you win with those markets? And could you also maybe mention a few of your customers there?

Ray Zinn

I don't know if we can mention our customers, but certainly all the major guys that are in that ACTV markets, you can figure out who those guys are, and it's a cadre. I mean we have power management in there. We have Ethernet. We have some high bandwidth products. So it's fortunate for us to take – we don't have just analog. I mean it's got a little of all the things that we produce. So we can be more of a general supplier as opposed to a single supplier. And so that's what our customers like, the fact that we're not just covering one part of the system for them. We're covering multiple parts of the system and that gives us some price leverage too because we can kind of do some packaging of some of our deals together and that's getting really helping, especially in these cost-sensitive consumer markets. So, on the Wi-Fi Voice-over-IP, generally we got some big opportunities there and of course, that's beginning to take off now, thank goodness. And I'm not sure that we can go over who that customer or customers are on that one.

Tore Svanberg – Thomas Weisel Partners

Fair enough. Thank you very much and again, great quarter.

Ray Zinn

Well, thank you, Tore.

Operator

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

Doug Freedman – AmTech Research

Hi, guys. Thanks for taking my question. I guess if we could start with a little bit of technical detail. Rick, there was a restructuring charge that assisted [ph] in the EPS this quarter. Can we get some clarity on what that was?

Rick Crowley

That was a cleanup finalization of our restructuring of our Santa Clara closure from a few years back. We had a legal issue that was outstanding and that got resolved in a settlement in the first quarter.

Doug Freedman – AmTech Research

Okay, great. And then, could you talk a little bit about what you're seeing as far as order visibility? I know a few years back you got what you guys called the order pipelining. Don't think that that's happening now, but can you talk a little bit about what you're seeing as far as your order visibility and is that playing any factor into your lower turns expectation?

Ray Zinn

That's an interesting question. So, when we go out and ask our distribution customers, how things are looking and how do they see things running out, they act real nervous and somewhat try to hold back on what they think the business is really like and what it's – but yet they're still hitting us with these big orders. So if we ask them, "Well, is this Micrel specific?" They will say, "Well, we're not sure, but certainly you guys are doing well." But when you ask them kind of a macro, global look at it, they tend to be more reserved. And they act like things are not – there's a lot of uncertainty. So we're a little confused actually. So that's why the little bit of conservatism in what we're doing because we'd like to see a little more clarity on really how long is this going to last? In other words, how much into the future is this run going to go? It looks like their consumption is equivalent to their bookings and we're happy with that. So, we don't think there's any pipeline, especially if we look at the lead times that they're currently asking for, it doesn't sound like this is a pipelining kind of thing. So having said that, Q3 has begun to book in nicely. So we're a little perplexed. If you listen to the media and kind of what's going on out there, you get the opinion that things are going to heck in a handbasket. But, it just doesn't seem that way when we sit there and look at the orders every day. It's kind of weird. So we're getting a lot of mixed signals. And I can't be any more clearer than that. I mean you guys are also hopefully out there testing the waters. And so, we're probably seeing what you're seeing.

Doug Freedman – AmTech Research

Great. Can you talk a little bit about what you are seeing on that front in terms of the ratio of sort of cancellations to expedites? Are you seeing more expedites or more cancellations, how that ratio might be at this point in the cycle?

Rick Crowley

Cancellations remain low, Doug. And we're definitely seeing more expedites than cancellations right now.

Doug Freedman – AmTech Research

Okay, clear positive. Going on to some of the business segments, last year, you had that development where foundry was building some solar concentrator cells. Can you talk a little bit about that business? Is that all or a large piece of the present foundry business?

Ray Zinn

Yes, it is.

Doug Freedman – AmTech Research

And what your expectation is there?

Ray Zinn

It's a large piece of it. It's still going on about the same rate.

Doug Freedman – AmTech Research

Has that business been ramping? Is there better revenue growth opportunity for you?

Ray Zinn

I don't see it right now. With the current economic climate, I think it is just kind of stable. I mean, I think we would be growing if the housing situation were a little bit better.

Doug Freedman – AmTech Research

Okay.

Ray Zinn

And maybe when it gets better, that'll get better too.

Doug Freedman – AmTech Research

And then just two other segments, I know you guys have been targeting and trying to grow the automotive networking business, can you talk a little bit about what's happening in that market?

Ray Zinn

Yes, that's ongoing. I mean it's definitely moving forward. There's quite a qualification path to do that. So it's not something you are going to see month by month. But, it is going to happen. And that ramp ought to start probably in 2009.

Doug Freedman – AmTech Research

Okay. So that's expected for '09? Because I did see BMW introduce some products there and I was wondering if you guys were in them already? Okay.

Ray Zinn

You could probably guess on that one yourself.

Doug Freedman – AmTech Research

Okay. And then I saw– if you could talk, my last question is for this SOHO Ethernet market and what's happening there?

Ray Zinn

Well, that one is kind of stable. I mean, as we seem to have kind of bottomed out there, so it's like it's keeping to [ph] fall off. It's kind of holding its own. So we have customers who like us and don't mind paying a little premium for the Micrel capability. And so we're just, because of the margins in the lower-end stuff, we're not really getting much help there. But, certainly in the – it's kind of stabilized, kind of where it is.

Doug Freedman – AmTech Research

All right, great. Thank you and congrats on the next quarter.

Ray Zinn

Well, thanks, Doug.

Operator

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

Ian [ph] – Banc of America Securities

Hi guys. This is Ian [ph] in for Sumit. I guess the first question on the strength in wireline, how much of that might have been a recovery for the power business you guys saw a softness in second half of last year?

Ray Zinn

There's probably some there. I mean I'm not going to deny that 100% do, but I don't know what percentage it is. It's hard to gauge. I don't think anybody has partitioned that out. And we tried to, by the way, but I don't know that we've got any solid numbers on it. Because, again, that's not something where there's an obvious step function measurement that we can make. And even though we have a sense that there's probably some of it, we're not sure that there's a lot of that.

Ian [ph] – Banc of America Securities

Okay. Is that business back to where you think it ought to be or do you think there's still some –

Ray Zinn

No, it's going up.

Ian [ph] – Banc of America Securities

So, you've recovered all your lost ground from the second half of last year?

Ray Zinn

Have I recovered all my lost ground? I'm recovering my lost ground. I don't know that we recovered all of it, but I'm recovering it.

Ian [ph] – Banc of America Securities

Okay. And just for context, do you have the historical turns levels for Q2? I know you did some scrubbing on the Q1 numbers last quarter. Do you have a similar feel for – ?

Ray Zinn

Historical is probably in the 55% range is kind of what our – if you just wanted a median. I mean it goes as low as say, in the high 40s to as high as in the low 60s. So probably about 55 is kind of nominal.

Ian [ph] – Banc of America Securities

Okay. So high-40s is pretty much the low end?

Ray Zinn

High 40s would be the low end yes. Well, I mean within this – since the downturn. Okay, I mean I'm not going back prior to the downturn.

Ian [ph] – Banc of America Securities

Sure, sure.

Ray Zinn

In the last eight years, seven or eight years, it is probably (inaudible).

Ian [ph] – Banc of America Securities

Okay and then just if you could, can you talk at all – quantify at all how much the backlog is up over – ?

Ray Zinn

I don't want to do that. We don't normally report that. So it's up.

Ian [ph] – Banc of America Securities

Okay, fair enough.

Ray Zinn

And that's why you're seeing the turns down.

Ian [ph] – Banc of America Securities

Okay, fair enough. Just one last question then on the new product traction, you're obviously releasing more and more new products every quarter. Can you tell us where you're seeing the greatest level of progress with your new products? Thanks.

Ray Zinn

David, why don't you respond to that?

Dave Schie

Yes, this is Dave Schie, Vice President of Engineering. Are you speaking with respect to the new products coming out or where we're seeing traction at customers?

Ian [ph] – Banc of America Securities

What kind of traction are you getting now that you weren't previously with the new products coming out now or in the most recent past?

Dave Schie

Yes, so the TV and set top box, I mean we did a lot of introductions. As you know, we've talked about the fact that we've tripled our new products. Some of those take quite a long time to design in. So we have been working with customers for some time and we've been waiting for it to finally turn into revenue and that's happening. And there were programs that we've been on for a while that we're pleased are getting to that point. The other area is cell phones. For example, we finally have the low-cost LDOs out and that was an area we've really wanted because it's the leader to other components in the phone. So cell phones, DC-to-DC, TV and set top box, I would say are the areas that we're getting the traction.

Ray Zinn

I think he was asking about what kind of designs are you getting out now that you – what is kind of the skew of the kinds of products you're getting out relative to in the past? Switchers –

Dave Schie

Yes, I mean –

Ray Zinn

What's your– what kind of phonic mix are you seeing coming out of the (inaudible)? I think that was what he was referring to.

Dave Schie

Sure. I mean we've put a lot of focus into the DC-to-DC, some of the high volume that would address the set top box, TV and those sort of markets. And that's a leader for a lot of other products. And then in the cell phone, the same kind of products, the high-current LDOs as well as these low-cost LDOs. We've also had the benefit at the moment of having a lot of competitors have difficulty maintaining their staff. So we've actually hired a lot of really good designers and we've been improving our tools, and that's actually accelerating our rate of new products and really good new products and that's been ongoing. So I think you're going to see even more over time because there is kind of a positive reinforcing circle on that. But, the biggest focus is LDO and DC-to-DC. We are pleased that the Power-over Ethernet, we've been working on that for quite a long time, and that's an area we're putting a lot of effort into. We talked a bit about the 2358. But, finally, the Ethernet ports are going to be powered and that's a big new area. We talked about 100 million units or ports available in the next year and we are working hard to address that. So, there's definitely a trend of technologies that we've been working on for a while, finally making it into the market.

Ian [ph] – Banc of America Securities

Great. Thanks very much for taking my questions.

Operator

Ladies and gentlemen, we have time for one final question. Our final question comes from Kevin Rottinghaus at Cleveland Research. Please go ahead, sir.

Kevin Rottinghaus – Cleveland Research Company

Thanks, can you hear me?

Ray Zinn

Yes, we can.

Kevin Rottinghaus – Cleveland Research Company

Okay, thanks for taking my question. First, just to clarify, did you say you need about 50% turns to hit the high end of guidance or is it the midpoint?

Ray Zinn

High end.

Kevin Rottinghaus – Cleveland Research Company

To hit the high end of guidance?

Ray Zinn

High end.

Kevin Rottinghaus – Cleveland Research Company

Okay. On the SG&A side, I know you had the extra 350 in there this quarter, but even stripping that out, it looks like it was up in the high single digits, in the 9% range, quarter-over-quarter. Is that normal? Was there anything going on there? I guess, in that light, how should we expect it to progress through the rest of the year?

Rick Crowley

As I said in prepared remarks, I'd expect it to be relatively flat excluding any of the incremental expenses for the proxy battle.

Kevin Rottinghaus – Cleveland Research Company

Okay.

Rick Crowley

You get payroll tax increases seasonally in Q1 versus Q4. We also had higher profit sharing expenses and stock compensation expenses in Q1 that popped it up and some higher incremental selling and advertising expenses. But, we expect that to level off here as we go into Q2 which should help provide some leverage.

Kevin Rottinghaus – Cleveland Research Company

Okay, does that ramp up again at all throughout the course of the year or does it track – ?

Rick Crowley

No, it shouldn't. I mean we've been reducing our operating expenses for the last eight quarters, up until Q1. And so we just kind of had multiple things hit at once here in Q1. That'll stabilize and we'd see some marketing and selling expenses, variable selling expenses as we go through the year relative to the change in revenue. But, excluding extraordinary expenses, then I would think G&A is going to be pretty level throughout the rest of the year.

Kevin Rottinghaus – Cleveland Research Company

Okay. On the R&D side, are you still – I guess the last comment was that you had added some engineers competitively. Is that still a goal for this year or have you kind of cooled it with the macro environment?

Ray Zinn

No we're still – should let David answer that. If David would have his way about it, we'd have nothing but engineers in the company. So we're still ramping. And I got to keep a lid on him. R&D expense would be out of sight if David had his way. But anyway, he's hiring all that I'll let him hire. And every single day seems to go by that he's got somebody else he wants to bring onboard. So anyway, no, you haven't heard the end of this.

Kevin Rottinghaus – Cleveland Research Company

Okay. On the movement into the low-end handsets, if that really ramps up the second half of the year, should we expect any change in kind of the margin profile maybe seasonally as more of the consumer stuff kind of flows through?

Ray Zinn

Well, we try to develop these products so the margins weren't hampered. I'm not going to say it's high-end margin, but it should be nominal, kind of where we normally target our margins. So it'll still be decent margin. So if that takes off, gangbusters [ph], which we expect it to based on the design wins, I'm not anticipating any real impact on margins, at least not at this juncture, unless some of the pricing starts getting out of sight.

Kevin Rottinghaus – Cleveland Research Company

And that opportunity, is that primarily with one major OEM right now or are you – ?

Ray Zinn

No, it's with almost any of those low-end handset guys.

Kevin Rottinghaus – Cleveland Research Company

But, as far as design wins?

Ray Zinn

Yes. I mean, the low-end handsets still need power management. I mean they don't need as much as they do in the higher-end stuff because you got a lot more stuff going on in the high end. But, we're just addressing some of those power management opportunities that heretofore we kind of walked away from because we couldn't figure out how we were going to compete margin-wise with our real high-end type power management. So what we did is, we developed some lower-end power management products that will do just kind of basic functions for them that they want, that they still need power management for, but just have lower accuracy or less power or maybe just – they just have, their specs are lower and so therefore, the dye size is smaller and we can just offer it for less money.

Kevin Rottinghaus – Cleveland Research Company

Okay. Should we expect you to maybe reenter any other markets that are maybe a little more cost aggressive, if you can get – or I guess price aggressive if you can get the cost profile down similar to low-end handsets?

Ray Zinn

Yes, like the PC area for example.

Kevin Rottinghaus – Cleveland Research Company

Right. So we should expect you to maybe start to reenter that market?

Ray Zinn

Yes.

Kevin Rottinghaus – Cleveland Research Company

Okay. Last question for me, you talked about design wins in consumer that you think will start to hit second half of the year and maybe I misheard you. But, were you talking about potentially seeing bookings into some of those applications already or is that more just – ?

Ray Zinn

We're seeing the bookings; just that we're not seeing the volume yet because the season is the holiday type, at least our customers are forecasting more of a holiday ramp as opposed to being a first half ramp. As you know, 2009, everybody has got to go digital anyway. So they're just going to get ready for that. And so it tends to – it just seems to be the nature of the beast, if I look at the rollup from the customers, their forecasts are more second half type thing.

Kevin Rottinghaus – Cleveland Research Company

Thank you very much for taking my questions.

Ray Zinn

You're welcome. So before ring off, do we have any more questions operator?

Operator

No, we don't sir. Please continue.

Ray Zinn

Yes, so before we ring off, I'd like to hear from Scott Ward, our Vice President of our Analog Business Unit. We heard from Andy and from David, but we didn't hear from Scott. So just so he doesn't feel left out, go ahead Scott.

Scott Ward

I never feel left out, Ray. Yes, I just wanted to maybe let you get a feeling for the excitement that we have here in the company for the analog management team and where we're taking this. It's the strongest analog team I've seen in eight or nine years that I've been here. Sometimes you wonder what it takes. To use a sporting analogy, you see a team that finally clicks after X number of years with a couple of new players. So that's kind of what we've got here and the team's excited. We're really focused for the synergy between us and the way we work together is outstanding. So, it's clear that we've got a manufacturing capability behind us that's second to none, in my opinion. And what we're going to do now is we're going to compete. We're going to go after every single socket out there in the markets that we play in; we're not going to walk away from anything that market provides. So we're not going to be stupid about it, but we're going to be very aggressive and drive this revenue coming over the next year or two.

Ray Zinn

Well, thank you, Scott. That was a nice conclusion to our conference call. So again, thank you for joining us. I want you to know how pleased I am at how the company is now really clicking and we are now seeing some of the results of some of this hard work we've been putting in the last couple of years and getting our product line realigned to hit those markets that are going to grow for us. Glad to see the resurgence of our industrial and communication end markets. Those are good margin areas and we're delighted to see those things come back. So again, just be ready for more. I mean you haven't seen the last. So thanks, again, for joining us. And look forward to seeing you – talking to you in July.

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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