Good day everyone, welcome to this Microchip Technology Third Quarter and Fiscal Year 2006 Financial Results Conference. As a reminder today’s call is being recorded. At this time I would like to turn the conference over to Gordon Parnell, Chief Financial Officer for Microchip, please go ahead sir.

Thanks Sarah 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 release of today as we announce our 10-K for the fiscal year ended 31st 2005, and our 8-K account reports that we have filed with the SEC that are identifying the important risk factors that may impact Microchip’s business and results of operations. In attendance with me today is Steve Sanghi, Microchip’s President and CEO. I will comment on our third quarter fiscal 2006 performance, giving geographic data and discussing balance sheet and cash information, and Steve will then give his comments on the results as inline with our guidance for the March quarter and update on the pertinent matters regarding our business. We then both will be available for the specific investor and analyst questions as required. So net sales for the December quarter were at record levels of 234.9 million, up approximately 3.3% from net sales of 227.3 million in the immediately preceding quarter, and up approximately 14.4% from net sales of 205.4 million in the prior year’s third quarter. Our GAAP net income for the December quarter was at record levels of 70.7 million or $0.33 per diluted share, an increase of 7.7% from GAAP net income of 65.7 million or $0.31 per diluted share from the immediately preceding quarter, and an increase of 33.1% from GAAP net income of 53.1 million or $0.25 per share from the prior year’s third quarter. Geographically sales in Asia and Americas grew by approximately 7.6% and 1.7% respectively, with Europe 1.8%. Asia…

Thank you Gordon and good afternoon everyone. I would like to apologize to our investors in the east coast for the timing of this call. It was a crowded calendar today with many companies announcing, therefore we had to chose this time. I would also like to wish all of our investors and analysts very happy and prosperous New Year. I hope that we help you make money with 25% appreciation including dividends in 2005 and 131% appreciation over the last 5 years, and we will continue to deliver you incremental value going forward. Today I would like to reflect on the result of the December quarter, then comment on the product lines, and finally discuss the guidance for the March 2006 quarter, so lets begin. I am extremely pleased with our continuing excellent execution in delivering yet another record quarter in every respect. We exceeded our guidance in net sales, in gross margin percentage and in earnings per share. Net sales were $234.9 million, which was an all-time record. Gross margin of 59.7 was also a record and was up 50 basis points sequentially. Our operating profit was another record and exceeded 36% for the first time in our history. Earnings per share was $0.33, exceeding our guidance by $0.01 and also it set an another all-time record. We also produced a record free cash flow of $126 million before a dividend payment of 34 million last quarter. We are pleased to be increasing the dividend paid to our shareholders by about 19% to a record quarterly dividend of $0.19 per share. Our dividend rate was already at the highest level in the semi-conductor industry and with this increase we continue to further increase the value delivered to our shareholders. Now I shall talk about the product lines. First…

Thank you, the question and answer session will be conducted electronically. If you would like to ask a question, please press “*” “1”on your telephone keypad. Let me remind you if you are using a speakerphone to please make sure your mute function is turned off to allow your signal to reach our equipment. Additionally, please limit yourself to one question due to time constraints. And we will take our first question from Michael Masdea with CSFB.

Well thanks. Your commentary on lead times was pretty interesting. Is there a risk that you run that some of the other features of the building materials lead times which seem to be stretching like we heard from Fairchild, from others. Does that put any pressure on your business or any risk of ordering that you see out there?

I didn’t hear Fairchild, what did they say?

Well they said their lead times continue to stretch, and that’s getting tighter basically in the backend utilizations kind of getting tighter etc., its consistent with what on and said on some others, just that we have this environment of expedite orders and threshing lead times etc., lean inventories and the supply chain maybe too lean, does that kind of pressure on the overall potential building materials putting pressure on your business are at risk over or even though your lead times are pretty stable?

Well in some cases we feel what they are feeling, in other cases we are doing a little bit better, we are expediting a lot of product, general inventory is very low, and customer is expediting a lot of product and expedites at all-time high. So that is really all true, but you know for the last several quarters, we have been seeing that we feel comfortable with our inventories, our total inventories were about 111 days plus distribution is getting about 2 months of inventory, and most of Microchip’s inventories at the at the inventory levels, so we have a healthy stock and we can very quickly put them in the required package and test them according to customer specification. We also have a very very large assembly and test plant in Thailand; I don’t know which company is purely subcontracting, which companies have their own. So having its own, having our own we have tremendous ability to be flexible and work overtime and work Sundays, and so we are really doing all that and been able to add some additional capacity as well as require some additional capacity at the subcontractors, so I think we had done an overall pretty good job of managing the lead times so it doesn’t become so long that it is not helpful to our customers.

With you doing that, is it a little surprising to you that the numbers didn’t do better in the quarter or I missed a few – what really drove that?

You know many times it’s a matter of choice, you know I think, you know, some of the memory and analog packages are very similar, some of the memory packages are similar to microcontrollers in the low-end and largely we want to ship the highest margin product, for we have given package available, and I also said memory pricing was actually up a percentage point, so our mainly strategy is not one of market shares, its really one of you know managing P&L profitably and in the mircocontroller and analog and both of those areas were gaining market share so I really think we put up many in resources where really we should have put.

Okay thanks a lot, makes sense.

We will take our next question from Adam Parker, Sanford Bernstein.

Hi, two things. Gordon, can you at all break down the impact of the options by COGS R&D and SG&A for fiscal ’07?

COGS would be about 20%; the balance would be in operating expense these item.

So 50-50 between R&D and SG&A?

Probably in that range about 30 to 40% in R&D and the balance is SG&A.

Okay. And the other thing is just about analog. Steve, could you talk at all about some of the successes there when you are winning now, why do you think you are winning, what’s your competition are offering, based why do you feel you are gaining momentum that seems sustainable?

I think as far as it comes on specific products and winning strategies we have really chosen to really not expand on that. Everybody listens to these calls and you know we really were doing a signal to any competitive where we are winning and why we are winning in either of our product segments. I think that’s the best position we can take.

Okay so same as your 8-bit strategy?

And as 16-bit strategy, there is really, you know I think overtime I feel investors and analysts gain not too much from it and make you feel better but you know competition gains the most, so there is no reason really why we should signal to any of our analog competitors in which areas we are gaining, would then go analyze our products and somebody has good market research they know it already, if they don’t then we don’t want to tell them.

Okay, so one last thing, can you provide a base at all for all the sequential growth numbers you gave in 16-bit, you know 19% of you know?

We can’t, we are providing that on analog and overall microcontrollers and memory, those numbers you have them available, we filed them in our Qs but we are not going to break out 8-bit and 16-bit microcontroller, none of our competitors do and we are not going to do it either.

Right, thanks guys, good job.

Moving on to Chris Danely, JP Morgan.

Thanks guys, before I ask my question, I am sorry can you just run through the geographic breakout again?

Certainly.

Yeah, geographically Asia was up 7.6%, Americas was up 1.7, and Europe was there in 1.8.

Are you asking in percentage terms or what they out of percentage of revenue?

I can take that out as a revenue for March quarter.

Okay.

And then just a follow-on on Parker’s question. Since you won’t give us the percent of revenue for 16-bit, can you give us a timeline on when it becomes material say in the 5 to 10% range?

No I really can’t do that either because I will be answering the same question in a different way.

Alright, strike 2. How about, can you give us your expectations for the different product types for growth in the March quarter, like how much you expect from micros versus analog versus EEPROM?

We provided some of that, I said on 16-bit microcontroller we are expected to grow 15 to 20%, 15 to 25% sequentially in March quarter, and on analog I said we expect it to grow from about 4 to 6% sequentially in the analog and we didn’t break down in the memory and rest of the microcontrollers.

How much do you expect the overall microcontroller business to grow in Q1 or excuse me in the March quarter?

By 3%.

Okay thanks guys I am out.

From Thomas Weisel Partners Eric Gomberg.

Congratulations on a strong quarter.

Thank you.

Could you maybe discuss a little bit more what goes into the decision on going forward with the repatriation and what we’d expect with cash that was brought into US?

Well you know if you look at it, you know very large portion of our expenses are in US, you know our fab here in US, you know most of our R&Ds in US. In Europe we largely have sales infrastructure, and in Asia we do have manufacturing but you know a lot of the huge demand of expenses and all that development really happens here in US. So we have very large amount of cash product overseas and many many companies are really doing what we are doing if you look at you know Fairchild and Xilinx and a lot of other companies and if you bring the cash to US, it gives you more flexibility in future overtime to really do whatever you know you wanted to do with it. This is one-time opportunity which is not available you know after the fiscal year runs out, when you can bring it in where you know one-fifth of or one-sixth of the tax payment compared to the regular tax rate, so this is really kind of a no-brainer in a way.

Okay, just wondering, maybe you give more color on what drove such strong bookings and what typically is a seasonally weaker period, you know kind of reassessing the question of things being tight, and then our people simply concerned that they can’t get enough product right now or you know there is more to it than that?

Well you know all through December quarter as I went to several conferences, what we basically said was if you go back you know 90 days ago the world was looking at the environment extremely negatively with the effects of hurricane and very high oil prices and so on and so forth and with all the interest rate increases and people were you know just calling for a discussion, and you know all of a sudden things improve and in the November-December timeframe, they improve quite a bit, it looks like the end of interest rate was coming, the oil prices came down, the gas prices came down, the effect of Hurricane Katrina essentially the rest of the US, the business activity was strong and so was in the rest of the world. And everybody was preparing fairly conservatively so some of the lead times starting to go out, and when that happens we always get booking activity because people want to deserve this but on the line. And now as you look at in the middle of January, it seems like some of the oil prices and others have gone back up but the environment continues to be fairly positive and we are seeing continuing strong bookings and its really no longer driven by lead time changes because lead time is sort of constant but it is not constant at 2 to 3 weeks as it used to be, it’s a little bit longer but you know we are seeing reasonably strong business environment, and we are getting the same thing from others who have been announcing their numbers.

Just a quick housekeeping question, Gordon, maybe you could help in terms of interest income, you had a nice jump this quarter, cash balance obviously keeps going up, interest rates have moved higher, what are we expecting coming quarters?

We had a stronger cash generation in the December quarter, receivables went there quite nicely in a period where obviously revenues grew so that mean we were liquidating receivables quite nicely. I think if you look at the overall effective interest rate on the growth and then apply it to what we are guiding you to this quarter I think you get close to the same sort of metrics so, you know, after the dividend we expect cash balances to be going up about $70 million, which should translate into another healthy increase in interest income.

Okay thank you.

Next question from Mark Edelstone from Morgan Stanley

Good afternoon guys.

Go ahead Mark.

Can you hear me?

Yeah you are becoming feeble but we can hear you.

Can you hear me still?

Yes go ahead.

Okay I am sorry, question on turns, what were they in the quarter, and then when you look at the business given the strength that you are seeing in the analog, industry when we look back over the past year or so, is it current profile for that business and difference than what you see in Microcontrollers, guess that the terms would be kind of lower there but so though the overall terms for the company in the quarter then just a profile of the analog business?

Mark you made a call three quarters ago we stopped talking about turn percentage is in turns, it was always confusing, we have always maintained that turns really do not correlate to our business, whether you get the business early on as schedule business prior to the start of the quarter whether your customer gives you the order on 20th of December or 5th of January does not make any difference if the order is being shipped in February. So we don’t really talk about turns any more. The second part of your question was…?

How does analog looking in that environment?

You know this would, analog turns are really no different than rest of our business, I think when we look at the various product line, they looked very very similar internally, so there is any missing I can break it out there.

So is there just any additional insight that you can share it here on the recent strength that you are seeing in analog in terms of your geographies or end markets that are driving that growth?

Well, I know the geography, I know the end market, but again if I start to talk about that earlier if we get to the application level and I don’t want to do that because it will really signal which products you know, if you look at in analog we are in 5 different market segments. We are in power management, we are in thermal management, we are in mixed signal, you know we are in Op Amps, which is called linear products and we are in interface products. So we are in 5 different product segments, and you know some of the segments we are seeing very very strong strength, we have good leadership position, we have best-in-class products, we have won some product awards and we are getting strong design activity and we don’t want to break out anymore than that, really where we are winning.

Okay thanks.

Most of this upside actually came from US designs and some of them get shipped in US and some of them get shipped in Asia but upside is from US designs.

Moving on to Cody Acree, Stifel Nicolaus & Company.

Thanks. Steve, just going to be following up there on the analog question there, are you seeing more strength attached to microcontrollers as a system or they standalone analog sales?

Well, what I have described in the past is that we had a three strong analog strategy: Phase I, Phase II and Phase III. Our Phase I was we would be wanting to attach the analog products to our microcontroller products because our main recognition was with microcontroller, that was we could most easily win, and after the acquisition of TelCom 5 years ago, our Phase I was really to maximize the attachment of analog with our microcontroller products. 2 or 3 years ago, we implemented Phase II which was, we wanted to win the analog products with any microcontrollers, so if microcontroller happens to be one of our competitors we still had very good analog products and the signal chain of that microcontroller, and we wanting to compete with better be our product rather than TI’s or Maximedia, Burbrown or somebody else. And so that was certainly successful because that showed us that these products could stand on their own two feet and compete successfully even in the second where we didn’t have analog. I am sorry where we didn’t have the microcontroller win, and then the third phase of that was, it was implemented maybe about a year ago is analog anywhere, whether its going in DSE socket, whether its going in a Microprocessor or XPGA or essentially anywhere and everywhere in direct competition with all of our larger analog competitors because we now believe with 500+ products and analogs we have the breadth and the strength in the best-in-class products in many areas where they could stand on their own two feet and compete with anybody. So right not all three phases are applicable, we essentially go anywhere analog could win and we no longer restricted by taking analog around the microcontroller so therefore we are winning everywhere.

Steve, thanks for the detail on that. On your guidance somewhat above a seasonal norm, you mentioned, it was mentioned earlier that some of the others in the industry were so tight, are you simply saying that the industry is above seasonal norms at this point, do you think you are benefiting from some market share gains here maybe helping to add to that?

I don’t really know how to break it out because I only know what everybody else is feeling in terms of their growth and why their growth is coming or whether their growth is being restricted by tightness or whatever, so I do not really know. What we are seeing is March quarter usually is a very very weak quarter for Microchip and we are seeing not as weak quarter, as we talk to our customers in Asia. And March quarter is by the weak primarily because of Asia, primarily because of the Chinese New Year, the Lunar New Year. There are more than factors, I mean that’s really why it is weak, its 46% of our business today and in 46% of our business, it takes a couple of weeks off in the middle of February, there is just almost no way to recover from that historically. As we look at it now and talk to our customers, most customers are talking about very abbreviated shutdown schedule for the Chinese New Year, not as long as it has been many times in the past because lot of the end customers are around the world in US, in Europe and they no longer afford to shutdown their factories for two weeks because their product demand. What we are seeing and we are essentially you know working hard to make all the product available with reasonable lead times to take advantage of that. In our business you can’t really win very short-term market share from somebody unless you know you won that design 6 months 9 months a year ago. So its just somebody else can’t supply the product in the month of February and I happen to have the product available, I am not likely to win market share, I am only likely to win if I won that market share 9 months in the design.

Great, thanks Steve.

And the next question is from Christopher Caso with Friedman, Billings, Ramsey & Co.

Hi guys, thank you, nice quarter.

Thank you.

Just if you guys could talk a little bit, when you set your longer term margin targets, you were talking about some tradeoffs that you were evaluating between you know perhaps seeing little more aggressive in the migration of Flash versus you know bringing the margins higher. Is that one of the factors that moving a little better than seasonal now, or you know maybe you could talk about, you know if you are taking that a more aggressive posture, when we might see the effects of that on the topline?

I don’t see the effects of all that could be so short-term because its really again on the proprietary product has to go to the design sales where you are willing to bid more aggressively in the design because you have healthy margin and you have a cushion beyond that. So really what you are seeing in the December quarter and March quarter really has nothing to do with that. You know that effective probably a year out. If you look at our last quarter and analyze it, you will see a 75% incremental gross margin, which is a strict calculation, incremental gross margin divided by the incremental sales quarter-over-quarter, so while our company GAAP gross margin was 59.7% the incremental gross margin was 75% so this is where it tells you that as sales grow that is still margin leverage and growing the margin overall.

And I guess would you guys looking forward over the next couple of quarters, would you assume that you would remain in that sort of 75 incremental gross margin level in that couple of quarters?

It’s hard to pin down because too many moving parts and expedites, non-expedites and packages and naxtites (Ph) and in the large volume business, I haven’t really monitored the graph as well of incremental gross margin overtime. And depends on when you run into the capacity end, then you add incremental capitals and that has to depreciate which lowers the incremental gross margin from that kind of numbers. So that one, incremental gross margin is not bad, perfectly linear, you know as the gross margin seems to be, so I can’t answer that it is going to stay at that level.

Okay so just one more, I will go away. Regarding the depreciation guidance you guys provided, it sounds like it is going down on a year-over-year basis, and if you just clarify the depreciation guidance you gave that was for fiscal ’07?

No, the 110 was for the current fiscal year.

For the current fiscal year, okay.

Yeah, yeah.

Do you have a number for next year?

No I don’t have a number for next year on that, its top off of my head.

It should be lower, right?

Yeah.

Because some other depreciation rolling off, which is going to be 7 depreciation should be lower than fiscal year ’06.

Yeah and it can also depend on growth rates and recapitalization and particular in assembly and test, so there is some living parts that are kind of effective too.

Okay great thank you.

Welcome.

Our next question comes from Tore Svanberg with Piper Jaffray.

Yes good afternoon, can you share with us where you are on the utilization rates, perhaps at this point?

Well you know, this strategy at Microchip, we always run at nearly 100% utilization, we don’t’ really build a large factory and then start depreciating it and then really try to find products to fill in. So our Fab 1 and I am sorry, our Fab 2 is earning nearly 100% the utilization, Fab 4 for the equipment that is installed and turned on and being depreciated, the utilization is nearly 100%. Having said that, there is a large amount of additional equipment available in Fab 4, which we acquired with the Fab when we brought it from Fujitsu, which can be turned on with a, you know, fairly short notice and tuned up and ready to go, so if I look at the utilization, looking at that equipment as a factor, and we have said before that we have capacity in Fab 4 to take the overall Microchip revenue into about $1.4 billion compared to where we have best in last quarter so you can forget out the utilization.

Great, very helpful, and then also on inventories, your internal is 111, distributors 2 months, would you classify that as a regular level or do you view that as low and if so, could it go lower?

Well the distributor and inventory is basically as low as it is our guidance, I think the lowest may have been 1.9 or something for the month or so but you know two months of inventory is pretty low. Historically it has been closer to 2.7 to 3 months. However, the change in this inventory and distribution from closer to 3 months and to two months does not seem temporary, it seems like its more permanent type with distributors through cycles of learning and supply chain solutions have really worked out a way to deal with lower assets trying to improve their own return on assets. So as distributors keeping a lower amount of inventory from historical levels, it basically requires Microchip now to keep slightly higher inventory from the historical levels, so the lead times can go out and we still will be able to serve our customers. If you look at Microchip inventory, the lowest ever it has been during 2000 boom was about 74 days, and the highest it ever was I think about 135 days. So you know at 100 and 110 right now we feel that inventory is basically right. We are not trying to take it higher, we are not trying to take it lower. If distributors were to stock up a little bit more and our inventory were to get down a little bit closer to 100, probably would be a better mix but you know I don’t’ think that’s going to happen short-term.

Great, and then just finally on your analog business, you’ve mentioned the 5 product categories, data converter was one of them, is that because that’s on the mixed single interface or you are just not doing data converters?

No, we are in the data converter business. People have different names for these titles but yeah we make A to Ds, D to As, we make Op Amps, yeah we make all those products.

Great, and congratulations on all the record metric.

Thank you, thanks Tory.

If you find your question has been answered you may remove yourself from the queue by pressing the pound key, and we do ask that you please limit yourself to one question. Next question from Shawn Slayton at SG Cowen

Hi guys, nice results.

Thank you.

Maybe Gordon that about the business segments, Steve, can we talk a little bit about the end markets, can you share with us what end markets are showing you know perhaps relative strengths to fuel the momentum here in January?

Well you know as we have always answered this question with 46,000 customers worldwide and so many of them buying through distribution, you know Top 10 customers making up less than 10% of our business, we don’t really have any end market commentary. We don’t really, we can’t distinguish you know we don’t have huge customers that are 10, 20, 30% of our business, we can distinguish strength of one market versus the other. You know an average customer that Microchip buys $20,000 to $30,000 a quarter, you know, over that many customers, so we do not have any commentary, we will reiterate the same numbers we gave, the consumers is about 34% of our business, automotive is approximately 18% of our business, office automation and Industrial at about 16 to 17% EH and the communication is about 13, and these numbers over several years have been moved by more than a percent or so.

Okay, let me move on to this, the Flash MCU, can you explain this, you know what’s the dynamic related to migrating existing customers to Flash from maybe OTP type products, and is that a strategy that’s benefiting your business strengths?

This strategy is absolutely benefiting our business, you know approximately 62% of our business by our estimates in 8-bit microcontrollers still non-programmable, which is a ROM-based microcontroller. ROM-based microcontrollers have to be programmed in the factory where the customer gives the factory a code, then you burn the mask with that code and then you apply the mask in the fab, and that really produce the product for the customer, completely custom as the core changes you can’t use that product if customer’s end product is unsuccessful, customer ordered 100,000 products and he is not able to sell his end product, only able to sell 30 or 40, then all those ROM microcontroller are wasted. So there has been a long-term trend which has driven the ROM memory to EEPROM then Flash, from our ACIT products to SPGAs, ROM-based microcontrollers to field programmable microcontrollers so that’s one long chain that has been going on for 10, 15, 20 years. On top of that, you know, Microchip was originally the leader in field programmable microcontrollers by using the EEPROM technology, which was one-time programmable, and in 1996 or something we made the first Flash microcontroller, maybe you know slightly prior to that in the industry, and now 55% of our business is Flash microcontrollers and much of that has come from converting the ROM-based microcontrollers the competitors do out Flash and some of that has happened by converting our own one-time programmable EEPROM based microcontrollers to Flash. The benefit of Flash is it can be programmed multiple times if you make an error you can recover from it, it can also be programmed in the bold, it can be reprogrammed on a modem, it can be reprogrammed remotely. So you have much more benefits like any Flash memory would have, it is electrically erasable and programmable.

I guess how does the Microchip salesman incentivize the customer to migrate to Flash?

That I don’t want to share with you for competitive reasons.

Okay, thanks very much.

Welcome.

We will take our next question from Brandy Brennan with Bam.

Steve, could you talk a little bit about the dsPIC independently or is that all there’s been the 16-bit standard?

Well, the revenue we have today is all dsPICs. The 16-bit microcontroller which is a PIC24 architecture was announced to the world I think in October-November timeframe, and so it’s really largely in the designing stage and there maybe some small development tool revenue but its product revenue is zero, so all the revenue we have today is dsPIC. However, going forward as a PIC24 starts to shift, PIC24 actually has a larger market and the dsPIC would be partly much more cost effective and it’s a pure microcontroller, so eventually it will get intermingled and we wouldn’t break those two out.

Okay thank you, also just to comment on the 6:00 o’clock time is fine.

Okay I appreciate, thank you we appreciate it.

Bye thank you.

We will take our next question from Sumit Dhanda with Banc of America Securities.

Hi guys, nicely done. Couple of quick questions. First, Steve, it seems like last quarter and then again based on the outlook for this quarter, the 16-bit business really seems to be picking up some momentum, can we, I know you are not giving out the base from where the revenue is growing but can we think about roughly similar sequential growth numbers on a more sustained basis over the next few quarters for this business?

Well you know the customer base is in hundreds rather than tens of thousands, so it’s harder to really give much longer-term guidance whether you can model that going forward. If you look at it in September quarter, actually the growth was zero, and December quarter it was 19% and we are guiding 15 to 25 going forward, so its really it can be fairly volatile in the early stages and because of the small revenue there, so its really much more difficult to tell you, you know to really model it for an extended period of time

Okay, my question is on your Flash microcontroller business, I mean is there anything special you are doing, I understand the rationale for migration in your customer base but what makes it difficult for your customers to replicate the strategy that you have in terms of incentivizing your customers and migrate to Flash business?

Customers or the competitors.

I mean how come the competitors can’t replicate this, is there something special that you are doing that you could share with us or not?

No I mean because and they will know it too, I think you should probably ask them that question.

Okay, and one final question for you Gordon, the deferred income line was down very substantially, that reflected a reduction in inventory to distributors or is there something else, or am I reading too much of it?

On the deferred income and the balance sheet?

Yeah deferred income and the balance sheet.

Yeah I think it was guidance, you know modest base, they were both the same number of months of inventory overall, so we spent about $4 million over also really just some mixed aspects there that tends to be in Europe as you saw in the results there, business is more driven from via distribution complement and so that’s reflective and inventory held in all geographies but that certainly won’t had an impact there.

Okay thank you very much.

You are welcome.

From Merrill Lynch Joseph Osha.

Hi folks congratulations, Steve a longer-term question as I have looked at your market share in the 8-bit business and so it kind of has picked up pretty regularly, a percentage point or so each year. As I look at 16-bit, should I sort of think about that in the same way, it kind of steam ahead and take a point or so each year or is there some maybe near-term discontinuity because it’s a newer business for you?

Well you know if we can do what we did on 8-bit, I mean that would be our dream, and that’s really what we want to accomplish, from you know starting from where we are right now whether it goes out that rate or it goes slower it goes faster, its kind of very very hard to say, you know it’s really pretty hard to say, and I don’t think I could model this with a certain percentage growth in market share for a year for an extended period of time from where we are today and we are really on the first or second whole year.

Okay that’s fine, second question, and I don’t know if this is for you or for Gordon. As we look at the dividend, and by the way I hope your competitors are listening to the call, and how should we think about the payout ratio or how do you get that number overtime that as you continue to generate operating cash flow?

Well you know we have internally talked about payout ratios but we are not comfortable with the concept of payout ratio yet because as you see we have a way to go in terms of increasing the dividend. Once we start to reach a number equal to that payout ratio internally, you know then we can talk about staying in that number and increasing it maybe less frequently, you know while we have been doing it every quarter, and really trying to you know take it to a payout ratio. Right now Board is very comfortable whether to continue to aggressively share the cash with the shareholders because we still have you know current quarter can well go over $1 billion in cash.

Yeah, I think is great, and then the last question, I guess for you Gordon, can you just update us on what your philosophy is in terms of where you know operating expenses should come in relative to revenues here, you know target over the next couple of years, and if I can ask you to include the impact of options compensation in that number?

Of course that’s going to obviously change the targets in terms of the longer-term goals, you know, we have said that getting into the range of 24 to 25 points excluding the effects of option expensing is where we see our longer-term goals as we continue to invest in technical resources and our sales and marketing organizations we continue to have field application engineers that are appropriate advocates for our product and microcontrollers and analog as well as having the ability to continue to have design activities and process technologies to support the products as we enter the market, those are sort of the levels that we would expect and as I said of the increase of 7 to 8% in terms of the overall effect of 123R, 80% of that would reside in the operating expenses with 20% being in the COGS area.

Alright, thank you very much.

You are welcome.

From William Blair & Co., Jeff Rosenberg.

Hello Jeff

Hi how are you? I want to follow-up on the last question about operating expenses, I think going back a couple of quarters, you would expect it to be spending more on operating expenses whether it was R&D or marketing resource that it drive demand and it doesn’t seem like that’s comes through, has there been some offsetting cost reductions or reasons you have any other resources you originally expected to?

Well you know several moving parts, you know the industry is pretty tight, employment picture is pretty full, so we have lot of jobs open, we are trying to hire people and its taking longer to get people on board today then it would have taken 6 months ago. We are hiring people around the world, we have large number of jobs open, and we are getting increased employment, we have people but really it’s taking longer to hire people than we thought six months ago.

Okay, and then another follow-up on the question asked earlier about our strategy to perhaps be more aggressive in terms of driving cost reductions to generate demand in the gross margin line, you’ve said its not having a short-term impact and I know there is a lot of moving pieces longer-term but just isolating that, have you been doing them more and do you feel like that’s been driving design wins and should we think about a slower trajectory in gross margin improvement, other things being equal over the next year or so than we have seen in recent quarters?

Well I mean we have basically given you the gross margin trajectory, you know we said a quarter ago that it takes about 2 to 3 years to get to 62%, and when we guided it we had about you know 250 basis points to go and there were 10 quarters, so the trajectory on a field map is about 25 basis point per quarter. You know and then the numbers always deviate because there is too many moving parts, so we have already modeled that trajectory by which we can see gross margin can improve, after accounting for you know what we are doing in pricing and all that, and yes we are winning more design, yes it is helping. In answering your prior question I wanted to add, you know one more point on the expense side of the equation that if you just go back about 4 months ago, I earlier mentioned in the call that the whole industry was very negative on the prospects of our industry, driven by all these negative things that were happening, the oil the gold, Hurricane Katrina and so on and so forth, you know our revenue estimates internally were much more conservative. We were prepared if the session were to come in or whatever, so we don’t want to have expenses to get ahead to the current growth levels we are achieving so we are actually done better in revenue, you know we have just guided you the 3% sequential growth, which is significantly higher, you look at your own estimates, not you, just one person but consensus I think its, you know, revenue guidance is about 6, 7, or $8 million higher than what the March quarter consensus guidance is out there. So as a result when you apply, you divide by a larger a denominator of` revenue, the operating expenses as a percentage of revenue look lower than they would have if the revenue wasn’t as high.

Okay that helps thanks.

We will take our next question from Simona Jankowski with Goldman Sachs.

Hi, thank you very much, if I understand it correctly, it sounds like your industry distributors was down a little bit, and I just wanted to find it if what was behind that, was there retails being higher or your shipments being a combination of the two?

Well, no inventories at the end of the day, Simona, we are largely inline about two months of inventory. I want just a change in the balance sheet but that’s not really material in the overall picture, two we worldwide basis, they were about at the same range in our Q months.

Got it, so your shipments are pretty well tracking the retail it sounds like?

Yeah I think Simona, I think to recall for a few quarters you have tried to correlate distribution inventories to you know projected strength or softness on the business. And I think it would help if you give us that correlation because distribution is trying to improve their assets, the return on their inventory, and that’s phenomena of lower distribution inventory has been happening for several years now. And I wouldn’t be surprised of distribution inventory over the next couple of year, find its way from two months to 1.8 months or 1.9 or 1.7, and we are keeping a higher level of inventory and distribution often is expediting Microchip because they didn’t have the right product and the shelf when they needed and sometime we are able to charge an expedite charge, sometime not, that kind of goes, there is a negotiation, but really trying to correlate the amount of distribution inventory on really what’s happening in terms of resale, I believe that correlation is not good, and it would help if you really not think that way at least for our business.

Yeah, actually I was trying to get more kind of the end demand picture, but I just kind of commentary interesting kind of the structural changes for distribution and that’s very helpful. Then just quickly on the modeling side, Gordon, are you able to provide us with the after-tax DSO expense number for the quarter?

After the option expensing?

Yeah for the option expensing.

We don’t have the option expensing currently, we will only implement that in April.

Oh I know, jus the number that you would normally dispose in the 10-Q based on broad shoulder assumptions etc, is that available yet or should we just look for the Q for that?

We are also waiting for the Q for that.

Okay I got it, thank you very much.

Thank you.

We will take our next question from Tom Thornhill of UBS.

I had a question on your forward gross margin goals, Steve, do you expect the achievement of these goals to largely be efficiency improvements and pricing or mix improvements in each of the individual sectors, one-time programmable Flash analog or is there some margin difference between the sectors IEM was higher perhaps that the mixed shift in the business would help facilitate achieving these margin goals?

I think you know there are lot of moving parts and we can’t think like you know we have about 225, 230 basis point improvement left in margin to our longer-term guidance of 62%. Its really hard to break it out by several elements, but I could tell you several element, one big portion of that is you know the increasing utilization in Fab 4 where we have large amount of incremental capacity and as with the revenue grows that capacity goes to work, the incremental cost much lower, so incremental gross margin is much higher, that’s a big piece. The second piece is the equipment depreciation is rolling off, you know a lot of the equipment we added 5 to 7 years ago in our factories, you know is rolling off equipment depreciation so there is no more depreciation on it going forward, and we will continue to use that equipment because you know Microchip is not a Moore’s law company, and you know we continue to use older processes, older equipment for an extended period of time. We are still using equipment, I went to production 10 years ago, so there is an element that improves gross margin because of that, and the third element is what you pointed towards were you know product mixes, analog has higher margin, Flash has higher margin, things and lots of these moving parts and last quarter if you look at memory business was down and on the other businesses were up, so its continuously richening mix by various elements more analog more analog microcontrollers, more standalone analog, more mixing, more Flash microcontrollers, more this more that. So all these elements then its very hard to take 230 basis points kind of number and break it out much more than that into pieces.

Thank you very much, that helps.

You are welcome.

Next question is from Chris Danely, JP Morgan.

Thanks guys, just two quick follow-ups, Gordon I think you mentioned that, you thought that fiscal ’07 depreciation will be down, does that mean you expect fiscal ’07 CapEx to be down?

No the depreciation that I reported, the 110 was for the currency alright, I don’t have on ’07 number yet to share.

Do you guys what’s the direction it would be versus ’07 up or down?

It would be flat to down.

Okay great, and then second one on the lead times, you know it sounds like you have done a good job of wrapping capacity a little bit and getting those under controlled. Is your plan to maintain those extended lead times or would you work to bring them down a little bit?

Well you know lead time is basically assumption of demand versus capacity, we work hard everyday to bring those lead time back down because that will be better service to our customers, however, demand continues to be strong, so we are really, we can’t, as long as they are stable I think it is okay but overtime we will bring those down, yes.

Exactly, so maybe you can get a handle on that in the June quarter or something like that?

Well you know June quarter is after March, June and September quarter is other two traditionally stronger quarters for Microchip so we are staring into actually two stronger quarters after this quarter. So I don’t really know as the lead times come down giving us stronger quarters.

Got it, okay thanks.

That is all the time we have to take questions, now I will turn the conference back over to you for any additional closing comments.

Thanks Sarah, I appreciate everyone’s bearing with us this evening and I know it’s a very long earnings season for everyone, so we will be available here for any additional question and we look forward to seeing you at conferences or in your offices during this eve, thanks very much.

Thank you, and that concludes today’s Microchip Technology’s conference, we thank you all for joining us.