Good day everyone and welcome to the Microchip Technology First Quarter Fiscal Year 2009 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Microchip's President and Chief Executive Officer, Mr. Steve Sanghi. Please go ahead sir.

Thank you, and good afternoon everyone. Let me first welcome you to Microchip's earnings conference call for fiscal first quarter 2009. I'll pass this call to our Chief Financial Officer, Gordon Parnell for our financial results. Gordon?

Thanks Steve, and good afternoon everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding the 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 well as our 10-K for the fiscal year ended March 31st, 2008 and our 8-K current reports that have been filed with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today as well as Steve is Ganesh Moorthy, our Executive Vice President. I will comment on our first quarter fiscal year 2009 financial results reviewing geographic data and discussing balance sheet and cash information. And Steve and Ganesh will then give their comments on the results, outlining our guidance for the September quarter and update other prevalent matters regarding our business. We will then all be available to respond to specific Investor and Analyst questions. Net sales for the June quarter were a record $268.2 million, up approximately 3% from net sales of $260.4 million in the immediately preceding quarter and up approximately 1.6% from net sales of $264.1 million in the prior year's first quarter. We're continuing to include additional information in our press release related to SFAS 123(R). Our non-GAAP results exclude the effect of the adoption of this accounting standard and a favorable adjustment related to tax reserves in the fourth quarter of fiscal 2008. Our earnings per share on a non-GAAP basis were a record $0.44 per diluted share in the June quarter, an increase of 4.6% from $0.42 per diluted share in the immediately preceding quarter and an increase of…

Great. Thank you Gordon and good afternoon everyone. I will now comment on the individual product lines. Let's start with microcontrollers. Our microcontroller business achieved record revenue and was up 3% sequentially and up 2% from the year-ago quarter. Flash microcontroller business meanwhile hit another record and was up 3.5% on a sequential basis and up 11.5% from the year-ago quarter. Flash microcontrollers now represent 75.5% of our microcontroller business. Development tools, which is one of our leading indicators were very strong again achieving another record with almost 35,000 development tools shipped last quarter. This is the third consecutive quarter of record development tools shipments indicative of continued strong design and activity and acceptance of our solutions, and this should bode well for future growth. Moving to our 16-bit microcontrollers, this business completed another good quarter and achieved record revenue as well. Revenue was up 5% sequentially and up 60% from the year-ago quarter. We shipped over 4,200 16-bit development tools in the June quarter bringing the total 16-bit development tools shipped to date to over 48,000. The revenue growth and development tool shipment results reflect a strong design win momentum across the broad range of customers and applications and the number of 16-bit volume customers grew by over 13.5% in the quarter to 1,433 in the June quarter from 1,261 in the March quarter. In terms of 16-bit customers overall volumes, that number continues to remain in the several thousands. Our 32-bit microcontroller line continues to make good progress. We now have 11 products of the 32-bit family that are in production with several more that are sampling. Customer interest has been very high and the industry accolades have continued to come in for this product line. We have a large number of designs across the broad range of both customers and applications that are starting to incubate and while we know that the design cycles will be long, we are optimistic about the 32-bit line's contribution to our overall microcontroller growth and leadership position. Moving to our Analog products, our analog business was up 2.5% sequentially and up 8% from the year-ago quarter, achieving another quarterly record for revenue. The number of customers buying our analog products grew to over 14,000 from 13,400 in the previous quarter and we continue to be encouraged by the level of design and activity and the breadth of customers that this activity is occurring at. Finally, on our serial E-squared business, this business was also up over 2.5% sequentially, and we returned to a pattern of growth after two quarters of sequential declines. The pricing in this marketplace declined moderately quarter-over-quarter. Let me now pass it on to Steve for some general comments as well as our guidance for the September quarter. Steve?

Thank you Ganesh and good afternoon everyone. Today, I would like to first reflect on the results of the June quarter, then I will provide guidance for the September 2008 quarter. I'm very pleased and proud of our execution in the June quarter amidst one of the most challenging business environments that I have seen in a while. Despite this environment, we made new records in the net sales, gross margin and non-GAAP earnings per share. It was also pleasing to see that we achieved growth in all of our product lines with microcontrollers, 16-bit microcontrollers and analog all making new records. We also shipped a record number of development tools providing evidence of continued strong design momentum on our products. With this growth and comparing it to our competitors' reports, it is clear that we are continuing to gain market share after a perceived pause in the market share gains last year due to our exposure in the U.S. housing market. During the quarter, we also saw some investors' concerns emerge about the possible negative effect of earthquake in China. This concern was very hard to understand because we were having record quarter in China. At the end, we completed the quarter with record sales in China and were up a whopping 18.2% sequentially. Against the backdrop of these results, we are disappointed by the level of carnage done to Microchip's stock price by reports of a slowdown in China. Now I will discuss the guidance for the September quarter. Our book-to-bill ratio for June quarter was 1.15. We achieved all-time record bookings in the June quarter. Our starting backlog for September quarter was significantly higher than our starting backlog for June quarter. We are also on a path to complete the month of July as the best first…

Thank you. [Operator Instructions]. First we'll go to Chris Danely with JPMorgan Equity Research.

Thanks Steve. It looks like I was a little off on my China prediction there. Can you just talk about what you saw as the area of strength there and then talk about other goes out in the world?

Well, thanks Chris. China was the strongest geography overall in the world. And overall, Asia did quite well too outside of China. China was up 18.2% and overall Asia was up about 11.5% or so that Gordon mentioned. Lot of the business we do in China are really exports back to mostly U.S., but some to Europe also. We will never know the exact number because of lot of the products really moves around. But a significant portion of the business that is done in China is really by multinationals doing manufacturing there. So, at the end, the strength of overall business in China comes down to back to our strong demand creation efforts here in U.S., through our own efforts from the last two or three years and continuing efforts of demand creation in China and Asia, where we also added a lot of resources to further take control of the demand creation. And I think, we've been talking about it for a while and you kind of seeing the results now show through in the demand creation efforts, resulting into revenue. We are doing business with record number of customers. At the last count, I think we had mentioned 60,000 customers, we didn't quite count them prior to this earnings call, I believe the number has grown further. We're doing business with lots of additional customers. However, because of the economy, every customer is buying less product than they are buying otherwise. So, run rates are smaller, but we're doing business with record number of customers. So, when you do the overall math, record number of customers even buying slightly less products overall is resulting into sequential growth, less sequential growth than we would like otherwise, nevertheless business is still growing. We grew in March quarter 3%; we grew in June quarter 3%; we're guiding September quarter up 0% to 3%. So, you can see that we're heading for significant growth over the four quarters here compared to where some of the Dataquest and numbers SAE numbers are. And I was just handed a note, our total customer base worldwide is now over 63,000.

Great thanks.

We'll now go to JoAnne Feene with FTN Midwest Research

Yes, thanks for taking my call. I had a question about some of the new products. The 16-bit and the 32-bit and also your efforts in analog. Last quarter you had thought that you might end up doing sequential growth in 16-bit in the range of I think you said 12% to 15% and in analog, something in the order of 8% to 12%. And if you even consider it a bit wider than that this quarter. Can you help us understand what the hold [ph] up is there?

The growth doesn't always come linearly quarter-by-quarter. You've seen prior quarters, where we've had 16-bit growth 30% and 40% sequentially. So, we take our best shot at the beginning of the quarter, but customers can place, it can be a month off one way or another. But if you look at it on an annualized basis, I think that's the much better way to look at the growth.

Okay. So you're still feeling like that's the kind of number we should think about quarter-to-quarter to generating annual forecasts for both of those areas it sounds like?

I think the... some of the comments that I made in general about record number of customers, but everybody, they are buying less quantity than they will buy otherwise, it holds good for analog and 16-bit also because they go into similar market exposures where we have others. We usually do not break out sales by product line at the start of the quarter. We report them at the end of the quarter. Once in a while we've taken the liberty to kind of point out what was driving the growth, and we mentioned the numbers in analog and 16-bit. In hindsight, looking back at it, probably was an error. So, we're not repeating that this quarter. The analog customer base became a new record as Ganesh mentioned earlier, the 16-bit microcontroller was a new record. However the number of units everybody bought was lower than really what we had anticipated. So, we still sequentially grew 3% sort of middle of the guidance range. But, our internal expectations were a lot higher.

And if I could follow-up, you talked last quarter about how you probably saw the bottom in December. And then, you guys sort of led the industry and you were seeing a turn? Do you still feel that way about the market, you're expressing some caution here? Are you seeing anything in terms of order trends, it sounds very positive that gives you still that confidence even though you're being a bit cautious?

Well I think... I think there is a brand new economic phenomenon taking over the world which is the high energy prices, a very strong euro, extreme economic weakness in U.S. whether it's headed for recession or not. Our comments back in December time frame were really coming out of the inventory correction or whatever more back that happened, the first wave of housing issues back in September and November time frame. We did recover from that, and then we talked about our internal demand creation effort worked quite strong and was keeping us ahead of really the general market environment in the industry. We did perform to that. We were up 3% in March, up 3% in June guiding up for September. So, in general, I think we feel pretty good about it, but at the same time we have to give you caution about the global market environment. If you look at all the earnings reports we have been tracking for the last week to two weeks, TI on down, the guidances that are coming in almost minus 3 to plus 3, centering around zero. So, that reflects the overall what is being seen in the global economy. We feel we're doing slightly better than that because of some of the efforts we have put in.

Okay. Thanks very much.

Welcome.

We will now go to Doug Freedman with American Technology Research.

Thanks for taking my question. Can you talk a little bit about the fact that you're seeing your lead times expand and the fact that distribution seems to be willing to place orders on you. Steve, you've mentioned the TI call, where we saw distribution sort of signaling that they really didn't want to carry some inventory here at this time. Can you just comment on that versus what you're seeing?

Well, we're seeing very strong orders from distribution and we are seeing distributors willing to give us visibility as well as willing to place inventory. Our distribution inventory isn't growing. Last quarter, distribution inventory was 1.7 months, down from 1.8 months a quarter before. So that result isn't any different. However, Microchip takes revenue recognition at sell through. Texas Instruments takes revenue recognition at selling. So, they get directly impacted by what distribution takes in. We do not get impacted by that, we only get impacted by what sells out and the sales out were pretty good even though the distribution inventory declined. However, the strong orders reflect that we're building backlog, we're getting good operational visibility, and part of that is because of strong demand. And we've had some specific package issues also, two or three packages demand, just tripled and quadrupled on our sales where certain volume customers decided to take one package versus the other. So, couple of lead times went out, and that kind of created the effect of people wanting to secure more product. And pretty soon it kind of spread across the board. So, the bookings were very, very strong and we have good visibility from distributors going all the way into September. Having said that, it's not like distributors are stocking inventory and building inventory, even if they were, that wouldn't affect our revenue.

Correct understood. Can you talk whether you are seeing any impact you mentioned the packaging, are you seeing any impact from commodity prices and flowing through or people [ph] or your suppliers starting to try to raise prices or any of that impacting, or do you see or are you concerned about that?

Well, yes, gold prices are up 2x and aluminum and copper and some of others are similar, the natural gas prices, transportation costs and really all those have gone up. So, nobody can escape those. We are doing record yields in our factories, record outputs in our factories. So to some extent, countering some of those effects, we are pleading with our customers and many of them we are not giving any price reductions. We maybe have done some selected price increases to pass through some of the cost of the commodity prices, and we still produce to record gross margin, and not a whole lot higher than the prior quarter, but nevertheless a record. And we are in that asymptotically approaching that 62% non-GAAP gross margin that we have been guiding you towards and it's 61.6% right now. So, it's really within 40 basis points of that, and will take a few quarters to get there, because there is a lot of headwind in terms of commodity pricing.

And my last question for you. On the capital spending line, you're showing that you're going to spend, I believe, it's $110 million this year. Can you give as an idea of where that's targeted at? And that will be my last one. Thanks so much.

The capital is pretty spread out, largest amount of capital out of that is assembly and test where we have to really add capital one-to-one when we're growing there to add capital. The fab portion is a lot smaller because as we have mentioned to you before, we have $1.6 billion revenue worth of installed capacity in the fab, and we only have to add small incremental amount of capital to get there, because we have purchase aggression fab where they are heavily loaded with equipment. So, the largest portion out of the $110 million is assembly and test. Also included in that $110 million is the $30 million of brick and mortar building which depreciates over 25 to 30 years. So, don't look at the $110 million of capital as and $95 million depreciation as if the depreciation would grow. Take that $30 million out and then the capital only becomes about $80 million, which would really depreciate over shorter time and current depreciation is $95 million. So, the net depreciation in the company is still dropping, the $30 million building is a one-time cost which will depreciate over many, many years.

Terrific. Thanks for the detail.

No. I think that covers it very fully.

Okay.

We'll now go to Jeff Rosenberg with William Blair & Company. Jeff Rosenberg - William Blair & Company: Hi. Could you give us an update, I think you've talked about in recent months some noise in your bookings as it relates to the Arrow transition. Can you talk a little bit about how that's played out?

Well, I think, as you see by the results, it has played out quite well. There were speculations by some on the Street that this would be a huge negative and we never understood how it could be huge negative. For two years or so, people were saying, "Well Arrow wasn't doing anything.” So it was a negative for Microchip and we've terminated them, and then there was the report again that would be negative because we terminated them. You can't have both sides. They were not doing anything; so terminating them would only be positive which is really the case. They were really not doing anything, the Arrow transition has been completed, all of the Arrow business have been successfully transitioned to other distributors around the world to Future Electronics, to Avnet, to Silica in Europe, which is a branch of Avnet and to some of our other regional and local distributors and catalog distributors around the world. So that transition at this point in time is complete and I will think it's an extremely good transition. The resulting distributors now are extremely charged up, doing demand creation, adding dedicated resources. As we speak, we're undergoing our annual masters' conference in Arizona, which is our annual strategic, technical exchange in the view with our customers. It's a record attendance over 1,000 people in attendance. People are paying huge amount of money to come here with 110 degree heat out in Arizona which clearly shows that people are interested in our products coming to learn it, paying money to truly come here and there are large number of distributor field application engineers here also as we they are engaging, or want to learn and want to go out and sell our product. So, the entire distribution momentum has really turned very positive. Jeff Rosenberg - William Blair & Company: Okay. Thanks. And then the other question I want to ask you was just looking at the strength you're seeing at 16-bit maybe wonder in general about whether you are seeing stronger demand? If there is any difference in the demand trends you're seeing, high-end mid-range, low-pin count products, I mean it's the 18 series, 16-bit, any... seeing in different trends. Now, what you're seeing in your baseline products versus your real low-pin count products, I don't know if there is anything to be gained there from a different trends you might be seeing across your product line?

Let me pass it to Ganesh.

There's really nothing specific about 16-bit necessarily. I think 16-bit is growing faster obviously from a smaller base. But, we are seeing strength across all of the different architectures. Jeff Rosenberg - William Blair & Company: Okay. Thank you.

We'll now hear from Craig Hettenbach with Goldman Sachs.

Yes. Thank you. Gordon, on the operating margin front, going forward, is there anything in terms of efficiencies to be gained there, or do you think that operating margins grow more with the revenue growth going forward?

Well, we have directed 62% overall gross margins from, on a non-GAAP basis. So, and as Steve said, that will take several quarters to realize as we look at our operating expenses line, we expect to continue to make some efficiency improvements overtime. But again, we want to make sure that we offer the appropriate investment from an R&D and a sales infrastructure and chemical support for our customers as we go forward. So, again we expect to see some modest improvements over time getting to our corporate goals in that area.

Okay. And if I could follow-up. Steve, any new updates for us on the acquisition or M&A environment out there?

Well, I would say the M&A environment continues to be difficult. Stock prices are down quite substantially just from six months ago, or a year ago. Ordinarily, that would really mean there should be opportunities, but no management teams like their stock prices, they all think the stock prices are unduly knocked down by the Street and everybody is waiting for their stock prices to get to old highs and they want premiums above that. Very few deals are getting done. I think, I just watched the roster and not hearing a lot of announcements. So, we continued to be interested in the proposition. We have the cash to do it, we have the currency to do it, we have some desire to do it, but we are very selective. We don't want to... our growth has largely been organic, but if a right kind of acquisition where to come along, we will be quite interested in it. But we're more interested to not do a bad deal than to do a good deal. So, we'll pass on to bad... good deal to avoid a bad deal and good deals are not easy to come by.

Okay. So it sounds like more tuck-in type deals, if deals happen in the near to intermediate term?

Well, there is nothing near to intermediate term. There is nothing... we're not anything close to that... close to that you can call it near-term.

Okay. Thank you.

We will now go to Romit Shah of Lehman Brothers.

Yes. Thanks a lot. Steve I'm still just trying to get my answer on the revenues coming in towards the lower end of your guidance and the backlog being so strong. Can you just spend a little time telling that linearity in the quarter and does that explain part of the disconnect?

Well, I think the quarter was quite linear, and in fact the quarter we just finished is one of the most linear quarters we have. The March quarter is non-linear because the Chinese New Year, the September quarter is non-linear because of August shutdown in Europe and December quarter is non-linear because of all the holidays at the end, the June quarter is probably the most linear quarters we go through, was it any different Gordon?

Yes. I think it was really in the order that you indicated. I think one of the key element, it's, Romit is the extension of lead times and specific areas that we have spoken to and that customers have given us an improved visibility in terms of backlog in those areas because of an extension of two to four weeks in particular areas of our business. So that's certainly one element that's important to take into consideration as you look at our results.

Is it fair to say that the six-month backlog has grown at a faster rate than the three-months backlog then?

I really wouldn't know what those statistics are.

Well, I think three months backlog is up quite a bit also. I don't know if the six months has grown faster than three months. Nobody has asked the question that way so, we haven't looked at it.

Okay.

As I mentioned the three months backlog, starting backlog on July 1 was substantially stronger than starting backlog on April 1. However I've been broken record on it for many, many years. Book-to-bill never correlates with our end-results and starting backlog never correlates with our end results. And Street is obsessed with it, maybe it makes sense for other people's business or in the commodity business, where you're competing with others to get the orders for the current quarter in DRAM or Flash or analog. In our business, it's a designing business, and once we have won the design, the business is ours. It doesn't matter whether you get the order on July 1 or you got the order on June 30. So, therefore don't read way too much into it. I simply look at it as an operational visibility, we can be more efficient in starting the wafers, manufacturing the product, planning the capacity with more certainty. But if you get larger orders before it simply means the turns are going to lower because the customers gave you their orders.

Okay. And then just lastly on the strength in July, have you guys seen North America and Europe start to come back or is the strength building driven mainly by China?

The strength is driven by Asia, yes, China in particular and Asia in general. The North America business is really quite strong, because again I would emphasize that a good portion of what we do in China is really North American customers simply manufacturing there. So while the U.S. economy is totally sick, our U.S. business is very healthy and if you were to magically measure it by where the business is consumed, rather than where it's manufactured, then you will see that our U.S. business grew very handsomely. We created a tremendous demand in U.S. despite a very, very soft economy.

All right, thanks a lot, good luck.

You're welcome.

From UBS we'll go to Uche Orji.

Thank you very much. Steve just a quick follow-up on the distribution ... distributor relationships. How would you now rate the agreement with Avnet's Memic in terms of incremental demand creation? Has that been tracking in line with what you expected? And then also, can you just update me on your headcounts in terms of how you also drive in the manipulation internally and specifically headcounts in China versus the developed market? So two questions there.

Well, our distribution relationships are the best they have been in a very long time. They are better than what they were pre-conflict with Arrow, because in the new distributor relationships, we are getting very, very strong and really dedicated resources from Avnet in future. In Avnet, we are not in the larger Avnet, which is Avnet Electronic Marketing. We're in the Memic branch of Atmel... Memic branch of Avnet, where none of our larger competitors are there. TI, Atmel, Cypress, Renaissance, NEC, PHILIPS, Infineon or anybody else, they are all in the Avnet EM, the general purpose Avnet division. We are in the Memic division, which really has Microchip as the only main microcontroller line. I think they have couple of small ones like Luminary Micro. So we're getting lot of dedicated attention of large numbers of apps engineers. We have created a similar structure inside and then large number of regional distributors that we have. In fact, the Chairman and CEO of Avnet, Mr. Roy Vallee is the keynote speaker tonight in front of 1,000 of our customer engineers present at our Masters Conference I talked about earlier in Scottsdale tonight. So, this relationship has been all-time wonderful. However, there is a time to market, so it will take another year or so before you see significant acceleration from the results of the enhanced distributor relationships. The results you are seeing meanwhile in the last two, three quarters are the results of our own efforts where we added a large number of internal Microchip resources to create demand and grow our business. That's what you're seeing here today.

Right. And then most of that resource got, in terms of the split in resource addition, U.S. versus emerging markets, [inaudible] most of that is in emerging markets.

We're not going to give you that because that's a good consumption for our competitors.

Okay. Fair enough. Just one another question. In terms of how you describe the U.S., in terms of your are creating good demands in the U.S. even though the macro environment is a bit soft. Are you seeing... what particular areas are you seeing these demand creation in terms of end products and can you also comment on things like touch pads because that is like a growth areas for MCU since your relationship with Quantum that [inaudible]. Is that... what are you doing in terms of driving demand within that period?

Well, Microchip has its own touch sense technology we introduced about a year ago. We have very, very large number of design wins. You'll see probably a year from now that Microchip probably makes the largest amount of shipments on touch-based technology compared to anybody including Cypress. We just can't really all share that with you or name any customers, or name any design wins. Your first part of your question was what areas are we seeing this growth. Let me tell you, we are not seeing it in housing and we are seeing it everywhere else.

Okay.

We don't want to narrow down any more. So, the housing segment, I haven't given you housing index in a while because I told you before that I was only going to do it for about six months or so. After that, there are new designs and customers moving to Asia and people manufacturing here and there and so many moving parts and it becomes very, very hard to correlate. But we continued to look at it internally, continue to try to track it internally. The housing index was slightly up March to June. Why I don't ask, why it was up? I think it was up because few new designs went to production over there, but the housing index was up slightly, but nothing to write home about. So, our business is growing really outside of housing. I'm actually quite proud of Microchip people that very quickly shifted some of the resources to other areas of the business, took some low-hanging fruit and very, very quickly able to negate the impact of the housing by growing our business in all other channels worldwide.

Right. And what about automotive?

Automotive business, you read the story, you read the news. The U.S. automotive business is pretty sick. We are doing better elsewhere in Europe and Asia, but the overall automotive business is not growing.

Okay. Great. Thank you.

We'll now going to Craig Ellis with Citi.

Thank you very much. Steve, I think early in the call you mentioned that there were some packaging issues that contributed to some lead time elongation. Can you identify if those packaging issues have been resolved, and if not, when would you expect that to happen?

The packaging issues have been resolved. In fact, some of the additional capital we have added is in those areas to try to tool up those packages internally. Remember, we do about 70% of the assembly ourself and about 30% of the assembly is outsourced. We do nearly 100% of the test ourselves. So, we've added some additional capital to improve both the test capacity for those packages as well as bring some more internal capacity for those packages that are underlined just outside. So, as we speak, we've made very, very significant progress. All the lead time have not come down yet, but we believe that going out of this quarter, we shouldn't have any impact because of packaging.

And would you expect lead times to have... I don't know how much they've moved up, but would you expect them to come back in a little bit as you make headway on getting shipments up, given the back-end investments that you have made?

Probably not completely, because the next quarter is front-end-loaded quarter because of the holidays. So, people have to place their orders for October and November, and we're likely to do see strong backlog, so... that continues to really put pressure on the lead time. So, I don't think they will fully recover.

Okay. And then maybe just a longer-term question for Ganesh. On the 16-bit business, it's my understanding that while you got 150 or so products out there due to the time it takes to get a design in, maybe half of them or less are actually generating revenues. So, if that so then what kind of visibility does that give you into the... the growth of that business over the next four quarters or so, given the revenue faction you're seeing from those products that already are generating revenue?

Of the 150, I would say, about a third of them are really in revenue-generation, the other two-thirds are all in design-in phase from the time they were introduced. I think we get a fair amount of customer design-in visibility, we are obviously involved at many of those designs, we're helping those customers overcome the issues in the way they are getting to production. And so this over... as we go quarter-by-quarter, you'll see more and more of these products being introduced over the last one to two years. Getting to the point, where their applications are tested, validated and go into production. And so we expect 16-bit to benefit from that and we will continue to see a sustained growth rate that is above what our corporate average is for some time to come.

Okay. And then quickly on the 32-bit business, I know that development tools are seen as good proxy for growth prospects. When will development tool shipments be sufficient to start to give you an idea of what the uptake for the 32-bit product line will be?

It's going to be a little more complex, because many of the development tools on 32-bit are also shared with 16-bit. And so I don't know if there is an accurate indicator from just development tools alone. However, what we do track is, customer engagements and how many of them, how far along they are, when they are going to... when they are planning to go into production et cetera. And by looking at those indicators, we believe that 32-bit is very much on track without expectation that it will have a design-in cycle that is at or slightly above where the 16-bit design-in cycle have been. And 16-bit has been about an 18 to 24 month design-in cycle.

Thanks, Steve. Thanks, Ganesh.

We will now go to John Pitzer with Credit Suisse.

Yes. Good afternoon guys. Thanks for taking my questions, just a couple of follow-ups, Steve, on the geographic breakdown just when you look at the Europe revenue being down sequentially, how much of that do you attribute to sort of macro weakness versus the fact that March kind of represent a difficult to compare?

Well, Europe has a strange revenue profile. We internally call it the Euro curve. Large portion of our European business is really through lots and lots of regional distributors. Largest distributor in Germany, and largest distributor in France, the largest distributor in Italy, in Spain. They are all regional distributors. They are not the global distributors. So through the regional distributors it's very much dependent on what the local number of working days and holidays and all that pattern is. Europe has the largest number of working days in the month... in the March quarter. In the June quarter, they have... the late part of the June there are some holidays, there also... Easter comes in April. August is close because of summer. Then they have holidays in December quarter. So, we usually every year see a majority of our growth from Europe in the first quarter. This time in the March quarter, we were up about 17% some number like that.

Yes, I think it was in that region.

In that region of 16% to 17%.

In double digit.

And then June quarter will be up, often flat-to-down slightly. We were down a little more than we would like to be in the June quarter and that was because of the economy and strong euro. The September quarter in Europe is always down because of holidays in August. We're modeling down little more than what we ordinarily would do because again... because of strong euro. And December quarter is again always flat-to-down because of slightly less number of working days and then the following March again is really always a very, very big quarter in Europe. So that's sort of our profile. We are slightly off that profile, the drop was deeper than we would like and we're modeling the September drop to be deeper than we would like.

And then see, this is the first time you've given out China's sequential growth. I understand you have been giving it out... you gave it out because there is something concerned in the marketplace. I'm just wondering related to that number, is that kind of how China is being growing in the last several quarters. Was this an acceleration or help me understand kind of to put that number in a little bit of perspective?

Well, we broke it out this time because there was a China specific call, which did some major damage to the stock. So, we thought we needed to answer that that China was not an issue. We don't plan to break it out in future, unless there was... in future it could be a specific issue in Italy then maybe we will break out. If we break it out the numbers in 100 different ways we just get... then you just latch on to every single number and it's impossible to go through that.

Well, I guess the reason why I am asking to your point, just given some concerns that... the strength might be because of some disruptions around the Olympic. I'm just kind of trying to get a sense of, how we get comfortable with the fact that this wasn't anomaly ahead of the Olympics and you could see demand slow there?

It was not an anomaly ahead of the Olympics now. June quarter is traditionally a very strong quarter in China and you also you have an easier comparison because of the Chinese New Year in the March quarter. So driven by that because March quarter has one less amount of week, so that itself is responsible for about 7%. So if you take out 18% growth and take out about 7%, then you get to about 10%, 11% growth and China has been growing very, very strong and our expectation in the September quarter is also a majority of the growth comes from China.

Great, that's helpful. Thanks guys.

[Operator Instructions]. We will go now to Mark Lipacis with Morgan Stanley.

Hi, thanks for taking my question. How... going forward, how should we think about the dividend growth. You've been pretty consistent with growing it. Should we think if you guys targeting some kind of a pad as a percentage of free cash flow or should we think about this growing with the cash flow? Thank you.

We have never targeted a payout ratio. The problem we have with payout ratio is, you could have a very strong quarter and then you pay a lot and then you have a weaker quarter, let's say the cash flow declines in the given quarter because of back-end loaded or less receivables or whatever and then you lower the dividend and the market doesn't respond very well to these kind of gyration. So, our feeling is that we're probably the only company that grows the dividend every quarter, that's what we're committed to do. Overtime as the numbers become substantial, the increase becomes smaller, as we have started doing in this current quarter. We grew it by $0.808 versus increasing it by about $0.01 before, but we want to grow the dividend every quarter. So no matter when an investor buys the stock either before the dividend or after the dividend, they can still continue to see dividend increases. If you increase the dividend once a year like many companies do then there is a lot of speculation around prior to the dividend announcement and people sell it before. So stock goods have some volatility just driven by the dividends. So, our commitment is to increase the dividend every quarter, overtime the increases become smaller, but we are not targeting any kind of payout ratio.

Okay. Very helpful, thank you.

And we will take a follow-up question from Chris Danely.

Thanks for it. Just a few follow-up questions. So in terms of the lead times extending, is that on a certain product line or is that across-the-board and then also it sounds like you... you are saying with that those lead times probably come in the December quarter?

Well certain specific packages lead time went out little more than normal, but the lead time that can have little bit to even on the all other products also because a lot of the equipment is common, lot of the test equipment, packaging equipment is common. So with a 1.15 book-to-bill ratio with a tremendous backlog when you get all the backlog, you get booked up. So, when the new orders come in they have to be scheduled out. So, our sense is that these lead terms will probably be stable from here and stay in this range for quite some time.

Okay and then in your prepared remarks you talked about high bookings but due to some revenue recognition that wasn't translating into sales. Am I misinterpreting that or could you just expand upon that a little bit?

What I said is that bookings are great because it build backlog and operational visibility, by operational visibility really what I mean is if I know what to build then I can build it with much more accuracy and I can batch process it rather than breaking FedEx all the time. When you don't have backlog, you don't have operational visibility, then you're building it to a forecast, you are building it to a guess what the customers will come and buy and then you have more tendency to be out of mix on a short-term basis. Therefore you are less efficient in trying to meet their demands. So, operational visibility is naive. But strong bookings and strong backlog does not result into a very, very strong revenue because we only recognize revenue when the distributor ships the product out. And another investor was asking question relative to TI. TI said that the distributors were lowering inventory. We do not get impacted by distributors lowering inventory or increasing inventory because we only recognize revenue to what the distributor sell out. And what I said was that we're not seeing the strength in sell out from distributors which is our revenue recognition consistent with that 1.15 book-to-bill ratio which somebody would like to translate into 15% growth. And we're not seeing that kind of strength in sellout. Hence we have modeled that into the guidance that we have provided.

Thanks. That's helpful. And last question, with the stock selling off here a little bit, why wouldn't you guys crank up the buyback?

We never said we will not, or we are, or we will or we will not. We have been in a quite period, we don't buy stock when we have inside information. So, we basically did not execute any stock buyback after we entered the quiet period. The window for us opens on Monday and what we will or will not do, you will probably see that in the 10-Q.

Okay. Thanks.

And it appears that's all the time we have for questions. Mr. Sanghi, I'll turn the conference back to you.

Well, thank you very much everybody. And we'll talk to some of you on the road as we go to some conferences and otherwise talk to you next time in the next earnings call. Thanks everybody.

Again, that does conclude our conference. We do thank you for joining us.