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Microchip Technology Inc  (NASDAQ:MCHP)
Q3 2019 Earnings Conference Call
Feb. 05, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to this Microchip's Third Quarter Fiscal 2019 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 Bjornholt. Please go ahead, sir.

J. Eric Bjornholt -- Vice President and Chief Financial Officer

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 or the future financial performance of the Company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press 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 Sanghi, Microchip's Chairman and CEO; and Ganesh Moorthy, Microchip's President and COO. I will comment on our third quarter fiscal year 2019 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environment as well as our guidance, and provide an update on our integration activities associated with the Microsemi acquisition. 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 want to remind investors that during the quarter ending June 30th, 2018, we adopted a new GAAP revenue recognition standard which requires revenue to be recognized at the time products are sold to distributors versus our historical revenue recognition policy where revenue on such transactions were deferred until the product was sold by our distributors to an end customer. We recently went through a comment letter process with the SEC regarding our non-GAAP reporting.

As a result of this process, we will now be referring to what we used to call non-GAAP revenue as a metric called end market demand and will provide this metric in our earnings release each quarter. End market demand is the net dollar amount of our products licensing revenue and other services delivered to our direct customers, non-distributors, and by our distributors to their customers. We are able to calculate end market demand by our distributors based on information that our distributors provide to us about their product shipments to their customers and inventory holdings.

The value of end market demand from our distributors is calculated as the net transaction value of these shipments. We will continue to manage our business and distributor relationships based on creating and fulfilling end market demand. All of Microchip's bonus programs will continue to put to work based on end market demand. Therefore, along with our GAAP and non-GAAP results based on distributions sell-in, we will also provide investors with our end market demand based on distributions sell-out but will not provide the P&L based on end market demand.

Even though we are changing our guidance practice going forward, for transition purposes today we will provide a review of our Q2 results compared to our non-GAAP guidance provided on November 7th, 2018 using our historical non-GAAP nomenclature. Our guidance going forward will reflect the outcome of the SEC comment letter process, which Steve will also comment on during his remarks about our guidance for the March 2019 quarter.

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 using end market demand metric as expenses and expenses prior to the effects of our acquisition activities and share-based compensation. End market demand in the December quarter was $1.416 billion, above the midpoint of our guidance, which was $1.4 billion and down 6.4% sequentially from end market demand of $1.513 billion in the immediately preceding quarter. We have posted a summary of our end market demand and GAAP net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were a record 62.2%, operating expenses were 24.8% of end market demand and operating income was $530 million and 37.4% of end market demand.

Non-GAAP net income was $405.6 million and non-GAAP earnings per diluted share was $1.66 and was $0.095 above the midpoint of our guidance of $1.565. On a GAAP basis, net sales in the December quarter were $1.375 billion, GAAP gross margins were 56.7% and include the impact of $3.4 million of share-based compensation, $74.3 million of acquired inventory valuation cost and $23.8 million impact from the differences in GAAP revenue and end market demand. Total operating expenses were $584.9 million and include acquisition intangible amortization of $193.7 million, special income of $1.3 million, $5.4 million of acquisition-related and other costs, and share-based compensation of $36 million.

The GAAP net income was $49.2 million or $0.20 per diluted share and includes one-time tax expense of $0.4 million related to a variety of matters, including tax reserve releases due to audit settlements, statute of limitations expiring, tax reform and transition tax refinements, and fiscal 2018 tax provision to tax return adjustments. The non-GAAP cash tax rate was 3.5% in the December quarter and we expect a similar rate for all of fiscal year 2019. We expect our non-GAAP cash tax rate for fiscal '20 and fiscal '21 to be 5% or less, exclusive of the transition tax, any potential tax associated with the restructuring of the Microsemi operations into the Microchip global structure and any 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 US interest deductions that we believe will keep our cash tax payments low. The cash tax payments associated with the transition tax for the combined Microchip-Microsemi group is expected to be about $293 million and will be paid over eight years. We have posted a schedule of our projected transition tax payments on the Investor Relations page of our website. For GAAP purposes, we had a significant tax benefit in the current quarter for a variety of reasons discussed earlier.

Moving on to the balance sheet, our inventory balance at December 31st, 2018 was $702.5 million, although the inventory mark up from Microsemi required for GAAP purchase accounting has now been sold through and is no longer reflected in the ending inventory balance. We had a 123 days of inventory at the end of December quarter, up six days from the prior quarter's levels. Inventory at our distributors in the December quarter were 36 days compared to 37 days at the end of September. We believe that our distributors are holding an appropriate level of inventory to support end market demand.

The cash flow from operating activities was $481.5 million in the December quarter. As of December 31st, the consolidated cash and total investment position was $436.2 million. We paid down $377.5 million of total debt in the December quarter and the net debt on the balance sheet reduced by $349.4 million. At December 31st, our debt outstanding includes $2.743 billion of borrowings under our line credit, $2.713 billion of Term Loan B, $2 billion in high-grade bonds and $4.481 billion of convertible debt. Our net debt-to-EBITDA, excluding our very long-dated convertible debt that matures in 2037 and is more equity like in nature, was 4.8 at December 31st.

Our net leverage metrics are based on 12-month trailing EBITDA which will continue to provide some headwinds due to the significant distribution inventory reductions that were made in the June and September quarter for Microsemi which caused our shipment activity to be significantly less than end market demand during these periods. The weak economic environment also has negatively impacted our EBITDA in the December 2018 quarter and will continue to do so in the March 2019 quarter. We are committed to using substantially all of our excess cash generation beyond our dividend payments to reduce our debt levels and we expect our debt levels to reduce significantly over the next several years.

Our dividend payment in the December quarter was $86.3 million. Capital expenditures were $27.4 million in the December quarter. We expect about $45 million in capital spending in the March quarter and overall capital expenditures for fiscal year 2019 to be about $235 million. We continue to add capital to support the growth of our production capabilities for our new products and technologies and to bring in-house more of the assembly and test operations that are currently outsourced. These capital investments will bring some gross margin improvement to our business, particularly for the outsource to Atmel and Microsemi manufacturing activities that we are bringing into our own factories. Depreciation expense in the December quarter was $47 million.

I will now turn it over to Ganesh to give his comments on the performance of the business in the December quarter and provide an update on some of the Microsemi integration activities. Ganesh?

Ganesh Moorthy -- President & Chief Operating Officer

Thank you, Eric, and good afternoon everyone. Before I get started, I'd like to clarify that the product line comparisons I will be sharing with you are based on end market demand metric, which is how Microchip measures its performance internally. Let's start by taking a closer look at microcontrollers. Our microcontroller business was sequentially down 8.7% compared to the September quarter, reflecting a broad macro weakness in the markets we serve.

Microcontrollers, however, were up 13.2% from the year-ago quarter. Microcontrollers represented 52.9% of our revenue in the December quarter. During the quarter, we continued to introduce a steady stream of innovative new microcontrollers ranging from the industry's lowest-power LoRa System-in-Package family to single chip maxTouch touchscreen controllers for screens up to 20 inches in size through Intelligent's Network Interface Controller technology, the industry's most efficient automotive infotainment networking solution that supports all data types, including audio, video, control and Ethernet over a single cable.

In my prepared remarks last quarter, I mentioned that our microcontroller business was annualizing at over $3 billion in end market revenue. Through our subsequent investor meetings, there seem to be the perception that our 32-bit microcontroller business was not very big. To address this perception gap, we'd like to share with you that over the last two quarters our 32-bit microcontroller business is annualizing at over $1.2 billion in end market revenue. The 2018 microcontroller rankings from Gartner are normally available in April and as we have seen in prior year's results, we expect to see significant market share gains again. We will report on these results during our next conference call.

Now moving to analog, our analog business was sequentially down 6.2% compared to the September quarter, reflecting the same broad macro weakness our microcontroller business experienced. Analog, however, was up 77.9% from the year-ago quarter. Analog represented 29.1% of our revenue in the December quarter and during the quarter we continued to introduce a steady stream of innovative analog products as well, including the industry's smallest multi-output MEMS clock generator, the industry's smallest fivechannel channel temperature sensor and the most robust silicon carbide diodes and MOSFETs in the industry.

Our FPGA revenue hit another all-time record even after going back to the Microsemi and Atmel history, with 8.7% sequential growth compared to the September quarter. Our low-power mid-range PolarFire family continues to garner strong market acceptance while the prior generations continued to demonstrate consistent growth even in the current market environment. We also unveiled the industry's first RISC-V system-on-a-chip FPGA architecture, combining the industry's lowest power mid-range our PolarFire FPGA family with a complete microprocessor subsystem based on the open royalty free RISC-V instruction set architecture. FPGA represented 7% of our revenue in the December quarter.

Next, moving to our licensing business, this business was sequentially up 7.9% as compared to the September quarter. Our results reflect the sale of another patent license for a specific set of patents that can be used in non-competitive fields of use. We anticipated this patent license to close in the December quarter and include it in our guidance. We continue to retain indefinite rights to these patents for the fields of use that are of interest to us. Our patent licensing strategy is to monetize portions of the substantial patent portfolio we inherited through acquisitions by licensing select patents to players in noncompetitive fields of use. In all cases, we retain rights to use these patents in our products as well.

We had meaningful patent license transactions in September and December quarters. Investors should expect that the revenue contribution in the future from this effort will be lumpy from quarter to quarter. We do not expect meaningful contribution from the patent licensing in the March quarter.

Our memory business was sequentially down 15% in the December quarter as compared to the September quarter. And finally, our multi-market and other business was down 3% sequentially compared to the September quarter.

A quick update about the Microsemi integration. Business units, sales, operations and support groups are all making rapid progress. Our thanks and kudos go out to the combined company employees who're working hand-in-hand to achieve the accelerated synergy results. Overall, we are ahead of our synergy targets and expect continued synergy gains for many quarters to come. What will take us a the longest is the business systems and operations integration which has been done in phases. The first phase for one of the business units went live on November 1st, 2018. The second phase just went live on February 1st and involve three more business units and more phase releases are planned with a steady cadence. We expect the overall business and operational integration will take about 15 to 18 more months to complete.

Let me now pass it to Steve for some comments about our business and our guidance going forward. Steve?

Steve Sanghi -- Chief Executive Officer

Thank you. Ganesh, and good afternoon everyone. Today I would like to first reflect on the results of the fiscal third quarter of 2019, I will then provide update on our progress at Microsemi, I will then provide guidance for the fiscal fourth quarter of 2019. Our December quarter non-GAAP financial results based on end market demand exceeded our guidance for net sales, gross margin percentage, operating margin percentage and earnings per share.

Our consolidated non-GAAP gross margin reached an all-time record at 62.2% of net sales and exceeded the midpoint of our guidance by about 100 basis points. Our consolidated non-GAAP operating margins were strong at 37.4% of sales and exceeded the midpoint of guidance by about 130 basis points. Our consolidated non-GAAP EPS exceeded the midpoint of our guidance by $0.095 per share. We are pleased with the financial results despite a very unfavorable business environment with tariffs, slowdown in China, European automotive issues, higher interest rates and under absorption charges from some of our factories.

Let me also touch on the performance of Microsemi. Microsemi's non-GAAP operating profit reached a record. We're systematically improving Microsemi's financial performance and realizing significant synergies. At the time of our announcement of Microsemi acquisition, we had guided to $0.75 accretion run rate after the first year. After nearly seven months, we are well ahead of the $0.75 run rate for attrition from Microsemi. On non-GAAP basis, this was also our 113th consecutive profitable quarter, I want to thank all employees of Microchip, including employees from our acquisitions for their contribution.

Now let me provide you some further update on the progress we have made with the Microsemi integration. First, distribution inventory; after reducing the inventory in distribution channel in the September quarter, Microsemi distribution inventory remained stable at 2.6 months in the December quarter. We believe that at the current levels, distribution is holding the amount of inventory it needs to support the end market demand. In last quarter's earnings conference call, we discussed moving several Microsemi customers back to being serviced directly that Microsemi had transferred to distribution. We completed this transition during the December quarter.

Microsemi internal inventory; Microsemi is internal inventories are still high as we continue to maintain lower loadings in Microsemi's internal factories as well as sub contractors until the inventory comes in line. As we said from the beginning, Microsemi has very good engineering teams and very good products. The customers' sockets are sticky and we continue to believe there are very good end market opportunities for the combined company. Our strategy for the better part of this decade has been to buy businesses and turn them into world-class performers in the likes of Microchip.

Here we started with excellent products, excellent gross margins and excellent engineering teams. With distributor and contract manufacturing inventory reduced and with Microchip's operating expense approach, we are optimistic about achieving our long-term targets for attrition from Microsemi. So far we are ahead of our original target.

Now regarding guidance going forward, beginning with this March quarter, as Eric mentioned, we are changing the information included in our financial guidance in response to comments and discussions with the staff of the Securities and Exchange Commission. After the GAAP standard change to sell-in revenue recognition, we continue to provide guidance and track our results based on sell-through revenue recognition and refer to the sell-through revenue as non-GAAP net sales.

After the adoption of ASC 606, the feedback we received from investors and sell-side analysts has been very positive on our continuing use of sell-through revenue recognition in our reporting of non-GAAP net sales. We continue to strongly believe that managing our business on a sell-through basis in the appropriate way to run Microchip. Therefore, we would have preferred to continue to use our end market demand as our non-GAAP sale. However, after receiving an SEC comment letter and discussing with the SEC, we have decided to provide net sales guidance based on sell-in revenue recognition under the new GAAP standard.

We will continue to provide non-GAAP guidance for gross margin percentage, operating expense percentage, operating profit percentage and earnings per share, but we will use sell-in based GAAP revenue for these calculations. When we report our results, we will also provide information on end market demand so that investors can understand the consumption of our product in the marketplace, but we will not use the end market demand for calculation of the non-GAAP P&L.

Now, I will provide you guidance for the March quarter. The guidance we provided for the September and December quarters which reflected our caution on business conditions turned out in retrospect to be spot on and was the harbinger for broader industry weakness. We continue to be cautious about the outlook for the March quarter. We see a very uncertain business environment with tariffs, slowdown in China, European automotive issues, higher interest rates potentially causing US GDP to slow down, any lingering effect of US government shutdown and potential for further US government shutdown. With all this commentary, we expect our total GAAP net sales based on sell-in revenue recognition for March quarter to be up 2% to down 9% sequentially.

We expect our non-GAAP gross margin to be between 61.2% and 61.8% of sales. We expect non-GAAP operating expenses to be between 25.8% and 26.5% of sales. We expect non-GAAP operating profit percentage to be between 34.7% and 36% of sales. We expect our non-GAAP earnings per share to be between $1.26 per share to $1.53 per share. Again, all these ranges for non-GAAP gross margin percentage, operating expense percentage, operating profit percentage and earnings per share are based on GAAP revenue and sell-in revenue recognition.

We also want to give the investors and analysts a sense of how we see the Microchip business past the March quarter. As you know, there is a substantial pending date of March 1, 2019 when if there is no settlement between US and China, a 25% tariff would kick in for about $200 billion of Chinese goods shipped into US. We think that the two governments will make some progress, but it is likely that the date of March 1, 2019 will be extended further out.

Barring any material negatives development on the trade front, we see the March 2019 quarter to mark the bottom of this cycle for Microchip. We cannot yet say what the shape of the recovery would be, will the recovery be a V-shaped to U-shaped or L-Shaped, that will depend somewhat on the outcome of the trade talks, but we do see a bottom forming and believe that the March quarter will mark the bottom for this cycle for Microchip.

Given all the complications of accounting for our acquisitions, including amortization of intangibles, restructuring charges and 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 GAAP basis. We believe that non-GAAP results provide more meaningful comparison to prior quarters and we request that the analysts continue to report their non-GAAP estimates to First Call.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll go now to Craig Hettenbach with Morgan Stanley.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes. Thank you so much. Steve, I appreciate the color around kind of tariffs and how you are thinking about things kind of post-March. Just any signals that you're looking at in terms of calling the bottom here whether it's kind of run rate of business, inventory at distribution, or customers just how you're seeing kind of the business evolve kind of beyond the March quarter?

Steve Sanghi -- Chief Executive Officer

Well, we look at a variety of factors including bookings and billings activity, discussion with our direct and distribution customers, distribution sell-through activity, customer cancellations, customer pull-ins, delivery pushouts, and pull-ins. With 120,000 plus customers that we service in a vast range of end-markets and applications, we really believe that we get a very broad perspective of what is happening in our business. Today these indicators are telling us that the environment is still very uncertain driven by a variety of factors, including the trade situation. However, we don't see things getting worse at this point, unless something more negative occurs on the trade front. Based on the vast amount of data that we get, we're really seeing a framework for the formation of a bottom for this cycle in the March quarter.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. And then just as a follow-up, can you talk about so far this quarter to-date kind of January into February, you know, what type of linearity you're seeing and how the business has been?

Steve Sanghi -- Chief Executive Officer

So, business is tracking well to the guidance we're providing. We have seen the bookings stabilize and even increased somewhat very recently, but I would say, it's a very short duration indicator and it's really not enough for long enough time to give you making calls based on that.

Craig Hettenbach -- Morgan Stanley -- Analyst

Appreciate it. Thanks.

Operator

We'll go next to Mark Delaney with Goldman Sachs.

Mark Delaney -- Goldman Sachs -- Analyst

Yes, good afternoon and thanks very much for taking the question. Steve, I was hoping first if you could give us a better sense as you think about the March quarter, if you think sell-through will be above or below or similar to the sell-in revenue that you're giving guidance for?

Steve Sanghi -- Chief Executive Officer

Yes, so we are -- we did not really have a good process for forecasting what the change in distribution inventory is going to be. That's not how we run our business historically. You know that. That's why we've given the sell-through information or end market demand consumption, historically. We really feel, as we said, kind of in our prepared remarks that distribution inventory is in a good position to support what end market consumption is. So I think at this point in time we've given a pretty broad range of guidance for the quarter of plus 2% to down 9%. So that's probably the broadest range of guidance you've seen from Microchip in a long time and some of that is the unpredictability of what the sell-in versus sell-through is going to be.

Mark Delaney -- Goldman Sachs -- Analyst

That's helpful. My follow-up question, on the completed quarter revenue and gross margins were above your guidance. Can you just give us a better sense for what enabled the Company to exceed its guidance on those financial metrics?

Steve Sanghi -- Chief Executive Officer

Well...you want to take that, Eric?

J. Eric Bjornholt -- Vice President and Chief Financial Officer

sure, I mean revenue was roughly 1%, little more than a 1% better than our guidance was. And I think that's just kind of the puts and takes that we saw in the quarter but it was good that we came in above the midpoint. And then on the gross margin side, we had a very favorable product mix in the quarter. We continue to really focus on cost reductions out of manufacturing area. You know that we made quite a bit of changes in terms of any discounts that were previously given for the Microsemi portion of the business on sales to distributors or contract manufacturers and we're really seeing the benefit reflect itself in the gross margin today.

Mark Delaney -- Goldman Sachs -- Analyst

Thank you.

Operator

We'll now take a question from Ambrish Srivastava from Bank of Montreal.

Ambrish Srivastava -- Bank of Montreal -- Analyst

Hi, thank you very much. Maybe you could just stick to the gross margin side, your guidance is on a Q-over-Q, that's a pretty big delta, but yet your margins are coming in much stronger than what I would have modeled it for. Can you just help us understand the dynamics there in the guided two quarter, especially in light of your inventory came down as well and I'm expecting you're not building inventory in the quarter. And then I have a quick follow-up.

Steve Sanghi -- Chief Executive Officer

Is your question that the gross margins are coming down, but the operating margins are not as much?

Ambrish Srivastava -- Bank of Montreal -- Analyst

No, my question is gross margin is coming in stronger than what I would have modeled given your shortfall in the revenues versus what the Street was expecting.

J. Eric Bjornholt -- Vice President and Chief Financial Officer

So I think the same reason where the gross margins were strong this quarter. We are getting an uplift from lot of the discounts that were given to the distribution channel and contract manufacturers and others and lot of the business that was moved to distribution from the Microsemi business, we have completed the conversion back to direct and therefore you take out the distribution margin hit. So all that is having a positive effect on ASPs and our margins. We are continuing to reduce cost in all of our factories. That is still lot of Atmel product which was outside. Every quarter more and more of it is coming in. There is also some Microsemi product we're starting to bring in. Some of the expenses have been taken out from the manufacturing overhead in synergies. So, there are lot of moving parts and the product mix is very healthy.

Ambrish Srivastava -- Bank of Montreal -- Analyst

Okay, good then my quick follow-up, Steve, usually things don't turn around that quickly and it's a small piece of the business FPGA, but if memory serves me correct, it was kind of the $320 million, $325 million run rate annual and you posted $100 million quarter. What's going on, is there -- hopefully not a last time buy, but some design wins that are ramping? Thank you.

Steve Sanghi -- Chief Executive Officer

Yes, there are no last time buys in FPGA that are driving that revenue. There has been seeds sown for many quarters on some of the new products, the fourth and fifth generation of the FPGA products. There's some of the FPGA which is exposed to markets like defense and aerospace. They have some quarter ending budget that needs to be spent. But it's a stable solid business and we see many, many good characteristics for how that can be continued to be built on. Quarter-to-quarter, we may have small changes, but overall, if you look at annualized revenue, it's on a nice -- good growth path for us.

Ambrish Srivastava -- Bank of Montreal -- Analyst

Yes, truly. Thank you.

Operator

We'll take our next question comes Vivek Arya with Bank of America.

Vivek Arya -- Bank of America -- Analyst

Thanks for taking my question.

Steve Sanghi -- Chief Executive Officer

Hello, Vivek,

Vivek Arya -- Bank of America -- Analyst

Hello, Steve. So, Steve, can you give us some color by end market, whether it's industrial or auto or consumer or communications where you are perhaps seeing better or worse trends than what the midpoint of your March outlook would suggest?

Steve Sanghi -- Chief Executive Officer

Ganesh?

Ganesh Moorthy -- President & Chief Operating Officer

Rather than going segment by segment, I think we have previously indicated that the automotive, industrial and consumer home appliance markets were weaker. In the last quarter, especially as we look at this -- in the guidance for this quarter, we're seeing the addition to that, the data center market, the communication markets have also started to have some softening that goes with that. So at this point in time I can't pick any one of them to say this is the main reason why the strength is coming or the weakness is coming. I think we're seeing a broad-based weakness and even some which were stronger last quarter are less strong at this point in time. Defense and aerospace has continued to be strong. It could have some impact this quarter from the government shutdown and what impact that may have, but that's all built into our guidance at this point.

Steve Sanghi -- Chief Executive Officer

I think aerospace and defense is a market in its own space and it doesn't really follow the usual what happens in industrial, consumer and other, it's a very different business. We did see some impact from the government shutdown we couldn't get certain export licenses processed and some programs were not released, but we kind of expect it to square up in the quarter, not really have any significant impact going out of the quarter. There is some impact of budget flush and there's a lot of budget flush in September and December quarters where all these large customers, they have government budgets and they need to spend it otherwise you use it or lose it. And so March quarter is sequentially down in that segment because of the budget flush.

Vivek Arya -- Bank of America -- Analyst

And so on my follow-up, Steve, is the -- let's say, do have a trade resolution in the next few weeks, do you think there is a potential for an inventory refill or do you think the industry is shipping to consumption right now, so we should not be modeling any better than seasonal quarters going forward?

Steve Sanghi -- Chief Executive Officer

I don't know about how everybody else is doing. So I will just speak for Microchip rather than the industry. A settlement of trade would be a bonanza. Our customers and distributors are so cautious, there is low visibility, they're building their bonds what the need for the backlog from their customers, nobody wants to get stuck with anything depending on what happens. If the trade talks are federal (ph) prior to March 1, this will be a big bonanza.

Ganesh Moorthy -- President & Chief Operating Officer

Yes, I think I'd just add to that is you can tell from our last two quarters of actual results where our end market demand was higher than what the sell-in revenue was, there's definitely a bleed down of the distribution inventory and we don't think that the end customer is probably any different although we don't get real data points on that.

Steve Sanghi -- Chief Executive Officer

Yes. So we are not shipping to consumption, as you said. We're shipping well below consumption.

Vivek Arya -- Bank of America -- Analyst

Okay. Bonanza sounds good. Thank you.

Operator

We'll take our next question from John Pitzer with Credit Suisse.

John Pitzer -- Credit Suisse -- Analyst

Yes, good afternoon guys. Thanks for letting me ask some questions. I guess, Eric, you said in your prepared comments you made the comment that the guide for the March quarter on the revenue is wider than normal. Can me help me understand to what extent is that just a reflection of how uncertain this environment is and to what extent is that just a reflection of having now to guide to sort of the sell-in revenue. And as we think about future quarters, is this now the right range of guidance around the midpoint you're going to give us or is this just a wider because of uncertainty?

J. Eric Bjornholt -- Vice President and Chief Financial Officer

I believe it is a combination of both, right. I mean, we haven't given guidance historically based on sell-in. So this is new to Microchip and we don't feel that we have a good way to understand if distribution inventory is going to increase or decrease in the period. So that as a factor, but obviously the environment is very uncertain. So I can't parse it out in terms of what percentage is each but this is a pretty broad range of guidance...

Steve Sanghi -- Chief Executive Officer

Yes. So I think I would just say maybe sticking my neck out a little bit that, you know, over time I think we will learn to have the guidance narrower. We have a very broad distribution. We do business with over 100 distributors around the world, which is not the case with many other semiconductor players that do business with largely three or four large distributors. As you know, in the past we have large distributors which we call global distributors. We have catalog houses and we have nearly 80 to 100 distributors in China alone. So our distribution network is very, very broad and to really figure out what everybody is going to buy, those are not the processes we've worked on in the past.

We don't really care what distributor buys, we care about what distributor sells out and our processes that care of that. So we will get better at it very rapidly. We're not saying years, we're saying quarters. We'll get better at it and the guidance will narrow. And the other impact is the uncertain environment, once the environment gets more certain I think we will narrow it also.

J. Eric Bjornholt -- Vice President and Chief Financial Officer

I think another contributing factor is that lead times are very, very short today, right. So backlog visibility is not great.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. Then maybe my follow-up guys. I just wanted to go back to the gross margin. A couple of other questions were asked around that. I'm just kind of curious, given that, Steve, you mentioned you are under shipping demand today in conjunction with sort of the slowdown, the industry level, you are also working through some excesses that the Microsemi business had when you bought it. I'm just kind of curious, how should we be thinking about utilization now, have you done all the utilization adjustments you needed to and I guess more importantly, as business comes back and you benefit from increasing utilization and some of the more in-sourcing activity you're doing, how do we think about kind of that long-term target gross margin because relative to that 63% you've talked about, you're not too far away in what's really, you know, rather a lackluster business environment. Is 63% the right margin to think about or could it be higher?

Steve Sanghi -- Chief Executive Officer

Good question, as always. You know, just keep that question on the back of your mind and I think as we get further, as we establish 63% then we will assess further. Right now, especially Microsemi factories are significantly under-loaded because we first corrected the distribution inventory and then the internal inventories were much higher. The internal inventories from Microsemi that we inherited are lot higher than really the level of inventory at Microchip. So we have a number of factories running at 50% capacity, number of them are running something higher than that. So, overall utilization is very low.

But -- and I made this point last quarter, you know, I think only about 10% to 20% of -- 15% of Microsemi business is done in the internal factories, the rest come from the foundries. So from foundries we have aggressively cut the starts and assembly and test loading to really bring that down rapidly at subcontractors. Internal, we have carried in the factories are running below capacity and when the business comes back, we get some improvement from utilization from the internal factories, but they were only 15% of Microsemi business, they are only probably 5% of our business, total Microchip, so just be careful.

John Pitzer -- Credit Suisse -- Analyst

Thank you.

Operator

We'll take our next question from Harsh Kumar with Piper Jaffray.

Harsh Kumar -- Piper Jaffray -- Analyst

Hi, one for Steve and one for Eric. Steve, I wanted to ask about your comment about marking the bottom in March. Couple of other broad companies have said the same thing. But they're usually talking about either some sort of stabilization in backlog or some kind of metric that they're watching and monitoring. I'm also -- when you make that statement, I'm also hearing sort of Ganesh in response to a question said things are still getting worse in some of the markets. So I'm curious if you have any kind of tangible data in terms of either backlog or orders or something else you could point to and do you think the China industry is sort of flushed at this point in time and that's where we are basically shipping to true demand and maybe under-shipping and that's the reason why you feel better about it? And then I've got a follow-up for Eric.

Steve Sanghi -- Chief Executive Officer

So I would say some of the data center and other business you are talking about, they are also down somewhat seasonally and they are weaker seasonally because March quarter is weak compared to September and December quarters in which year-end shipments happen. But I think the question you're really asking is what gives us the confidence that the March quarter will mark the bottom. Is that the question?

Harsh Kumar -- Piper Jaffray -- Analyst

Yes.

Steve Sanghi -- Chief Executive Officer

Okay. So I think I would say we really can't present to you enough data to convince you and we're not going to try. What we can tell you is that our current backlog for June quarter is about flat with the backlog we had for the March quarter on November 5. Okay? So, that may look flat, but then you have to look at after November 5th, we had a bunch of holidays, you know, Thanksgiving, Christmas and then Chinese New Year in the March quarter. There are no major holidays for June quarter. So, starting with a flat backlog and going into the stronger quarters without the holidays, that's why we say barring any significantly negative developments from the trade negotiations with China, you know, we believe the June quarter will strengthen or we are confident that it should not be sequentially down again.

But the second point I would say, Harsh, is and I don't mean this for all the analysts and for all the investors. There are lots of them that have followed us for a long time and believe the calls we make, but there is -- there are lot of the others who don't. We have made numerous calls in the last 15 years or so for the business environment to turn negative and then turn positive. When we first make a negative call, first it is not believed, it's even ridiculed few times. Then three to fourth months later, what we say gets confirmed and everybody goes down.

Then comes a recovery part of the call, it is not believed either. As we go on the road over and over and over, we get the question, what gives you the confidence and we answer it. That is not believed either. So to my recollection, we have not been wrong in 15 plus years in calling the downturn and we have not been wrong in the same time frame calling the upturn, and that's what gives us the confidence. As you say in your business, past performance is no guarantee of the future results. So we don't guarantee anything. So, of course our confidence is subject to some number of risks, but I think that's the narrative I like to explain.

Harsh Kumar -- Piper Jaffray -- Analyst

That's very helpful actually. And then question for Eric was, how much free cash flow do you expect by your calculation to be available for debt payment in March? And if that's the base level number and we expect business to better so we can get an idea of what you're kind of going to be able to do hopefully going forward if nothing macro changes?

J. Eric Bjornholt -- Vice President and Chief Financial Officer

Sure. So we expect somewhere between say $175 million and $200 million of debt pay down in the current quarter. The last two quarters were significantly higher than that. I would say that we obviously are coming off where our accounts receivable is down quarter-over-quarter. We had some very good help from some of our customers and some of our vendors in terms of payment terms and negotiating that and really making significant progress compared to what our guidance was in the December quarter, but we don't really have those levers to pull in the current quarter. So I don't think I'd use that $175 million to $200 million as kind of an ongoing run rate. We do expect that it will get significantly better from this point forward, but we'll continue to focus really all of our excess cash generation outside of the dividend on paying down debt.

Harsh Kumar -- Piper Jaffray -- Analyst

Thanks guys. Thank you for the color.

Operator

We'll go to William Stein with SunTrust for our next question.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Hi, thanks for taking my question. Steve. I'd like to maybe take a different approach to the sort of cycle and recovery question. Acknowledging that you've tended to call these turns early and correct. I just want to understand what's giving you the confidence from the perspective of trade? We have this March 1 deadline hanging over us and it sounds like you're providing us with some, not guidance, but some sense of demand post March quarter that implies this gets resolved constructively and I'm just wondering why you're -- why you feel confident to do that? And then I have a follow-up, please.

Steve Sanghi -- Chief Executive Officer

I don't know if that's what I'm saying. Actually I'm seeing very clearly that barring any significant negative developments on the trade front, there was a caveat in what I said. What I also said was that I think with a month to go to March 1, I think the governments are making progress, the positive signal is coming out of the White House. You recall how negatively signals were coming out regarding Canada during one of the conferences I think and then all of sudden a week later it all came out good. So, Trump has used that strategy in a way and then not those negative signals coming about China. So I think the progress must be good, but it's a lot of work to get done and I'm simply saying it's most likely that there is some positive announcement, but the actual settlement gets pushed out further. If settlement gets pushed out further, the environment we're seeing remains. Our guidance assumes a fairly current environment continuing and if that current environment continues, then June quarter is still greater than March quarter.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Okay, thanks for that. One other question on the Microsemi integration. I know that -- I recall they acquired Vectron lower margin business right before you acquired the whole company and that was a -- they never even reported a quarter with that asset and there were some other things in their portfolio that might not have met Microchip's, I don't know, view of a great business to be in. I'm wondering if you've made any portfolio adjustments, if you've closed any of their businesses so that we can think about it maybe a different margin profile or growth profile when demand normalizes and all the inventory adjustments are made? Thank you.

Steve Sanghi -- Chief Executive Officer

We have not. We have not sold any of the businesses. We have not closed any of the Vectron factories. We're running the business. You are correct that the business is at a lower gross margin. By using our usual techniques, we are trying to improve the gross margin through ASP management. They also -- Microsemi had cut some expenses and we have cut some. So the contribution to EBITDA is actually much higher than really where it was originally. But the gross margins, if you only focus on that, then the gross margins are lower.

We have other businesses at Microchip where the gross margins are lower than our corporate margin. There are also many businesses that are higher in 70s and 80s. So at the end of the day, it's a mix.

Ganesh Moorthy -- President & Chief Operating Officer

There's a question (inaudible) Vectron. In the last two conference calls, we've also mentioned as part of our integration efforts, we have reviewed every single business. And while there are many, many excellent businesses, there were some that needed improvement and we have made adjustments in terms of level of investment we're making in those businesses to be better overall results for us as well. So, but that's all largely behind us at this point. As Steve mentioned, on Vectron and all the other businesses, we are working on improving what we inherited and making significant progress toward it.

Steve Sanghi -- Chief Executive Officer

And when the factories come back to full production as we take out this excess inventories, the Vectron business will see substantial cost reduction through higher utilization in that factory, their numbers are going to start looking much better.

William Stein -- SunTrust Robinson Humphrey -- Analyst

Great, thank you.

Operator

We'll now take a question from Chris Caso with Raymond James.

Chris Caso -- Raymond James -- Analyst

Yes, thank you. Good evening. Just wanted to ask a question about revenue geographically. And I guess that we probably anticipate some of the weakness that you've seen in Asia that you talked about before, it look like from the results that you saw a downtick in Europe also. Can you talk about that and if there's anything specific geographically, you're anticipating as you go into the March quarter?

J. Eric Bjornholt -- Vice President and Chief Financial Officer

I can take that. So I mean, all geographies were down, we posted this on our website. So it's available for everybody to see and it will be in our 10-Q filing, but all geographies were down. It is not unusual, all four of the Americas and Europe to be down in the December quarter just because of all the holidays and typically we see strength from Asia in that time period prior to leading into the Chinese New Year in the current quarter. But I think all geographies were weak. This weakness was not just a China issue, it's kind of spread across the globe. And in terms of forecast for the next quarter, the current quarter that we're in, we don't really break out the forecast by product line or geography.

Steve Sanghi -- Chief Executive Officer

Well, I think directionally in the March quarter usually our European business is strong. Our China business is weak because of Chinese New Year, even in a normal time, we're also dealing with trade here and the US business is kind of normal. So I think directionally you can have that.

Chris Caso -- Raymond James -- Analyst

Okay. Just as a follow-up. The follow-up question's on revenue linearity through the quarter and kind of expectations for March as well. And you mentioned last quarter that you saw a slight uptick, I guess, in the first month of the quarter. I presume that downtick toward the end of the quarter and then how do you typically see linearity as you go through the March quarter, again, taking into consideration the Chinese New Year holiday in the middle?

Steve Sanghi -- Chief Executive Officer

Well, so I think the uptick we talked about in bookings in November call basically did not hold. I think you have heard from everybody that December was fairly weak. That's always the problem in making decisions based on very short-term data and I said that earlier that our bookings have normalized. Very lately we have even seen some strength, but don't take it to the bank yet, I'm not taking to the bank. We have made the call today at the midpoint down about 3.5% sequentially from GAAP to GAAP revenue. This does not include any dramatic improvement of bookings or improvement of trade or anything like that. I think it's just assumes that the market stays in the doldrums.

Chris Caso -- Raymond James -- Analyst

Okay, understood. Thank you.

Operator

Our next question comes from Harlan Sur with JPMorgan.

Harlan Sur -- JPMorgan -- Analyst

Good afternoon. Thanks for taking my question. In terms of executing on the March quarter guide and maybe providing the team with a bit more confidence on the June quarter kind of qualitative outlook, historically how much changes upon the replenishment rates post Chinese New Year and when do you typically get these signals, is it two weeks, three weeks after Chinese New Year?

Steve Sanghi -- Chief Executive Officer

So, March quarter sometimes lands up very much depending on where the Chinese New Year falls based on the lunar calendar. Earlier the Chinese New Year, the better the March quarter usually lands up being because Chinese customers kind of go slow before that then they come back and then they see all charged up and ramp up the factories. So Chinese New Year is happening this week, which we will consider kind of early because it can be -- late February can even be fairly late, but it has been even earlier sometime in late January, but this is really early to mid. So this is good sign and we will see what happens after Chinese New Year.

Harlan Sur -- JPMorgan -- Analyst

Okay, I appreciate the insights there. I know you guys are waiting for the Gartner data, but just looking at the recent SIA data, the MCU segment was down about 4% sequentially in Q4 versus your MCU business, which was down about 9% sequentially. I know you guys look at this data as well. Any reason for the big delta, is it sell-in versus sell-through, so not a fair comparison?

J. Eric Bjornholt -- Vice President and Chief Financial Officer

I think in any given quarter, you're going to find that the data is more noisy. It's easier to look at these on a four-quarter rolling basis and that's what we expect when we will see the 2018 data. So there is no doubt in our mind we're gaining market share, but quarter to quarter, the numbers can be more noisy.

Harlan Sur -- JPMorgan -- Analyst

Thank you.

Operator

Our next question will come from Gil Alexandre with Darphil.

Gil Alexandre -- Darphil -- Analyst

Good evening.

Steve Sanghi -- Chief Executive Officer

Hello, Gil.

Gil Alexandre -- Darphil -- Analyst

Good evening.

Steve Sanghi -- Chief Executive Officer

Good evening.

Gil Alexandre -- Darphil -- Analyst

Nice work.

Steve Sanghi -- Chief Executive Officer

Thank you.

Gil Alexandre -- Darphil -- Analyst

(inaudible) it seems that your 300 synergies is pretty good number looking for fiscal '21 or '22.

Ganesh Moorthy -- President & Chief Operating Officer

So what I would say to that is we are ahead of the accretion target today, just because in some cases we have pulled some of the synergies in, it has gone better in terms of integration, but we haven't revised the final number. The other major change that happened is this business environment recession that we're going through that we have not built into the forecast. Nobody had anticipated back then. It will depend on the shape of the recovery. If the recovery is fast like it has happened in some prior cycles and we get back on that schedule. If the recovery is lot slower and it's kind of L-shaped recovery, it stays in doldrums for the year then the schedule for achieving that may have to be adjusted. But I don't think we're uncomfortable with the number, total accretion.

Gil Alexandre -- Darphil -- Analyst

So it really means that you get $8 non-GAAP earnings in fiscal '21 or '22, or you could?

Ganesh Moorthy -- President & Chief Operating Officer

Well, you're putting words in my mouth, but that was our forecast then and again, depending on the shape of the recovery that is still our target.

Gil Alexandre -- Darphil -- Analyst

Okay. And your long-term model targets are stayed the same as you made in March of 2018?

Ganesh Moorthy -- President & Chief Operating Officer

Correct. I think -- state them again for everybody.

J. Eric Bjornholt -- Vice President and Chief Financial Officer

So it is 63% gross margin, 22.5% operating expenses and 40.5% operating margin on a non-GAAP basis.

Ganesh Moorthy -- President & Chief Operating Officer

Yes, thank you.

Gil Alexandre -- Darphil -- Analyst

And do I need to be concerned that autos represent 17% of your mix?

Steve Sanghi -- Chief Executive Officer

Autos has been a very good business and you shouldn't be concerned. We have just tremendous funnel of the design wins in automotive for future and all that, significant entry into various electric vehicles around the world and autonomous vehicles around the world. So there is really no reason to be concerned. The issue in automotive market have been two. One is Europe implemented a new emission standard for their diesel vehicle starting September 1 and all the agencies had a one-year notice, they knew a year ahead of time that the new emission standard will go into effect on September 1, 2018.

September 1, 2018 came and there was no capacity. People kind of just felt sleep on the switch. So there were millions of cars taking away airport parking lots that can't be on the road because they don't pass emission standard. So that created a significant dislocation in the European car market. It's working through, it will take more time to work through all that. So that was one issue. And the second issue was the slowdown in China. China is now the largest automotive market, larger than US and larger than Europe and China is going through its own issues of slowdown and stock market crash and some of the people's wealth have been affected. So the China automotive market, all that will come back.

Ganesh Moorthy -- President & Chief Operating Officer

And Gil, if I can add one more point. The consumption of electronics going into cars continues to go up year after year after year. So -- and in many years that consumption of electronics going up offsets any reduction in production as well. And so, that's been the long-term trend and it remains so.

Gil Alexandre -- Darphil -- Analyst

I thank you very much. Good work.

Steve Sanghi -- Chief Executive Officer

Thank you, Gil. Nice to hear you on the call.

Gil Alexandre -- Darphil -- Analyst

Thank you.

Operator

We'll take our next question from Kevin Cassidy with Stifel.

Kevin Cassidy -- Stifel -- Analyst

Thanks for taking my questions. Hi, Steve. Maybe just on the 32-bit micro traction that you're seeing, can you say what end markets it is, maybe your discussion around automotive maybe that plays into it. But can you say which end markets you're gaining the traction?

Ganesh Moorthy -- President & Chief Operating Officer

We're broadly represented, the 32-bit microcontroller market, the standard products are broadly represented in all the end markets, it's a ubiquitous product. I can't pick any one of them that's necessarily the one that's going there, but we've been coming off of a -- being lower in the rankings, we're rapidly coming up the rankings and as we do that it has to come from all the different segments that we plan.

Kevin Cassidy -- Stifel -- Analyst

Okay, great. And maybe is there such a thing as an upgrade from your 8- and 16-bit customers going to 32, is that helping your traction?

Ganesh Moorthy -- President & Chief Operating Officer

No, not at all. I think the 8- and 16-bits are continuing to do well. And again when you see the annual results for 2018, you'll see that all three segments as it was in prior years are doing well. The 32-bit, we have more capabilities that have come both organically as well as through the acquisitions. It's allowing us to play in a number of incremental markets that perhaps we couldn't get to a few years ago. And so I think the point of providing some color was there was a sense of perhaps 32-bit was still very small for us, we've been just playing in 8- and 16s. 32-bit at over $1.2 billion annualized base in the last two quarters is a pretty significant portion of a $3 billion plus annualized microcontroller market for us.

Kevin Cassidy -- Stifel -- Analyst

Okay, thank you. Congratulations.

Steve Sanghi -- Chief Executive Officer

Thanks.

Operator

We'll go next to Chris Rolland with Susquehanna.

Christopher Rolland -- Susquehanna -- Analyst

Hi, Steve. So regardless of the SEC opinion this analyst supports the standard should be sell-through for what it's worth, but in terms of the question, now that we're a few quarters into Microsemi what has been the biggest positive surprise for you in terms of products and traction and demand for those products positively since you guys closed?

Steve Sanghi -- Chief Executive Officer

I would say that we confirm usually a lot of positives after we close the acquisition. We don't usually find new positive because the management is always, you know, those are the positives they bring out and they are selling of the company, so there isn't (ph) not hidden positive. We usually find some new negatives that we may not have known or may not have fully understood or may not have been fully explained as you have seen. But on the positive side, we don't get surprises, but we get confirmation.

And here as I said, we've got a very good confirmation. The products are very good, customers sockets are very sticky in discrete military products, in FPGAs sockets, and a lot of the analog sockets, in timing business, and data center businesses and they are very good businesses, a good sticky socket, very complex products as well as very simple discrete products. So it has a range of products and very, very good engineering teams, and very, very good work done and I think we have continuously said that we feel very good about it, business fits very well with Microchip.

We have truly enhanced the ASPs and gross margins by our methodology of discontinuing some of the discounts and all that. We've brought the inventories to the right levels. Internal inventory, we're still working through as we reramp the factories, I think that will have some more positive effect. So all that is very good. I think we feel good about where we are.

Christopher Rolland -- Susquehanna -- Analyst

Great. And then on some of the PMCS products whether it's optical or storage, given kind of the well-known storage slowdown trends that we've seen out there more broadly and then some guys talking about a data center slowdown or hyperscale digestion out there, have you seen any of this at all and have you seen that play into either optical or storage for you guys?

Ganesh Moorthy -- President & Chief Operating Officer

I think built into our guidance for this quarter, as I mentioned earlier, does reflect that there is some weakness in those two segments, in communications and data center. It's not different from what others have been talking about as well and we are seeing that in the Microsemi products that play into those segments.

Steve Sanghi -- Chief Executive Officer

But I don't think anybody questions the strength of data center or communication markets as a good market longer term. Any segment is going to go through inventory digestion and cycles. The question we were dealing with was, is Microsemi a good business? Is it the right acquisition? A short-term cycle coming in and having some hyperscale digestion for a quarter or two will not really factor into our decision. I think this will be a very good business long-term.

Christopher Rolland -- Susquehanna -- Analyst

Thanks, guys.

Operator

Our next question will come from Rajvindra Gill with Needham & Company.

Rajvindra Gill -- Needham and Company -- Analyst

Yes, thanks for taking my questions and forgive me if this question was asked because I am joining late. But I was wondering if you could -- if you can make a distinction between any potential trade settlement or trade agreement versus the actual deceleration that's happening in the Chinese economy. So meaning, if there is some sort of trade settlement, what impact would that have in the business environment or is it just maybe taking one risk off the table, but the reality is that the economy is slowing down dramatically and the trade agreement would really more have a sentiment improvement, but nothing really changing in terms of actual business. Just wondering if you could -- maybe if you could just elaborate on that.

Steve Sanghi -- Chief Executive Officer

So, Rajvi, I think our assessment is that trade is the problem why Chinese economy is weakening so much. China has been the production center for the world. And as these trades came in, Chinese goods became more expensive and threatened to go more expensive with $200 billion of Chinese goods getting 25% tariff, that's a $50 billion tax. So companies have moved production out of China to the extent they could, to the extent the product was running in two different factories and one was outside, but there is just not enough capacity outside of China to take all that outside, but there are lots of them in works.

With the tariffs, Chinese stock market has taken a major hit and Chinese consumers use the stock market as the cash machine to run their businesses and buy cars and buy stuff. So I think you cannot take (ph) the trade issue away from the Chinese economy. As the trade issues settle, that is a boost of the Chinese economy will need. And then the people have to think about, do they stop taking factories outside of China or with the trade talks settled, all their efforts stops. I can't know what would have happen there. Is there a a future risk? If there is complete removal of trade barriers, then I think nobody is going to do the work to move the factories outside if the settlement happens whether there is significant barrier on both sides, then all that will continue.

Rajvindra Gill -- Needham and Company -- Analyst

That's helpful. And along those same lines, do you think there will be some sort of fiscal stimulus in addition to the -- if there is a trade agreement, a fiscal stimulus coming out of the Chinese government?

Steve Sanghi -- Chief Executive Officer

I thought (ph) there already was one.

Ganesh Moorthy -- President & Chief Operating Officer

Yes, some small ones that have been done, but we don't have any inside knowledge...

Rajvindra Gill -- Needham and Company -- Analyst

Post New Year, post Chinese New Year?

Steve Sanghi -- Chief Executive Officer

I think that was one small one done, but I would think, yes, if there is a settlement and trade post Chinese New Year, you know, whenever Chinese economy has been weak, that's what they have done, stimulus for various things. That's largely predictable. And I don't know, I don't have a line to the premier, but I think that's probably what would happen.

Rajvindra Gill -- Needham and Company -- Analyst

Okay, thank you.

Operator

We'll take our next question from Janet Ramkissoon with Quadra Capital.

Steve Sanghi -- Chief Executive Officer

Hi, Janet, long time no see.

Janet Ramkissoon -- Quadra Capital -- Analyst

Yes. I was still there as a shareholder, Steve, very happy. Just a question about the China again. Could you comment on the business with ZTE in the quarter. Did you see a recovery there? And do you have any exposure, specifically to Huawei?

Steve Sanghi -- Chief Executive Officer

So ZTE had no restrictions in the quarter and our business was normal. I think we've said in the prior quarter, there was some demand destruction where during the time ZTE couldn't build the product, they lost some designs and competitor picked it up and in certain cases we got designed with the competitor also, in certain cases we did not. But ZTE business is kind of normal. The Huawei business is normal. There is a lot of talk about US indictments and CFO has been detained in Canada. There has been no impact of any of that on the Huawei business yet.

Janet Ramkissoon -- Quadra Capital -- Analyst

Thanks very much, appreciate it.

Steve Sanghi -- Chief Executive Officer

You're welcome.

Operator

Our next question will come from Craig Ellis with B. Riley FBR.

Craig Ellis -- B. Riley FBR -- Analyst

Thanks for taking the question. Steve, I wanted to go back to the issue of integration with Microsemi a bit, approach it more qualitatively than quantitatively understanding that you're not changing any targets at this point. So as we look at calendar 2019, can you just touch on what the key integration milestones are, objectives are, top two or three for sales items and channel management. Then the follow-up, obviously right now it's similar, if we looked lower on the income statement at manufacturing and operating expenses, what would be some of the key issues you'd want to tackle this year in those areas as well?

Steve Sanghi -- Chief Executive Officer

Well, we are moving forward on a very, very wide beachfront, so pick one. When we bought Microsemi, Microsemi compiled their results on 21 different ERP systems, business unit by business unit and then they compiled, (inaudible) like a conglomerate. We -- the companies we have brought, we have brought them all into our enterprise system and ran a single enterprise system for years and years. With Microsemi, we have said we are going to go down to two systems. I would love to go down to one, but the work was just too much.

So we were 22, one of ours and 21 of Microsemi. From 22, we will go down to two, and we're making progress. We took one business into our system on November 1. We took three on February 1. We have another three years or so planned for May 1 and then there will be a cadence of these go-live every quarter. In another 12 to 18 months, we will consolidate. So that's a huge project with lots of synergy and accretion coming from that.

The business units in terms of the marketing and design and pipelines and integration with our technologies and factories and all that is largely some done, some ongoing. Most of Microsemi parts are not going to come into our factories like PMC-Sierra parts, they run in foundries and FPGA parts are run in foundries and they are not going to come in, inside but certain products of other business units may come in and that's an ongoing process.

As far as sales is concerned, sales all work for a common sales leader. So that's already done. The biggest job in sales is cross-training and cross-pollinating. So a Microchip sales person feel very confident selling Microsemi products and a total system solution gets all those designed in and vice versa, a Microsemi person feels very confident with Microchip. With $4 billion company on one side, $2 billion company other side, that takes some time and that's progressing. And how we kind of make it work is really is a team where you call on the expert from the Microchip side or the Microsemi side to make that join call so you start to get to total system solution effect and that we're already getting. The reviews we see from various businesses in the Microsemi reviews we see Microchip parts designed in, in the future boards and on the Microchip reviews, we see that Microsemi parts are designed in. So that is starting to happen, but lot more needs to happen.

Craig Ellis -- B. Riley FBR -- Analyst

That's helpful. And on that last point, Steve, is that something that will bear fruit from a revenue standpoint this year or does that just put you in a position where you've got the design win and then you work through what can often be 12 to 18 month gestation period before that design would go to revenue?

Steve Sanghi -- Chief Executive Officer

It's the latter. The designs take about nine months to two years to go to production depending on how complex it is. You could have a very simple some discrete parts such something are designed in, there could be faster, but they're complicated products which would be longer. So it's really yes, there's a gestation period after you get the design in. You should see some revenue coming out of TSS in 2020 and then it accelerates from there.

Craig Ellis -- B. Riley FBR -- Analyst

Thank you very much and good luck.

Operator

That concludes today's question-and-answer session. I'd like to turn the conference back to Mr. Steve Sanghi for any additional or closing remarks.

Steve Sanghi -- Chief Executive Officer

Well, we want to thank everyone for joining this call today and we'll be seeing some of you between now and the next conference call on the road, there are various conferences we'll be going to. So, thank you.

Operator

This concludes today's call. Thank you for your participation, you may now disconnect.

Duration: 77 minutes

Call participants:

J. Eric Bjornholt -- Vice President and Chief Financial Officer

Ganesh Moorthy -- President & Chief Operating Officer

Steve Sanghi -- Chief Executive Officer

Craig Hettenbach -- Morgan Stanley -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

Ambrish Srivastava -- Bank of Montreal -- Analyst

Vivek Arya -- Bank of America -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Harsh Kumar -- Piper Jaffray -- Analyst

William Stein -- SunTrust Robinson Humphrey -- Analyst

Chris Caso -- Raymond James -- Analyst

Harlan Sur -- JPMorgan -- Analyst

Gil Alexandre -- Darphil -- Analyst

Kevin Cassidy -- Stifel -- Analyst

Christopher Rolland -- Susquehanna -- Analyst

Rajvindra Gill -- Needham and Company -- Analyst

Janet Ramkissoon -- Quadra Capital -- Analyst

Craig Ellis -- B. Riley FBR -- Analyst

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