Good day everyone, and welcome to this Microchip Technology Second Quarter and Fiscal Year 2015 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, Eric Bjornholt. 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 actual events or results may differ materially. We refer you to our press release 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 President and CEO; and Ganesh Moorthy, Microchip's COO. I will comment on our second quarter fiscal year 2015 financial performance, and Steve and Ganesh will then give their comments on the results, provide some additional information on our acquisition integration activities, 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 Relation page of our website at www.microchip.com, which we believe you will find useful when comparing GAAP and non-GAAP results. I will now go through some of the operating results, including net sales, gross margin, and operating expenses. I will be referring to these results on a non-GAAP basis prior to the effects of our acquisition activities and share-based compensation. Net sales in the September quarter were a record $546.2 million, including $16.9 million of net sales from ISSC, and were up 2.8% sequentially from non-GAAP net sales of $531.3 million in the immediately preceding quarter. Revenue by product line was a record $361.8 million for microcontrollers, $122.6 million for…

Thank you, Eric, and good afternoon, everyone. Let's take a closer look at the performance of each of our product lines, starting with microcontrollers. Including ISSC revenue, which will be reported as part of our microcontroller revenue, our overall microcontroller business grew 5.2% sequentially in the September quarter, and was up 12.7% from the year-ago quarter, thus achieving a new record. Excluding revenue from ISSC, our overall microcontroller revenue grew by 0.3% sequentially in the September quarter, and was up 7.4% versus the year ago quarter, and also achieved a new revenue record. We're being transparent with the revenue added from our ISSC acquisitions, so that analysts and investors can more meaningfully compare our microcontroller results to other companies. Excluding any revenue from ISSC, our 16-bit microcontroller business was up 8.3% sequentially in the September quarter, also achieving a new record for revenue. 16-bit microcontroller revenue was up 23.3% versus the year-ago quarter. This business continues to be an important engine of ongoing growth for us, as we continue to find and serve new customers and new applications with our expanding portfolio. Excluding revenue from ISSC, our 32-bit microcontroller business was up 7.6% sequentially in the September quarter, also achieving a new record for revenue. 32-bit microcontroller revenue was also up 38.6% versus the year-ago quarter. We are continuing to rapidly expand our new product portfolio, win new designs, and expand our presence in new fields of play, to enable further growth in revenue and market share. Our 32-bit microcontroller business, combined with our 16-bit microcontroller business, together are at the size and growth rate where they're making meaningful contribution to our ongoing growth. We believe we are continuing to gain significant microcontroller market share and expect the 2014 market share rankings to bear that out when it is published…

Thank you, Ganesh, and good afternoon, everyone. Today, I would first like to reflect on the results of the fiscal second quarter of 2015. Then I will comment on the progress of some of our acquisitions, and then provide guidance for the fiscal third quarter of 2015. I will also comment on the macro-cycle call we made three weeks ago. We are disappointed with the level of business activity in the September quarter. September quarter is usually a very back-end-weighted quarter, because of traditional weak August, due to holidays in various parts of the world. The month of September is usually a very strong month for our revenue after the summer holiday period. This time, the September sales did not materialize to our expectations, leading us to pre-announce the quarter on October 9, 2014. There were a few bright spots in the results, in the areas of microcontrollers and licensing division. As Ganesh mentioned, 16-bit MCUs were up 8.1% sequentially, and 32-bit MCUs were up 7.6% sequentially. Overall MCU revenue achieved another all-time record in the quarter. Licensing division revenue was up 10.5% sequentially, reflecting increased penetration of our SuperFlash technology at foundries and IDMs, alike. During the quarter we worked on simultaneous integration of two different acquisitions. On April 1, 2014, we had closed the acquisition of Supertex. By July 1, 2014, we had integrated the financial and business systems of Supertex with Microchip's. During the quarter we successfully qualified many of the high-volume products of Supertex in Microchip's Tempe, Arizona, fab. During the quarter, we also decided that we will close down Supertex San Jose Fab. It is a six-inch wafer fab located in a leased building in San Jose, California. Currently we are on schedule to make the last wafer start in San Jose fab by the…

Absolutely. (Operator Instructions) We'll take now take Chris Caso from Susquehanna Financial Group. Chris Caso – Susquehanna Financial Group: Hi, thank you. Good afternoon. Steve, I wondered if you could maybe take us through the last month since the pre-announcement. Obviously at the time and it sounds like you still feel that way, that we're in an industry down-turn. But based on your guidance, it would seem to be a fairly mild down turn as compared to some of the others. I guess a few questions on that. Is that an accurate assessment of how you feel? Has anything changed in your view since you made the call earlier in the month and what gives you confidence in the visibility that you have?

Well, nothing has changed since we made that call. In fact, many other companies are singing the same song. We did not quantify in our pre-release. We didn't have all the data to be able to provide the guidance at that time, so it was a very limited release. We could have waited another 21 days to tell the numbers today. But – son in pre-release we simply made the statement that we see a correction coming. The street reaction and their interpretation of that correction was grossly overestimated. And, we see a yes, we see a slight correction and one to two quarters worth. For us, last quarter was down, this quarter is nearly seasonal. Our last 10 year average of seasonality for December quarter is minus 4.38, to be exact. To do that math, you've got to take some of the acquisitions out. If you're doing an acquisition in August and you know, it skews the numbers, so you have to do some math to do that. Minus 4.38, and our guidance is pretty much seasonal for this quarter, and we expect us to sequentially grow in the March quarter.

We'll now take our next question from JoAnne Feeney with ABR Investment Strategy. JoAnne Feeney – ABR Investment Strategy: Yes, thanks for taking my question. So I was wondering, Steve, if you could or Eric, if you could address the question that's come up as to whether the shift in the dollar to yen exchange rate, which has now persisted for a few quarters might have been altering your competitive position against Renesas and may have driven some consumers away?

Well, Joanne, nobody asked us the question when yen went the other way whether our competitive position was improving. The fact of the matter is microcontroller designs are done two years before, and microcontroller sockets are not competed on such a close price issue of yen versus a dollar. A large majority of Renesas business is in Japan, where we have a relatively small business. We see really relatively small competition with them in US and Europe. The ones we see are mainly in the automotive market, where designs are three, four-year designs. It really absolutely has zero impact.

JoAnne, to add to that, you can see the Renesas results. They are public, and there is nothing to write home about. JoAnne Feeney – ABR Investment Strategy: Okay, that's helpful. As then a follow-up, I'm wondering, you know, you're always faced with a difficult question about what your end markets look like, and the geographical distribution not being terribly representative of the actual end consumers. But given that you've come to have to look at this cycle, I'm wondering if you've looked at perhaps another way to represent your end markets? And in particular, to what sorts of end markets in China are you most exposed, given all the acquisitions you've had, in which sorts of products? And if you can address that, and perhaps how much you're exposed to the housing market perhaps then you can let us know what you think about the new China stimulus measures that were announced just yesterday, and how that might affect the extent of your recovery here?

Well, obviously, any stimulus measures announced in China will have a positive effect on us, like it would in any other market. JoAnne, our business is the broadest business any company could have. I don't know really how everybody else counts the number of their customers, but our top 10 customers don't make even 10% of our business. You'll have to go deep tail, we've got 80,000 customers. We do business with everybody, you know, people making no matter what, because microcontroller and analog, they are the most ubiquitous devices. You've got chips in light pens and cables and just everything. So we have a very, very broad business and with such a broad business, you're very much tied into the sentiment of every little company building stuff and lots and lots of small companies who build their stuff in their own garage shop and don't use the large subcontractors and don't have the sophisticated supply chains and multiple subcontractors building products for them. In that kind of environment information is very hard to get and can easily take a quarter. Because every subcontractor thinks well they gained market share. They're doing 60% of the total. If there are three subcontractors, everybody thinks they're doing 40% of the total, and that number adds up to 120%, just like there's inventory in the channel. But with our customers with a long tail, it's the chief engineer who is the President and he's directing the buy. We see the impact of any market moves economy related directly on our revenue on a sell-through basis from distribution and also from our direct customers. And with that kind of business, it's very, very difficult to give you end market breakdown, because we do business with everybody. JoAnne Feeney – ABR Investment Strategy: Okay. We'll do our best with that. Thanks.

Thank you.

We'll now take our next question from William Stein with SunTrust.

Great. Good afternoon and thank you for taking my question. Not exactly to follow up on that prior one, but Steve you did highlight that the weakness came from the channel in China. Meanwhile we actually saw pretty robust results from the likes of both Arrow and Avnet, which I think are, represent at least part of your channel. They had good results. So should we think about this maybe as kind of smaller tier two type suppliers or rather distributors? And maybe you can also talk about if there's any identification of the weakness from not only an end market perspective, but large versus smaller customers, OEMs versus contract manufacturers, regionally in China, it's just a bit perplexing? Thank you.

Yes, Americas was up about 5% and Europe was up 1%.

Yes. So we were up in both geographies, so US and Europe were very good. So our problem was in China. Our business in Asia is a much larger percentage than Arrow's and Avnet's business is, so that will really explain one. Secondly, every single question you can ask in this line what we saw versus the others saw, we make this statement and we make this explanation in every cycle, because the way our business is, which I just explained in answering Joanne's question, we have a very long tail of lots of these small customers, and revenue recognition based on sell-through, that we do see effects of industry turns early, about a quarter or so early. It's happened every time. We go through the same criticism and the same line of questions every time. I don't even know why we do it. And a quarter letter when things settle, then everybody has seen it and then for now then people are telling me for the last 10 years, we have called every one of them right. This is going to be the same.

Steve, I appreciate that. If I can ask one follow-up, perhaps you could talk a little bit about capacity planning. I know that last quarter at this time you were talking about some spot shortages, as I recall and having to add capacity kind of as quickly as you could in order to meet customer demand. And I'm wondering if perhaps there is a different approach where you may get, you may want to add the capacity in advance of the rush sort of demand and kind of talk maybe a bit about your capacity planning generally? Thank you.

Well, you know, we've been in business 24 years. I have been on this job and we've gone through many cycles and our capacity planning has been excellent. This was a one time. We are on a select group of new products and technologies. Our business, as I mentioned, last quarter was growing nearly 15% to 20% sequentially per quarter, quarter-after-quarter for many quarters, almost a couple of years. And we went into a plan for the fiscal year to put a capacity for 50% growth on those products, which internally was questioned are we crazy, and so on and so forth and if I told you, you would really ask similar questions. We grew more than that. We grew 70% to 75%. So it was because of tremendous success in a certain line of products. It wasn't across the board. It was certain select group of products. The weakness we saw in the September quarter has largely corrected that problem minor amount that remains really gets corrected this quarter. So it was a really short term kind of problem. We have fixed it. It's not a deep rooted capacity-planning issue. We're really good at it.

That's helpful, Thank you.

(Operator Instructions) We'll now take our next question from Craig Hettenbach with Morgan Stanley.

Great. Thank you. Can you follow up on the comments that you do see it as kind of a slight correction calendar Q3 and Q4? What's the feedback like from customers in the channel as you look into March quarter, which typically is up and you're calling that to be up at this early stage?

Do you want to take that?

Yes, we don't have all the visibility into March that perhaps your question implies. We look at what does it seasonally look like. We look at how is the backlog for the March quarter starting to build. We know what has flushed through the system in September and in our guidance for December. And if you put all that together, the best of our intelligence and our own analysis, what we're hearing from our customers, what we're hearing from our field, gives us the confidence to talk about the March quarter being up.

I think guidance for September is already kind of seasonal, so it's highly unlikely. There's really almost no reason for it that the March quarter then gets away from seasonality again in a negative direction. It's just not likely there will be a double dip.

Got it. And then as my follow-up Steve, you made the comment you view the stock after the pull-back here as attractive. The company in the past has been opportunistic in terms of buy-back. So how do you view that in terms of buying back your own stock, versus pursuing potential M&A opportunities?

We don't really have any US cash to buy back stock. We cannot buy stock with our foreign money without writing a check to Washington, and we're not going to do that. So we'll maintain the foreign cash for acquisitions or to bring it in when some tax favored deal can be put together like it was several years ago for patriation. So meanwhile, we continue to be active, looking for various M&A opportunities rather than buying back stock.

And we have the debt capacity to be able to go out and do those things.

We do have a $1 billion plus remaining on our line of credit, but we're not going to use it for buying stock. It's not that far away from where it was, you know, $3 or $4, you know, that's not it.

Okay. Got it. Thank you.

Hi, Steve. If I can ask you, what in your best opinion was the source of the weakness that you are seeing? Is it you think in your best opinion inventory driven, or was it just a spot pause in demand? And we're hearing from you things have already picked up. Just if you can give us some color we would appreciate it.

Well, you know, I am sure and I hope you guys watch the news that I watch and the headlines that I watch. China industrial production was the lowest in 5 years. The growth of that China housing market has been well written. The negative effect on China GDP that has been seen from stimulus that was taken away for a while ago. And then you know the macro conditions were slow. And we had anticipated a certain amount of demand. And sometimes people have trouble making a connection between inventory and lower demand. It's really one and the same. When the demand is low it creates inventory, because you were building it to a higher demand and then you have to correct for it and it's really one and the same. But macro conditions in China were weak. The whole LP build has been lower. You have seen that in the results of companies who were exposed to that. You have seen broad based guys like announced in the last week. You've seen from plenty of them. Other than really one smartphone manufacturer, unless you're really largely exposed to it, that has been the only strength driven by shipping RF and all those things into those phones. The other big cell phone guy has been weak, also. So there's really only been one place to hide, which is if you're exposed highly to the guy in Cupertino.

That's, fair, Steve. Steve, as we look out, Steve and Eric, as we look out to December and we try to model for that $20 million odd sort of decline that your guidance suggests, should we think of spreading that roughly equally amongst the different businesses by percentage rating, of course?

Yes. We've got 13, 14 different divisions inside of Microchip that we put together in about three or four buckets report to you. We can't really break it out on a guidance. We got the numbers, but we believe that it will be reasonably spread equally.

Thanks, guys. Appreciate it, as always.

Thank you.

Yes, guys. Steve, thanks for letting me ask the question. Steve, I was wondering if you could help quantify a little bit how much you're taking down utilization, how much were you able to get ahead of this within the September quarter versus December. Is there sort of an inventory target we should think about for the company exiting December? And as my follow-up, is the gross-margin decline in December all utilization driven and will there be a residual effect in the March quarter for some of the actions you're taking in December on utilization?

So, you want to answer that?

Sure. I can answer the utilization piece. So, yes, we've taken our factories down. There's some impact in the December quarter from that. We would not project at this point that gross margins would go lower in the March quarter. So with the decline in revenue and we are building inventory in the December quarter, we would expect that just based on our accounting practices we would have higher inventory obsolescence charges, probably not true obsolescence, but obsolescence’s charges from an accounting standpoint. With our expectation that revenue will increase in the March quarter, we would not expect that to repeat. So, we have taken our utilization down in both fabs and assembly and test facilities, but we aren't breaking out a specific percentage for the street.

We are very transparent, so we take it right away in the current quarter, so that's what you see. So if the utilization doesn't go any lower next quarter, which there's no reason it should, you shouldn't see any further lower gross margin.

Adding to your point on inventory, so if you take out all the goofy acquisition accounting, and we ended the September quarter with about 109 days of inventory. And we've got a fairly broad range for the current quarter that's in our release for what inventory could do, just based on our revenue range. But based on the mid-point of our guidance, we think that increase in inventory might be seven or eight days. That would take it to let's say 116 at the mid point. That's kind of on target with what our external guidance has been for target for the longer term.

Eric, just as clarification, that's inventory on your balance sheet? What do you expect through distribution in the December quarter?

That's a hard one to forecast. We were at pretty low levels heading into the September quarter. It went up by 3 days. If you look at where it's been in the last 5 or 6 years, it's ranged between 27 and 47 days. So sitting at 34 days doesn't really concern us. But you know, there will be some movement, but it's very hard to forecast.

So, you know, that's another area where I think street's interpretation of our inventory build was a massive inventory in the channel, hundreds of millions of dollars or something. Inventory went up from 31 to 34 days, I mean, that's all. And you know, many companies that say they've got distribution inventory ranges, 8 to 10 weeks or something like that, it's a slight shift, but it all happened to be in China. That three days increase, it all happened in China. So the number of days increase in China is little more than that, and has to be corrected. But it's really not a massive increase in inventory. We don't know what distribution would do, whatever they buy from us, it's not our revenue until they sell it out.

Perfect, guys. Thank you.

You're welcome.

We'll now take our next question from Gilbert Alexander with Darfield Associates.

Hi, good afternoon. You've answered basically my questions. I would ask one thing. This softness is it basically at the contract manufacturer's level?

The softness is not at a contract manufacturer’s level. The softness is in a customer demand level. If somebody in the June economy wanted to build 100,000 widgets, in September and December economy he wants to build 95,000 widgets. And you know, when the demand is down 4%, 5% then they are drawing that much less from distribution. If you were building it to your level, then distribution had that excess inventory they've got to bleed out.

All right. Thank you very much.

You are welcome, sir.

We'll now go to Kevin Cassidy with Stifel.

Thanks, for taking my question. Just on the attempted acquisition, or the proposal for Cambridge Silicon Radio. Can you talk a little more of what the strategy was there? Are you looking for more Bluetooth technology beyond what ISSC has?

Well, the basic Bluetooth technology we got from ISSC and it's very good, as good as any we could get. But ISSC revenue is $17 million a quarter and CSR had substantial scale and beyond scale, they also have the location technology. But we looked at CSR like any other acquisition would look at. At any point in time, we have three, four, five companies either we're talking to or getting with or doing the analysis. As we valued it, unfortunately our interest became public during the process, due to some leak somewhere. Otherwise you would have never known. But after total diligence and was really a disciplined approach we have, and our track record of successful acquisitions, we were unable to reach a valuation for CSR that would support making the kind of offer they got from the other company, it was just that simple.

I see. I wonder if I could just change subjects slightly and go to the utilization. With your foundries, have you cut back orders at foundries also?

We have cut back orders in foundries also yes.

Okay. Thank you.

Yes.

We will now take our next quarter from Liwen Zhang with Blaylock Van.

Hi, thank you for taking my questions. Would you please comment on your 8-bit business as you did the last quarter? That would be helpful.

Comment on the 8-bit business.

So, you know, we don't break out all the different segments every single quarter. We made an exception to that last quarter about the 8-bit. Suffice to say overall microcontrollers were up and there's a number of moving parts within it. You can see what the growth on 16 and 32 were. You can draw your own conclusions from it.

Okay, thank you. Also, for the MCU industry and especially you have a lot of exposure to Asia-Pacific, what kind of a competition are you seeing there, also, the pricing strategies, offer to buy local MCU products? Thank you.

I seem to recall you asked the same question yesterday in another conference call. The local Asian MCU competitors are not a challenge. There is no new competitors, there is nothing going on. That's not the issue here. We're not really seeing any major competition there. A few commodity guys making low end parts. There's really no formidable Asian competitor, other than the Japanese competitor like Renesas who's really a competitor to us. I do want to add another comment to Ganesh's answers on 8-bit. We don't want people to walk away with 8-bit having any kind of issues. In the June quarter 8-bit was an all-time record. In September 8-bit was also all-time record, but including a small amount of ISSC revenue which was taken as microcontroller. Without that it was down a little bit. So there is really no immediate 8-bit issue. We don't normally break out the numbers and all that, because of sensitivity on the competition front.

Thanks. That's all I have.

You're welcome.

We will now take our final question from Craig Ellis with B. Riley.

Thanks for taking the question and I hopped on late, so I apologize if this was asked and addressed. Steve, could you just put into context the order slow down, and then what appears to be an improvement in that condition recently? How does what you saw compare to what you've seem historically, shorter, longer, more severe, less severe? Can you just put some context around what you're seeing in the business, and the degree to which it's highly localized versus very broad based?

I think we have seen the shallow, couple of quarter correction before, and we're seeing it again. It's nothing like late 2008, and it's nothing like year 2000. But some of these smaller inventory corrections that have come every couple of years or so, it's really one of those. This is a very mild one. And then I think we get out of that with a probably 5%, kind of or less than that, total cut and what we were thinking before was what we're thinking before. You've got to exclude the ISSC, otherwise it complicates numbers. But if you exclude them we missed it by about 4% last quarter. Our current quarter guidance is seasonal or within 0.5% of seasonal. So you're talking 4%, 4.5% kind of total cut. I would consider that to be fairly mild, if it doesn't really go any worse, which we are not expecting.

In the past –and I think this was more of a 2007 dynamic, but there have been times when there's been an application-specific issue related to some of the softness that you have seen. Did you detect any of that in the recent period, or was it across various application groups or end markets to the extent that you see them?

Well, you know, so my feeling is that US business is good for everybody, and was good for us. Europe business is also fine. You read the headlines in Europe. Germany is teetering on the brink of recession and all that. I'm not sure all that was seen before. If it gets any worse then it's different, but otherwise Europe business is fine, too. The problem is mostly all in Asia and there are a large number of headlines coming out of China, with a significant GDP drop or slowest industrial production in 5 years, crash in housing, automotive build is low in China. So I think as far as China is concerned, my feeling is with the exception of the companies which are exposed to one guy in Cupertino, excluding that, it's broad based.

Okay. And then lastly, in the release in early October, you identified that you thought the business would return to growth in the first calendar quarter. Is that still the expectation, and can you quantify the degree to which you think the business could grow?

We're not giving a guidance numerically, but we think first quarter should be about seasonal.

Thank you.

We have no further questions. I would now like to turn the conference back over to our speakers for any closing remarks.

Okay. Well, we want to thank everyone for going through this period and listening to our long commentary here. We'll see some of you at the CSFP in Scottsdale, which we will be attending. It's our home state, and we'll see some of you there. Thank you.

That does conclude today's conference. Thank you for your participation.