Microchip Technology Management Discusses Q1 2013 Results - Earnings Call Transcript

Aug. 3.12 | About: Microchip Technology (MCHP)

Microchip Technology (NASDAQ:MCHP)

Q1 2013 Earnings Call

August 02, 2012 5:00 pm ET

Executives

James Eric Bjornholt - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Ganesh Moorthy - Chief Operating officer and Executive Vice President

Steve Sanghi - Chairman, Chief Executive Officer and President

Gordon W. Parnell - Vice President of Business Development and Investor Relations

Analysts

James Schneider - Goldman Sachs Group Inc., Research Division

Christopher B. Danely - JP Morgan Chase & Co, Research Division

John W. Pitzer - Crédit Suisse AG, Research Division

Uche X. Orji - UBS Investment Bank, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Blayne Curtis - Barclays Capital, Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Kevin Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Sumit Dhanda - ISI Group Inc., Research Division

Harsh N. Kumar - Stephens Inc., Research Division

JoAnne Feeney - Longbow Research LLC

Terence R. Whalen - Citigroup Inc, Research Division

Craig A. Ellis - Caris & Company, Inc., Research Division

Raymond Joseph Rund - Shaker Investments, L.L.C.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Operator

Good day, everyone, and welcome to this Microchip Technology First Quarter and Fiscal Year 2013 Earnings Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Microchip's Chief Financial Officer, Mr. Eric Bjornholt. Please go ahead, sir.

James Eric Bjornholt

Thank you. Good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions, and that actual events or results may differ materially. We refer you to our press release as of today, as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and our results of operations.

In attendance with me today are Steve Sanghi, Microchip's President and CEO; Ganesh Moorthy, Microchip's COO; and Gordon Parnell, Vice President of Business Development and Investor Relations. I will comment on our first quarter of fiscal year 2013 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environments and discuss our guidance. We will then provide an update on our acquisition of SMSC and be available to respond to specific investor and analyst questions.

Before I jump into the details, I want to remind you that we are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted the full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at www.microchip.com, which we believe you will find useful when comparing GAAP to non-GAAP results.

I will now go through some of the operating results, including net sales, gross margin and operating expenses. I will be referring to these results on a non-GAAP basis, prior to the effects of our acquisition activities and share-based compensations. Non-GAAP net sales in the June quarter were $352.4 million and were up 4% from net sales of $338.9 million in the immediately preceding quarter. Non-GAAP net sales were about $250,000 higher than GAAP net sales as GAAP does not recognize revenue on the sell-through of products sitting in the distribution channel on the date of an acquisition. This $250K difference relates to our April acquisition of Roving Networks. We expect we will have larger differences in the coming quarters in our GAAP and non-GAAP net sales due to the acquisition of SMSC.

On a non-GAAP basis, gross margins were 59% in the June quarter and non-GAAP operating expenses were 26.3% of sales. Operating income was 32.7% of sales and net income was $96.9 million. This resulted in earnings of $0.48 per diluted share, which was at the midpoint of our guidance.

On a full GAAP basis, net sales were $352.1 million and gross margins, including share-based compensations and acquisition-related expenses, were 57.7% in the June quarter. Total operating expenses were $106.7 million or 30.3% of sales and includes share-based compensations of $8.7 million and acquisition-related expenses of $5.5 million. GAAP net income was $78.7 million or $0.39 per diluted share.

In the June quarter, the non-GAAP tax rate was 13.3% and the GAAP tax rate was 13.4%. The tax rate was impacted by the mix of geographical profits, withholding taxes associated with our licensing business and the tax effect of various non-recurring items.

We expect our forward-looking effective tax rate with the combination of Microchip and SMSC on a non-GAAP basis to be about 13% to 14%. And I remind you that this is without any benefit from the R&D tax credit, which has currently expired and has not yet been reinstated.

To summarize the after-tax impact the non-GAAP adjustments had on Microchip's earnings per share in the June quarter, share-based compensation was about $0.043. Acquisition-related items were about $0.04 and noncash interest expense was about $0.006.

The dividend declared today of $0.3501 per share will be paid on September 5, 2012 to shareholders of record on August 22, 2012. The cash payment associated with this dividend will be approximately $68.2 million.

Moving on to the balance sheet. Microchip's inventory at June 30, 2012, was $221.5 million or 136 days, down 1 day from the prior-quarter levels. Inventory at our distributors continue to be at historically low levels at 31 days, flat to the prior quarter. I want to remind you that our distribution revenues throughout the world is recognized on a sell-through basis.

At June 30, Microchip's accounts receivable balance was $174.7 million, an increase of 2.6% from the balance as of the end of March. Receivable balances are in great condition, an excellent payment performance continuing from our customers.

As of June 30, Microchip had a record cash and total investment position of approximately $1.82 billion. During the June quarter, we generated free cash flow of $101.4 million prior to dividend payments. Excluding our acquisition of SMSC, SMSC's cash flow and dividend payments, we expect our total cash and investment position to grow by approximately $100 million to $110 million in the September quarter.

Capital spending was approximately $10 million for the June quarter, and well below our original forecast of $18 million. With some of the June capital plan rolling into September, we expect about $20 million capital spending this quarter excluding any SMSC capital expenditures.

We have reduced our overall capital expenditure forecast for the fiscal year from $70 million to $60 million, again excluding any SMSC capital requirements. Depreciation expense in the June quarter was $20.7 million, which was down from depreciation of $20.9 million in the March quarter.

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

Ganesh Moorthy

Thank you, Eric, and good afternoon, everyone. Let's now take a closer look at the performance of our product lines. And let's start with microcontrollers.

Our microcontroller business was up 5.1% on a sequential basis in the June quarter, with all 3 microcontroller businesses up sequentially. During the quarter, we marked another milestone as we shipped our 11 billionth cumulative microcontroller.

Our 16-bit business was up 23.7% sequentially in the June quarter and up 18.9% from the year-ago quarter to achieve an all-time record. After a pause in the March quarter, our 32-bit business is up a whopping 71.5% sequentially in the June quarter to achieve another new record. Our 32-bit business was also up 118.5% from the year-ago quarter. Both the 16-bit and 32-bit microcontroller businesses continue to benefit from the many demand creation actions we have taken as more customers who have selected to pick microcontroller platform either commence production or ramp their volumes.

Our design-win momentum remains strong. And while we're not immune to the macro business conditions, we continue to outgrow the secular growth patterns for these segments.

Moving to development tools, we shipped over 47,000 tools in the June quarter. Cumulatively, we have now shipped close to 1.35 million development tools, and development tools sales remain an excellent leading indicator of continued strong design and activity and acceptance of our solutions by customers.

Now moving to analog products. Our analog business was up strongly, with 9% sequential growth to also achieve a new record, and performed exceptionally well in the current environment. The synergy of selling more analog content around our high-end microcontrollers, combined with innovative new products and demand creation actions we have taken, are fueling the growth of our analog business. We remain pleased with the design-win momentum our analog business has shown and have a strong pipeline of more innovative new product lines that we will be unveiling over the next few months.

Now moving to our memory business. This business, which is comprised of our Serial E-squared memory products, as well as our SuperFlash memory products, was down 2.4% on a sequential basis. We continue to run our memory business in a disciplined fashion that maintains consistent profitability, enables our licensing business and serves our microcontroller customers to complete their solutions.

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

Steve Sanghi

Thank you, Ganesh, and good afternoon, everyone. I am speaking to you from SMSC headquarters in New York today, where we are excited to have completed the acquisition of SMSC this morning.

Today, I would like to first comment on the results of the fiscal first quarter of 2013 and then provide guidance for the fiscal second quarter of 2013, including comments on the integration plan for SMSC.

Our June quarter results were consistent with what we had guided during the last earnings call. The quarter started out strong, but the negative effects of Europe, weaker economic activity in Europe and weakening economy in China led us to finish the quarter slightly lower than the midpoint of our guidance in revenue.

Gross margin was up 85 basis points sequentially, leading to an improvement in operating profit, which was about 32.7% of sales. Our licensing business was down 4.8% sequentially. Our licensing business tends to trail industry manufacturing output by approximately 1 quarter and reflects the manufacturing inventory correction by foundries in IDMs over the prior 2 quarters. However, we did sign 2 new license agreements with 2 major foundry customers last quarter, both of them will be the users of SST flash for the very first time and will help us expand our penetration in the use of SST flash in the embedded world. We continue to build a strong foundation for future growth with these 2 new significant license agreements signed in the June quarter.

I will now provide guidance for the September quarter including SMSC revenues. Our guidance is based on the economic data points we are getting that say that Europe's economic recovery has stalled. Europe will continue to be in the doldrums and is made worse so by the summer holidays. And China, which has been the engine of growth, is starting to slow down.

In preparing our guidance, we have done bottoms-up analysis region-by-region, distributor-by-distributor and by major customers. We have also included SMSC revenue from today to the end of the quarter as we understand it.

We expect our net sales in the September quarter to be between $412 million to $430 million, which is up 17% to 22% sequentially. It includes about $65 million to $70 million revenue from the sales of SMSC products. We expect non-GAAP gross margin to be 58.5% to 59% of sales for the combined company. We expect non-GAAP operating expenses to be about 28.5% to 29.5% of sales for the combined company. And we expect to combine from being non-GAAP operating profit to be between 29% to 30.5% of sales, the Non-GAAP earnings per share to be $0.50 to $0.52 per share.

Now we will provide you some updates on SMSC acquisition. We're excited to close the acquisition and begin the process of integration to drive shareholder value. We want to welcome all SMSC employees on this journey. In Microchip culture, employees are our greatest strengths.

Today, we would like to cover 4 subjects before I open the call for questions. First, I will explain to you how the revenue of SMSC will be consolidated into Microchip's FUT [ph] revenue reporting. Second, Ganesh will give you an update on the integration planning. Third, Eric will give you guidance on the accretion we expect to get from this acquisition. And finally, I will update Microchip's long-term financial model, which will now include SMSC.

So let us begin with how the revenue of SMSC will be included in Microchip's revenue reporting. As you know, Microchip breaks its revenue reporting in 5 different imported product lines: microcontrollers, analog products, memory products, licensing and others. Over the last 3 months, we have studied SMSC's products. SMSC breaks down this revenue into 5 reported product lines: automotive, wireless audio, USB, industrial networking and computing, more end market-based rather than product-determined. Many of SMSC's products are based on the microcontroller core. They are, in fact, special-purpose microcontrollers for automotive, wireless audio or computing applications. These are not in most specialty microcontrollers than touch controllers are for mobile phone applications that many of our investors are very familiar with.

In SMSC's 10-Q filing on June 10, 2012, SMSC reported $103 million of revenue for their quarter ended May 31, 2012. If such revenue had been on Microchip's clock, we would have reported 43% of their revenue as microcontroller product revenue. The remaining 57% of the products are mixed signal/analog products, which we would have added to our analog product revenue.

SMSC's mixed signal/analog products sell into many markets like automotive, PC, industrial and consumer, and we expect that they will benefit from Microchip's broad penetration in a large horizontal customer base. Similarly, we expect Microchip's microcontrollers, analog and memory products will find home in more automotive, wireless audio and computing customers with SMSC.

As of today, we do not expect that the acquisition of SMSC will create any additional report about product lines. SMSC's revenue will be included with Microchip's microcontroller and analog revenue reported product lines. This is perhaps too much made of Microchip being a horizontal market company and SMSC being a vertical market company. Over the last decade, Microchip has added vertical market resources in the area of automotive, home appliances, medical, Smart Energy, digital power, motor control, lighting and several other market segments. We see the acquisition of SMSC as a natural addition to Microchip's continued growth and penetration into certain vertical markets. The addition of SMSC will add wireless audio and computing as 2 additional vertical markets for Microchip. The automotive market is already a significant area of focus on Microchip. It's not something we break out, but we have broad automotive penetration and we do business with nearly every tier 1 automotive manufacturers. Microchip has devices in many hundreds of car and truck models around the world. For example, there are over 20 Microchip microcontrollers on the current model of the Mercedes S-Class cars.

So I will now pass it on to Ganesh, who will give you update on our integration planning. Ganesh?

Ganesh Moorthy

Thank you, Steve. Since the announcement of the acquisition, we have engaged in extensive discussions with the management of SMSC to understand their business, organization and systems. We have developed a detailed integration plan that we have begun to execute starting today.

SMSC currently runs 5 product groups: the automotive products group, the wireless audio product group, the USB product group, industrial and networking product group and the computing group. Microchip will continue to run these 5 product groups.

At Microchip, we call the product groups as divisions. But essentially, they are the same, and there's no difference between a product group versus a division, as the 2 different companies have called it.

There could be some movement of specific products from SMSC divisions to Microchip divisions or vice versa, as we fine tune the organization and look for synergies and execution.

We have also studied the business systems of both companies. We have laid out a plan that will combine the best of both systems of the 2 companies. The 2 companies will operate on a single set of business systems, and the estimate of this transition will be completed sometime in the calendar first quarter of 2013.

In regards to manufacturing, SMSC is established company and uses many of the same wafer foundries that Microchip uses for acquiring some of our wafers. We do not expect that Microchip will bring any SMSC products to our in-house wafer fabs. SMSC subcontracts 100% of its assembly and 90% of its test. Many of the packages that SMSC uses are different than Microchip's packages. The final test systems that SMSC uses are also different than Microchip's test systems. Therefore, we expect that the majority of the assembly and test of SMSC products will remain with subcontractors.

We will continue to do a make-versus-buy analysis for newly developed products and expect to ship the mix to Microchip assembly and test when it is cost-effective.

Microchip will, however, combine the manufacturing systems. These are wafer ordering, assembly and test management, shipments and warehouses. We expect that all SMSC products will be shipping from Microchip's manufacturing systems by the start of a new year on January 1, 2013 or earlier.

Regarding field sales and applications, we have done a thorough analysis of the sales and application structure of SMSC. Over the last decades, as Steve said, while Microchip had a predominantly horizontal sales force, we have selectively added vertical marketing capability in several areas like automotive, home appliances, medical, Smart Energy, digital power, et cetera. We believe that SMSC's sales force will help us expand our vertical market capabilities further in the areas of wireless, audio and computing. We are, therefore, planning to keep SMSC's sales and applications engineers and will add them to our vertical market sales force in conjunction with the horizontal sales force that we have.

Many of the large multinational customers may see a combined effort by the 2 sales forces. Many other accounts will continue to be called on by either the Microchip or the SMSC salespersons with many cross-selling opportunities.

We also plan to combine the distribution network for the 2 companies. Many of the distributors for the 2 companies are the same, but many are also different, and our goal is to achieve expanded distribution capabilities for the products of both companies.

Finally, in regards to human resources, we expect to combine the human resource systems as well. This includes the compensation plans, medical and dental benefit plans, equity plans and all other benefit plans like 401(k), vacation benefits, et cetera. But this combination of plans could take some time, and certain combinations will be more convenient for the beginning of the new calendar year. Meanwhile, SMSC will continue to operate with their current plans.

And with this, I will now pass it on to Eric, who will provide guidance with accretion from the SMSC merger. Eric?

James Eric Bjornholt

Thanks, Ganesh. With the rate at which we expect the integrations to progress, we currently expect the SMSC acquisition to be accretive in the current September quarter by about $0.03 per share on a non-GAAP basis. During our acquisition announcement on May 2, 2012, we had said that we expect the acquisition to be accretive in the first full quarter after close. We have now pulled the accretion schedule in and expect the acquisition to be accretive starting the partial September quarter on a non-GAAP basis. We now expect that the acquisition will add approximately $0.06 to $0.07 per share to Microchip's non-GAAP EPS for the December 2012 quarter. For the March 2013 quarter, we expect the accretion to increase to about $0.07 to $0.08 per share. And for the June 2013 quarter, we expect to be in the full range of accretion, which is expected to be about $0.08 to $0.09 per share per quarter. These numbers are preliminary and depends upon the speed of the integration efforts and the health of the underlying economy in general.

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

With that, I will pass the call back to Steve, who will provide you Microchip's long-term model including SMSC. Steve?

Steve Sanghi

As you very well know, Microchip has maintained a premium financial model for gross margin, operating expenses and operating profit for a very long time. Every time we do an acquisition, where the target's operating business model is not at par with Microchip, there is substantial speculation regarding what the acquisition will do to Microchip's combined business model.

Our track record has shown that Microchip has been able to improve the business model of its acquisitions, and our combined business model has remained virtually unchanged. In the case of SMSC, we expect to implement substantial business process improvements to include gross margin percentage, lower operating expenses and substantially increase its operating profit.

Our long-term model for the combined company will be a gross margin of about 60%, plus or minus 0.5%; operating expenses of about 27.5%, plus or minus 0.5%; and operating profit of about 32.5%, plus or minus 0.5%. All of these numbers are non-GAAP.

This long-term model will continue to be a premium model in the semiconductor industry and will drive substantial shareholder value.

With this, operator, will you please poll for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

Steve, I was wondering if you could give us a little bit of an outlook in terms of what you're seeing from customer order rates by different geographies whether you expect -- which geographies do you expect to be up or down in the next quarter?

Steve Sanghi

Well, if you recall the guidance we provided on sales, all the growth is coming from the partial SMSC quarter added to our numbers. If you take the midpoint of our guidance minus the SMSC revenue of $65 million to $70 million, Microchip is flat to up with just 0.2%, 0.3% or so. In terms of geography, Europe's geography is very weak, made worse so in some of the quarter as we said. So that will definitely be down. And the other geographies of U.S. and Asia were largely -- make up for the drop in Europe.

James Schneider - Goldman Sachs Group Inc., Research Division

Fair enough. And then as a follow-up, can you maybe just address the R&D line in terms of absolute dollars? I understand where you're talking about in terms of long-term percentages, but can you maybe talk about whether you expect R&D to drift up or whether you are not trying to reign that in over the next 2 quarters and add to the dollar basis?

Steve Sanghi

Well, if you add substantial R&D of SMSC together with Microchip, then those numbers will trend down as we gain synergies and make some restructure and changes, if that's what your question is. But if you compare it to a Microchip R&D number as we had it last quarter, of course numbers will go up because there's substantial R&D from SMSC being added.

James Schneider - Goldman Sachs Group Inc., Research Division

Of course, but the combined R&D should slow down over time in terms of dollars?

Steve Sanghi

Well, it should go down short-term in dollars and long-term in percentages, yes.

James Eric Bjornholt

Right. So we're not giving any specifics of the breakout of the operating expenses at this point in time, Jim. So we've shared the long-term model on what we expect this quarter. So that shows that operating expenses should trend down, but we haven't given specifics on any particular line item.

Steve Sanghi

See, we have a partial SMSC this quarter and then there'll be full SMSC next quarter for the total operating expenses including R&D or as R&D itself are going to rise in September and rise in December because of SMSC.

Operator

Next, we'll hear from Christopher Danely with JPMorgan.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Steve, on SMSC, to achieve the targets, do you think you will have to get rid of any of the businesses? Or do you think that you can get it to those targets with the current mix of business that they have?

Steve Sanghi

So there is no selling of the business involved in getting to those targets. But there's a -- because the definite restructuring within the business itself using the combined energy of the 2 companies, using synergy in R&D, synergy in sales, synergy in operations, IT, finance and other things.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Great. And for my follow-up, would you care to give us any sort of long-term revenue growth target for the combined company?

Steve Sanghi

It's too early in the year. We just started today.

Operator

And next, we'll go to John Pitzer with Credit Suisse.

John W. Pitzer - Crédit Suisse AG, Research Division

Yes. Just a follow-up to Chris' follow-up. Relative to kind of understanding when you can get the revenue synergies, clearly, the accretion guidance makes the financial rationale for this acquisition readily impaired. But as you think about either trying to leverage your distribution channel or SMSC distribution channel or curtain vice versa or your customer base, when do you start to think you'll see dividends on the top line from them?

Steve Sanghi

Well, nearly all of their products are proprietary and a very high portion of Microchip's products are proprietary. And you know that proprietary products, they take anywhere from lower 6 months for design win to as long as 1.5 year, 2 years in design before they go to production. So when some of the low hanging fruit from distribution, from each of the distribution in customers, we could get that in 6 to 9 months, but some of it will take longer. And it's also by product. We take much longer in automotive for us to sell into their customers, for them to sell into our customers. But it will be quicker in consumer and it could be quicker in the PC segments. Some industrial segments, especially the USB products and Ethernet products are very, very good products for our broad horizontal customer base with regard with selling to 70,000 customers. And those are easier products to get designed and also relative to automotive.

John W. Pitzer - Crédit Suisse AG, Research Division

That's helpful. And then maybe, Ganesh, as a follow-up. Can you just remind us how much of SMSC's business was done through distribution and what percent do you think your distribution overlap versus new distribution opportunity when you look at the revenue stream?

Ganesh Moorthy

I'm going to hand that to Eric. Eric, do you remember the percentages of their existing business in distribution?

James Eric Bjornholt

I believe it's somewhere between 25% and 30%. I don't have the exact numbers in front of me. I don't know if Gordon might.

Gordon W. Parnell

Yes. Actually, it's closer to 30%.

James Eric Bjornholt

Thank you.

Operator

Our next question comes from Uche Orji with UBS.

Uche X. Orji - UBS Investment Bank, Research Division

Steve, well, first of all, congratulations on closing the deal. I know you're trying to keep the product groups and the divisions, but are there any overlaps you've seen at this point that may be areas of easy consolidation by which of, by way of eliminating one and to help create some [indiscernible] synergy? And how much is that?

Steve Sanghi

So there isn't much of product overlap per se. It's like they don't make horizontal general-purpose microcontrollers. 43% of the business is microcontrollers, but they are specialty microcontrollers for automotive, for wireless audio, for computing embedded control and things like that. But there is a substantial overlap in the R&D development because to do a specialty microcontroller, you have to do a large amount of R&D to really build the panel, build the I/Os, build the analog, having an extension, analog library, some of the IT you may have to buy or build from inside or outside, Ethernet, USB, converters, flip-flops, and on and on and on. There are hundreds of circuits that are developed and then you get those circuits and put them together to build a chip. So there is a substantial synergy in developing that library because we develop it today at Microchip and they develop at SMSC. Now some of it comes very quickly, but some of it takes a little bit of time because number one, 2 companies may not be at the same foundry or in the same process node. So the current products will continue where they're being developed, but as we look forward on the even 3 or 6 months forward, the new product design starts. We will try to converge them on similar processes at the same foundries, so these libraries have synergy. There is a large amount of library developed at Microchip, at foundries where SMSC is bringing some of their products. So they could be idiot users of our libraries. Similarly, we are going to certain foundries with some of our products where they're already present, so we can use their library. That's where the R&D synergy comes from.

Uche X. Orji - UBS Investment Bank, Research Division

That's helpful. And let me just ask you separately, if I look at the 60% long-term gross margin targets, can you help me rank order the -- what of -- are you comfortable either way, end market or by product group? How the gross margin contribution will come? And I'm asking this question specifically while the when I look at areas like USB and some of the computing product areas that they generally carry lower gross margins? And I'm wondering whether how that fits into the long-term vision of the combined company, as especially given its gross margin targets?

Steve Sanghi

So your information is not correct, that they carry lower gross margin. A lot of people looking at some of our competitors, also to microcontrollers carry lower gross margins or 8-bit carry lower gross margins or those assumptions have been wrong regarding Microchip also. We know how to make gross margin. And SMSC actually did very well in gross margins. They actually, last quarter, already was about 58%, I think. So I think the numbers you quoted, that those has no gross margin, is incorrect. It may be correct in general, if you look at the other people that build the commodity products to the business, but they were building other proprietary products. Overall gross margin is very good for the company. It's very good for Microchip. And our gross margin has been down a little bit because of absorption, because the revenue has been down because of the recession. When our fab fill up again as the business comes back, you know our gross margin goes into low 60s again like always. And their gross margin is very rough. So the guidance we gave you on overall gross margin of 60% is solid.

Operator

Our next question comes from Chris Caso with Susquehanna Financial Group.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Just first, the question on SMSC. Now that you obviously, you've done a lot more homework on the integration now and presented the plan, as you look prior to -- compared to when you're doing due diligence as you announced the deal, what's the biggest surprises that you've seen either on the positive or negative now that you've had a chance to dig in deeper?

Steve Sanghi

Well, the negative surprise largely has been the time it took to get approval from China. Although the people, lawyers working on it have told us it's very rare that a company gets approval in phase 1 in China, and this is the fastest any company has gotten. I think ADI's yield took 5, 6 months. But with all the deals that we have done, public deals and others, negative surprise was it took about 30 days longer than we would have liked. The positive surprises, I think of [indiscernible] and then understand it better. And probably original assessment was hedged and we are more confident as we have closed the deal and risked covering the deal. Closing has gone away as we have looked into the IT systems, the financial systems, the R&D understand the library, the processes, where to do business and all that. And I think we feel very confident and very, very good about it, and as we work with very good, talented employees, many them, we have worked with for the last 3 months with obviously, a fair amount of restriction in really what we could get because the companies have to operate independently. But we are very positive and very confident that as we engage in the coming weeks, this thing will be a great acquisition.

Blayne Curtis - Barclays Capital, Research Division

Okay, great. And as a follow-up, just with respect to the core Microchip business, I, for one, have been surprised that with the things have slowed down on the macro as they have. Can you talk about what you guys are doing from a manufacturing standpoint, perhaps from a cost standpoint to deal with the current situation and where we go from here?

Steve Sanghi

Well, I mean our current situation isn't drastic like it could be for some other people. I mean, we are -- we have a solid gross margin. Our inventory days are flat. Actually, we were down by 1 day, so we don't really consider a situation to be anything that really needs correction. Business grew in the March quarter. It grew in the June quarter, maybe not as much as we wanted to, but it's a sizable growth. Our microcontroller business was up 5%. Our analog business was up 9%, so the reductions came from licensing and some of the other memory businesses. Some of it was subcontracts. So our products are doing well. And I think we'll -- our plan is to run the factory flat, both in the front end and back end, and inventory will continue to come down slowly. And eventually, there will be an upturn and the factory will fill up again.

Christopher B. Danely - JP Morgan Chase & Co, Research Division

Just a final point. With running the factories flat in the near term, what do you expect inventory, your own inventory to do in the near term as a result of that?

Steve Sanghi

Well, so at last quarter's production, our inventory went down by 1%. So if nothing else changes, then our inventory should go down maybe by another day. Although the distribution is a different equation, so the distribution inventory was nearly all-time low.

James Eric Bjornholt

Yes, it's 31 days.

Steve Sanghi

31 days. And the normal has been between 31 to 45. So at any point in time, if the distribution starts to rebuild inventory, then our inventory would come down substantially. And it's largely, went up here because the distribution has been keeping very low inventory. And when distribution keeps low, we want to keep it high so it's available to the channel. Now having said all that, going forward, our inventory gets mixed with the SMSC. So the inventory numbers will report next quarter, will be -- have 2 months of SMSC and then 3 months of SMSC. So it's going to be impossible to compare it to really what happened in the prior quarter in the baseline.

Operator

Our next question comes from Brendan Furlong with Miller Tabak.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

A question for you on SMSC going into the December quarter. SMSC is kind of tough with this -- they had an off quarter and they had a very strong November and a weak February quarter. And I guess I'm trying to figure out if maybe you could lend us some color on how we should we think about the seasonality of SMSC's business on what is now a calendar December quarter?

Steve Sanghi

So that's a very, very good question. That's something we have pondered with ourselves. Their quarter ended in November and then February. So in the February quarter, they picked 2 very bad months. One is usually the month of December, that has lots of holiday. And then January usually starts out slow after the holidays, and then you get Chinese New Year. You all get that in the one quarter. So that was a very weak quarter. And I think now on our clock in December, you will pick up the December weakness and the December quarter and the Chinese New Year will go with ours. So we'll have to get some cycles of learning. I think you can look at the prior data and do some averaging. Give us some time on our clock and I think we'll be able to help you more. But today is our first day and I think I will just be guessing.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Okay. I guess I'll ask you that next quarter. The other question now for you. It looks like your 8-bit MCU revenue was down slightly, sequentially in the quarter?

Steve Sanghi

Let me correct. Our 8-bit revenue was up sequentially.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

It was up sequentially? But as some call it slightly or I guess, I'll look to my data on that. The -- but as a lead indicator, 8-bit based on your -- on Steve's general comments on the cycle that you've given us in the past, I guess I'm looking if you could give us your opinion on what you think on the cycle on demand going forward here for the next couple of quarters?

Steve Sanghi

Well, the September quarter, we've given you guidance already. And December quarter, usually the weak quarter for Microchip historically, if you look at it. So this quarter and next quarter, given the backdrop of the economy, of fiscal cliff rating, election's coming, Europe in doldrums, I think the hope is on China, there is some activity in China to try to come up with a new fiscal package. And when China comes up with fiscal packages, that's really to promote usually home appliances and automotive and other stuff for their consumers to buy. We benefited very well when that happened the last time. There is some talk of that right now. If that happens, we'll do very well. And China is the largest geography now. We ship more in China than U.S. But Europe will be weak and U.S. is anybody's guess, I think, if there is no breakthrough in Washington, U.S. will continue to be where it is, more of the same.

Operator

[Operator Instructions] And we'll go next to Kevin Cassidy with Stifel, Nicolaus.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Can you say what similar customer feedback has been on the merger acquisition?

Steve Sanghi

So the -- when the deal was first announced, obviously, some customers get nervous regarding what Microchip might do. And a lot of this nervousness is actually deferred, fear uncertainty and doubt created by either the competitors or the analysts, honestly, and I'll tell you why. It is to competitor's benefit to go to major customers and say, "Oh, Microchip today, high margin company. They're different there. Look at the profitability. They're not going to support this. They are not going to support that." I expect them to do so because if I'm the competitor of somebody, I'll do the same. The analysts, with lack of information, very little information is available on May 2 when we announced. A lot of reports come out, some guessing we'll sell the USB. We'll do this. We'll do that. We'll not support this. We'll not support that. And people read that, too, and that makes them nervous regarding the programs they continually have won. So SMSC work very well together. Their management, kudos to them, reached out to us when there were some significant high and large customer concerns, and we made some joint calls to the customers to make them feel comfortable. And in today's call, as people are hearing officially, we're going to keep all the divisions and all the products, keep their sales force, should really alleviate any remaining concerns. Actually, there haven't been concerns after the initial one, which we satisfy.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And also other customers, maybe in the automotive, where with your larger scale, that you'd build 1 plus 1 could equal 2.5 or so?

Steve Sanghi

Yes. I mean, absolutely. Even in the last 3 months, I have visited Microchip's automotive customers where they also wanted to talk about SMSC. In most cases, we could not because -- anti trust issues and all that when it wasn't clear that there is very high interest in SMSC's customers. Microchip is a very good supplier to them. I gave you an example. We have over 20 microcontrollers in Mercedes S-Class cars, and there's a great relationship there to -- with their suppliers and all that. So obviously, they want to talk to us.

Operator

And next, we'll hear from Sumit Dhanda with ISI Group.

Sumit Dhanda - ISI Group Inc., Research Division

Steve, first question I have for you is, is there any color you can offer up on when exactly you're starting to see the weakness in your business in the June quarter? And then, in July, is that just state, low at -- flat at a low level exiting Q2, has there been any pickup or deterioration? Any color you can provide would be appreciated?

Steve Sanghi

So if you look at it, we actually made that quarter. Our guidance was 3 to 7 for midpoint of 5 when we came in at 4. So a slight weakness. And I think most of that came in second half of the quarter. At our earnings call, which was on May 2 or 3 time frame, we had given that guidance. So, so far at that time, we were okay. And the weakness developed later on. I think the last month, specially June, was weak and the late part of May could have been weaker here with week 2.

Sumit Dhanda - ISI Group Inc., Research Division

And then any color on July?

Steve Sanghi

It's continuing at that pace. That's why we're guiding roughly flat.

Sumit Dhanda - ISI Group Inc., Research Division

Okay. And then as my follow-up, growth in your 16- and 32-bit business is obviously very impressive, but seems like although 8-bit grew, it probably grew very modestly. Any thoughts there? And at least compare those with some of the other guys reporting their 8-bit business, which was a little bit better, is it just a timing issue in your opinion or an exposure issue from an end market or product-cycle basis?

Steve Sanghi

It's -- it could be anything. It could be end market exposure, the more exposed to automotive, which was our strongest segments. It could be geography. It could be where the business is. And we have substantial growth in 16, 32. Our 8-bit business also is larger than most of those -- so their 8-bit businesses is smaller. So it could be a starting issue at some time. I can't compare to other people's numbers because I don't know what happened in their business.

Operator

And we'll move next to Harsh Kumar with Stephens.

Harsh N. Kumar - Stephens Inc., Research Division

First of all, congratulations on closing the deal. And thanks for the accretion schedule. That's very helpful. But just a quick question on that, Steve. Are you just assuming cost cuts at this point in time when -- with the accretion schedule that you gave us, so you're building in some sort of cross-selling incentives? So could you give us an idea of how we should think of cross sales?

Steve Sanghi

The accretion schedule that I have given you for now through March and June does not really have revenue synergy in it. As I mentioned earlier, if I want a design tomorrow, we'll be 9 months to production at least. Those are the fastest schedules and most will take longer. So the accretion schedule we have given you is largely through synergy and cost savings and longer.

Harsh N. Kumar - Stephens Inc., Research Division

Got it. Steve, and then another follow-up question for you was, SMSC obviously, lower gross margins, lower operating margins compared to Microchip. And I'm not asking for numbers, but I'm just curious of qualitatively, you could give us a hint or some idea of what areas do you see the most supreme? And would it be COGS? Would it be OpEx? And any kind of color would be helpful?

Steve Sanghi

So I cannot break it down much for you. I think based on SMSC's public number and ours, you might be able to do some triangulation. I've given you synergy and you guys are the model on odd numbers. For me to further break it down, I think it will be telling you guys before the employees have heard it and all that so...

Operator

And we'll move next to JoAnne Feeney with Longbow Research.

JoAnne Feeney - Longbow Research LLC

I was hoping you could provide a little bit more details on how to think about the new employee stock plan for the SMSC guys and how that would affect the non-GAAP to GAAP translations?

Steve Sanghi

So all vested stock options of SMSC were cashed out now essentially at the deal price. All unvested equity was assumed. And what we have in our share count, I believe, the guidance table has noted the bottom that shows about 700,000 shares dilution.

James Eric Bjornholt

We did shares from that. That's not the number of shares that come into the plans.

Steve Sanghi

Yes, so -- but there's 700,000 shares added to Microchip's otherwise share count for September quarter because of the options we're assuming. Is your question related to this inducement plan that we filed today?

JoAnne Feeney - Longbow Research LLC

Yes, that was the one.

Steve Sanghi

Okay. So FUC -- I'm sorry, SMSC had a shared appreciation rights plan, which was the cash settled. So they -- an employee gets a certain number of SARs, which are good for 10 years. And after they are vested, they could really, at any point in time, exercise it. And from strike price to the fair market value, they get cash from SMSC. All the vested ones, SARs were cashed out also. The unvested ones are being converted to this inducement plan, and there are about 440,000 shares in that plan. So that's the number, 440,000. The dilution is not all of them because there's a strike price also. So the dilution is already in the 700,000 shares. So whatever comes out of the SAR dilution is already included in the other 700,000 number I gave you. And you can basically ignore this new plan we filed. That's more -- we didn't have a plan like that to convert, so we put a plan like that. But the number that's important to you is already in our guidance table. That fully is inclusive of all invested equity.

JoAnne Feeney - Longbow Research LLC

Great. Thanks for the clarity. I appreciate that. Then we could just go back to your higher responding to this global weakening. I'm wondering if you're doing anything about plant shutdowns? Or is there any natural days off this quarter because of vacations? Well, it seems to have come to an end last quarter. So I'm wondering perhaps summer vacations are giving you a bit of latitude there to allow utilization rates to fall. Could you provide some hints as to that?

Steve Sanghi

There's nothing we need to do in business than we are doing. And like I said earlier, we don't feel that our inventory is alarming. No, it's not 160 days or something. Inventory is probably high by 15 days or so or to what I will think comfortable. We're at 120 and 133, 13 days. I'm not -- I don't need to do a -- I have enough on my plate to get accretion from SMSC, manage the business, restructure it, get synergies from other teams. So we don't really need to do any shutdowns. We don't need to do anything. I think if the business falls off for any reason further, which we're not expecting, we don't have a crisis at hand. We're not [indiscernible]. The business isn't down like some of the other companies. It's really doing fine. Our business compared to a year ago was down...

James Eric Bjornholt

5.9%.

Steve Sanghi

5.9%. I mean, that's just -- the framework you guys are in, where you're reading, what other people are doing. And so you're asking us what we're doing. The business is only down 5.9% versus a year ago. The company gross margin is 59%. Operating profit is 32.7%. And those kind of numbers, we're not in a crisis situation. We don't have to do anything.

Operator

And we'll go next to Terence Whalen with Citi.

Terence R. Whalen - Citigroup Inc, Research Division

This question is a little bit of a high-level question. And that is, how long will it take you to unify some of the design tools so that a client will be able to use those Microchip blocks and SMSC blocks together in a unified development environment? How long will that take? And will that present more of a significant opportunity to then recognize revenue synergy from the merger?

Steve Sanghi

I will forward that to Ganesh. I think he has looked at it more closely.

Ganesh Moorthy

Well, I think for some time to come, the tools are going to be different. They are not impediments for the customer. In many cases, the customer was doing a design with a set of tools. It will take us some time to assess what combination of tools makes sense. It doesn't make sense in all cases, and then we'll make those changes as appropriate. But I don't see any impediments to customers to adopt either our product, if they're an SMSC customer, or an SMSC product, if they're an existing Microchip customer using the tools we have today. And it's just we can make enhancements and there'll be improvements as we go along. But there are no impediments.

Terence R. Whalen - Citigroup Inc, Research Division

And then one my follow-up was a broader economic question. I think, Steve, in the past, you've talked about Microchip seeing inflections in the economy a little bit earlier than peers. It sounds like you really haven't seen improvement in your order rates yet, yet there's some other peers who are seeing stronger second halfs due to application exposure and whatnot. I guess my question is, based on your experience, would you have expected to have seen improvement in the economy by this point? And I guess, another way of asking that, other peers you are seeing improvements in the second half, do you think it's just the seasonal build and they are yet to see a contraction again in the first half of next year?

Steve Sanghi

Well, the economies at the low point, and for all we know, it could get further worse with what's happening in Europe. And I don't know if I completely understand your question. The question I would have expected is, "Why didn't you see the weakness earlier that we always see?" You're asking a question, "Why didn't we see the improvement?" And I'm not sure business is improving right now. But the question I expected that I'd like to answer is, "Why didn't we see the weakness earlier this time?" We always see the weakness a quarter earlier. Well, we would have seen the weakness a quarter earlier if our superior growth of 16-bit, 32-bit and analog and positive sequential growth on analog, both June quarter and March quarter, had an overcoming. That's why we didn't see. So if we had a normal level of growth on 16, 32 and if 8-bit business was flat to down, then we would have seen the weakness compared to the industry earlier. We did see a lower run rate, customers correcting for inventory, lack of confidence, but number of new designs go to -- going to production on 8-bit, 16-bit, 32-bit and analog overcame it. And now the question you're asking me is, "Why we're not seeing the improvement earlier?" I don't know who's seeing it. And I'm watching the dust from many of our competitors. And the businesses are bad.

Operator

Next we'll go to Craig Ellis with Caris & Company.

Craig A. Ellis - Caris & Company, Inc., Research Division

And congratulations on your biggest deal ever. Just from a financial reporting standpoint, it's very helpful to get the product detail. Can you provide the 16-bit business, 32-bit business analog? Will we be getting the same thing for the SMSC business in the future?

Steve Sanghi

We haven't exactly figured out what we're going to provide you. I think for reporting, as we said, the SMSC business will break into 2 pieces: microcontrollers and analog. Microcontrollers will be added to a microcontroller number, analog to an analog number, to the extent that microcontroller has 8-, 16-, 32-bit complements which they do, they will add to our respective 8, 16 and 32, if that was your question.

Craig A. Ellis - Caris & Company, Inc., Research Division

Yes, that's the question, Steve. So in this transition period, there'll be an adjustment where you add those in. And will you be giving us some mapping to tell us how much of the SMSC business went into each of those segments for modeling?

Steve Sanghi

I think we'll do some of that, yes, not enough for you to be able to call it the 8-bit.

Craig A. Ellis - Caris & Company, Inc., Research Division

That's touche. And then a follow-up question for Eric. Eric, it sounds like that the accretion assumptions were all expense-based and there's not a revenue contribution there. Is that correct?

James Eric Bjornholt

Yes, that's correct.

Craig A. Ellis - Caris & Company, Inc., Research Division

I mean, in what you provided so far?

James Eric Bjornholt

That's correct. We have assumed that the revenue synergies take longer.

Operator

And next we'll go to Ray Rund with Shaker Investments.

Raymond Joseph Rund - Shaker Investments, L.L.C.

I had a couple of questions. One is, can you give us the breakdown of what your revenue was by the various product areas that you -- as you usually disclose in your 10-Q?

James Eric Bjornholt

Sure. Sure, we can do that. So microcontroller revenue was $240,594,000. Memory was $40,718,000. Analog was $47,184,000. Licensing was $20,282,000. And other was $3,608,000. And those are non-GAAP numbers.

Raymond Joseph Rund - Shaker Investments, L.L.C.

Those are non-GAAP numbers?

James Eric Bjornholt

Yes.

Steve Sanghi

There was a $250,000 non-GAAP difference, a consumer [indiscernible].

James Eric Bjornholt

Yes, that's -- it's small. I don't have those numbers in front of me right at the moment, but it's a small difference. And if you want to follow-up with me, I can give them to you.

Raymond Joseph Rund - Shaker Investments, L.L.C.

Okay. Also, I mean it sounds from just taking a quick look at what your guidance is, that unless the non-GAAP SMSC numbers are widely different from the GAAP SMSC numbers, it looks like you're going to see your non-SMSC revenue go down sequentially in these coming quarters. Is that correct or did I miss something in my computation?

James Eric Bjornholt

I think you missed at a few. If you back the numbers out of the $65 million to $70 million in growth, I think you'll see that there is a midpoint of slightly above flat. But it is relatively flat.

Ganesh Moorthy

So typically, midpoint of the guidance and subtract $60 million, $70.5 million out of that, you'll get a Microchip number, which is slightly north of our last quarter.

Operator

And we'll go next to Suji De Silva with ThinkEquity.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Two quick questions, hopefully. First of all, Steve, you talked about the China plants. Market is potentially being an uplift in the second half. Do you have any insights as to whether that the incentive programs are going to come? And if they come back and the timing? And what's your exposure to that market will be about the term?

Steve Sanghi

I don't have the better claim to [indiscernible] for sure. No, I do not know what's the status of those programs and whether they will be implemented.

Sujeeva De Silva - ThinkEquity LLC, Research Division

Are you seeing anything in the order patterns that might indicate people building up for that?

Steve Sanghi

No.

Unknown Analyst

Okay. And then the second question really is around synergies with SMSC. Should we think, all things being equal to revenue, synergies are more from SMSC's autos business and the consumer businesses versus their computing businesses? Or is that not a fair statement?

Steve Sanghi

No, that's not a fair statement. We expect to be able to sell the USB, industrial products into our customers and the computing and automotive also. And we expect to sell some of our products into wireless audio, data synergy, automotive customers, their computing customers, large computing customers and some of the consumer customers, so it's both ways.

Operator

And that concludes our question-and-answer session. I'd like to turn the call back over to our presenters for any additional or closing remarks.

Steve Sanghi

So I just wanted to say thank you all for attending the conference today. It's been a very busy day for us here today, closing the acquisition and doing this call at the same time. Although it kind of worked out because after closing, we were able to give you back more information than we could have given you if the closing was next week or next month. So we'll see many of you in the conferences that will happen this quarter and we'll be at some of those. Thank you.

Operator

That does conclude our call for today. Thank you all for your participations.

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