Good day, everyone, and welcome to this Microchip Technology First Quarter And Fiscal Year 2018 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Microchip's Chief Financial Officer, Mr. Eric Bjornhold. Please go ahead, sir.
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'll 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 first quarter fiscal year 2018 financial performance and Steve 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 and 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 effect of our acquisition activities and share based compensation. Net sales in the June quarter were a record $972,100,000 above the high end of our June 5th 2017 upwardly revised guidance and up 7.7 seating 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 60.4% in the June quarter and above the high end of our guidance, which was 60%. Non GAAP operating expenses were 22.9 percent of sales, below the low end of our guidance range of 23% and non GAAP operating income was a record 37.5%, well above the high end of our guidance range of 37%. Non GAAP net income was a record $319,100,000, resulting in record earnings per diluted share of $1.31 which was $0.07 higher than the midpoint of our guidance of $1.24, up 12.9% on a sequential basis and 56% as compared to the same quarter last year. On a GAAP basis, gross margins, including share based compensation and acquisition related expenses, were 60.1 percent in the June quarter. GAAP gross margins include the impact of $3,400,000 of share based compensation, and $700,000 benefit from the recovery of material that was previously written off due to a vendor material issue.
Total operating expenses were $362,800,000 and include acquisition and tangible amortization of 120,800,000 share based compensation of $19,000,000, $2,900,000 of acquisition related and other costs, and special income of 2,800,000 consisting primarily of the gain on the sale of the Micrell San Jose wafer fab in the June quarter. After these adjustments, GAAP net income was a record $170,600,000 or $0.70 per diluted share. The non GAAP tax rate was 8.7 percent in the June quarter. The GAAP tax rate was negative 2.6% in the quarter. We expect our longer term forward looking non GAAP effective tax rate to be between 8.25% and 9.25%.
A large difference between our non GAAP and GAAP tax rates relates to the differences in the specific tax rates that apply to the charges that are excluded from our non GAAP results. Moving on to the balance sheet, our inventory balance at June 30, 2017 was $426,800,000. Microchip had 100 days of inventory at June 30, down 3 days from the end of the March quarter. Inventory days are at a 7 year low, and we don't expect inventory days to grow in the current quarter as our capacity increases are hardly keeping pace with the increases in demand we are seeing in the business. Inventory at our distributors was at 31 days, and that was down 2 days from the March quarter levels.
The cash flow from operating activities was a record 3.45 cash and total investment position was $1,650,000,000, of which about $546,000,000 is domestic cash. We continue to make good progress This is down from 1.94 at the end of the March quarter. Our EBITDA in the June quarter was a record $395,600,000. We expect our net debt to EBITDA to be under 1.3 by the end of September. Our net debt to EBITDA does not include our 2037 convertible debt as it is excluded from our banking covenants because it is more equity like in nature due to its 20 year maturity date.
Our net debt to EBITDA is in excellent condition and declining rapidly, so we are not going to continue to share this metric in our earnings calls in future periods unless there is a material change. During the June quarter, we received about $40,000,000 of capital at our facilities. Capital spending for the quarter was only 22,100,000 due to the timing of the receipt of and overall capital expenditures for fiscal year 2018 to be about $180,000,000. We are aggressively adding capacity to support the growth of our production capabilities for These capital investments will bring significant gross margin improvements to our business over time, particularly for the Atmel manufacturing activities that we are bringing into our own factories. Depreciation expense in the June quarter was $29,000,000.
I will now ask Ganesh to give us comments on the performance of the businesses in the June quarter. Ganesh?
Thank you, Eric, and good afternoon, everyone. We are very pleased with how all our product lines performed in the June quarter and how the combined assets of Microchip and former Atmel working in Harmony continue to produce differential growth results. These are our first results, since we unveiled Microchip 2.0 to our investors about 2 months ago. We look forward to sharing many more updates of our transformation to Microchip 2.0, as we continue to enable our Let's now take a closer look at the performance of each of our product lines, starting with microcontrollers. Our microcontroller business performed very strongly in the June quarter, with revenue being up 9.5% sequentially as compared to the March quarter.
Spending a new record in the process. On a year over year basis, the June quarter microcontroller revenue was up a whopping 18.1%. The June quarter of this year and the year ago, June quarter are completely comparable as they both represent a full quarter of combined Microchip and Atmel business. We continue to see clients using microcontrollers that originated from Atmos heritage express confidence in microchip stewardship of these product families. As a result, we are seeing more designs that are in the pipeline, going to production and ramping in volume.
We're also seeing continued growth in our design in funnel, which we expect will drive future growth as these designs progress into production over time. Microcontrollers at over $2,500,000,000 in annualized revenue represented 65.4 percent of Microchip's overall revenue in the June quarter. Additionally, we shipped our 2000000000th cumulative microcontroller in the June quarter. In the June quarter, we also started sampling the PIK32C product line, our first PIK32 microcontroller, which happened to have an Arm Control and ARMcore. So we now have PIK32 microcontrollers with MIPS and ARM cores within them, both of which supported by the Microchip Development Tools ecosystem.
This is consistent with what we have always said, which is that the core inside the microcontroller is not as important as the brand on the outside, along with the attendant brand promise for what clients expect from pick microcontrollers. Our microcontroller business gained further market share in the second quarter of calendar 2017, as evidenced by our June quarter results. In fact, the results show that all our microcontroller product lines are firing on all cylinders and driving differential growth and market share gains. We believe we have the Microchip 2.0 transformation and build the best performing microcontroller franchise in the industry. Moving now to our Analog business.
Our Analog product revenue was up 3.7% sequentially in the June quarter as compared to the March quarter, and also set a new record in without which the growth would have been higher. On a year over year basis, the June quarter the June quarter analog revenue was up 11.2% well ahead of the market growth rate for Analog. At over $950,000,000 in annualized revenue, our Analog products represented 24.6% of Microchip's overall revenue in the June quarter. We are successfully finding more opportunities to attach microcontroller's vast portfolio of analog products to Aetna microcontrollers and microprocessors at multiple customers and applications. This effort should pay dividends over time as these new design wins go to production.
We continue to develop and introduce a wide range of innovative and proprietary new, linear mix signal, power, interface, timing, and security products to fuel the future growth of our analog products. As we march relentlessly towards making analog a greater than $1,000,000,000 annualized revenue business for Microchip, sometime in fiscal year 2018 and a much larger business in the coming years. Moving now to our licensing business, Our licensing business was up 8.5 percent sequentially in the June quarter and set a new record in the process as annualized revenue broke through the $100,000,000 mark for the first time ever. For the last 3 to 4 years, we have licensed multiple foundries and independent device makers on multiple process technology nodes and have been working to enable getting these technologies qualified for production. We expect the fruits of this work will soon begin to manifest in our licensing results as the licensed processes start generating royalty revenue for many, many years to come.
Moving to our memory business. This business was sequentially up 8.8% in the June quarter as compared to the March quarter. We are being very successful in our memory business using the combined product lines of Microchip and Atmel and getting the best from each. There are significant cost reductions underway using Atmel originated silicon which will be assembled and tested using Microchip's back end factories to achieve the lowest overall cost. We believe that this that maintains consistently high profitability, enables our licensing business and serves our microcontroller customers to complete their solutions.
Finally, before I conclude, a couple of general items. 1st, in case there are any lingering concerns about the automotive end market, in light of the results announced by some of our competitors and the seasonally adjusted annualized rate of automobile shipments, also known as SAR, which some analysts track. We would like to categorically state that our automotive business performance was strong in the June quarter, which sequential growth pretty close to the Microchip's overall performance. Now this is understandable as microchip content tends to be in mid to high end cars which are less sensitive to inventory and consumer cycles, and we continue to benefit from the growth in automobile electronics as well as our market share gains in the automotive market segment. Therefore, Microchip's automotive business does not necessarily track with the SAR numbers.
And we expect our automotive business to perform well again in the September quarter. For more information about our automotive business, we refer you to a presentation we made on June 6th at an automotive focused investor conference, which is available in the Investor Relations section of our website. Secondly, on the heels of our ranking in June ranked Microchip as one of the top 10 largest industrial semiconductor companies. And among the top 3 largest micro component suppliers to the industrial market. Micro components in the IHS report refer to microcontrollers and microprocessors.
Automotive And Industrial are important end markets for our growth and consistent performance. And as we shared with you in May, they together represent about 60% of our revenue. Let me now pass it to Steve for some general comments about our business and our guidance going forward. Steve?
Thank you, Ganesh, and good afternoon, everyone. Well, how do you like the results from Microchip 2.0? Today, I would like to first reflect on the results of the fiscal first quarter of 2018 I will then provide guidance for as well as Microchip 2.0 that we introduced to the investors during the last quarter. Our June quarter financial results were extremely strong. Our net sales were a huge new record and well above the high end of our revised guidance.
Our non GAAP net sales for this quarter were up 15.2 percent from the June quarter of a year ago, and this revenue comparison is not impacted by any acquisition since Atmel's full quarter revenue was in the June 2016 quarter. Our non GAAP gross margin percentage, operating profit percentage and earnings per share each exceeded the high end of our guidance and each crossed significant milestones. Our non GAAP gross margin crossed the important 60% milestone Non GAAP operating profit exceeded 37 percent for the first time and non GAAP earnings per share crossed an important run rate of well over $5 per 56% from the June quarter of a year ago due to improving sales, gross margin percentage, operating expense leverage, and successful execution of our core I want to thank all This was also our 107th consecutive profitable quarter. There are three other points I would like to make on our sales growth. 1st, every one of our major product lines 8 bit MCU, 16 bit MCU, 32 bit MCU, analog, wireless, licensing, memory and others were up significantly in the June 2017 quarter over the year ago quarter number 2, Every major geography, North America, Europe and Asia were up significantly in the June 2017 quarter over the year ago quarter.
And number 3, sales in all end markets were up in the June 2017 quarter over the year ago quarter. Regarding the reason for a large sequential and year over year growth, I will refer you back to Microchip 2.0. We are experiencing an enormous customer preference to design with our microcontroller solutions in all 8 bit, 16 bit and 32 bit customer applications. This is also demonstrated in the recent EE time survey The E time survey also indicates that customers believe that Microchip has the best ecosystem in the industry. On the 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.
Our sales channels have been trained and are welcoming the opportunity to sell multiple products to our customers in the same board. As a result, our customers are responding by giving us incremental design wins with multiple products in the same board. That in Microchip 2.0, we will continue to see the acceleration in the organic growth of Microchip. Now before I go into the guidance for September quarter, I will say that we are continuing to see a very strong business environment for our products worldwide and have a number of company specific demand drivers. Our bookings rate in the June quarter was extremely strong.
Our inventories at Microchip as well as at distributors are towards the low end of the normal range. Both inventories at Microchip as well as product distributors declined further sequentially in the June quarter, while our manufacturing operations produced a lot more units in the June quarter, we shipped them all for growth and did not progress towards improving our inventory position. However, through the growth we would like them to be, they're not getting any longer, and we appear to have created a soft landing so far without triggering any double ordering or panic from our customer base. We have increased wafer starts in our 3 internal fabs and we are adding capacity in our 3 backend facilities. We will continue to add additional capacity in all of our fabs assembly test plans, foundries and subcontractors.
In the back end, there are too many product tester handler combinations, We are catching up on some of those combinations as we convert Atmel products to Microchip's more efficient assembly test platforms. However, we don't expect to fully catch up on 2018. Now let us go into the non GAAP guidance for the September quarter. We expect total net sales to be up approximately 3% sequentially, which represents approximately 14.6% on a year over year basis. I want to remind investors that in the last 5 years, we had 3 acquisitions that closed in the September quarter.
SMSC closed in August of fiscal year 13. ISSC closed in July of fiscal year 15, and Microwl closed in August of fiscal year 2016. Therefore, mathematically taking the average of the last 5 years of sequential growth we'll give you a number of 6.7 percent, and that number would be totally wrong. Excluding these acquisitions, the average sequential growth in the September quarter over the past 5 years has been just under 0.5% and ranged between minus 2.6% and plus 6.5%. Our current sequential revenue guidance of 3% growth and year over year guidance of 14.6% growth is showing substantial organic growth consistent with the Microchip 2.0 that we have presented to investors.
As a result, in September quarter, we expect to see our first $1,000,000,000 quarter. Regarding gross margin, we see a steady improvement in overall gross margin of the company, We expect gross margin for the September quarter to be between 60.5% to 60.75% of sales, We expect overall 37.5 percent and 38.25 percent of sales, and we expect earnings per share to be between $1.33 $1.37 per share. Now last quarter, we revised up our long term financial model to a long term non GAAP gross margin of 62.5 percent, operating expense of 22.5% and operating profit of 40% And as you have seen, we are relentlessly marching towards this model. This quarter we would like shared with investors over longer term annual growth expectations of high single digit growth. This higher growth expectation comes from our transformation to Microchip 2.0 and then an environment which we expect through industry consolidation will continue to improve from a pricing discipline standpoint.
Given all the complications of accounting for the acquisitions, including amortization of intangibles, restructuring charges and inventory write 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.
You. Additional
questions And we'll take our first question from Vivek Arya with Bank of America Merrill Lynch.
Thank you for taking my question and congratulations on the strong results and outlook. Steve, you mentioned the pricing discipline as being an important factor. When I look at the 2 other microcontroller companies that are bigger than microchip renaissance and NXP, do you see this pricing discipline pervasive in the industry? Or I assume you really mostly talk about Microchip, but what about your competitors? Do you see this pervasive through the industry?
The pricing discipline is improving and, to a different extent with various manufacturers. I can't mention it, the names of the competitors and specifically what they're doing. But we have seen some discipline on others also, some more than the others. Microchip has kind of led this charge in the last 5 years, And especially after the acquisition of Atmel, whose pricing was really below acceptable pricing, We have, quite substantially corrected those pricing. And we have seen others who were relatively undisciplined also make some correct moves in that direction.
I see. And for my follow-up, you have mentioned a few times, the concept of attaching more analog products, is there a way to quantify what that attach rate is, how it's trended and whether it it's even useful to analyze this trend?
Well, it's not something we can completely certainly shared, but we have large number of internal indicators, which are really driven by number of microchip products per customer board. So if you think about years ago, we just sold microcontrollers and you will usually have one device per customer board. We have well in excess of one device per customer board. And a larger and larger that number becomes means you're being able to attach more and more devices and rather than the attach, we kind of use the word these days, total system solutions. So we track that internally and it's moving in the positive direction.
It's not something we plan to share with the street as just one other thing to track and hit us over the headwind.
We also have some examples in some of the investor conference presentations. And again, if you go back to Steve's presentation from back in early June, you'll see some examples of what exactly total system solution means.
And those slides are still on the internet. You can check it on the investor page.
Thank you.
Thanks Vivek.
And we'll take our next question from Mark Delaney with Goldman Sachs.
Yes, congratulations on the record quarter. And thanks very much for taking the question. The question was on the lead times. I mean, if you give us a bit more quantification of how extended lead times have gotten to and any sort of differences between types of products and if you could put it into context versus prior cycles?
I would lead times on most products today are between, I would say 4 weeks 20 weeks. So lots and lots of products are kind of normal on lead time. It could be version of a given silicon that is longer, but other versions are shorter. So a large bracket around it is about 4 weeks to 20 weeks. But more important part is really they're not getting any longer.
They were getting longer in the prior quarters as we extended. And the normal lead times, we will consider where 90% of our products can be bought in 4 to 8 weeks. So that's kind of the brackets. And with the capacity growth we have had, we have been able to stabilize the lead time. But as I said in my remarks, we're essentially shipping all the excess production for growth and are not able to either lower the amount of delinquent product or unsupported product nor are we able to really dramatically shorten the lead times on some products where Testry handler product combinations have caught up.
Yes, but in broad majority lead times are stable, but not coming in yet.
That's helpful. And for follow-up question, somewhat related to that, in your prepared remarks, Steve, you commented that you think by stabilizing lead times, you think you can engineer a soft landing you've always been very thoughtful on a cycle and revenue growth. Any more detail either for the industry or microchip specifically about what shaped into that assumption about a soft landing and how exactly you go from sort of mid teens growth to what's assumed in a soft landing scenario? Thank you.
Well, I don't have any comments on the industry. I resigned from that job 2 years ago. We're just simply I will comment on, Microchip. And, and what I'm saying is that by lead times really not going longer, And taking almost a year to bring these lead times down that we're guiding to really by the middle of next year, We believe we already have engineered a soft landing, not creating any panic, not having runaway book to bill ratio, strong backlog, fairly fair amount of unsupported product, but still, it's largely a good behavior on the part of customers and distributors. Inventories still very low all over the board.
Distributor inventories are low. Microchip inventories are lowest in 7 years. I mean, this is, this is essentially engineering at Southlanding.
Thank you.
And we'll now take our next question from John Pitzer with Credit Suisse.
Yes, good afternoon guys. Congratulations on this call and results. Thanks for letting me ask the question. Steve, I had a couple sort of clarifying questions around your longer term growth rate of high single digits. Is that your view on an organic basis?
Or will that continue to include sort of the successful M and A strategy you've employed in the past? And if it's more the former than the latter, does that change your view on M And A? In addition, you talked about better pricing. I'd just be kind of curious from where we were to where you think we're going? How much pricing adds to that?
And then my last point would just be market share? And I guess around that, specifically at a time when some of your peers are kind of consolidating their distribution partners and trying to take economics from them you're taking sort of a more of a Switzerland approach and kind of spreading the wealth a little bit. Do you think that's having a positive effect just through the distribution channel and that enormous design funnel you were talking about? Thank you.
Those were a number of questions. Let me see if I can remember all of them. I think the first one was our the high single digit kind of growth I talked about is organic. The acquisitions are unpredictable. You do not know when they happen.
You cannot schedule them. So that growth rate is organic. Now we believe over the last several years, as the industry growth has been fairly slow, inception of this current year where the industry growth has been reasonable. It was a there was always unit growth. But the entire unit growth was eaten up by the year over year price decreases and pricing pressures and bad practices in our industry constantly to give the price away.
As through consolidation and other reasons, as large companies have gotten pricing discipline, we believe that unit growth is not being eaten up by the price drop. So some of that price discipline is built in into the longer term organic growth guidance we're giving. And the second part was The
second question they asked was does the change in your view on organic growth change the M and A strategy?
Does it change the M and A strategy? It does not change the M and A strategy. We find a right company that fits well, we can buy it at a reasonable price is accretive going in. And with all the other, check all of the boxes that we have sort of a pretty proprietary scheme of how we how we essentially select an acquisition. If we can do that, we would do it.
However, as you know, the, the herd is pinning. There are fewer companies left. And the valuations are quite high as we speak. But as we're able to find some things on reasonable valuation, it doesn't change our view.
All right. And John, I think the last piece of your question was market share. I'd like you to repeat that to make sure we answer it specifically.
To the extent, how much of the high single digit long term growth is expected market share gains? And specifically, at a time when some of your peers are sort of consolidating their distribution partners and trying to take back some economics from their distribution partners. You seem to be taking more of a Switzerland approach and perhaps spreading the wealth a little bit more. I'm just kind of curious as to what extent do you think really helping that design funnel you referenced in your prepared comments?
Well, these distribution things go in cycles. You may recall, 10 years ago, we were taking some actions on distribution. When we felt that fit in distributors were not creating demand. And a decade later now, some other people feel the same way. So these things kind of go in cycles.
But what we are experiencing is currently as a number of our competitors have defranchised either distributed completely or they have, narrowed their margins and not giving them demand creation margin. We have seen these distributors put a tremendous attention and focus on Microchip and especially with a broadened product line sort of under the Microchip 2.0 initiative that we have, we are finding that distributors are finding the new Microchip 2.0 product portfolio to be so much more desirable and essentially being able to replace the number of other comparative companies where they have lost the franchise on. Including microcontroller, analog, wireless, USB, Ethernet, wired products, USB Ethernet and wireless, just really timing is just perfect for the distribution to grab on to our broad portfolio and do a great job for us. So I think we are taking advantage of it right now.
And then, Steve, if I could sneak one more in, clearly, your initial intent around the Aetna acquisition was to buy back stock and you ended up not doing that. The stocks had a good absolute run since then. But if you kind of look at the relative valuation of microchip to the S and P. I think by our math, this is one of the lowest levels we've seen in almost 15 years. And so Can you talk a little bit about the appetite to do some buybacks here, and whether or not that given where you are on your net leverage and your ability to generate cash flow, that might become a more systematic way of returning cash to shareholders?
Well, the net leverage is in a problem now. We're down to 1.58 and we'll be lower again by the end of September. That's not the issue. I think the issue is the majority of the cash is still overseas. And we got about $500,000,000 or so here domestically.
And, and we're still looking for the acquisition. So it really wouldn't make sense to buy a bunch of stock back and then either have to issue stock in the next acquisition. Or really then borrow large amounts of money. So, I don't think buying back stock really fits right now.
Perfect. Thanks and congratulations again guys.
And we'll now take our next question from William Stein with SunTrust.
Great. Thanks for taking my question. Congrats on the very strong results and outlook. Steve, I know you're out of the sort of broader semi cycle discussion, but as it relates to your business, you've got very good year over year growth that you just posted the guidance suggests it moderates slightly sequentially. Let's say you beat that a little bit.
You're still growing very solid double digits year over year. What do you anticipate with your new high single digits long term growth view? How do you anticipate sort of the back part of this cycle to look like at what pace do you expect that growth that's very strong right now to moderate?
I don't really have a whole lot to say on that in terms of cycle. I think we are We are we're seeing a very, very strong demand for our products. I think it's largely driven by a lot of company specific drivers in analog, in attach and being able to take atmel portfolio that was being marketed in a substandard way. Costs were high or other things were not right. And we're correcting a lot of those things and being able to attach analog wireless and other products to that portfolio So a lot of it is really company specific drivers.
And so I think really this growth momentum continues. We didn't want it to get over frothy and get into double ordering or holding and all that, I believe we are successfully avoiding that by engineering and soft landing. So somewhere over the next year, I think it goes from a current growth rate to the long term growth rate, almost in a soft lending fashion.
That's helpful. One other question, it's actually a product question. I normally don't spend a lot of time in this area, especially in your press releases, but you highlighted in the first bullet, regarding highlights from the quarter, a new product with the 2 d GPU integrated. I wonder Is that representative of any new are you seeing more demand for that sort of processing capability? And if you could talk about the market for that sort of product, it'd be very helpful.
Thank you.
So I'll have Ganesh comment on that, but let me read the bullet for all the investors. It says Microchip announced the industry's first microcontroller with integrated 2 d GPU and integrated DDR2 memory. Our PIK32 MZDA family provides groundbreaking capabilities for an MCU. Ganesh,
This is not really related to artificial intelligence. This is in embedded applications, there is a set of applications where people want the richness of the human interface to include, you know, graphics that have more capability. Those are historically been done with separate processors that did the microcontroller or microprocessor and the graphics on a separate chip we're now putting those together, creating more complete solutions where the microcontroller, the graphics, and the DRAM that's required are all on the same chip. And in same package. So, it's an extension of continuing to have high performance microcontrollers opening up new and better control spaces.
Helpful. Thanks guys.
And we'll now take our next question from Chris Caso with Raymond James.
I guess, for the first question, just a follow on on the steps you're taking, with with regard the soft landing. And I think we understand what you're saying there. Perhaps you could talk about what's different in the steps you're taking now as compared to, some prior cycles when your lead times extended. Is it now that you've moved more quickly to expand some capacity and prevent the lead times from getting higher? And maybe you could just expand upon that.
I think the main difference is your memory is probably, of the event 2 or 3 years ago. For the 2014, I think. There was basically a abrupt contraction in the Chinese business at that time, which we mentioned in our call, and that's really what led to a quarterly miss and then cycle unraveling. And it was seen by the entire industry, subsequently, within 3, 4 months of that, Even though a lot of the investors and analysts originally did not see it, we saw it first. I can't predict the world event.
There's a war somewhere, something else happens in a and some sort of event terminates it, so changes it. So I think that was the main difference. If you're should outlook is that, you know, some sort of strong event takes place somewhere then all best change that I can have forecast.
Right. Okay. Yes. I don't have a crystal ball for that either. Just with the follow on, on gross margins, perhaps you could talk about some of the specific benefits over the next few quarters.
I know that you're still working to consolidate some of the manufacturing, there's still some steps that will benefit gross margins aside from just better fixed cost absorption.
So we're ramping all 6 of our facilities. 3 are front end wafer fabs and our 3 back facilities investing significant capital and those investments increase the utilization of the facilities, make us more cost effective. Make the cost per unit go lower. And so there's a lot of things happening across the board. There's a lot happening in back end manufacturing, which we've talked about more extensively where a lot of the capital dollars are going.
And as those come to fruition, the gross margin is going to improve. This last quarter, we continue to see benefits from the Micrell shutdown. And most of that is in the model at this point in time, but there's still a little bit of that to go. But the main things are really the capacity improvements. Pricing as Steve has talked about publicly continues to be a driver of gross margin and we think that's going to continue as better practices happen throughout the industry.
Thank you.
And we'll take our next question from Craig Ellis with B. Riley.
Thanks for taking the question and I'll throw my hat in the ring on the congratulations on good execution. And I'll just start on that point and go back to, two points that you made Steve. 1, the target for high single digit long term growth and the view that that's attainable. And secondly, that with Microchip 2.0, organic sales should accelerate you've recently presented, I think it's 7 points on revenue growth related to Microchip 2.0. So with an eye towards monitoring the levers that are really going to drive that growth acceleration, what are the things that us investors should be focused on, as we monitor Microchip's progress to drive accelerating growth under those 7 initiatives.
Are you picking up several initiatives from our conference call presentation? Yeah.
That was from your presentation of Microchip 2.0, I believe. I think you had 7 different revenue growth drivers there.
Just pulling it up. I think your question is really sort of how can investors track it? So a lot of it is related to being able to sell a large number of peripheral products around the main microcontroller, which, you sometimes call it attach, and we're calling it Total System solution. We are seeing it in our funnel. We are seeing it in a number of design wins of devices per board.
Going up from 1, like one would be no attach. So a lot of these things, we don't plan to share it externally. I think it So that's part of the challenge, but total system solution, we will track it internally. You can track customer preference to design with our MCUs And that analysts and investors can track. There's an e time survey, which is public.
It's on our website, when asked the customers which microcontroller do you expect to use for your next embedded design on 8 bit, 16 bit, 32 bit, 8 16, we were number 1. And 32 bit, if you combine ours and Atmel and 2 or 3 different lines, they were number 1 tied again over there too. So that you can track We have multiple, growth drivers as we, quarter after quarter, talk to you about growth a microcontroller business, growth of licensing business, growth of analog business. We don't break out our wireless business, wired and wired connectivity. A lot of that is buried into the analog business.
We have tremendous growth going on in our security business as, people in IoT are looking for security of transaction, security of being able to connect to the device. We have number of key assets in that area. Automotive business is doing very well in networking, in HMI, in access control, lighting, body like electronics. You can see some of that through our press release, continuous flow of press release we're having with most of us and other So I think it's a it's complex tracking, but it's all there.
All right. Thanks for the color on that. The follow-up question will be for Eric and it's just related to inventory. So, 7 year lows on hand, the channel is lean Is that a level that Microchip can comfortably operate at if we think about the intermediate term or should we expect and what would typically be a seasonally soft period like the fiscal third quarter that the company would look to replenish some inventory, whether it's in the channel, on hand or both.
So channel inventory, we can't really, manage out of the fact that delivering the product that the distributors want. So that's a little bit tougher, but it is on the low end of what we've seen historically. Our own inventory, we've been trying to build inventory on the balance sheet for the three quarters and just haven't been able to do so with the upsides in demand that we've experienced. So this quarter, we expect to not build inventory again. The lead time commentary that Steve talked about getting healthy by the middle of calendar 2018, I think that probably at the point when inventories might return to a more normalized level, but it's very hard to predict what the demand environment is going to be.
So you talked about seasonally soft December quarter in which we could build some inventories. I think what's more likely is that we're able to catch up on some of the delinquencies and unsupported product, leading to better than seasonal December, we're not building inventories, because you can't build inventory before you have given the product to the customer to meet their demand. So it's more likely that we will reduce the unsupported amount of product, than building inventory. So that's what it looks like right now.
Okay. So you're from what you can see now, the demand, from your customers as well as the timing with which new capacity is coming online, both front end and back end would lead you to believe that it's likely that there'll be some demand catch up and you could happen above seasonal quarter, Steve?
It's not really numerically guiding it, but directionally, I expect it better than seasonal December.
Okay. Thanks for the help. Good luck.
Our next question from Harlan Sur with JP Morgan.
Hi, good afternoon and congratulations on the solid Cushan and outlook. On the strong quarter on quarter year on year performance in MCUs, I'm just wondering if the AML products grew faster than the overall MCU segment, just post closure, you had higher confidence levels by Admiral's customers, You've got the refresh 8 bit AVR product line and other enhancements. It's only been more than a year post atmel you guys are probably still seeing some of that momentum. Just wondering if this is driving some enhanced growth in the product line?
So, we're not commenting on any breakout of growth on ethanol products versus our growth. In some cases, product can even be substituted And like we said from the very beginning, we manage it as one company and give the customer the best solution where we have product available or can meet its needs. In some cases, switch from one to other, if the product is not available in one category, make it available in the other category. So I think individually commenting on where the growth is coming from is really not meaningful at this point in time.
Okay. Then on the transformation to microchip 2.0, and then the results of the time survey, I mean, the team has already had a strong systems focus in place for a long period of time. I think you guys have something like over 2500 reference platforms, development boards, sample projects, etcetera. So you guys already had a pretty strong program in place to help customers what your design solutions and drive attach rates. So how does Microchip 2.0 build upon this to further drive the attach rates of allow connectivity, networking, memory and interface products?
So that's a good question. And let me take a shot at answering So microchip 2.0 is not an event where I flipped the switch today. My chip 2.0 has been information for about 5 years, which yourself said. In, when we acquired SMSE, We got USB technology. We got Ethernet technology.
We got audio technology. When we bought to Microw, we got a number of great analog assets. When we brought to Atmel, we got some Wi Fi assets, we've got some security assets, in the Ethanol's large microcontroller portfolio, As you go to the customers, there was largely one product per board. Atmel sold the microcontroller. There's no microchip analog or anything else present around it because we were the enemies.
So it will be anybody else's product or microchips. And in the last year, on all the internal or reference designs, development tools, sales brochures, and sales training and all that, is now full with Microchip's analog and power management and Wi Fi Bluetooth ethernet USB timing products and all that kind of stuff. So this has been a thing in building. And we are really just packaging it for you now and saying, we are seeing it working. And it took some time to train the apps engineers and Salesforce and get the distribution aligned with what some other companies have done with the distribution also gave us an opportunity.
So it's really culmination of all these initiatives coming together where we can tie a bow around and say, Hey, this looks like a new company to our distributors today and to our salespeople and others and saying I can sell a very broad portfolio today. Take any one company out of it at mail. It substantially reduces, take, you know, micro allow it, reduces it further, take SMS out, reduces it further. So it's a buildup on all these companies. I don't know if that helps you.
Welcome.
And we'll now take our next question from Chris Stanley with Citigroup.
Hey, thanks for squeezing me in guys. Steve, I'll ask you to refrain from any industry predictions, but it sounds like the improvement in microchip is mostly microchip specific. So between what you're seeing and what your distis are seeing. How do you think, like the overall semi business or the overall semi industry did during the June quarter. Do you think it just kind of held serve or do you think there was some improvement sort of industry wide that happened during the quarter?
Well, I was hoping that SIA announced their June numbers. Usually, they always announce it on July 31. This one time, I needed it and they did not. And I was going to use that to comment on it. I think they're going to announce later this week, and that would be a read on the I don't really have any comment on the industry.
Okay. And then, one quick clarification. So on the lead time stretching out, when do you think you could take them back to normal? Do you think it's like a year from now or maybe 6 months from now? Or when do you think they can get back to normal?
Yes. So I earlier said, the lead times are right now between 4 weeks 20 weeks and are stable, not going longer. The normal we consider between 90% of our products to be within 4 to 8 weeks. And we believe it's going to take us at least till June next year to get there.
And we'll now take our next question from Gil Alexander with Garfield Associates.
Thank you.
On your normal inventory levels, you used to have 130 days or 120 days Do you use these numbers now or you've changed?
So, the normal inventory for us would be 115 to 120 days. We may have in the past also said 115 to 125 days when we felt we need a larger band. We haven't changed the targets. We just cannot seem to get there, with the strength of the demand. I mean, the growth we had last quarter of 7.7%.
For last several years, that was a 2 years of growth. That we did it in 1 quarter. So we're basically it's taking everything we got in growing the capacity, building more units and then shipping it out the door for revenue. And the inventories are very low. Our inventory is 7 year low right now.
And we don't see short term being able to build it.
And we'll now take our next question from Kevin Cassidy with Stifel.
Thank you for taking my question. Yes, thanks for taking my question. As you're adding new capacity, do you have an idea of what revenue level can the capacity of Avid Drive?
Capacity is being added in small chunks all over the place. You had a furnace here, a handler here, a tester here, approver here to resolve specific product constraints on specific package types and specific product lines. It's not like we build another $1,000,000,000 fab and it takes you from here to there. So the new equipment is arriving every week to 2 weeks. So it's really more incrementally serially being added rather than in very, very large chunk to get to some new number.
Yeah. This is a better controlled and this is how you're avoiding a risk of, your customers, I guess.
Yes, but there is no capacity. There's no risk here of all this capacity that somehow sits idle. Because as soon as the next tester and handler arrives, there's a rush to put it on the floor, qualify it, characterize it, and put it in production. Every diffusion tube, every handler, every step or everything is very quickly going to incrementally produce the product. And help to either 3 things, help to either reduce the unsupported product, delinquent product to the customer.
That's the first priority. Number 2, to then really build a little bit of the inventory so that the lead time will come down. We can never get to the second because largely we should and number 3 to ship for growth. So shipping for growth is number 1. Reducing delinquencies number 2 and building inventories number 3.
We're only able to do number 1 right now, ship for growth.
Okay, understood. Thank you.
And we'll now take our next question from Ravindra Gill with Needham And Company.
Hello, Rajiv.
Caller, please check your mute function. And with no response, we'll take our next question from Craig Hettenbach with Morgan Stanley.
Yes, thanks. Just wanted to dig in a little bit more to microchip 2.0. And Steve, as you said, it's kind of been a formation over 5 years, but just anything you're doing from a sales organization from a distribution, whether it's incentivizing them or education to kind of really see the full benefits of 2.0?
So I happen to have a VP of sales and applications, Mitch Little, in the room, and I'll give him the unique opportunity to answer that question. Our compensation system, first
of all, we have to recognize our compensation system has never changed. We are the only non tuition sales team in our industry. So we've not changed any of that. We've done basically the same things. We've engaged with our distribution partnerships in just that mode.
Engaging with them to help them do more of what they're doing. So we've not shifted anything other than shifting our thinking about total system solutions a little more broadly. We're pretty much what we've always been and been successful at.
Got it. And then just as a follow-up, Steve, any commentary? And I know one of the focuses has been kind of atmel attaching, you touched on that in terms of the opportunities, but any other color you can add in terms of the design kind of funnel and what you're seeing on that front?
Well, like I said, the design win funnel is very, very large. It's almost scary. And you never know from a large design and funnel, what is the yield out of that? Because customers can always tell you this design is 10,000,000 units and turns into lower amount. We have metrics on that from years of experience, what size of the funnel can yield to what kind of growth?
So what is the yield out of the funnel? But as the with the microchip 2.0 as some of the input variables are changing, a lot of attach, a lot of ancillary designs around our micro, the whole integration of Atmel attaching our products to Atmos microcontroller, I think the yield out of that funnel is a bit less predictable. If the yield is the same as it was before, it's scaringly large, but it's possible that it is a little bit new. And therefore, the yield could be slightly different, but it enough good to be very optimistic about what I'm telling you and it's based on data and information. It's not a pipe dream.
Okay, got it. Thanks.
And we'll now take our next question from Chris Rolland with Susquehanna Financial Group.
Hey guys, nice performance on the quarter. Also great performance for MCU. Steve, I think you mentioned all those different MCU categories that were up year on year. Perhaps you can highlight maybe a few that had upside surprises for you or perhaps some that had faster growth than others?
Ganesh, do you have anything to comment on that?
No, we don't break out the growth rate of specific microcontroller segments. It works as a collective portfolio. It's very, very strong with a combined portfolio of, classic Microchip and APMA combined. And, I think it's, it's winning designs because, you know, we've infused energy into the Atmel designs, and, our historical products have always had strong momentum behind them. But outside of that, we don't have any additional color.
Okay. Switching gears, then, Steve, looking back on publishing that, letter to customers in April. That. Did you guys actually see a marked surge or kind of uptick in orders immediately, or would you say that it was kind of just select customers coming in and a smaller percentage of customers that put fresh orders in, how would you describe kind of trends immediately after publish of that. Was it a big deal or not?
It was not a big deal. We published the letter on 4th April for some strange reason investors didn't catch on to it for 2 weeks. We thought, you guys get that in a second. But we published a letter on the web on 4th April, I commented on that in our May press release in the May conference call. We basically did not see any impact bookings were extremely strong in the March quarter.
And after publishing the letter, the bookings did not really get any stronger. The activity that usually takes place is all of our worldwide sales force takes a letter to our customers and to our distributors and distributors start working with customers to understand their longer term needs and saying lead times are going longer. So don't only tell me what need it for this quarter, also tell me what you need for next quarter, start looking at major products and new designs that may have a substantial ramp coming up. And that information then through distributors and our own people, customer by customer, start flowing in into building a demand forecast and is a more accurate reflection of what we should be building and what we should be planning. And what it results is and some of it comes into backlog.
And what it results into is it increases our ability to build the product in a better mix. Remember, a large amount of product that we start wafers on, we start wafers on in forecast. Not always having a backlog today. We start on a forecast. And by the time the wafers go through fab assembly test, the backlog will come in on that product to ship it.
So, anytime you start on a forecast like that, you always have a a level of out of mix situation where we built a little too much of this and a little too little of that and a little too much then ships in the following quarter, but it results into some lost lost sales because you didn't have the right product. The effect of the letter is really giving us a broader understanding of customers' needs in more exact mix resulting into an outstanding execution in the correct mix and its results you saw in the quarter. With a very strong growth and continuing stronger growth in the coming quarters.
And it appears there are no further questions in the queue at this time. And Mr. Sangee, I'd like to turn it back over to you for any additional or closing remarks.
Well, we want to thank all the investors and analysts for attending the call and we'll see some of you during the quarter as we get back out on the investor circuit or conferences in September. So thank you very much.
And ladies and gentlemen that concludes today's conference call. We thank you for your participation.