Good day, everyone, and welcome to this Microchip Technology Second Quarter and Fiscal Year 2016 Financial Results Conference Call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Microchip's Chief Financial Officer, Eric Bjornholt. Please go ahead, sir. J. Eric Bjornholt - Vice President & Chief Financial Officer: Thank you, and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Steve Sanghi, Microchip's President and CEO, and Ganesh Moorthy, Microchip's COO. I will comment on our second 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 integration activities associated with the Micrel acquisition, which closed on August 3. We will then be available to respond to specific investor and analyst questions. I want to remind you that we are including information in our press release and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at www.microchip.com, which we believe you will find useful when comparing GAAP and non-GAAP results. I will now go through some of the operating results, including net sales, gross margin, and operating expenses. I will…

Thank you, Eric, and good afternoon, everyone. Since this is the first time we are including results from Micrel, before I jump into the product line details, let me remind you how we will be reporting Micrel's results as part of our public reporting segments. As Eric has already mentioned, what's included in our reporting is a partial quarter of Micrel's September quarter results, starting from the close date of August 3. Of the Micrel revenue, approximately 3% was derived from foundry services where Micrel manufactured custom products designed by customers. This revenue is included in our public reporting segment called Other. The remaining 97% of Micrel's revenue was derived from products developed by Micrel. Of this revenue, over 99.5% of Micrel's revenue this quarter is part of our Analog reporting segment, while less than 0.5% of Micrel's revenue this quarter is part of our Microcontroller reporting segment. With that clarification, now let's take a closer look at the performance of each of our product lines starting with Microcontrollers. Our Microcontroller revenue was down 4% in the September quarter, as compared to the June 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 2.7% 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 further market share. Microcontrollers represented 59.7% of Microchip's overall revenue in the September quarter, down a little from last quarter, as Micrel's revenue contributed predominately to our Analog reporting segment. Moving to Analog, our Analog business, excluding Micrel results, was about flat in the September quarter, as compared to the June quarter,…

Thank you And we'll take the first question from Craig Hettenbach with Morgan Stanley. Craig M. Hettenbach - Morgan Stanley & Co. LLC: Yes. Thank you. A question for Steve, just given some of the consolidation we've seen across semis, you guys have been very successful integrating a number of small to mid-sized deals. What's your view in terms of – do think you can replicate that success with bigger deals over time? Steve Sanghi - Chairman, President & Chief Executive Officer: Yes. We can replicate that success in the bigger deals, but we haven't found a deal that meets our purchase metrics. Craig M. Hettenbach - Morgan Stanley & Co. LLC: Okay. And maybe just as a follow-up to that specific question, of the deals that you've done, I mean, the synergies are pretty clear in terms of improving margins. Any updates on ISSC or Supertex in terms of some revenue growth drivers that may be emerging as you look out over the next 12 to 18 months? Steve Sanghi - Chairman, President & Chief Executive Officer: So, yes. I gave the example of Supertex business model, which has improved very nicely, and we are – basically have lots of different design wins on Supertex that are in various stages of the incubation process. The design wins to production timeframe is usually a year and a half to two years on these complex designs, really from the date of the acquisition. So Supertex acquisition is now about 18 months, so I think probably another six months or more to go, and we should start to see some growth coming from these new design wins on Supertex. Regarding ISSC, I'll let Ganesh comment on it, how we're gaining the acceptance of Bluetooth worldwide with our ISSC efforts.

So when we acquired ISSC, their sales force was predominantly focused in Taiwan and in South China. But the opportunities for the Bluetooth products are really global, and over the last year plus, post the acquisition, the rest of the Microchip sales teams and channels have been working to expand the number of designs at customers that are Microchip traditional customers, and many of the applications that Microchip is strong at, so that all is activity that is in progress. We expect it will accrue as a design cycle gets completed, but we today have worldwide coverage of the ISSC product lines for Bluetooth opportunities as compared to what we inherited when we acquired the company. Craig M. Hettenbach - Morgan Stanley & Co. LLC: Thank you both for the color.

And our next question is from Harlan Sur with JPMorgan.

Hi. Good afternoon. Thank you for taking my question. It's clear that some of your peers that have a sell-in based disti model are now working through inventories in the channel and at their customers, and in some cases, it's a pretty substantial inventory buildup. Obviously, you guys have been under shipping consumption and normal seasonal trends now for about four quarters. Steve, how confident is the team? What metrics are you looking at to give you confidence that in the March quarter, customer inventories are in the right place and that you'll be shipping to consumption and seeing some potential growth? Steve Sanghi - Chairman, President & Chief Executive Officer: Well, Harlan, it's exactly the same question that investors and analysts have asked at a similar time in every cycle. We basically do not measure visibility by backlog, because it tends to vary by lead-times. We measure visibility by analyzing our business region by region, customer by customer, division by division, distributor by distributor, and looking at the inventory and sellthrough and all that. So just like we see the effects of the industry events earlier and began this correction earlier, we can also see that we are ending this correction earlier, and we are now poised to resume growth in the March quarter. We were telling you when nobody was admitting that there is a substantial sell-in driven inventory build being built in distribution, and we were not getting a lot of agreement from a lot of the analysts at that time. But now you have seen, as the results have come out, that there is a substantial inventory build, and a number of companies are guiding down quite substantially, as they take that drop because of sell-in driven revenue recognition.

Thanks, Steve. Steve Sanghi - Chairman, President & Chief Executive Officer: Yeah.

Next will be Chris Caso with Susquehanna Financial Group.

Yes. Thank you. For first question, perhaps, you could talk about what you're seeing from a geographic perspective. Obviously, a lot of your peers have seen weakness that was really focused on China. And then, following on from that, Steve, given your commentary on the March quarter, typically you do have the Chinese New Year effect that affects your March quarter with growth elsewhere. Is that sort of still what you're expecting, and that's kind of baked into your expectation where we'll see some growth in the March quarter? Steve Sanghi - Chairman, President & Chief Executive Officer: Yes. I mean, as far as China is concerned, I mean, we actually called it first. We were seeing substantial issues in China at thousands of small customers, who pull their horns very, very quickly because when the small customers make a mistake just once, the end result is you go out of business, while the large companies have substantial cushion and can carry inventories and correct them over time and can cash flow and buy through distributors and contract manufacturers and can return parts and do all those things. And many of the small customers, when they make a mistake, there is no second chance. So that's why our visibility to thousands and thousands of small customers have always taught us over the years and over the decades actually that we get a glimpse of what's coming ahead in the business first, and which is what we had told you. So, yes, the problems materialized in China as we expected. Now, as you look at the next quarter. Yes, it's a year of the Chinese New Year, the quarter of the Chinese New Year, and we will expect our business in China and Asia to be sequentially down. But we make up for that elsewhere with a very, very strong Europe and a good America. And many times, our March quarter is sequentially up, and we expect this time, too.

Okay, great. Moving on to some of your commentary with regard to Micrel and the accretion that you expect, specifically getting to that $0.25 run rate by the end of the year, is really the catalyst for that getting the fab closed, and you talked about that, I guess it's around the August timeframe? And am I right to expect that that's the biggest driver of getting to that full-year accretion number? Steve Sanghi - Chairman, President & Chief Executive Officer: Yes, that's the biggest driver. But there are others, too, as we continue to, for example, this quarter we moved all the IT and business and financial systems to Microchip. In the next quarter, you see a lot of the – some of the results, some of the expense and other reductions coming from that as we're not running two parallel systems, so there's accretion all along, every quarter higher. But the big one comes from fab, and it doesn't happen right away when the fab closes. It happens more after when some of the older higher-priced 6-inch inventory is sold, which is about six months after the fab closes. So that's why I'm saying around the end of next calendar year.

Right. And just the final follow-on, how would we see that in the gross – do you have a metric we can look at in terms of how that will benefit gross margins? Steve Sanghi - Chairman, President & Chief Executive Officer: Well, I mean, you should expect that that will – just like Supertex, we began with 47%, and last quarter its gross margin was over 60%. And that was exactly six quarters after we closed the Supertex deal. So six quarters after we close the Micrel deal, you can expect the gross margin to have a 6 in front of it.

Great. All right. Thank you.

The next question is from Chris Danely with Citigroup.

Thanks, guys. I didn't know I went from Jewish to Italian overnight. Hey, just a quick follow-up on Caso's question. So, Steve, between these cost savings on the OpEx versus gross margin side, would you say it's one third on the OpEx and two-thirds on the gross margin, or any little bit of color there would be appreciated? Steve Sanghi - Chairman, President & Chief Executive Officer: On the Micrel accretion?

Yeah. Steve Sanghi - Chairman, President & Chief Executive Officer: I haven't done the math on one-third, two-third, but I think the Micrel expenses are in the mid-30% range. And as we bring them towards mid-20% range, that's the synergy you should get from that. And then, the gross margins grow from, let's say, 50% to 60%.

Yeah. Perfect. And then just for a brief follow-up, so I think most of your competitors have reported, you've seen their results or looking at your results, I mean, essentially, you guys are guiding for normal seasonality. I mean, how do you feel about your positioning versus the competition right now if you take a look at what your competitors have reported? Steve Sanghi - Chairman, President & Chief Executive Officer: Well, Chris, why don't we just talk about our business and what we see and let them worry about theirs?

Okay. Fair enough. Thanks. Steve Sanghi - Chairman, President & Chief Executive Officer: Yeah.

The next question is from Craig Ellis with B. Riley. Craig A. Ellis - B. Riley & Co. LLC: Well, thanks for taking the question. I'll start off with one for Ganesh. Ganesh, acknowledging that the Analog and MCU businesses have hundreds of products and tens of thousands of customers, the growth variance between the two seem to be at the wide end of what we typically see. Is there anything in particular going on in the two product lines, or is that just the byproduct of what we're seeing as we kind of wrap up an inventory correction?

The question – you said the growth between the two product lines are – say that again, please? Craig A. Ellis - B. Riley & Co. LLC: About 400 basis points difference, MCU is down 4% sequentially, Analog was flat. That 400 basis point variance, at least in my model, is at the wider end of the range we typically see.

Quarter to quarter, you're going to have small changes that are there. Analog has been growing faster for several quarters as you've seen. We're continuing to complement our organic growth with the acquisition growth, as well, over time. I would not take anything particular out of the numbers in one quarter, where you have a small difference in growth rate between Microcontrollers and Analog. Both product lines continue to perform well in terms of new designs, and we expect will continue to grow across the 8-bit, 16-bit, 32-bit spectrum in Micros and across a broader spectrum in Analog. Craig A. Ellis - B. Riley & Co. LLC: And a follow-up on the upside, it sounds like all of the Micrel parts will port into Microchip fabs. One, is that so, and two, as we look at Microchip's internal versus external production capacity, where are we overall right now and where will we be once the Micrel port in is done? Steve Sanghi - Chairman, President & Chief Executive Officer: So, yes, confirmation that all of Micrel's parts will port into Microchip's two 8-inch facilities with the only exception that 100% of Micrel's parts don't run into Micrel fab. What was that number?

I'd say 70%. Steve Sanghi - Chairman, President & Chief Executive Officer: About 70% of their products ran in their own 6-inch fab and the rest ran in professional foundries. We're not bringing any of the professional foundries parts in at this stage, nor do we plan in future. We're simply bringing all the parts from the Micrel 6-inch fab to inside. The second part of your question was what? Craig A. Ellis - B. Riley & Co. LLC: Microchip's internal fab intensity. Steve Sanghi - Chairman, President & Chief Executive Officer: We can absorb all of Micrel products in our inside fab and still have plenty of clean room space left over in our Oregon fab to really add many, many hundreds of millions of dollars of additional revenue, so there's no really problem. There's lots of clean room space here to install the equipment as we go. With several quarters of weak performance we have had driven by very weak market, our factories are not full today. We just took a nine-day shutdown in our Oregon fab in the month of October, and in the current quarter, we have scheduled a similar shutdown in our Arizona fab in December. So even after absorbing all of Micrel products, I think we still have internally slightly higher inventory, not fully loaded, room to expand, and no problem. Craig A. Ellis - B. Riley & Co. LLC: That's helpful color, Steve. Thank you, and then the last one a detail for Eric. You mentioned the $250 million cash onshoring. When will that occur, Eric? J. Eric Bjornholt - Vice President & Chief Financial Officer: That will happen this month. Craig A. Ellis - B. Riley & Co. LLC: Thanks, guys.

The next question is from Gil Alexandre with Darphil Associates.

Good evening. My question has been answered, and congratulations on that stock purchase. Thank you. Steve Sanghi - Chairman, President & Chief Executive Officer: Thanks, Gil.

And we'll go next to Harsh Kumar with Stephens.

Yeah. Hey, a question for Steve and Ganesh. Guys, we've heard auto business commentary ranging from so-so, okay, all the way to horrible, at least in the short term – call it, last quarter, quarter and a half. I'm curious how your auto business is tracking relative to what we're hearing in the industry?

We have a range of both applications we're designed into as well as regions of the world. The overall automotive business was down in the quarter. Obviously, there are parts of the world where automotive is not doing as well. But there are also other parts of the world where it has been strong, and the sellthrough has been strong, the U.S. as a good example. So it follows geographically where the sales have been. But automotive continues to be in the current environment one of the stronger segments relative to the other segments for us.

Understood. Thank you, Ganesh. And then, Steve, in your commentary, you talked about inventory correction nearing the end. But I gather, just reading between the parts and pieces that you talked about, that demand is still, call it, lackluster at best. As investors and as sell-side guys, what can we follow to get an idea as a factor, when demand will start to tick up for Microchip? Steve Sanghi - Chairman, President & Chief Executive Officer: Well, considering we do business with 90,000-plus customers, it's very, very hard to really latch on to any kind of indicator. Most market checks that you occasionally – that you guys occasionally refer to does not seem to work for our business very, very well. We do business with – so, for example, just two weeks ago, I was in Asia, and I spent two weeks there. I met during that trip – I personally had meetings with 60-plus Asian distributors, at their presidents and product marketing heads that drive Microchip business, 60-plus, personally. And so, that's the view on a first-hand basis I bring to you regarding what I see there. And you cannot match that by any kind of so-called channel checks. So I just have trouble telling you really what you could track, because the business is just so diversified, so broad and 90,000 plus customers.

Understood. Thanks, Steve. Steve Sanghi - Chairman, President & Chief Executive Officer: Welcome.

The next question is from William Stein with SunTrust.

Hi. Great. Thanks for taking my question. First, a housekeeping one. Revenue total, I guess, I would call it non-GAAP revenue for Micrel, was that $39.5 million or higher than that? J. Eric Bjornholt - Vice President & Chief Financial Officer: $39.5 million was Micrel's revenue, non-GAAP. Steve Sanghi - Chairman, President & Chief Executive Officer: For two months.

For the two – understood. One other, understanding that we appear to be passing through the bottom of this cycle, I'm wondering if you can give us a view as to what growth coming out of it looks like. It seemed that in December of last year, Steve, you – as I recall, you seemed to indicate that we were coming out of it and then quickly sort of back into this not very good demand environment. I think now you're telling us we're sort of approaching the end of the inventory correction. How should we expect growth coming out of the cycle to look, both near-term where we'd normally expect sort of more of a snap back than just normal seasonality? And then, longer term how do think the business grows? Steve Sanghi - Chairman, President & Chief Executive Officer: Well, you know, if you look at last year, in December, we were coming out of that, and our March quarter was sequentially up last year without any effect of any acquisition, totally clean. Our March quarter was sequentially up. And then, lots of other events developed, the whole falloff of the Chinese stock market, lots and lots of customers invested their money in the Chinese stock market and lost it, and Chinese payment terms are starting to mimic Italy. In many cases, our distributors are telling us they're concerned about getting paid. People are pushing out schedules, pushing out launch of the new products, cutting down the run rates, cutting down inventories, so there are additional things that happened. Now, all that environment is currently dialed in our guidance. You know, question is does it get any worse than that? Is there another shoe to drop or driven by anything. That we don't know. That kind of view we don't have. This is based on what we are able to see today.

Thank you.

And the next question is from Kevin Cassidy with Stifel. Kevin Cassidy - Stifel, Nicolaus & Co., Inc.: Thanks, Steve. Just going into a little more detail of the 60-plus distributors that you met with in Asia. Are they stocking distributors or more of a design type distributors that would prefer that you hold the inventory and they sell through? Steve Sanghi - Chairman, President & Chief Executive Officer: No, all these distributors, they hold the inventory. They also have dedicated application engineers for Microchip, which help the customer to design-in our products into the end customer socket. And then, they ship it from the inventory. The Asian distributors will hold in months of inventory, lesser inventory than an equivalent U.S. distributor will hold just because they work on much lower margin. So if they work on a lower margin, they have to hold lower inventory. Otherwise, it's not affordable. But they're all stocking distributors. So these are not like reps. What you're talking about is either reps or...

Design houses. Steve Sanghi - Chairman, President & Chief Executive Officer: Design houses and things like that. We have some of those, too, but these people I'm talking about are real-life distributors. Kevin Cassidy - Stifel, Nicolaus & Co., Inc.: Okay. So maybe for some of the visibility that maybe the design houses have, are you seeing design activity? Is this what gives you some optimism that you'll see a uptick in demand, that there's new designs happening? Steve Sanghi - Chairman, President & Chief Executive Officer: So Asia-wide consolidated – I have the number for worldwide, also. I don't have it on my fingertips. But entire Asia combined – Asia, China, Taiwan, Japan, Korea, everything – all Asia combined, our total design win dollar revenue was 15% higher this year than it was last year. So when I look at on the graph, how on a monthly basis design win dollars progressed, it was 15% higher than a year ago. But when you look at the net new revenue created from those designs this year versus the net new revenue created from new design wins last year, it was about a fourth of it, which was – and it was consistent geography to geography, distributor to distributor. Whether you look at Japan or you look at Korea or you look at China, it was really no different, which was a broad-based sign of very good excellent design win activity, but customers were all holding back, either not taking their designs to production or running much lower run rate in dollars on those designs in terms of unit consumption or not having the money to launch it. The effects of the Chinese stock market crash, I talked about. So this was universal across the board. And sooner or later, those customers got to run their businesses, also. When they take those designs to production, you will see sort of the other side of that, a very pent-up new product design activity. As it goes to production, the business really takes off. Kevin Cassidy - Stifel, Nicolaus & Co., Inc.: Okay. Thank you. Very good color. Thanks. Steve Sanghi - Chairman, President & Chief Executive Officer: Thanks.

And we'll go next to Mark Lipacis with Jefferies.

Hi. Thanks for taking my question, and congratulations on 100 consecutive quarters of profitability. A question for Eric, the fact pattern, could you describe or give us a framework for thinking about the fact pattern that you have with Micrel that allows you to bring back cash tax-free? What are the circumstances there? Of the deals that you look at, as you guys look at, what percent of the targets or potential targets that you've been looking at have this kind of a fact pattern that might be – allow you to bring back more cash? Thank you. J. Eric Bjornholt - Vice President & Chief Financial Officer: So, obviously, every transaction is different than the next. But in Micrel's situation, they had not really done any foreign tax planning. And unlike most companies in our space that are maybe more mature or higher revenue, higher profits, they've done that. And so, all of Micrel's IP was sitting, intellectual property, was sitting in the U.S. And so, to get that into our structure, we have to move that value of that intellectual property offshore. Microchip is sitting on some net operating losses in the U.S. that can soak up that income coming in. That's net operating losses that have been generated for a variety of different reasons over the course of time. But in this particular situation, we're able to bring the cash back and not pay cash taxes on that in the U.S.

Okay. That's very helpful. Thank you. J. Eric Bjornholt - Vice President & Chief Financial Officer: You're welcome.

And we have a follow-up question from Harlan Sur with JPMorgan.

Yeah, thanks for taking my follow-up question. And apologize if this was already answered, but on the manufacturing footprint, I think the team was going to do a major shutdown, I think PM on the Gresham fab in October. Did you guys actually execute to this? And then, given the lower December outlook and the rise of inventories in September, I assume that you guys are still planning for a December shutdown of the Tempe fab and then a few days extra beyond that to work down inventories. What do you expect your level of inventories to be exiting the December quarter? Steve Sanghi - Chairman, President & Chief Executive Officer: So affirmative on both of those. We did execute the planned shutdown for the Gresham fab, and we are on schedule to execute a maintenance shutdown at the end of the year in our Arizona fab. The shutdown we had announced in the Arizona fab before, we're not making it any shorter, we're not making it any longer. We're holding it to what we have told you before. And the inventory going out of September quarter was 120 ... J. Eric Bjornholt - Vice President & Chief Financial Officer: 125 days. Steve Sanghi - Chairman, President & Chief Executive Officer: 125 days total, and going out of December would be ... J. Eric Bjornholt - Vice President & Chief Financial Officer: So our guidance that's in our release says that inventory will be between – well, it will be flat to up six days. Steve Sanghi - Chairman, President & Chief Executive Officer: Okay. J. Eric Bjornholt - Vice President & Chief Financial Officer: Depending on the range of guidance. Steve Sanghi - Chairman, President & Chief Executive Officer: Yeah. There you go.

Okay. Thanks, Steve. Thanks, Eric.

It appears there are no further questions at this time. Mr. Sanghi, I'd like to turn the conference back to you for any additional or closing remarks. Steve Sanghi - Chairman, President & Chief Executive Officer: Well, we want to thank all the investors. I think the next major conference we go to will be the CSFB conference in Scottsdale, which is in our backyard. We'll get into great weather. So come out here, and we'll see you. Thank you very much.