Microchip Technology Inc (MCHP) — Q3 2018 Earnings Call Transcript

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 results of operations. In attendance with me today are Steve Sanghi, Microchip's Chairman and CEO; and Ganesh Moorthy, Microchip's President and COO. I will comment on our third quarter fiscal year 2018 financial performance, and Steve and Ganesh will then give their comments on the results and discuss the current business environment as well as our guidance. We will then be available to respond to specific investor and analyst questions. I want to remind you that we are including information in our press release on this conference call on various GAAP and non-GAAP measures. We have posted a 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 and 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 compensation. Net sales in the December quarter were $994.2 million, modestly higher than the midpoint of our guidance and down 1.8% sequentially from net sales of $1.012 billion in the immediately preceding quarter. We have posted a summary of our revenue by product line and geography on our website for your reference. On a non-GAAP basis gross margins were at the high end of our guidance range of 61.4% in the December quarter. Non-GAAP operating expenses were at 22% of sales which was a record low and below the low end of our guidance range which was 22.2%. Non-GAAP operating income was a record $391.7 million at 39.4% above the high end of our guidance of 39.2%. Non-GAAP net income was $341.2 million and was up 38.4% as compared to the same quarter last year. Non-GAAP earnings per diluted share was $1.36 which was above the midpoint of our guidance. On a GAAP basis, gross margins including share-based compensation and acquisition-related expenses were a record 61.1% in the December quarter. GAAP gross margins include the impact of $3.5 million of share-based compensation. Total operating expenses were $361.8 million, and include acquisition and tangible amortization of $121 million, share-based compensation of $20.5 million, $1.2 million of acquisition-related and other costs, and special charges of $0.2 million. GAAP net income was impacted by a $439.8 million discrete tax event in the quarter primarily associated with the Tax Cuts and Jobs Act, and we also incurred a loss of $2.1 million on the retirement of our 2037 2.125% convertible bonds. After these adjustments, the GAAP net loss was $251.1 million or $1.07 per diluted share. The non-GAAP tax rate was 8.5% in the December quarter, and we expect the rate to be about the same in the March quarter. Due to the Tax Cuts and Jobs Act we expect about $300 million of taxes to be paid over the next eight years related to the tax incurred on foreign earnings that were permanently invested offshore referred to as the transition tax. We estimate the tax payments to be approximately $25 million in years one through five, $45 million in year six, $60 million in year seven and $75 million in year eight. We will continue to evaluate the impact from the Tax Cuts and Jobs Act and these estimates may change as we complete our analysis. We are working through the impact of recent U.S. tax reform on Microchip's longer term effective tax rate. There is no impact on the fiscal year 2018 rate as you can see from our March quarter guidance provided in today's earnings release. Excluding the transition tax from the Tax Cuts and Jobs Act, we expect our ongoing long-term cash tax rate to be below 9%, which is what we are providing to investors and analysts for cash flow and operating model forecasting purposes. We will continue to refine this over the coming months prior to providing guidance for Q1 of fiscal year 2019. Moving on to the balance sheet, our inventory balance at December 31, 2017, was $487.1 million. Microchip had 115 days of inventory at the end of the December quarter, our targeted inventory levels are between 115 and 120 days. Inventory at our distributors in the December quarter was at 34 days and up 3 days from the prior quarter, and in the normal historical range for distribution inventory. The cash flow from operating activities was a record $365 million in the December quarter. As of December 31, the consolidated cash and total investment position was $1.985 billion, of which about $550 million is domestic cash. Due to the Tax Cuts and Jobs Act, the majority of our offshore cash could be brought back to the U.S. without incurring any material additional tax cost. We bought back the remaining amount of our 2037, 2.125% convertible bonds in the December quarter through $58.3 million in cash. Capital expenditures were $66.4 million in the December 2017 quarter. We expect about $50 million to $60 million in capital spending in the March quarter and overall capital expenditures for fiscal year 2018 to be about $200 million to $210 million, which is at the lower end of the guidance that we provided last quarter. We are aggressively adding capital to support the growth of our production capabilities for our fast-growing new products and technologies, and to bring in-house more of the assembly and test operations that are currently outsourced. These capital investments will bring significant gross margin improvements to our business, particularly for the Atmel manufacturing activities that we are bringing into our own factories. As mentioned last quarter, our capital spending in fiscal 2018 also reflects three new building projects we are constructing in Arizona, India, and Germany, which will give us meaningful lease cost reductions and avoidance in the future, as well as allow us to cost-effectively scale our future growth. Depreciation expense in the December quarter was $32 million. We also want to provide an update on the tax treatment of our dividends. In fiscal year 2017, our dividends paid to shareholders were treated as return of capital and we were expecting similar treatment in fiscal year 2018. The Tax Cuts and Jobs Act which passed in December 2017 has changed this outlook. Due to the U.S. taxation and fiscal year 2018 of our foreign earnings which were historically permanently invested offshore, Microchip is taxable in the U.S. in fiscal year 2018. As a result, dividends in the June, September, and December 2017 quarters are fully taxable to our shareholders, and dividends to be paid in March 2018 will be fully taxable to our shareholders. We believe the impact of U.S. tax reform on Microchip's U.S. taxable income in future periods will result in dividends being fully taxable to shareholders in fiscal year 2019 and beyond. We will continue to provide updates to shareholders on this topic in the future if facts and circumstances change. I will now ask Ganesh to give his comments on the performance of the business in the December quarter.

Thank you, Eric, and good afternoon, everyone. We performed better than we expected in the seasonally slow December quarter with a sequential revenue decline of 1.8% and year-over-year growth of 12.8%, all organic growth as there was no contribution from acquisitions in the last four quarters. The Microchip 2.0 transformation continues to make good progress, especially in terms of new design opportunities as we enable our clients' innovation with the very best smart, connected, and secure solutions. Taking a closer look at microcontrollers, our Microcontroller business performed well in the December quarter with revenue down sequentially only 0.6% as compared to the September quarter. On a year-over-year basis, the December quarter Microcontroller revenue was up a very strong 18.9%. 8-bit Microcontroller revenue actually set a new record again, edging out the September quarter performance, while 16-bit and 32-bit revenue continue to have strong year-over-year performances. Our Microcontroller portfolio and roadmap has never been stronger and we are seeing continued growth in our design-in funnel which we expect will drive future growth as these designs progress into production over time. Microcontrollers represent 66.5% of Microchip's overall revenue in the December quarter. Now moving to our Analog business. Our analog revenue was sequentially down 3.2% in the December quarter as compared to the September quarter, and up 1.5% on a year-over-year basis. As we highlighted at our last conference call, our publicly reported analog results continue to see some revenue classification headwinds resulting from a deliberate shift in strategy we made several quarters ago. The change in product line strategy, as we reported last quarter, is that we have for some time been adding microcontroller cores to several of our more complex analog products, especially those that provide our clients with smart connectivity solutions. The addition of microcontroller cores to these analog products enables us to sell a higher value and more defensible total system solution. These smart connectivity products are growing nicely, and as they replace older products and new designs, our revenue classification for these new products have shifted from the analog product line to our Microcontroller product line. Transitioning to more sticky and higher margin smart connectivity revenue is the right Microchip answer, but does impact some of the product line reporting that analysts are interested in as some of the revenue growth shifts into our Microcontroller product line. In the longer term, as the revenue from analog attached design wins continues to ramp, we fully expect that the analog product line revenue will grow nicely. Our analog products represented 23.3% of Microchip's overall revenue in the December quarter. Moving next to our licensing business. This business was up 6.8% sequentially in the December quarter and up 15.5% on a year-over-year basis, setting a new record in the process. We are seeing the fruits of having licensed several foundries and independent device makers for several years on multiple process technology nodes as they manifest in our results as the license processes ramp volume and generate royalty revenue for many years to come. Finally, our memory business was sequentially down 7.6% in the December quarter as compared to the September quarter, and up 3.4% on a year-over-year basis. Let me now pass it to Steve for some general comments about our business and our guidance going forward.

Thank you, Ganesh, and good afternoon, everyone. Today, I would like to first reflect on the results of the fiscal third quarter of 2018. I will then provide guidance for the fiscal fourth quarter of 2018. Our December quarter financial results were good. Our net sales were slightly above the midpoint of our guidance, which itself was slightly better than five years of seasonality. Our non-GAAP gross margin of 61.4% of sales was at the high end of our guidance. Operating profit of 39.4% of sales made a new all-time record, and earnings per share of $1.36 exceeded the midpoint of our guidance by $0.01 per share. I want to thank all the employees of Microchip worldwide for delivering an outstanding quarter and calendar year 2017. On a non-GAAP basis, this was also our 109th consecutive profitable quarter. Now I will provide you with an update on Microchip 2.0. We are continuing to experience an enormous customer preference to design with our Microcontroller solutions in all 8-bit, 16-bit, and 32-bit customer applications. On top of that, our various acquisitions have now built a powerful diversified product line through which we are able to provide total system solutions to our customers. We are winning incremental design wins with multiple products in the same boards of our customers. We have a robust design win funnel and we feel very optimistic that Microchip 2.0 is working and increasing the organic growth of Microchip. Based on SIA numbers, our Microcontroller market share in calendar 2017 was at a record 15.7%, up 220 bps from calendar 2016. To be fair, calendar year 2016 only had three quarters of Atmel, while 2017 had all four quarters of Atmel. So I calculated market share for three quarters of 2016 to three quarters of 2017, which will be April 1 to December 31 of both years. Based on that nine-month comparison, our market share gain was 91 bps higher than 2016. Also, our Microcontroller market share grew in each of 8-bit, 16-bit, and 32-bit product lines. Now let us go into the guidance for March quarter. Our inventories at Microchip at the end of December 2017 were 115 days, which is right at our target. We were able to get to this target a quarter or so ahead of what we were thinking. This is due to the enormous progress we made on the manufacturing side and bringing capacity online and decreasing lead times. Our book-to-bill ratio has also continued to moderate from 1.11 in both March 2017 and June 2017 quarters, and then the book-to-bill ratio was 1.05 in September 2017 quarter and 1.0 in December 2017 quarter. This moderation of book-to-bill reflects the improvements in lead times that we have seen or we have been able to achieve over the last several quarters. As we have indicated before, our seasonality for any given quarter will change as we integrate acquisitions and end up with new blended seasonality. The seasonality of the Atmel business is driven by a larger percentage of consumer-oriented business, which has a sharper decline in the March quarter. In fact, the historic Atmel seasonality in the March quarter over the five years prior to the acquisition was a 7.8% sequential decline when they were an independent company. Meanwhile, Microchip's historic seasonality in the March quarter in the five years prior to acquiring Atmel was a 2.75% sequential growth. The blended average March seasonality results in a minus 1% sequential decline. You can also see the contribution from Atmel's consumer business in the stronger than seasonal blended results Microchip experienced in the June, September, and December quarters of 2017. We will compare our March quarter guidance to this combined seasonality of new Microchip. So now let's go into the non-GAAP guidance for the March quarter. We expect total net sales in the March quarter to be down 3% to up 1% sequentially, giving us a midpoint of the guidance at minus 1%, which is right at seasonality that I explained about. In September quarter last year, our net sales were up 15.8% from a year ago quarter. In December quarter, our net sales were 12.8% from a year ago quarter. In March 2018 quarter, we are guiding the net sales to be up 9% from a year ago quarter, clearly demonstrating the soft landing scenario that we have been talking to the investors. Our total fiscal year 2018 sales ending March 31, 2018, with midpoint of the guidance is expected to be up 13.2% from fiscal year 2017 sales, beating most of our competitors for the same time window. Regarding gross margin, we see a steady improvement in overall gross margin of the company. Based on Microchip 2.0 margin drivers, we expect gross margin for the March quarter to be between 61.3% and 61.7% of sales. We expect overall operating expenses to be between 22% and 22.4% of sales. We expect operating profit percentage to be between 38.9% and 39.7% of sales. And we expect earnings per share to be between $1.30 and $1.39 per share. I want to remind investors that our long-term financial model is a non-GAAP operating profit of 40% and you have seen that we are relentlessly marching towards this model. Given all the complications of accounting for the acquisitions including amortization of intangibles, restructuring charges, and 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 comparison to prior quarters, and we request that the analysts continue to report their non-GAAP estimates to First Call. With this, operator, will you please pool for questions?

Yes, thank you. Steve, thanks for the color in terms of book to bill and lead times. When you think through the March quarter seasonality with Atmel/Microchip combined can you help us as you go toward June in terms of what you typically see for the June quarter?

Well, the June and September were stronger quarters for Atmel as well as for Microchip and you have seen pretty strong June and September quarters for the last couple of years since we have had Atmel in both quarters. And you've seen the December quarter slightly stronger than our historic seasonality as we just reported. And what their results is significant difference in the March quarter seasonality where Microchip was historically up for 2.5% to 2.75%, and Atmel was down a whopping 7.8%. And that's really when you combine it together, that's what results into a minus 1% seasonality.

Got it. And then maybe just a follow-up for Eric. As you approach the target model and given the margin expansion you've seen, can you talk about just some of the initiatives this year and maybe on the intermediate term for both gross margins and operating margins?

So, I mean, on the gross margin front it's more of the same of what we've been talking about over the past year in terms of investing in the assembly and test and bringing more of that in-house, and we're making progress on that front. We've deployed a lot of capital over the last couple of quarters, we had more coming in this quarter as we talked about in my prepared remarks on the $50 million to $60 million of capital coming in. So that will continue to add to the gross margin improvement over time. We've got good utilization in our wafer fabs and all those things are making our cost structure very favorable. At a midpoint of guidance here of about 61.5% gross margin, we've got about a 1% improvement to go to get to the target model, and we're confident that we're going to get there with all these initiatives that we have.

Got it. Thanks.

And same thing on the operating margin, we just reported 39.4%, and our long-term model is 40%. And we're fairly confident that most of that gross margin will fall through and we're going to be in that range.

Great. Thanks for taking my question. I'm wondering if the inventory build is something that you had expected at the start of the quarter or if that occurred more as a result of perhaps orders not coming in with turn rates as fast as you might have expected when the quarter started?

So the inventory was pretty much right on target what we had guided to and what we achieved. The turns rate in December quarter was not soft. We beat the December quarter from the midpoint of our guidance so I don't think there was any issue in terms of our bookings in December quarter, which will have changed the inventory.

Yeah. And you can see from the guidance that we had on our release, we think we're going to continue to be within our inventory target range of 115 to 120 days in the quarter that we're in right now, so I think inventory is well-managed.

That helps. One follow-up, if I can. You might have mentioned this, and I apologize if I missed it, but you've been talking about supply constraints on the Atmel portfolio, in particular in backend tests, and I think you've noted that you expected to be supply constrained there for – one time you said for the next year, maybe now we're at either six or nine months more. Any update on that relative to the capacity you've been adding. And I see the book-to-bill coming down and lead times coming down. Is that specifically related to the Atmel backend test? And any update there will be helpful. Thank you.

So Atmel had many business units. It was just not one business, it was microcontrollers and memory and defense and aerospace and RF and automotive and wireless and other businesses. We had broad-based challenges on the Atmel business, and every quarter certain products, certain business units get help you on that. And we have been guiding from the very beginning that we expect this to take until about June of this year for it to – all business to get healthy and that really hasn't changed. So as we speak right now, there is largely, I would say, one-and-a-half business units that are still having significant challenges. Most of the others are in the very tail end where a large amount of problems have been resolved. And this last one-and-a-half business unit largely chose the testing platforms to be the one that you cannot acquire any more of. These were very old testers of 1970, 1980 vintage that should have been obsoleted prior to the year 2000. And 20 years later they're still running, but they're not running, they're not running well. And the capacity on them is going down not up because every quarter you've got to take one of it down to use for spare parts because you cannot buy anymore, so therefore the capacity is decreasing not increasing. So we are bringing that testing up on those products on more modern testers or microchip platforms, but that process is painful and then qualification of customers, many of those are automotive customers. So that is the process we've been going through for the last year-and-a-half, and I think during which we have grown the business, results have been great, lead times have been slowly coming down, but some of the remaining challenges remain and we think we need another five months to get it all behind.

Thanks for the details.

Welcome.

Yeah. Hey, guys. First of all, congratulations on a solid quarter. 9% growth is pretty impressive, Steve. I wanted to ask about your outlook for March. In those markets, your broad end markets, auto-industrial consumer, which one do you think is going to outperform, in your opinion, the most?

Well, if the question is just for the March quarter, the consumer, obviously, is the weakest. Automotive should do very well. Industrial should do very well. In some markets you have kind of brand-new budgets coming in, in the New Year. The only market that is soft which is driving a minus 1% guidance is because of the Atmel seasonality which is usually down almost 8%, and that is driven by some of the consumer markets. Everything else should be good.

And maybe I'll add to that on a geographic basis, this will be a strong quarter for Europe. It always is, just many more shipping days in the quarter without the holidays. Asia is the most challenged just because of the Chinese New Year, and Americas should do pretty well.

So Steve, as my follow-up, you guys always run the company for the long-term, and historically in lean times even you've grown inventories, your target level of inventory is 115 to 120 days. You just hit 115 days now. By all metrics, end markets are still pretty good. Does it actually make sense for you to – can you make the case that you should actually be growing your inventory levels even further and beyond the 115 days? So why stop here?

Well, if our inventories get below 100, then we don't have usually all the right product in the right place and all the permutations and combinations and SKUs and permutations and combinations and SKUs and flavors available, and then you go on support and you're expediting and you're going to have a lot of manufacturing challenges. When you are in the 115, 120 days of inventories and I think we can manage our business reasonably well. I mean, I wouldn't distinguish between 115, 120 or a few days left or a few days even more than that on the outer side. But we don't want to have – keep going, like you said, to have 135, 140, 150 days of inventory, because then you're not really making the right use of that inventory. We don't need that much inventory and you have the opposite risk of obsolescence where certain products, customer changes are flavored. They want to use a different package and we packaged it in and we want to keep most of the inventory and die inventory. And when you do that, then its dollar value doesn't grow as much versus if you put it in the finished goods. So I think that's well-tried over the years, that's really the right kind of number. And when we are lower than that, we're trying to grow inventory, when we are higher than that we're trying to decrease inventory, and that's kind of still the right number.

Understood. Thanks, guys, and congrats.

Thank you.

Yes. Thank you. Good evening. I guess to start if you could talk a little bit about where lead times are in general now? You're talking about them coming down. Would you consider them at normal levels now? And just following on from that, Steve, you had talked about the soft landing that you were trying to achieve. You've got lead times down now, you had the book to bill at 1, I mean, would you consider that with what you are seeing now, that soft landing is what we're seeing now or are there are more steps that need to be taken as you go into next year in order to achieve that?

So let me have Ganesh answer the lead time, then I'll pick up on your soft landing question.

So lead times are running – if I look at the December quarter in the 4-week to about 14-week window. So if you remember, we had – at the peak of this, we've had between 4 and 20 weeks and we have started out the capacity has come on board as we're able to get our manufacturing to respond. We've been bringing that down and we fully expect that it gets a little bit farther down in the March quarter, maybe closer to about 10, 11 weeks at the top end, and then gets down to between 4 and 8 weeks which is what we would consider to be normal on about 90% of our standard line items by the June quarter, right about on the same timeline we established about a couple of quarters ago.

So picking up on the soft landing scenario, I think I would say we've pretty much demonstrated it. We're on the tail end of it. So March quarter is right at seasonality combining Atmel and Microchip together. And if June quarter grows from here, June, September are stronger quarters, then we kind of just right went through soft landing and getting back to kind of seasonality and March quarter is up 9% year-over-year. And right in the upper end of that range that we had given you and over time it gets into the middle maybe or something around that. I mean, we're not minus 10%, we're not correcting like some of the people thought we will.

Okay. Thank you. Just as a follow-up on the analog business and some of your comments on that. And I think I understand what you're saying that there's growth in analog within the microcontroller market which is affecting what gets classified in the analog segment, but what does that mean going – well, I guess two questions. One is why are we seeing that now in that – are there particular product cycle transitions happening which would cause that to show up in the numbers now? And then what does that mean for the analog business going forward? Should we expect some flattening of the growth on the analog business over the next several quarters as that trend plays out?

So the transition we're going through is some of our analog business was connectivity business when it either got originally created or if it came to us from an acquisition, was largely all analog in its functionality and therefore classified as analog. As time went on, if you look at a customer's system, we then begin to see what are the other functions that are on that customer's system. And often there are microcontrollers that are there to be able to take advantage of that analog. What we did some time back was create a new set of products which effectively combined the microcontroller and the analog into a single product. And as we go win new designs – and by the way, sometimes that microcontroller was ours, in other cases the microcontroller was somebody else's. But when you take a complete solution, which is a single chip which has the microcontroller and the analog, particularly in some of these smart connectivity solutions and there's a fair amount of software that we provide, the combined solution is a far more defensible, far higher margin, and far more sticky business that we have. So it creates the right answer and we don't think ahead of time should we create products that fall into analog or fall into microcontroller. We're doing what we think we need to do to be able to grow, protect and have high profitability on the products we have. So that's one part of the headwind you're seeing, so to speak, by classifying it as microcontroller versus analog. But the other side of the tailwind that is coming, and I think we will see it progress along is the standard analog products that we've had, as they get attached around our microcontroller, our new designs as we have talked about the total system solution and the whole Microchip 2.0 approach of going to market. The remaining analog products will, over time, get back some of that tailwind and have that growth. And there's a bit of crosscurrents between some of the analog that is moving to microcontroller for the right reasons, and the new analog designs that will come in and give us growth. But in the long run, we fully expect that analog will be a part of the growth story for Microchip.

By the way, if a pure analog company adds a microcontroller core to another complex product to improve performance or programmability or for any other reason, they would still call it an analog product. If the exact same product existed in Maxim or Linear or Intercell or – they'll call it an analog product. But same product, if it has a microcontroller core, we put it in microcontrollers, so it's a classification difference. It doesn't change the value proposition. At the end, we have a better total solution for the customer, more sticky socket, higher ASP, higher margins, and overall growing the revenue.

Sure. But just to be clear then, with that trend and the microcontroller growth on a year-on-year basis already up, as we model your analog business going forward, that trend should persist until, I guess, you said, you see that attach rate from the analog components start to rise. Is that the correct interpretation?

It's certainly, as Ganesh described, it has some headwind because of that. Because of that classification, it puts a little tailwind on the microcontroller, a little headwind on the analog. How it will manifest itself longer-term next quarter or the quarter after and all that, we don't really yet know. It's a new phenomenon. I mean, we manage the company in an overall growth and we don't really care where you put it.

All right. That's fair. Thank you.

Yes. Good afternoon and thanks for taking the questions. First question relates to Atmel. The company did a fantastic job of improving the margin structure of Atmel and I had thought that maybe some of that margin improvement was adjusting which end markets are being targeted with the historical Atmel products, maybe more towards automotive and industrial. Can you just talk about to what extent that was a factor or is consumer still a pretty big part of the mix? And I asked just to better understand the comment around the Atmel seasonality in March versus the historical rates.

Well, I mean, we have had Atmel for seven quarters. That's usually the – six quarters plus is the lead time to get a new product in production. So if you talk a lot of this improvement has come from because we largely changed the flavor of which markets the products were sold, I think you miscalculated there. What we had said was Atmel had a focus on – what terminology we used, home runs, Eric?

Yeah. Swinging for the fences.

Yeah. Swinging for the fences. We had a focus on large account in the consumer segment, swinging for the fences and some you win, some you lose, and gross margins are lower and all that. So we very largely changed the focus on where the future retention is. And true, it's automotive, it's industrial, in other areas and less on the consumer accounts. But it didn't change the existing flavor of those parts in the last several quarters till those designs were obsolete and the new designs we are focused on come to fruition. So a large majority of the margin structure change has come from improvement of pricing, disciplined pricing, dramatic cost reduction in the fab, assembly test, bringing a lot of those parts inside, reducing a large portion of the expenses, just doing the whole job overall better and rationalizing R&D, rationalizing manufacturing. But you cannot change the flavor of the business regarding what segments of business is in seven quarters. You barely touch it in seven quarters.

Got it. That's helpful. And then for a follow-up on capital allocation, the company had talked in previous quarters about potentially engaging in M&A now that the balance sheet has been improved. I'm curious for an update on how Microchip is thinking about that at this point, especially with the increased flexibility in your cash post the U.S. tax reform?

We are really not thinking any differently. Post U.S. tax reform, the cash becomes easily movable from offshore that really was not easily movable before because it was permanently invested offshore. But our priorities have not changed. We continue to believe our priorities are investing in M&A first, dividend second, and our stock buyback only opportunistically. So those have not changed.

Thank you.

Hey. Thanks, Steve. Just to talk about, I guess, the soft landing that we're all trying to engineer here. Can you give us a little more color on like specifically what would be the combined typical June seasonality for Microchip plus Atmel? And then could we be above or below that? I mean, I guess, how can we be sure that we've, I guess, landed yet in terms of the soft landing?

So I don't have the number for June quarter. It's a good question. We should have thought about it. I don't have it off the cuff. But you have seen strong June quarters for the last two years, you've seen strong September quarters for the last two years, and then you have seen stronger than historical December quarters. March quarter is right at seasonality. So it's really – that's what I'm seeing where it has landed. Therefore, the June quarter is below seasonal. If that's your concern, we think the June quarter should be pretty good, June quarter should be strong.

Yeah, guys. Thanks for squeezing me in. Steve, congratulations on the solid results, especially on the operating margin. Steve, one of the questions I had, over the last several months as you talked about sort of the soft landing scenario, you kind of alluded to the potential that you could keep every quarter this calendar year in that sort of high-single digit long-term revenue growth target. Is that still kind of the way you see this calendar year playing out? And I guess secondly, if it is, do you get there on just seasonal growth sequentially or will it take some above seasonal quarters?

John, I don't know, I think this March quarter Atmel seasonality last year kind of threw everybody off, I would say including us. And as we really dove into it and looked at our backlog and look at the business and then analyzed prior five years of Atmel business and the behavior of these large swinging for the fences accounts and design wins, the last year's performance kind of threw it off and those accounts still had a problem last year. But it was kind of overcome by the general halo of price increases and a lot of under-marketing of AVRs and all that that Atmel had done and where we improved the position, stronger distribution, and things like that. So the number of things last year kind of threw it off, and I guess all of us together somehow didn't quite capture the blended March seasonality. So that's what we are adjusting to. So give us a little time to get our feet back on the earth and really see what effect it has on the rest of the quarter. I mean, economy is not bad, bookings are not bad, the business is not bad. We're getting strong turns, our inventory is right. We're not in a massive inventory correction mode of any kind. There's really no problem in business. We're doing well. And when you do the calculation like we have shared, we are right on target. But obviously...

That's helpful. And, Steve...

Go ahead.

Well, just anecdotally, for me one of the things that's always important as we kind of orchestrate the soft landing as book-to-bill and lead times come in, are you seeing any sort of unusually high cancelation patterns or different order patterns from your customers, or are they responding to your ability to meet demands in an orderly fashion?

Yeah. So they're just responding to us shipping into a more orderly fashion. If you recall, last March to last June, the bookings were not any stronger, the book-to-bill was exactly the same because we informed the customers of lead time, they responded with higher orders out in time to respond to their lead time. And as the lead times have come in, then customers that are adjusting to their lower lead time and don't have to place outer bookings which is then lowering the book-to-bill ratio, and now it's at parity and it's moderating so customers are essentially giving us as many bookings as they need and don't have to give huge bookings out in time. This is almost perfect landing, I think, so far. The only difference, I think, street had higher expectations for March looking at March seasonality last year which was kind of typical Microchip, and basically there were lots of other factors in the business, pricing and others which match that seasonality. And this year, December to March, we can't.

Okay. That's very helpful. Thank you, Steve.

And obviously, result is some of the other quarters have to be stronger and I think they will be and hopefully they will be. Certainly, last year they were/ March, June, September, December, they were all stronger, and this year should be the same. Next couple of quarters should be stronger because of that March seasonality.

Thanks for squeezing me in. Hey, Steve, can you give us a rundown on the competitive dynamic in 8-bit, 16-bit and 32-bit? Have things changed over the past several years and so on? Thanks.

The number of competitors continues to be reasonably – a reasonable number of good strong competitors. We have continued to move up that ranking and so we have been gaining share in all of these product lines, including the overall microcontrollers as well. Some of these competitors have had various challenges relative to either their capacity. In some cases they're being acquired or not, so there have been those kind of things that are taking place there. But microcontrollers remains a competitive product line, a competitive market and I think that more rational actors today than they were perhaps five years ago. And they are responding, in some cases more so, or in some cases less so to the consolidation that's taking place, and that certainly helps as well. So nothing dramatic to report that is different about our competitive dynamics in microcontrollers.

I mean our Microcontrollers – I'm sorry... Microcontrollers business is up, I think almost, 19% last year. It was higher than Microchip's growth and higher than the industry growth in that segment. Based on FIA numbers, we gained share in all three 8-bit, 16-bit, and 32-bit, and I shared with you the overall share gain by 90 bps almost. So I think things are good.

And Ganesh as a...

Microcontrollers. I'm sorry, wait, wait.

I just want to say...

No. I was saying that back in the 8-bit and the 16-bit side, we are seeing the ASPs that are lower, less competitive companies having some issues, and the better sales position has made strength to Customers who rely on the superior technology, service, and reliability

Okay, good. Thank you very much.

You're welcome.

Well, thank you, everybody, for joining our conference call and we'll see some of you on the road at the various conferences we might go to. Thank you very much. Bye-bye.