Ladies and gentlemen, thank you for standing by, and welcome to the Microchip's Q4 and fiscal year 20 financial results conference call. At this time, all participants And please be advised that today's conference is being recorded. Now I would like to hand the conference over to your speaker today, Mr. Eric Braunhold, Microchip Financial Officer. Sir, please go ahead.
Thank you, and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward looking statements regarding future events for 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 releases 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 Sangey, Microchip's Chairman and CEO and Ganesh Moorthy, Microchip's President and COO.
I will comment on our fourth quarter and full fiscal year 2020 financial performance and Stephen 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. We are including information in our press release and 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 our GAAP and non GAAP results. We had also posted a summary of our outstanding debt and leverage metrics on our website.
I will now go through some of the operating results, including net sales, gross margin and operating expenses. Other than net sales, I will be referring to these results on a non GAAP basis, which is based on expenses prior to the effects of acquisition activities, share based compensation and certain other adjustments as described in our press release. Net sales in the March quarter were $1,326,000,000, which was up 3% sequentially and above our revised guidance for March 2, 2020, when net sales were expected to be about flat sequentially. We have posted a summary of our GAAP net sales as well as end market demand by product line and geography on our website for your reference. On a non GAAP basis, gross margins were strong at 62%.
Operating expenses were at 25.4%, and operating income was 36.6% compared to 35.1% in the previous quarter. Non GAAP net income was $375,500,000. Non GAAP earnings per share was $1.46 which was up significantly from $1.32 produced in the prior quarter. On a GAAP basis, on the March quarter, gross margins were 61.4%, and include the impact of $5,100,000 of share based compensation and $3,300,000 of COVID-nineteen shelter in place restrictions on manufacturing activities, Total operating expenses were $653,200,000 and include acquisition intangible amortization of $248,500,000 special charges of $17,200,000, $15,300,000 of acquisition related and other costs, and share based compensation of $35,600,000 The GAAP net income was $99,900,000 or $0.39 per diluted share. Our March quarter GAAP tax benefit was impacted by a variety of factors, including tax reserve releases associated with the statute of limitations expiring, deferred tax adjustments related to intercompany movement of intellectual property, tax reserve releases associated with tax audits and other matters.
For fiscal year 2020, net sales were $5,270,000,000 On a non GAAP basis, gross margins were a record 61.9%. Operating expenses were 25.7% of sales, operating income was 36.2 percent of sales. Non GAAP net income was 1,440,000,000, and EPS was $5.62 per diluted share. On a GAAP basis, gross margins were 61.5%, Operating expenses were 49.2 percent of sales and operating income was 12.3 percent of sales. Net income was $570,600,000 and was $2.23 per diluted share.
The non GAAP cash and 6.3% for fiscal year 2020. We expect our non GAAP cash tax rate for fiscal 2021 to be between 6% 7% Exclusive of the transition tax, any potential tax associated with the restructuring with the Microsemi operations in the Microchip's global structure, and adding tax audit settlements related to taxes accrued in prior fiscal years. We have many tax attributes and net operating losses, and tax credits as well as U. S. Interest deductions that we believe will keep our cash tax payments low.
The future cash tax payments associated with the with the transition tax are expected to be about $245,000,000 and will be paid over the next 6 years. We posted a schedule of these projected transition tax payments on the IR page of our website. Our inventory balance at March 31, 2020 was $685,700,000, We had 122 days of inventory at the end of the March quarter, down 7 days from the prior quarter's level. Inventory at our distributors in the March quarter were at 29 days compared to 28 days at the end of December. We believe distribution inventory levels for Microchip are still quite low compared to historical averages.
In the March quarter, we exchanged cash and shares of our common stock to retire the $615,000,000 of principal plus accrued interest of our 20 25 convertible senior subordinated notes. The cash used to pay the principal on this exchange was funded by a 3 64 day bridge phone. This exchange will significantly reduce share count dilution to the extent Microchip stock price appreciates in the future. During the quarter, we also amended our credit facility. As disclosed in our March 21, 2020 press release, the total leverage and senior leverage covenants were favorably modified as part of the amendment, giving Microchip greater financial flexibility.
The cash flow from operating activities was $371,700,000 in the March quarter. As of March 31, the consolidated cash and total investment position was $403,000,000. We paid down $236,000,000 of total debt in the March quarter. Over the last seven full quarters since we closed the Microsemi acquisition and incurred over $8,000,000,000 in debt to do so, we have paid down $2,222,000,000 of debt and continue to allocate substantially all of our excess cash beyond dividends to aggressively bring down the debt. We have accomplished this despite the adverse macro and market conditions during most of this period, which we feel is testimony to the cash generation capabilities of our businesses, as well as our ongoing operating discipline.
We continue to expect our debt levels to reduce significantly over the next several years. Our adjusted EBITDA in the March quarter was $548,100,000 and our trailing 12 month adjusted EBITDA was 2.129000000000. Our net debt to adjusted EBITDA excluding our very long dated convertible debt that matures in 2037 and is more equity like in nature, was 4.46 at March 31, 2020. And our dividend payment into March quarter was $88,000,000. Capital expenditures were $11,900,000 in the March quarter, and $67,600,000 for fiscal year 2020.
We expect between $12,000,000 $18,000,000 in capital spending in the June quarter, and overall capital expenditures for fiscal 2021 to be between $50,000,000 $70,000,000. We continue to add capital to maintain and operate our internal manufacturing operations, support the production capabilities for as well as to selectively bring in house some of the assembly and test operations that are currently outsourced. We expect these capital investments will bring some gross margin improvement to our business particularly for the outsourced atmel and Microsemi manufacturing activities that we are bringing into our own factories. Depreciation expense in the March quarter was $41,800,000. I will now turn it over to Ganesh to give his comments on the performance of the business in the March quarter.
Ganesh?
Thank you, Eric, and good afternoon, everyone. Let's start by taking a closer look at microcontroller. On a GAAP basis, our microcontroller revenue was sequentially up 5.9% as compared to the December quarter. From an end market demand standpoint, our microcontroller business was sequentially up 2.9%. From an end market standpoint, 32 bit microcontrollers in the March quarter represented an all time record of just over $340,000,000.
Or 47% of our microcontroller demand. We continue to introduce a steady stream of innovative new microcontrollers including a new cryptography enabled 32 bit microcontroller designed to stop malware for systems that boot from external flash memory. As well as a new high end 8 step microcontroller product family for improved designs in real time control and connected applications. Michael Controllers overall represented 55.2 percent of our end market demand in the March quarter. Last month, Gartner released their microcontroller market share report for 2019.
We are pleased to report that Microchip retained number one position for APAC microcontrollers. Once again, we gained market share as we grew faster than the overall APAC microcontroller market, In fact, we are now almost twice as big as a number 2 player. In the 16 bit microcontroller market, We remained at the number 5 position and continue to gain market share as we grew faster than the overall 16 bit microcontroller market. In the 32 bit microcontroller market, we remained in the number 6 position for the Gartner report and gained significant market share again as we grew faster than the overall 32 bit microcontroller market. These results are despite Gartner rolling up our 32 bit microcontroller revenue to be about $400,000,000 lower than the $1,200,000,000 results we actually achieved in 2019.
Had Gartner used our actual calendar year 2019 32th microcontroller results, we would have achieved the number 4 ranking And as I shared with you earlier, our 32th of Microcontroller business in the March quarter ran at approximately 1,360,000,000 annualized run rate based on end market demand. For microcontroller overall, we remain in the number 3 position despite Gartner rolling up our revenue to be about $400,000,000 lower than our publicly reported results for calendar year 2019. Using our publicly reported results, we would be approximately 7.5% away from the number 2 player and 16.5% away from the number one player ahead of us as we continue to relentlessly march towards number one spot. Our microcontroller portfolio and roadmap have never been stronger. We believe we have the new product momentum and customer engagement to continue to gain even more share in 2020 as we further build the best performing microcontroller franchise in the industry.
Now moving to analog, On a GAAP basis, our analog revenue was sequentially up 1.1% as compared to the December quarter. From an end market standpoint, our analog business was sequentially down 1.8%. During the quarter, we continued to introduce a steady stream of innovative analog products, including the industry's first space qualified radiation tolerant Ethernet transceiver, as well as an expanded silicon carbide family of power electronics to provide system level improvements in efficiency, size and reliability. 700 volt, 1200 volt and 17 100 volt power modules. Analog represented 27.6% of our end market in the March quarter.
As compared to the December quarter. From an end market demand standpoint, our FPGA business was sequentially up 1% FPGA represented 7% of our end market demand in the March quarter. Our licensing, memory and other product lines which we'd refer to as Elan Mall was sequentially down 10.7% as compared to the December quarter from an end market demand perspective. During the quarter, we introduced a new miniaturized Rubidium at atomic clock, the industry's highest performance atomic clock, for size and power. LMO represented 10.1% of our end market demand in the March quarter.
An update regarding coronavirus and its impact on our operations. Regrettably, we have had 9 employees who tested positive for the virus. With over 18,000 employees worldwide, this was inevitable, but thankfully, they're all recovering nicely or have already recovered. Most of our non factory employee base is working from home as we rapidly transformed business processes to run remotely Our global teams have been highly engaged, collaborative, and productive under the circumstances, resulting in enhanced customer engagement on new designs and high effectiveness in our product development programs. We would like to thank our worldwide team for rapidly adapting the changing conditions and making the best of what was possible under difficult circumstances to continue delivering results.
Our manufacturing operations had varying degrees of constraints last quarter, as what started with China shutting down for several weeks, expanded to many other locations that shut down the full notice. Our operations team, notably adjusted to constraints as they emerged, and implemented our contingency plans where needed to ensure that we continue to serve customers' customer needs despite the challenges In most of our manufacturing locations, we were able to get essential services designation as our products are quite ubiquitous in medical, work from home, defense and communication infrastructure applications. Our Philippines operations had the largest impact with restriction on people movement being so strict that we have had a large number of our dedicated employees living in our two factories there since mid March. To support production and customer shipments. Our global teams also successfully worked through a myriad of ground and air logistics issues throughout the quarter as conditions change regionally over time.
Our customers and our supply chain partners also endured constraints with their factories and logistics that made the March quarter challenging. We are appreciative of our global team who engaged and work through a rolling step of customer and supplier challenges even as we work with challenges and constraints that were placed on our own factories. Pandemix are inherently unpredictable. And NABF, other twists and turns to come in the days ahead. We continue to process the news daily, as well as monitor information from the Center for Disease Control and the World Health Organization, and we will adapt our response as needed and focus on the things that we can't control.
Given the current market uncertainties, we are providing some qualitative insight into our principal end markets. The areas of strength we see are data center, driven by continued strength from the exponential rate at which data is being created and the consequent seemingly insatiable demand for data storage. For computers, printers, monitors, and other accessories enabled by the increased shift to working from home. For medical devices, COVID-nineteen related items like ventilators, respirators, oxygen monitors and ultrasound machines, but also a host of other hospital equipment needed for increased patient loads. For contact free, consumer and industrial products like hands free dispensers for soap water, paper and sanitizers for infrared thermometers, as well as barcode readers for retail shopping, all in an attempt to prevent the spread of COVID-nineteen.
And then for communication infrastructure, in part because of work from home related network loading changes, but also in part due to stimulus investments in infrastructure, especially in China. The areas of weakness we see from an end market perspective are automotive, broad based industrial, consumer and home appliances, and, aviation or aerospace. Our defense and space business remains relatively even key. Let me now pass it to Steve for some comments about our business. And our guidance going forward.
Steve?
Thank you, Ganesh and good afternoon, everyone. Today, I would like to first reflect on the results of the fiscal fourth quarter of 2020 and the whole fiscal year 2020. I will then provide guidance for the fiscal as the effects of COVID-nineteen pandemic unfolded in many dimensions. I am proud of how rapidly the Microchip team adapted to the new constraints we faced so that our employees would be safe. Our customers will be well served and our partners engaged to ensure mutual success despite the challenges we faced.
Despite the COVID 19 pandemic challenges, we delivered 3% sequential net sales growth as compared to our early March updated guidance, which was for net sales to be about flat. Our final March quarter GAAP net sales came in at $1,326,000,000, up 3% sequentially and down just 0.3% from a year ago March quarter. Our end market demand based on sell through was approximately $3,800,000 lower than GAAP sales after 7 quarters of end market demand being higher than sell in based net sales. March quarter was nearly even for end market demand versus selling net sales. We also delivered outstanding non GAAP gross margin of 62% just above the high end of our original guidance from February 4, 2020, and non GAAP operating margin of 36.6 percent near the high end of our original guidance.
And we did all that while reducing our days of inventory from 129 days 1 100 22 days. Our consolidated non GAAP EPS was $1.46. We did not provide EPS guidance when we revised our net sales guidance on March 2020. Our original non GAAP EPS guidance provided with earnings release on February 4, 2020, was $1.35 to $1.51 with a midpoint of one $0.43 and we beat that original 18 consecutive profitable quarter. In the March quarter, we paid down $236,000,000 of our debt, Our total debt payment since the end of June 2018 has been about $2,220,000,000 The pace of debt payments has been strong despite the weak and uncertain business conditions, underlying the strong cash generation characteristics of our business as well as our active efforts to continue to squeeze working capital efficiency.
On a full fiscal year 2020 basis, our net sales were $5,274,000,000, down 1.4% over fiscal year 2019. Now I will discuss our guidance for the June quarter. Ganesh in his prepared remarks discuss the impact we are seeing on our supply chain, as well as our customers. Ganesh also described the end market where we are seeing strength and those where we are seeing either current or expected weakness. Our March quarter bookings were up double digit percentage over the December quarter bookings.
The book to bill ratio for March quarter was very strong at 1.17. That resulted in our starting backlog for June quarter to be strong compared to the starting backlog for the March quarter. In our April 8 2020 press release, we said that we believe that the strength in bookings may be a result of customer concerns about supply chain disruptions due to COVID 19 virus. With economies around the world contracting rapidly, with millions of people getting laid off and with customer factory closures due to shelter in place ordinances in various countries, We believe that product demand is likely to weaken significantly. With another month under our belt now We have seen some of the customer order push outs and cancellations.
Our backlog for the June quarter compared to the backlog from March quarter at the same point in time has now deteriorated somewhat in the last month. We believe the backlog position compared to March quarter will continue to deteriorate due to the combined effects of supply chain disruptions, customer factory closures and demand destruction. Taking all these factors into consideration, we expect our net sales for June quarter to be down 2% to 10% sequentially. The guidance ranges to help account for the uncertainty associated with the evolving coronavirus situation. We have no way to model how the rest of the quarter will play out for the coronavirus situation and what the consequent business impact may be.
But we believe that our guidance range incorporates our best judgment for the possible scenarios. We have prepared the company for and are adjusting the factories by reduced work hours for rotating time offs. We have also frozen all business travel and cut discretionary expenses. Regarding CapEx, we finished fiscal year 2020 with a CapEx of $67,600,000, a significant reduction from fiscal year 2019 CapEx of $229,000,000. This is consistent with what we have said before that our CapEx is divided between growth capital, maintenance capital, and new products on technology capital.
In a fiscal year like 2020, in which our net sales declined the growth capital, which is the largest portion of CapEx, declines to virtually nothing. And therefore, the total CapEx declined significantly. We expect CapEx for fiscal year 'twenty one to remain low in the range of $50,000,000 to $70,000,000. For June quarter, we expect our non GAAP gross margin to be between 60.4% 61.2% of sales, We expect non GAAP operating expenses to be between 24.4% 25.2% of sales We expect non GAAP operating profit to be between 35.2% and 36.8% of sale. And we expect our non GAAP earnings per share to be between $1.25 per share to $1.45 per share.
We believe that despite strength and diversity of the businesses and end markets we are in to achieve long term growth in excess of the average semiconductor market growth. Given all the complications of accounting for our acquisitions, including amortization of intangibles, restructuring charges on inventory write up on acquisitions. Microchip will continue to provide guidance and track its results on non GAAP basis, except for net sales, which will be on a 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 you.
Your Again, to ask a question, this
operator, you have no questions?
Yes. There are no further questions at this time. You may continue.
Yeah. I don't think that's possible. Let's, let's stay open here for a while. Our Investor Relations managers is indicating that we're having quite a few problems here. So let's hold and see if
we can get this solved because
I know there's questions to be asked. So I've been told we have 12 questions in queue. We just need to figure out how to get them, available for those questions can be asked.
Your first question is from the line of Chris Caso from Raymond James.
Yes, thank you. I appreciate that. Good afternoon. So I guess for the first question, Steve, if you could give us some thoughts about perhaps the magnitude of of the downturn that I guess we're all expecting. I realize that's a difficult question with what's going on with the backlog here.
But I guess comparing some of your competitors have compared what's what we're seeing now to the 2009 cycle. I'm not sure if that's the right way to look at it right now. But I guess Microchip is also a different company as compared to 2009. And what you're guiding to is not quite as bad as we put all that together, how are you thinking about things going forward?
So, so I think, you know, we really unable to speak about anybody else's business, but our own you mentioned some other companies. I believe all companies have a different end market and customer exposure we have been building this franchise for many years now to organic efforts as well as acquisitions and have compiled a very large number of very, very good assets and then deployed a program called TSS total system solutions that we have discussed with you in which we are garnering larger and larger share of the customer's board with our product. So the outperformance that you may be seeing from us in business today is really nothing to do with what we have done today or last year. It's been a result of really many years of effort in new products organically as well as through acquisitions. And our customer support activities, our distributor relationships and everything else over the past several years.
Don't know if that helps you.
I guess perhaps you could take us through what you've seen in the order rates and you put through some of that in your in your prepared remarks about what you've been seeing since March. I guess what's interesting now is that the customers came in, the channel lease came into this crisis with very low inventory levels. And that's, I guess, unusual in a downturn industry. How does that affect things going forward and what sort of visibility do you have on what customers may be doing with the inventory levels here?
So, you know, this is a very unique cycle. You know, we have, this is a first time ever, we are experiencing a demand shock and a supply shock. We have seen demand shocks before like 2008, 2009 cycle you mentioned. We also saw a major demand shock during the 2001 tech bust. And I think we saw a little mini demand shock really even during SARS in 2004 or 3 or whenever it was.
And we have seen some supply shocks in the industry. The 2 that I remember are One was during tsunami in Japan and Southeast Asia with a number of factories, were closed down or shut down and there was a major demand shock. And the other demand shock I recall was during the major floods in Thailand a few years ago, where many of our, you know, peers factories were underwater Microsoft factory was okay though. So we are seeing really, really either a supply shark or a demand shark. This is the first time ever in my 40 years of experience that I'm seeing in simultaneous demand shock and supply shock.
And the supply shark is driven by, you know, just various, shelter in place to ordinances and Dinesh talked about it extensively, Philippines being the worst and Malaysia being the second, where we couldn't get our workers into the factory. And In some cases, our workers are living in the factory because if they leave, they will not be able to come back. And a number of our product lines, that ran in those factories, produced a limited output because the whole workforce wasn't working. So that resulted into a supply shortage and a supply shock and some of the lead times went out and that kind of drove some of the demand further from customers and distributors. And on the demand side of it, our customers' factory shutdown the worst being in the automotive business where I think, you know, you guys keep track of SAAR data.
And if you look at the SAAR data, you'll find that Europe has been the worst and U. S. 2nd, a lot of factories were shut down in Asia also, but those factories are coming back in automotive. So the automotive business is going through just a gut wrenching Ganeshock And Industrial Simber. And, while on the other hand, like, you look at a market like data centers where demand charges in the upward direction with all the data and work from home ordinances, that demand has gone up.
And the other area, which is really quite sleepy for us in general, I don't think it's a very large percentage of our business is medical. We mailed that into index the medical is really with contact in industrial, but a month and a half ago, I wouldn't know what what a ventilator was. And now we found that all the ventilator designs around the world everyone is using our products and the demand has gone up 100 XL, if not more. The hospital will have 2 to 3 ventilators only emergency purposes. And now a single hospital is requiring 1000 to 2000 ventilators.
So that demand has gone up 50x to 100x same thing on digital thermometers to automatic soap dispensers and bathroom products that will you put your hand under? The soap falls down. They all use microcontrollers or sensors or many of our products. So that's kind of really the end market feel. So in, in certain markets, demand is very strong.
Other market demand is very weak. In some cases, the impact is because of supply chain disruption. In other cases, the impact is because of stronger demand. So I think, how do you make sense with all that? We started June quarter with a fairly strong backlog.
And our backlog for June quarter is still higher than our backlog was for the March quarter at the same point in time. But it has deteriorated significantly compared to where it was on April 1. And at the rate we are seeing, customer adjustments, push outs and cancellation, where the customer may have ordered more products, really shows us that the deterioration in backlog in June compared to March will continue. Know how much we lost in 1 month. We got 2 more months to go.
And putting all that into the equation really Our crystal ball tells us a midpoint of minus 6 and a range of minus 2 to minus 10. Sorry for the long answer, but I think it's kind of the question is earlier.
I think that's the discussion we're looking for. Thank you.
Thank you. The next question comes from the line of Ambrish Srivastava Sir, your line is open.
Hi, thank you very much, Steve. Lots of details there. Can you focus on the gross margin and just help us understand the dynamics. It's more than hanging in despite you actually drawing down lowering inventory on your balance sheet. And disney inventory didn't really go up by that, but so just kind of help us understand the factors.
This seems to be a structural change and Chris asked the question about the difference between Microchip from 10 years ago and all of us have been following you for a while. But just talk through the structural changes. And then you mentioned that with some manufacturing, the CapEx, which enable you to bring more microsemi and atmelindor and that will have some positive. And this is obviously a longer term kind of question that I'm asking. Thank you.
So let me ask, Eric, the on hold to answer that question and I'll add something that's needed at the end. Go ahead, Eric.
Okay. So I mean, gross margins held up extremely well in the March quarter and we posted 62% non GAAP gross margins, which were really outstanding. As you know, we've been running our factories at less than optimal levels and we reported underutilization charge in the quarter of about $14,000,000. That was actually $3,000,000 better than the prior quarter as we were running our assembly and test factories harder we have in the previous quarters when we were draining finished goods. So the strong gross margins are really driven by a variety of factors.
Including a favorable product mix and then just ongoing cost reduction and cost containment activities in our factories. So the current quarter, we're guiding the gross margins to be down, at 60.8% at the midpoint, and we expect higher underutilization charges in June compared to March due to some of the rotating time off that we're going to be doing in the factories and just lower production outputs. We believe we're really well positioned for the long term for gross margin improvement in the future as we grow back into our factory capacity. So we're there's a number of things that influence that other than the factory capacity. We've been also doing a good job of really holding average selling prices flat.
Our customers and that has long term gross margin benefits also. So that's the general summary there. Steve, what would you like to add?
No, I think that's Good. So we, let me add a couple of sentences. I think we started this down cycle with probably the lowest inventory we had. You know, 1 22 days at the end of March. I, I recall prior down cycles will be started with fairly high inventory.
And so I think, you know, it's such a low inventory, and we're keeping it low by factory, rotating time offs and others. So I think when we get on the other side of it and start ramping our factories back up, And we're starting with the gross margin in the 60s. I think we'll be very, very well positioned longer term for a very good record gross margin.
Okay. Thank
you. 2nd piece of Ambras question related to, CapEx. And, we will still focus longer term on bringing some more assembly and test in house. But we're we've really locked down capital pretty significantly, see what our forecast is fiscal 2021 of between $50,000,000 $70,000,000. So where there's benefits to be gained, we'll evaluate those, but we're being pretty conservative in our in terms of making
Thank you. I exceeded the fluoropharma other fellow sales head guys.
The next question comes from the line of Gary Mobley from Wells Fargo Securities. Sir, your line is open.
Hey guys, thanks for taking my questions. In the interest of time, I'll post both my questions now. Steve, I'd be interested to get your opinion on the recent export recent change in export control rules in the impact this may have on the owner's process of applying for licenses to shift China customers or any sort of limitations on that? And then I'm asking this question really on behalf of many different people, but I'm interested to get your perspective on how safe your dividend is? Thank you.
Sure. So, I'll pass on to Denise to answer the question about export control and then I'll come back and answer the question on the dividend. So after the
recent announcement that was made, we're still sorting through what the commerce department's rules are The specific item that we are paying attention to is, the possible military use of products and how we can provide confirmation that it is not going into those applications. We think it's fairly straightforward to be able to do it. We have time until the 29th June to be able to implement it. But at this point in time, we do not expect that it has an issue in terms of Microchip's business?
So regarding the dividend, your question about how safe is the dividend, dividend is very, very safe. We were, we were one company that did not cut our dividend back in 2009 when, from peak to bottom, our revenue went down almost 36%. Today, we are so much more profitable on gross and operating margin level We have done a stress test on our business. You can't find a number low enough. You know, you could lose a very, very large amount of sales and still companies still is cash flow positive.
Plus we got $1,200,000,000 of money remaining on line of credit. So I think, really, we are unable to model a scenario, a reasonable scenario where the dividend would be addressed And if we felt that the dividend was at risk, we certainly would not be increasing the dividend, which we are a little bit every quarter.
All right. Thank you guys.
The next question comes from the line of Craig Hettenbach from Morgan Stanley. Sir, your line is open.
Yes, thank you. A question for Steve, just on kind of the the downturn playbook. And so that the employee cost cuts pay reductions and CapEx, you've done this in prior cycles, as you mentioned, this is a very different cycle. So just trying to gauge how you're thinking about the depth of this cycle and some of the things you're doing to protect margins as it plays out?
So I think, we learn a little bit through every cycle and one of our goal is to never let a cycle go to waste. What happened in 20 2009 was, the cycle really hit in early part of October of 2008. And the business was down very substantially in that December quarter and down a lot more even in the March quarter. And we didn't, implement pay cuts and all that till we were well into the cycle where the storm was already there. And and we were being better, just verbally.
So this time, what we have done is, understanding that with 33,000,000 people, I think, already lost jobs in the U. S. Alone and I don't know how many around the world these people are not going to be buying cars and refrigerators and other stuff that really would have a product So this time, we buried down the hatches and boarded up the windows ahead of time before the storm really hit. So we finished the March quarter, actually, sequentially, up 3%. And we implemented the pay cut starting in 2020.
And at that time, our business really hasn't even weakened, where our June quarter was still backlog higher than the March quarter backlog, at the same point in time. So what we have really done is really out of abundance of caution, just thinking that this term internally at Microchip, we have described that to be a category storm waiting in the wing, where, you know, category 5 is the highest category, because we have never seen this before, simultaneous demand in supply shock, a pandemic and no place to hide and 33,000,000 people laid off in 5 weeks in U. S. Alone. So we have prepared the company, with a, with a cost structure and the June guidance we have given you has the paycheck pay cuts for June quarter dialed in, but not for the whole quarter because we started in the middle of the quarter.
And September expenses will be down even slightly further from that. So we essentially have positioned it for a any extreme case that may materialize. It's a lot easy to give the money back, undo the, undo the cuts on the salary change them from x percent to y percent lower than it's much easier to do that, than truly have spent all the money and then really fight the storm and you're out of supply or out of ammunition. So that's really how we're looking at it. We're looking at it as we don't know.
I don't think anybody knows. Anybody says he knows their line. They don't. So what we have done is really out of abundance of caution prepared the company for the worst case analysis. And we'll give the money back, if we didn't need it.
Helpful color. Thank you. Just as a follow-up on the push outs and cancellations, is it pretty broad based? Are there any certain product that are you're seeing it more than others?
It's not by product. It is more by end market. The worst is automotive. The Second would be industrial and general consumer like appliances and all that. And I think Ganesh described all those area.
Where the strength is, the, the strongest area is, data center. I would think the next is really 5G related work from home related PCs, printers, computers and all that. Medical is extremely strong. So those are the areas we're not seeing outs and cancellations, we're seeing those in the automotive and some general industrial.
Got it. Thank you.
The next question comes from sir from Credit Suisse. Sir, your line is open.
Yes, good afternoon guys. Thanks for letting me ask questions. Steve, you said in your prepared comments, that clearly the June backlog is deteriorating, but at least through the month of April, it would still suggest the potential sequential growth in the June quarter. So I'm just kind of curious when you think about the range of revenue you've given for June, what's the expectation as we go into May June, does the rate of deterioration in the backlog need to accelerate from here to kind of hit your midpoint or just kind of give us any sort of color you feel come with, with helping us understand kind of what you're embedding in further deterioration in the backlog from here?
Well, there isn't a way to model it. So there are 2 challenges, maybe 3. One is that the existing backlog further cancer that pushes out in the following quarter. Second is we still need turns to take. If there is zero cancellation from here on, but we get no more turns for the quarter, That's not a good scenario either.
Then, so that would be fairly soft too. And the third is the supply, depending on what products, the demand comes on, there are products where if you place an order today, you know, the easiest, earliest I can give you is July, August. And those are from the most constrained areas of factories that have had a 6 weeks for 6 weeks, they haven't been able to run full production. And now as they're coming back production, we are so far behind in delinquency. We'll leave the June quarter with a fairly large amount of product delinquent.
Same thing happened at the end of March quarter. So in a way, someday, when we catch up, all that product gets shipped, it's a good news. But for now, we're not going to be able to ship all the backlog in the June quarter. Neither will be able to ship that all in March quarter. In fact, if just the supply side shock had not happened and our factories were running for March quarter, we would have met or exceeded our regional guidance, which was about 5%, 5.5%.
We only did 3 And that was largely because we couldn't supply the product.
That's helpful, Steve. And then you also mentioned that some of the OpEx, controls that you put in place this quarter are not into the full quarter, so it will have a positive effect on OpEx declining again in September. I'm curious, are there more levers you can pull on OpEx? And should we take OpEx being down sequentially in September? As a sign that you feel like revenue might be down again in September as well?
So The only reason that the September, OpEx will be down below June would be because the pick up will be for the entire quarter. And, the pay cuts didn't kick in until June, June 20 in U. S. And probably may wonderful in some of the international geographies depending on the various international laws, but the September quarter, we get the full quarter. If your question is, what if you didn't need it?
I business as well, then you remodel it and you change the takeout from 10% to 6% or 5% or if you see growth, you make it 0. I mean, anything is possible. But I'm saying right now, in a stain prepared for a category 6 tone, we are structured to take the June quarter expenses below the March quarter because of the full quarter savings. And then December compared to September would be about the same. If you don't make any changes, and the pay cuts end at the end of December.
That's currently the case. We have announced to the employees that the pay cut ends at the end of December. So the March quarter OpEx will rise again and hopefully, we're well out of the woods from the cycle. If we're not, then we'll do something different.
Helpful. Thanks, Steve.
The next question comes from the line of Chris Danely from Citigroup. Sir, your line is open.
Hey, thanks, Steve. Can you just expand on I guess what percentage of your revenue is dealing with these supply issues? And are the supply issues sort of where as we speak? Or do you think you got a handle on them and they should get better as the quarter progresses?
Let me have Dennis comment on it? I don't think we have quantitative numbers where Ganesh can talk qualitatively.
Yes. So it's not our entire product right? So we build a lot of product in many countries, Thailand, Philippines, Malaysia, depending on if it's our factory or subcontractor factories. Our principal issues from a constrained standpoint were in the Philippines and in Malaysia. Malaysia at this point effectively has turned on 100%.
They don't have it running at 100%, but there are no restrictions. And they have a lot of staff that they can bring their direct label workforce, they will catch up as we go through the quarter. Philippines are still operating under restrictions. We have been able to improve from March to the June quarter by having more people residing in our factories. So this is, we've got 500, 600 employees living full time inside the factory to be able to get the utilization to be higher.
We expect that that will get turned those restrictions will come off as we go into the latter part of May, maybe in the middle of May, start off our control. And as that happens, we will have more output that come out of it. So I believe the constraints, manufacturing constraints are coming off and coming off rapidly, but there's catch up to what was left from when the constraints were there plus ongoing support that it had to come through.
Got it. Thanks Ganesh. And for my follow-up, so Steve, you kind of called this weakness after a little bit of strength. Last quarter. What does your spider sense tell you on how long this weakness could last?
I mean, do you think that some of these end markets that are very strong right now like data center? Could they start getting weaker in the second half of the year? Any guesses how long this weakness could last Good to last in the next quarter?
I don't currently expect data center to weaken. I think you know, 90% of the world data has been created in the last 2 years. And, you know, any company that's related to data center just got off the board of Melena. They've got finally the deal closed, bought by NVIDIA on April 27. And they announced the prior quarter, the March quarter just a couple of days before the deal closed.
There was a very, very strong quarter you're seeing it in the results of Navidea also. So I just think, data center market is very, very strong. And I think, how we are designed in our print position on the customer's board. So that one looks very, very good. I think as the automotive factories go back to work and people start buying cars again, that market is the most destroy today, and that market will show huge potential for getting back to normal and industrial will be the same way.
Okay. Thanks.
The next question comes from the line of Vivek Arya from Bank of America Securities. Go ahead. Your line is open.
Thanks for taking my question. I had 2 as well. Steve, when I look at your peak to trough sales declines from September last year to hopefully the trough in June or if I just take the midpoint of what you're guiding to in June or take the low end of that, it's a reduction of 7% to 11%. That's actually much better than what we have seen at some of your analog and microcontroller peers that are down almost 25% in that same period. So the question to you is what is helping you stay more resilient And I appreciate the visibility is not there, but if, let's say, those competitors start to come back in September, Is there anything that prevents Microchip sales to also rebound in September?
Yes. So I think I didn't get answered that question earlier that, we think what we're seeing is years worth of effort in building a stronger print position in customer's boards with Total Systems solutions and also acquiring product lines with synergy with our products and what we have gotten from mail and Microw and Microsemi with all the discrete product lines with various stuff that can go into similar mode as a microcontroller. And much stronger distributor relationships. I think, some others have been tweaking their distribution policies maybe to the detriment, maybe not in our time would tell, but I think we are seeing a stronger effect of our stronger distributor relationships. And, and, and the effect of end markets like we discussed.
So I don't really know why anybody else is doing better or worse than us. I'm sure there are other companies doing better than us and a lot of our more closer competitors are doing worse than us. So We're happy to be gaining share, but I don't know. We can totally allocate percentages how much is because of what reason.
See. And for my follow-up, gross margin, so you're guiding down, I think about 120 basis points or so. Down to 61%, I understand there are supply chain disruptions, etcetera. But the last time your gross margin were under or around the 61 ish percent or below levels, your revenues were 20% lower, right? They were closer to $1,000,000,000 or so over 2 years ago.
And at that time, you did not even have Microsemi, which has been accretive to margins since then. So I'm curious why this conservatism and gross margins? Is it utilization? Is there anything else, right? And then how should gross margin behave assuming that sales start to rebound in September?
Thank you.
Eddie, do you want to take that?
Sure. I'll take it. So the midpoint of our guidance this quarter is 60.8%. Our long term model is 63%. So quite honestly, I think the margins have held up extraordinarily well.
If you look at the fall we had in gross margins back in 2008, 2009, that margins went down significantly. Now we've got a little more balance between what we do internally versus what we do externally from a production standpoint. But the bottom line is with revenue being down, as you mentioned, said 7% to 11% from peak to trough. We have to run our factories at a lower level. And I think we've done a very good job of ensuring controlling inventory levels, ending this last quarter at 122 days.
That's a very good position to be on, with what's in front of us. So I think it just comes down to utilization of our factory footprint that we have. And as we drill back into it, we can be very cost effective.
It's just a trough though.
I think his question is, you know, revenue is so much higher than last time, our revenue was last time, my margin was this kind of number. So why is margin not higher? I think was it, I think that's your question. Going back over 2 years ago, it was a different company. I mean, we didn't have Microsemi, all of their factories around the world, the totally different cost structures.
Some of those factories have low demand. Some of those are okay. I mean, it's not a it's not the same company. Combined with Microsemi now, Microsemi was about between 40% to 50% of our revenue and company has totally changed.
The next question comes from the line of William Stein from SunTrust. Sir, please go ahead.
Great. Thanks for taking my question. I apologize if you answered this already. It seems clear you're expecting some further order cancels or push outs or downsizes.
So I
think we understand that, but when we think about the pace of cancellations, Have you commented on that yet? Is that starting to slow down where maybe the daily reduction in backlog is getting to a point where those changes are smaller and
don't know if I can definitely say that. I think, it's, end market by end market, and it's geography by geography. But, overall, it may have slowed down somewhat, but in some other geographies and in some other markets, it's continuing. So I don't think, if the cancellations were over and the push outs were over, revenue would be higher than March quarter. That's not what we're guiding, and that's not what we're thinking.
Okay. That helps. Next one, if I can, perhaps for Eric, but whoever wants to take it, if most semi companies in the past few months or past couple of months have taken to try to term out debt and sort of protect themselves on the balance sheet. Microchip's moves here have been a little bit more I don't know, it looks like opportunistic or aggressive you might characterize by pulling down the revolver to payoff part of the convert.
I'm wondering if you can walk us through what the thinking was that gave
the company the courage to do that in this environment.
Let me take that. So, you know, we we began the effort, to want to buy some of our convert back, when the stock hit about $60, you know, like, you know, low 60s And that was down from about a peak of 110. The amount of dilution we get from these converts when the stock goes from, let's say, $65 to $110 is so large because it has a hyper feature where you know, the stock at least had 1 a half times a rate for every $1 increase in stock price, and was just very, very dilutive. So when the stopped price because of the recession went down from 1.10 into low 60. We decided not to waste that recession.
Retire a portion of a convert, but to do so, we needed the money. And, you said we took the money out of the line of credit. We did We didn't take any money out of the line of credit. We, we first wanted to raise the money in the public market through a debt. But with extreme volatility, the debt markets closed for a period of time.
And so we went to the direction of getting a a 3 64 day bridge. So we got $615,000,000 of bridge at the very, very low interest rates, same interest rates as the line of credit. And with that, we bought $615,000,000 worth of face value convertible. And by the time we executed those convertible stock had already rebounded to about 70.71, where we average, where we bought them, and where the stock is now at 85.50, you could just imagine how much dilution we have saved that we would have incurred. So we think that was a, very, very opportunistic, good move and we didn't stress the credit line to do that.
We got a separate bridge. So it was a brand new money in separate bridge. That we have to pay out someday within a year.
Got it. I didn't maybe I didn't appreciate the distinction. Thank you.
I just would say I wish I was able to raise more money than I would have bought even more. But it was a very, very difficult time. There were companies, there was a run on the bank, people were drawing their credit lines completely and banks were under a lot of stress. And in that environment, I was able to raise $615,000,000 of new money. It sounded like a miracle at that time.
The next question comes from the line from Susquehanna.
Hey guys, thanks for the question. I guess first, maybe talk about cycle times and lead times Some of our data suggests that your lead times are up a little bit. I think you did talk about the Philippines, Malaysia, Maybe just talk about lead times from that perspective. I know they're low historically, but talk about where you are there with any increases. And then I guess balance that with inventory.
It looks like you're not increasing any inventory. So I guess you guys aren't super worried, but maybe talk about that lead time and the balance with inventory as well.
Ganesh, let me have you take a lead time question.
So lead times for most of our products remain relatively stable lead times in the factories that have been constrained by shelter in place have gone out and they've gone out by, I would say, on average, about a couple of weeks. And so whatever you are hearing or seeing is on certain product lines particularly the ones that go through in the Philippines, or Malaysia where we've seen it. But, for the most part, lead times outside of that are remaining stable. And we expect that lead times will catch back to normal by probably closer to the end of the quarter as we catch up once factories reopen. And we're able to both ship normal, but also do any catch up shipments.
Great.
Steve, you're the big picture guy. And you touched on this a bit already, but looking forward, what do you think the biggest risks are to your business here? And if you have to start pulling some contingencies to lessen the blow, what do you think you can what's in your control from here that you plan on doing? Thank you.
Well, the biggest risk to the business is, that COVID-nineteen is not contained, as we are talking about, to, from state to state and even, you know, Internationally, nationally and Internationally from Washington and other places, as people go back to work here in the coming months. Question is do we see a second wave of COVID-nineteen cases, starting to go back up as people will need to go back to work. I think as people go back to work, there'll be all the precautions of masks and cleaning and others. And hopefully, we will not have a second wave. But if a second wave requiring to go back to shelter in place, and that would be the largest risk I would think.
Because I will prolong the time frame during which the factories will be shut down. The demand would be low people won't be buying cars and then other stuff, that I see as the biggest risk. And now in terms of what levers do we have? I think we've already implemented those levers, while our business in March quarter was not even in lot of stress we sequentially grew, but we implemented these measures to essentially find the categories extra And those are the levels we already have implemented, and we'll just continue with those and look for even cutting more discretionary expenses and see if the capital could go down further and any of the discretionary expenses could go down further. I mean, organization, I and others to take a larger picker if that would help.
But usually, it's a volume of people taking a picker, you know, that helps. And I don't think we can ask the worldwide employees to take any larger takeout. But, you know, you also have, you know, bonuses to play with and capital and other things. But like I mentioned, I think in answer to an earlier question, we try to model a scenario to try to see what how much of revenue has to go down before we become cash flow negative or dividend comes to a question about it's way too low. And when I get the, I think it's just the business is too strong today.
The formation of the business is so good that We're not gonna burn cash, and the dividend is not at risk and, I think I think we're in a pretty good place.
Thank you and congrats on buying that convert bonds. Nice price.
The next question comes from the line of Harlan Sur from JP Morgan. Please go ahead.
Afternoon. Thanks for taking my question. Just more of a sort of geographical question back in March, when the we saw the team downshift at that time. The downshift was driven by sort of a shortfall in China, right? Is the country was starting to open back up, but at a slower pace.
But you also did point out at that time that orders and business activity At that time in China, we're starting to pick back up. And since then, we've seen more opening up of activity in China. We've seen auto production picking up this quarter. Factories are starting to open up consumers starting to spend. So have you seen follow through of that China improvement trend as maybe rest of the world demand is weakening into and through the June quarter?
Or are you also seeing degradation and deterioration in China orders and bookings as well?
So I think depending on whether you look at monthly or you look at it by quarter, when you look at it by quarter, China was very weak for, for the March quarter because the Chinese New Year, 1st of all, was extended to 2 to 3 weeks from 1 week And then all these factories were closed. So the China business was very good. If you, you know, if you really look at it for the quarter, but if you look at it on a monthly basis, as the COVID 19 situation got contained and people went back to work, China business almost seems like it's back to normal. However, the concern is it may look like back to normal because it's really kind of making up for some of the shortfall and all that it has. And once that demand is met, is the steady state demand in China back to normal or not, I think that answer needs to be answered in the month of May June.
But April, China was very strong and late part of March in China was very strong, as if it would be normal or even better.
Yes. Okay. Appreciate the insights there, Steven. And just on the back end operation, you talked about Malaysia, talked about Philippines, but you guys actually have a pretty large test facility in Thailand. They're on lockdown to the end of this month.
So how has the team been able to managed quite nicely through the movement control in Thailand. And is Thailand running at full run rate?
Yes. So Thailand did not really have any strong ordinances. Let me have a Ganesh comment on that. Ganesh?
Yes. So the time of lockdowns are really a curfew at night from about 10 pm until 8 am. It doesn't affect our ships our ability to operate our plants. And so and there's been no, logistical other issues that we've gone into. So, thankfully, Thailand was this entire episode has been running full steam, no issues.
The next question comes from
This is Ari Shusterman on behalf of Raji Gill. Thank you for taking my questions. So I first want to talk about Automotive subscription auto, which products have shown the greatest strength? And can you talk about traction you have been seeing in silicon carbide? Thank you.
Let me have Ganesh answer that.
So I think when you have such a large demand reduction in automotive. There is no segment I can call out and say is strong. And so automotive across the board, when we look at our many different product lines, they're going to automotive. They're all down in the site. Now to your question, the silicon carbide, it's early days, right?
And silicon carbide is predominantly a new technology that is aimed at electric cars from a high volume standpoint, electric cars as a percentage of the total automobiles produced are sold are it's 1% to 2%. And so it's still a small percentage. We're making good inroads with our products to be a new design and new activities that are taking place but it's really not a factor in any revenue, that is taking place for automotive today, but we're making very good progress because the silicon carbide solution for Microchip are extremely robust. And in an automotive environment, which is very harsh, from a voltage and temperature standpoint, robustness is one of the most important factors they take into account for using silicon carbide products.
And as a quick follow-up, with regards to your FPGA business, what trends we've been seeing in it and how would you say your FPGA compared to Lattice as ioanix, Alterra? Thank you.
Go ahead, Ganesh.
So, our FPGA business continues to be, reasonably strong. It had a nice growth as we showed you in the, in the March quarter results that we announced Our FPGA also has a reasonably good exposure into defense and space applications those end markets are not as badly affected as some of the other end markets that we have. And, to be quite honest, we don't really see Lattice and some of the other names that frequently in what we run up into the market. We play predominantly into the mid range and to the low mid to lower end of the, of the FPGA market, we have some unique positioning relative to, security low power robustness and in those areas, we do extremely well.
Any other question operator?
Yes. The next question comes from the line of Craig Ellis from B. Riley FBR. Sir, go ahead.
Yes. Thanks for taking the question. And team, thanks for all of the detailed information so far. Steve, I wanted to go back to a couple of comments that you made about how unique this environment is and the fact that we've got multiple dynamics at play when in the past we have in had to contend with those. And the question for you is, given how dynamic things are what's Microchip doing?
What are you doing to kind of assess where we are as demand compresses overall and then potentially reaccelerates? And again, is it orders and backlog or have you expanded the things that you look at to see when we'll get to the turn? And do you have a view on when we would get to that turn, whether it be June or September or some of the time?
19 really keep a very, very strong finger, on the pulse of the business. We watch a very large number of indicators, internal and terminal, on a weekly basis and more often than that it needed, you know, on a specific indicator. So to that large stack of indicators and graphs that we constantly monitor. We have added a few to really further assess that situation frequently. And some of the things we are looking at it much more frequently things like dollars of push outs and cancellations, number of coronavirus cases and various geographies where our factories are and customers are, whether they are peaking, they're stable, they're going, they're coming down.
We're also just watching a number of other indicators, employment related, first time unemployment claims and all that. So there's really a large amount of data that we are absorbing And this definitely will include the data we get from our own customers through our salespeople regularly with bookings and design wins and our customers kind of customers comments on whether their business is growing or falling away, would it go and what's happening? So there's so much more intelligence that goes into really before we come to you and and we're even more focused on getting all that intelligence today.
Okay. And is that giving you any sense for when we could be at the bottom?
No. I think, I think that is too early to really have that kind of conference where is the bottom.
That's fair. It's certainly uncertain.
The numbers are so broad. I mean, just have a guidance of minus 2 to minus 10. It's just so broad that we cannot yet say what September will bring. It will largely depend on whether as the people go back to work, does the coronavirus just kind of dies down, or there's a second wave of coronavirus coming back, and we're dealing with it for the factory shutdowns even in August September. If that happens, then the bargain doesn't hear yet.
Certainly. If I could ask a follow-up, just relating to some of the things that, are happening inside of the business, given how dynamic things are. 1, does it cause the team to think any differently about the level of inventory that should be stocked appropriately to full customers? And two, given Ganesh's characterization of what's strong and what's weak, does it cause the team to think any differently about where it's emphasizing incremental R and D on products and that kind of thing. Thank you very much.
So our long term target for inventory level is 115 to 120 and we finished the March quarter at 1.22. I don't know if you get any more precise than that. So inventory is really right exactly where we want the inventory to be. And I wanted to regard a little bit high earlier during the U. S.-China trade related softness and And then we have been bringing it down.
So March quarter inventory was nearly perfect. And because of this coronavirus situation now, we didn't want the inventory substantially grow. So therefore, we have put our factories on reduced workload, rotating time off, reduced hours of work or whatever. You may want to call it so that as the revenue in the June quarter is declining, we don't want the inventories to grow very stantially. So I think our inventory is in the right range, and we are comfortable with it.
In terms of, R and D, Ganesh want to comment on that?
Yes. So I think no one should take short term positives and negatives as the way in which we're investing from an R&D Right? That's what we're seeing in this cycle at this point in time. R and D is really a longer term view of where are the markets going, where are the opportunities? And we are guided there by the 6 megatrends that we have shared with you.
We believe over the next 5 to 10 years, growth is going to be available a faster level or a higher level in 5g, data centers, ADAS autonomous drive ins, IoT electric vehicles and artificial intelligence and machine learning. And so the many product lines of Microchip are working on how can they create complete solutions, total system solution for the mega trends. And what may be strong today and maybe not so strong in 6 months or 12 months isn't how we do our R and D spend.
I'm showing no further questions at this time. Presenters, you may begin.
Okay. Thank you, operator, and thanks all the investors and analysts who are on this call. The travel is really totally banned. So we will be attending some of the conferences this quarter. They will all be virtual conferences.
We'll do it out her home. So we'll talk to you, some of you more at those conferences. So thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.