Good day, everyone, and welcome to this Microchip Technology First Quarter and Fiscal Year 2016 Financial Results Conference. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Microchip's Chief Financial Officer Mr. 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 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 President and CEO, and Ganesh Moorthy, Microchip's COO. I will comment on our first quarter fiscal 2016 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 the acquisition of Micrel, which was completed today. 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 Web site 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 our 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 acquisition activities and share-based compensation. Net sales in the June quarter were 534 million, below the midpoint of our guidance which was $555.5 million and we’re up 0.5% from non-GAAP net sales of $531.3 million in the June 2014 quarter. Revenue by product line in the June quarter was 348.2 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. Our microcontroller revenue was up 1.3% in the June quarter as compared to the year ago quarter. We experienced the same broad based weakness that has been reported by many of our peer group companies. In aggregate, over the last four rolling quarters, our microcontroller business was up 8% over the prior four rolling quarters. We are continuing to deliver innovative new 8 bit, 16 bit and 32 bit microcontrollers that we believe will enable us to grow faster than the market and gain for the market share. Microcontrollers represented 65.2% of Microchip’s overall revenue in the June quarter. Moving to our analog business, our analog business was down 0.6% in the June quarter as compared to the year ago quarter. In this business too we experienced a broad based weakness that has been reported by many of our peers. In aggregate over the last four rolling quarters, our analog business was up 11% over the prior four rolling quarters. Our analog business represented 23.8% of Microchip’s overall revenue in the June quarter. We continue to develop and introduce a wide range of innovative and proprietary new products to fuel the future growth of our analog business. Our memory business, which is comprised of our Serial E-squared memory products as well as our SuperFlash Memory products was down 4.8% in the June quarter as compared to the year ago quarter. We continue to run our memory business in a disciplined fashion that maintains consistently high profitability, enables our licensing business and serve [technical difficulty] to complete their solutions. Our memory business represented 5.95% of Microchip’s overall revenue in the June quarter. Now a short update about…

Thank you, Ganesh and good afternoon everyone. Today, I would like to first comment on the results of the fiscal first quarter of 2016 and then provide guidance for the fiscal second quarter of 2016 including comments on the integration plan for Micrel. Our June quarter results were shy of our guidance, but were consistent with what other than the semiconductor industry have reported. The quarter started out well but the negative effects of the very weak economy in China and challenges in Europe led by a very weak Euro caused us to finish the quarter below our guidance in revenue. We were able to keep the non-GAAP gross margin percentage and earnings per share within the guidance albeit on the low end of it. Gross margin of 58.3% operating expenses of 25.6% and operating profit of 32.6% were all very respectable achievements. The June quarter was also our 99th consecutive profitable quarter. I want to thank all the employees of Microchip for their contribution in this remarkable achievement of 99th consecutive profitable quarters. I look forward to the current quarter being our 100th consecutive profitable quarter, an achievement unmatched in our industry. I will now provide guidance for the September quarter including Micrel revenue. Our guidance is based on the assumption that Europe will continue to be in the doldrums and is made worse so by the summer holidays, and China, which has been the engine of growth in the past, remaining slow. In preparing our guidance we have done bottoms up analysis region-by-region, distributor-by-distributor and by major customers. We have also included Micrel revenue from today August 3rd to the end of the quarter as we understand it. We expect our net sales in the September quarter to be between $532 million to $569 million, includes [technical difficulty]…

Thank you. [Operator Instructions] We'll take our first question from Craig Hettenbach with Morgan Stanley.

Thanks. Starting first with just that industry question, Steve, if I look at the current environment today, what’s your sense the biggest difference between today versus last fall, when there was also at that time, I'll albeit a brief correction.

Craig, I was hoping that, this question could wait some time at least later, that's a first question. So, let's take it. As the earning season has progressed a number of investors and analyst have commented and have asked me, how I thought about the current environment in the semiconductor and if this is something that Saturday in October of last year, with our earnings warning at that time, I have not engaged into any conversation within any of the investors and analyst, because we were in the quite time. Then I thought, if the question was asked, shall I address it here, so here it is, it's really the first question. And while it’s really painful to visit that period again, we do believe that the first signs of its slowdown in China, were visible at that time. We saw that through thousands of small customers, who were experiencing the economic headwinds and not buying enough products. This was further, enhanced by a very tight credit environment that was prevalent at that time in China, then after a warning, the December quarters numbers for most semiconductor companies were cut by an average of about 5%. The company is in the supply chain of one mobile customer where a notable exception. Now then came the March quarter, which was seasonally weak for most companies due to Chinese New Year and also some others blamed it on Euro weakness, which was indeed a new phenomenon. Then came in the June quarter which is traditionally a very strong quarter in China and we saw a broad based miss from the industry led by China and the September quarter guidance has been very weak also driven by China. Now we have semiconductor companies admitting that there was indeed inventory build in China and in the distribution that needs to correct. We knew from the companies that we have acquired and others that we conducted diligence on but did not acquired that there was a broad based selling driven inventory build in distribution channel which the prevailing rate of demand could not support. You can only play a selling gain for so long and this time it can truly went a bit longer. But now everyone’s numbers have been cut significantly, a large number of companies are now selling well below the stock prices on October 9th prior to our call, when I said I quote “we believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future. But it probably took a quarter longer than it has taken historically, likely mached by the smartphone supply chain with everyone having some exposure to it. But really in answer to investor and analyst question, I see yes this is pretty much a continuation of the phenomena that we saw last October.

Just a quick follow up to that before have an additional question. Just the comment on China remained slow, how would you kind of frame just the environment in China? Do you think we’re through most of the inventory correction and it will attract demand or any additional quotes in China for Q3?

We’re not through all the inventory corrections, no. There will again be differences in sell in versus sell through also, all of our revenue is sell through. But we bought Micrel today which had a mixture of sell-in and sell-through with most of China being sell-in which will be converting to sell-through only recognizing sell-through, so there are number of moving parts in our business. But industry still has a lot of inventory in China.

And then just a follow up on Micrel, appreciate the thoughts in terms of how you expect to transform the business, particularly in manufacturing. On the product side given that you had a little bit of time in talking to customers, any anecdotes of feedback in terms of their product portfolio and how you see that kind of best fit within Microchip?

We have decided to take linear and power solutions business which was the largest division inside of Micrel and completely fold that within Microchip which is happening starting today. So essentially we have taken our analog business and internally in Microchip’s split it into two portions, one is called the analog power and interface division and second is called the mix signal and linear division, both about equal size and then the entire Micrel linear and power business is folding into one of those division which is the analog power management business. So, we will apply our principles, our metrics of R&D and all that. When I look at R&D as a percentage of sales for analog, Microchip is one of the most efficient in the industry, we don’t breakout into visual R&D, but the amount of R&D we spend to get the margins and revenue and all there and Micrel is one of the worst when you look at the numbers. So we have to move this from worst to best. And we have done that with others, we’ve done that with SSC and SMSC and Supertex and over and over and over, we have team there, that’s what we have to do here. Then there is LAN business here which is about $50 million, $60 million and that also we’re going to completely fold that into Microchip’s USB and Networking Division where our LAN business resides, that again will then really benefit from our methodologies, our metrics, our management and everything else. And the third business here is the timing business, which is a new business for us and we will keep that as a business unit but if you’re reporting to one of our seasoned general manager so he can also get the mentorship and really move towards our model.

We’ve move next to William Stein with SunTrust.

Steve based on the tenure [ph] of what now you’re describing as three or four quarter downturn. And the order of linearity that you are seeing maybe in the calendar second quarter and into July and now August, I am wondering if you can provide any view as to when you think demand normalizes?

I think, I resigned from the forecasting business last year, you might recall that in November. I am not going to make that comment looking forward for the industry. If we just look at ourselves, we think we gave you September quarter guidance already, December [technical difficulty] is seasonally a weak quarter for Microchip and really also for the industry. Considering this correction happening in June and September, what would manifest for December, it's kind of hard to see right now. But as we go through the quarter, one could make a guess that December quarter should not seasonally be weak because ordinarily December quarter is followed by a very strong June and September. This time it is not. But I am not making that prediction today. I got to see the quarter. I got to see the bookings, the backlog, everything else and talk about it later maybe as we go on the road. The biggest leverage here short-term is really improving Micrel's business and I think there is a fair amount of opportunity for us to do that, and largest leverage comes from the fab. There is 30% utilization in the fab and we dramatically lower its cost by transferring product and the first five products will be running out of Microchip's fab in about six weeks.

That's great. Steve, I appreciate that. Maybe I can use that as sort of the next question. So after completing this deal and understanding that all the synergies and all the work is still in front of you, I wondering if you can characterize the current appetite for a future M&A,? It certainly helps dull the pain from the current demand environment a little bit. And I am wondering how much appetite there is for more of that though? Thank you.

Well, we have substantial line in place, which we did that earlier in February. And we have constantly -- a good of number of companies in our funnel that we are constantly talking to, dating with, analyzing and there's no guarantee, these things are not schedulable at any given point in time, and sometime it takes longer for a deal to materialize, other time it's shorter. But yes, we still have appetite for the next acquisition, no question about it.

We'll move next to John Pitzer with Credit Suisse.

Yes. Good afternoon guys. Thanks for letting me ask a question. I guess Steve, Ganesh and Eric, I was wondering if get a little more detail about kind of the actions you are taking around utilization rates in your own fabs, I am kind of curious, do you think September will represent the trough, I guess Steve given your comments about uncertainty around December, but possibly a scenario where December is a little bit better than normal seasonal weak. Does that mean that, that most of the utilization action is behind you or how should I think about that? And Eric remind me again how that flows through the gross margin?

Well, let me comment on the utilization. First of all, the Gresham factory in Oregon is a newer factory and in a newer factory we need a -- once in a five years we need a major shutdown to repair things that can't be repaired while the factory is running. And that shut down has been previously scheduled for a year for this October and that shutdown usually is about seven to eight days you have to shut the factory and we reserve for it going into that shutdown, and it's planned shutdown, we have to do it every once in a five years. We are currently planning to tack on a few more days to it to bring the inventory down because the factory will be shut down anyway and rather than starting and staffing it will be best to extend that a little bit. Then the factory in Tempe is a much older facility and doesn’t have as many redundancies built into it and the Tempe facility [technical difficulty] we always do that in December, over the holidays. So this time again we will have a shutdown in Tempe facility over the holidays and we are planning to tack on a few more days to that to correct our inventory. So you will see our internal inventory rise in the September quarter, but then it corrects because we got shutdowns in both factories in the December quarter. The normal shutdown, we accrue it over four quarters, balance over the year but the extra shutdown days we're going to do will charge it to the current quarter. Basically in the quarter it happens which will be the calendar Q4. So Q4 gross margin would be impacted, I don’t know whether Eric is able to dollarize it at this point in time and whether it will GAAP or non-GAAP that would be a one-time phenomenon.

Yes, and I think Steve you've answered John's question and I don’t -- at this point in time we're not willing to give guidance for December quarter gross margin. So I will leave it at that.

That’s helpful guys. Maybe as my follow up for Steve and Ganesh. Steven and Ganesh, we tend to like to sometimes compare apples-to-oranges here on Wall Street. We look at your microcontroller business and often time compare that don’t have sort of 8 bit part of the business and might be a relatively new entrant. And I guess I am trying to think about kind of your relative growth rate of microcontrollers versus your peers. Is the right way for us to think about this as given your breadth in 8 bit perhaps you are more cyclical in these parts of the cycle? And if that's the case, maybe Ganesh you can give us some metrics around 16 bits and 31 bits that make you guys comfortable that you are at least maintaining if not gaining share in those segments in the market?

So we don’t breakout 16 bit and 32 bit as you may recall from about two to three quarters ago but we did present in April, where the market share results were and we had significant growth in market-share in each of 8 bit, 16 bit and 32 bit. So we look at the market as a continuum off solutions that I needed in many cases an 8 bit is good enough, in some cases it's a 16 bit and in another cases it's 32 bit. And we see growth opportunities in all three of them both in terms of the applications and the markets that they can go into. So our view is that that is growth that is taking place and then there is growth yet to be had in all three segments we’re not looking at 8 bit to save us or 32 bit to save us or 16 bit to save us all three of them we expect will grow.

And next we’ll take Chris Caso with Susquehanna Financial Group.

The question is -- like first question is on Micrel and you talk about $0.25 of accretion over one or two years, could you give us some help in determining how much of that perhaps we might see a bit earlier and how much of that would have to wait? Your comment said that much of this I guess the majority of this comes in the fab closer and I assume that is sometime we have to wait for little bit or perhaps there is some near-term accretion as you start to control some of the OpEx?

So there is near-term accretion, I don’t know if I have a breakdown considering we’re closing the acquisition just today before that all we had model and then we have quickly verified some stuff. But if you give us little more time maybe as we get on the road and see you at some conferences or the next conference call or we can have much more intelligent numbers for you. But there is accretion coming from expense reduction and other thing that prior to that it's not all from fab.

And just with -- just kind of a follow-up on the market conditions as well and I am sure you heard from some others there was -- I guess there have been some different commentary regarding the pace of bookings through the quarter kind of how things have started in the quarter in the month of July, wondering if you can give some clarity on that, plus linearity from the June quarter, how July has gotten started and if that’s giving you some incremental optimism or pessimism as you look forward?

I listened to some of the calls and it's amazing how the customer’s been placing bookings are kind of behaving almost same for everybody and I could say the same team that, this quarter’s bookings look better than it was last quarter and there was some strength in the overall numbers. But that’s baked into the guidance and I think if you look at various people’s commentary last quarter, April was good and May was good and then June fell off. So I think people make these adjustments through the quarter and better a July doesn’t necessarily mean better end of September for us or anybody else because customers can correct that anytime in the quarter. Sometime people place bookings earlier, so whatever product they need for the quarter they have commitment from the supplier that they will get the product for their needs and then easy for them to cancel or slip it out, that I don’t needed in September, give it to me in October then to have a situation where they don’t place the order and September quarter comes and needs something and somebody’s lead time is more than four weeks and they can’t get it. So customer seem to have very little penalty for getting their queue in line, almost no penalty. So therefore, it's not unusual for the first quarter sometime to see stronger bookings only to get corrected later on. And I would not reach so much into it for anybody.

[Operator Instructions] We’ll move to Kevin Cassidy with Stifel.

Going back to the Micrel fab and shutting that down, you gave data point that five products have moved. Can you say, what is the determination between getting it closed in one-year to two years? Is it customer qualifications or finding other fabs that can manufacturer?

So that’s a good question. So we bought Supertex on April 1, 2014 and we closed the Supertex fab in April of 2015 took us about 13 months and that fab was much smaller than Micrel fab is, Micrel fab is larger, it's a larger company than Supertex. But we learned a lot doing Supertex and we were able to do that in 13 months. So we’re mounting a much larger team and we’re going to transfer the products at more than twice the rate than actually we transferred the products from Supertex fab into and the basic difference between whether it's a year or two years is, sub-types [ph] of customers, the products from the new fab, products coming out of fab and working first time and you have retreat it, running into any kind of equipment issues, equipments and fabs seem to be different, we believe we can emulate Micrel’s process on our equipment and we are successful in the first couple of processes we are attempting so far. But at any point in time you could run into a challenge and have to then convert a Micrel piece of equipment from 6 inch to 8 inch or buy a new one and have three, four, five months delay in getting that equipment. So there are lot of unknowns, lot of unknowns, that’s why we gave this band of a year to two year. My desire is 11 months, but I don’t get everything I desire, I think it's going to be somewhere between one to two years.

Okay, maybe just, maybe some unknown also but is there a chance that there would be some products you can't manufacture somewhere else and they would be discontinued and maybe not get the full revenue Micrel had?

Well, no, so what we do is, there always -- especially in analog there lots of products that needs one fab run every two years. And those products don’t make sense to even having mask set, and put the cost of transferring it. So usually on those mask set we build strategic inventory of four years so. So if the product needs a one run a year then you run four runs out of the Micrel fab before you shut it down, now you have four years customer demand, then you've four years to figure it out what are you going to do with it? I build it into our fab or take it to a subcontractor, transfer the equipment, do whatever. So that's what we will do. That's not going to hold up the fab.

Okay.

And Micrel is a small company as a percentage of Microchips. So even though there will be a strategic transition inventory build on the products we are transferring in and on the products we are not transferring. The products we are transferring here to build some strategic inventory on those too because you got to give the customer time to qualify 8 inch material while they have 6 inch material available, so you will see that strategic inventory build on our balance sheet. But it's not going to be that large compared to the size of the company and it's strategic in nature.

We will move next to Gil Alexander with Darfield Associates.

Hi. Thank you. My question has been answered.

Thank you Gil.

Thank you. We will take Chris Danley with Citi.

Hey. Thanks guys. I guess just one quick clarification on what you are seeing in terms of your guidance. So I think as the other Chris said some of the competitors are saying that business is getting better. So are you, implicate in your guidance, are you assuming that your business is going to get a little worse or just kind of remain at this level throughout the quarter?

I don’t know if I can decipher anymore, Chris. I mean our business in September quarter based on guidance is worse than last quarter and so is everybody else's. So far the guidance I have seen, their guidance for September is worse than what they accomplished in June. So they've got a little bit spurt in bookings, I saw the spurt in bookings, also in July, my [indiscernible] customers trying to lockup their place in line for September, not any different by -- for us versus anybody else. So I wouldn’t read anything more than that.

Okay. Great. And then my follow up just a couple of things on, Micrel. Is there any way you could quantify the benefit from shutting down their fab and then in the December quarter what sort of revenue should we assume from Micrel because I believe you guys will be incorporating two quarters -- excuse me two months of it in this quarter. Anything you could talk about in terms of your planned OpEx reductions for Micrel in the December as well?

I think it’s supposed to give that considering the deal closed two hours ago, so probably just be a little more patient. I think I could even do a better job two weeks from now, but not today. We are cutting expenses. We are letting number of people go as we are merging these divisions there is some high level senior leadership that we do not need. So we're making those changes and we got to dollarize it. We are unable to give you December quarter Micrel guidance, Micrel revenue has been falling for four years and recently has fallen a little harder. And we need to understand that. We need to meet with the distributors. We need to see what Microchip's sales force can do. So I don’t quite trust the guidance that I am hearing from them. So therefore I am not able to give December guidance on it yet.

So can tell us if it was in the June quarter, the revenues for Micrel?

Well I think the June quarter really wasn’t announced because the acquisition closed and I am not sure I am in a position to say that.

Okay. That’s fine. Thanks.

We'll move next to Rajvindra Gill with Needham & Company.

Steve I was wondering if you can maybe elaborate further on the China weakness. Specifically, which segments or which verticals are you seeing the weakness in, I know there's been -- when you talked about China being weak back in October, you had mentioned the industrial vertical, wondering if that has spread to other verticals within China and any color there would be helpful?

I think China is weak across the board exactly what it was in October, I don’t remember Microchip has been having industrial and I said we believe that another industry correction has begun. This correction will be seen broadly across the industry in the near future and the verbiage led by China, so I’m not sure whether it could be more industrial, but not only industrial. It’s really not that much different than it was back then. China is weak across the Board.

And if you could talk about the competitive landscape in the microcontroller market, you have obviously a big pending merger that will be closing in Q4. That merger the combine entity will become one of the largest microcontroller suppliers in the world both from the 8 bit and 32 bit side and a huge player in the automotive market. So I want to get a sense from you how you’re viewing the competitive landscape going forward given these changes in the market share and M&A that’s occurring?

I think if you scan our history of 25 years we began with nothing and competing with some of the largest microcontroller manufacturers in U.S., Europe, Asia and Japan. When we were $100 million microcontroller business we competed with people who had billion, Freescale and NXP and Renesas and others. So I am not sure scale is necessarily a total advantage. We have won that through our disciplined approach to developing products, to running a very responsible P&L, having a high margin business. We go to market totally different than other people do other people try to seek very large chunks of business that very-very large OEMs which are offering at lower margin and not sticky and our model is at a 100,000 customers, no single customer is larger than 1.5% of our business. So, it’s not necessary that our business is always in the same places. And Renesas hasn’t been able to stop us in years, Freescale hasn’t been able to stop us and they were 100 times larger and them merging with NXP doesn’t really change in IoT for us. I don’t go -- the data deal closes I don’t go to work any different than I did the day before.

And just last question on IoT. Wondering how you’re thinking about that market in terms of your competitive position and assembling the building blocks to address the market. And any color in terms of how the intensity of the activity of IoT at your customer base, is that really picking up or is it going to take some time to take off? Thanks.

Everybody say that and people don’t kind of wake up a numbers nor do we and everybody is putting different stuff into IoT, so it’s kind of very hard to compare it’s wild west. But all make the claim that we have the strongest IoT franchise. You need intelligent microcontrollers, you need RF building blocks, you need Wi-Fi, Bluetooth, Bluetooth Light, RF, Zigbi. We have all of them. You need various ecosystems with software and stacks and middleware and all that. We have all that. And we have significant number of cloud partners where you have to ping off to often connect with equipment or whatever. We have the strongest building blocks of anybody. We’re seeing companies that will take all of their microcontroller business combine it with sensors of something and petition that as an IoT business while you could do that. But if a PC is connected to a printer and then microcontroller in that chain, it’s not really IoT. But it’s connected and you can call it IoT, and so I think we gave you a little summary last quarter remember.

I think we said our IoT business was about $275 million annualized growing at a 35% compounded annual growth rate and really to more narrowly define it to be where there is both smart and connected application.

So this is a microcontroller attached with some sort of connectivity to it, is that how you’re going to [Multiple Speakers].

[Multiple Speakers] IoT, so it’s really where you truly making an RF connection using it as a Wi-Fi or a Bluetooth or a Zigbi --.

Or could be Ethernet to it if it’s wired, so its microcontrollers, it’s analog, its memory and its connectivity, all those solutions put together with the software frame work that Steve talked about with security built into it and an ecosystem of third parties that allow the connection to the cloud. So it is an important market, it is one in which we have -- historically had significantly strength because all the companies before you can connect have to have something that is smart. And if you want something that is smart microcontrollers and analog are at the heart of building smart devices.

That does conclude our question-answer-session. At this time, I’ll turn the call back over to our speakers for any final or additional comments.

Well, thank you very much, we are going to couple of conferences this year and next conference would be?

We’ll be at the Jefferies 101 conference in Chicago in late August and then the Citi conference in New York in I think September 8th or 9th.

And by that time we may have more understanding of Micrel may be able to tell you more. So I'd love to see you at one of those conferences. Thank you.