Ladies and gentlemen, thank you for standing by and welcome to the Microchip's Q4 and Fiscal 2020 Financial Results Conference Call. At this time, all participant's line are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator instructions] And please be advised that today's call is being recorded. [Operator instructions]Now I would like to turn the conference over to your speaker today Mr. Eric Bjornholt, Microchip's Financial Officer. Sir, please go ahead.

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 Chairman and CEO and Ganesh Moorthy, Microchip's President and COO. I will comment on our fourth quarter and full fiscal year 2020 financial performance. And Steve and Ganesh will then give their comments on the results and discuss the current business environment as well as our guidance. We will then be available to respond to specific investor and analyst questions.We are including information in our press release and in 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 our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website.I will now go through some of the operating results including net sales, gross margin and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of acquisition activities, share based compensation and certain other adjustments as described in our press release.I will now go through some the operating results including net sales, gross margin and operating expenses. Other than net sales, I will be…

Thank you, Eric and good afternoon, everyone. Let's start by taking a closer look at microcontrollers. On a GAAP basis our microcontroller revenue was sequentially up 5.9% as compared to the December quarter. From an end market demand standpoint our microcontroller business was sequentially up 2.9%. From an end market standpoint [indiscernible] microcontrollers in the March quarter represent an all-time record of just over $349 or 47% of our microcontroller demand.We continue to introduce a steady stream of innovative new microcontrollers, including a new cryptography enabled 32 bit microcontroller designed to stop malware for systems that boot from flash memory as well as a new high end [indiscernible] microcontroller product family for improved designs in real-time control and connected applications. Microcontrollers overall represented 55.2% of our end market demand in the March quarter.Last month Gartner released their microcontroller market share report for 2019. We're pleased to report that Microchip retain the number one position 8-Bit or 8-Bit microcontrollers. Once again we gained market share as we grew faster in the overall 8-Bit market. In fact we are now twice as big as a number two player. In the 16-bit microcontroller market we remained at a number five position and continue to gain market share as we grew faster than the overall 16-bit microcontroller market:In the 32-bit microphone market, we remained at a number six position for the Gartner report and gained significant market share again as we grew faster than the overall 32-bit microphone market. These results are despite Gartner rolling up our 32-bit microcontroller revenues to be about $400 million lower than the $1.2 billion results we actually achieved in 2019.Had Gartner used our actual calendar year 2019 32-bit microcontroller results, we would have achieved a number four ranking and as I shared with you earlier our 32-bit microphone…

Thank you, Ganesh and good afternoon, everyone. Today I would like to first reflect on the results of the fiscal fourth quarter of 2020 and the whole fiscal year 2020. I'll then provide guidance for the fiscal first quarter of 2021. The March quarter had unusual business challenges as the effects of COVID19 pandemic unfolded in many dimensions. I'm proud of how rapidly the Microchip team adapted to the new constraints we faced so that our employees would be safe, our customers will be well served and our partners engage to ensure mutual success despite the challenges we face.Despite the COVID19 pandemic challenges we deliver 3% sequential net sales growth as compared to our early March updated guidance, which was for net sales to be about flat. Our final March quarter GAAP net sales came in at $1.326 billion up 3% percent sequentially and down just to 0.3% from a year ago March quarter. Our end market demand based on sell-through was approximately $3.8 million lower than GAAP sales.After seven quarters of end market demanding higher than selling based net sales, March quarter was nearly even for end market demand versus selling net sales. We also delivered outstanding non-GAAP gross margin of 52% just above the high-end of our original guidance from February 04, 2020 and non-GAAP operating margin of 36.6% near the high-end of our original guidance and we did all that while reducing our days of inventory from 129 days to 122 days.Our consolidated non-GAAP EPS was $1.46. We did not provide EPS guidance when we revised our net sales guiding on March 02, 2020. Our original non-GAAP EPS guidance provided with our earnings release on February 04, 2020 was $1.35 to $1.51 with the midpoint of $1.43 and we beat the original guidance by $0.03. On a…

[Operator instructions].

Yeah I don’t think that's possible. Let's stay open here for a while. Our Investor Relations manager is just indicating that we're having quite a few problems here. So let's hold and see if we can this solved. I know there is questions to be asked. So I've been told we have 12 questions in queue. We just need to figure out how to get them available so those questions can be asked/

Your first question is from the line of Chris Caso from Raymond James. Sir please go ahead.

Yes. Thank you. Appreciate that. So I guess for the first question, Steve if you could give us some thoughts about perhaps the magnitude of the downturn that I guess we're all expecting. I realize that's a difficult question with what's going on with the backlog here, but I guess compare with some of your competitors have compared what we're seeing now to the 2009 cycle. I'm not sure if that's the right way to look at it right now, but I guess Microchip is also a different company as compared 2009 and what you're guiding to is not quite as bad. As we put all that together, how are you thinking about things going forward?

So I think we're really unable to speak about anybody else's business but our own. We mentioned some of the companies, I believe all companies have a different end market and customer exposure. We have been building this franchise for many years now through organic efforts as well as acquisitions and have compiled the very large number of very, very good assets and then deployed a program called TSS, Total System Solutions that we have discussed with you in which we are garnering larger and larger share of the customer's board with our product.So the outperformance that you may be seeing from us in business today is really nothing to do with what we have done today or last year it's been a result of really many years of effort and new products organically as well as through acquisitions and our customer support, customer support activities, the distributor relationships and everything else over the past several years. I don’t know if that helps you.

Okay I guess perhaps you could take us through what you've seen in the order rates and you put through some of that in your prepared remarks about what you've been seeing since March. I guess what's interesting now is that the customers came in, the channel at least came into this crises with very low inventory levels and that's I guess unusual in a downturn in our industry. How does that affect things going forward and what sort of visibility do you have on what customers may be doing with the inventory levels here?

So this is a very unique cycle. We have for the first time ever we're experiencing a demand shock and a supply shock. We have seen demand shock before like 2008, 2009 cycle you mentioned. We also saw a major demand shock during the 2001 tech burst and I think we saw a little mini demand shock really even during SARS in 2004 or 2003 whenever it was. And we have seen some supply shocks from our industry the two that I remember, one was during tsunami in Japan and Southeast Asia where we have a number of factories were closed down or shut down and there was a major demand shock and the other demand shock I recall was during the major floods in Thailand a few years ago where many of our peers factories were under water. Microchip factory was okay though.So we've seen really either a supply shock or a demand shock. This in the first time ever in my 40 years of experience that I am seeing a simultaneous demand shock and supply shock. The supply shock is driven by this various shelter in place ordinances and Ganesh talked about it extensively, Philippines being the worst and Malaysia being the second where we could get our workers into the factory and in some cases, the workers are living in the factory believe they believe they will not be able to come back and number of our product lines that ran in those factories produced limited output because the whole workforce wasn't working. That resulted into a supply shortage and a supply shock in some of the lead times run out and that drove some of the demand further from customers and distributors.And on the demand side of it, our customer's factories shut down, the worst being…

I think that's the discussion we're looking for.

Thank you. The next question comes from the line of Ambrish Srivastava. Sir, your line is open.

Lot of details there. Can you focus on the gross margin and just how those understand the dynamics, it's more than hanging in the slide to you actually drawing down lowering inventory on the balance sheet the inventory didn't really go by that, but kind of help us understand the factors there seems to be a structural change in Chris asked the question about the difference between Microchip from 10 years ago and all the stuff we've followed you for a while but just talk through the structural changes and then you mentioned that with some manufacturing the CapEx which enable you to bring more Microsemi and Atmel indoor and that will have some positive and this is obviously a longer-term question that I am asking thank you.

So let me ask Eric Bjornholt will answer that question and I'll add something if needed at the end. Go ahead Eric.

Okay. Gross margins held up extremely well in the March quarter and we closed 62% non-GAAP margin because it was really outstanding. As you know we've been running our factories at less than optimal levels and we reported a underutilization charge in the quarter of about $14 million. That was actually $3 million better than the prior quarter as we were running our assembly and test factories further than we have in the previous quarters and we were draining finished goods.So the strong gross margins are really driven by a variety of factors, including attainable product mix and then just ongoing cost reduction and cost containment activities in our factories. So that term quarter we're guiding the gross margin to be down at 60.8% at the midpoint. We expect higher underutilization charges in June compared to March due to some of the rotating time off that we're going to be doing in the factories and just lower production output. But we believe we're really well positioned for the long-term with gross margin improvement in the future as we grow back into our factory capacity.So there is a number of things that influence that other than the factory capacity. We've been also doing a good job of really holding average selling price flat with our customers and that has long-term gross margin benefits also. So that's the general summary there. Steve, what would you like to add?

No I think that's good. This down cycle, let me add a couple of sentences. I think we started this down cycle with probably the lowest inventory we had, 122 days at the end of March. I recall prior down cycle when we started with really high inventory and so I think it's such a low inventory and we're keeping the flow by factory rotating time offs and other.So I think when we get on the other side of it and start ramping up factory back up and we're starting with the gross margin in the 60's I think we'll be very, very well positioned longer term, but it really good record gross margin.

The second piece of Ambrish's question related to CapEx and we will still focus longer-term on bringing some more assembly and test in-house but we're really locked down capital pretty significantly to see where our forecast is for fiscal '21 of between $50 million and $70 million. So where there is benefits to be gained, we'll evaluate those, but we're being pretty conservative of our posture in terms of making adjustments right now.

The next question comes from the line of Gary Mobley from Wells Fargo Securities. Sir your line is open.

In the interest of time, I'll post my questions now. Steve you gave your opinion on the recent export -- recent change in export control rules and the impact this may have on the owners process of applying for licenses to shift China customers or any sort of limitations on that and then my next question really on behalf of many different people, but I would interested to get your perspective on how safe your dividend is, thank you.

Sure, I'll pass on to Ganesh to answer the question about export control and then I'll come back and answer the question on the dividend.

As a recent announcement that was made, we're still sorting through what the Commerce Department's rules are. The specific item that we are paying attention to the possible military use of products and how we can provide confirmation that it is not going with those applications. We think it's fairly straightforward to be able to do it but we have time until the 29 June to be able to implement it but at this point in time we do not expect that it has an issue in terms of Microchip's business. Go ahead Steve.

So regarding the dividend, your question was how safe is the dividend. Dividend is very, very safe. We were one company that did not cut over dividend back in 2009 when peak to bottom our revenue went down almost 36%. Today we're so much more profitable on gross and operating margin level, we have done a stress test on our business you can't find a number lowering up, you could lose a very, very large amount of sales and the company still is cash flow positive with regard $1.2 billion of money remaining on line of credit.So I think really we are unable to model a scenario, a reasonable scenario where the dividend would be at risk and if we felt that the dividend was at risk we certainly would not be increasing the dividend which we are little bit every quarter.

The next question comes from the line of Craig Hettenbach from Morgan Stanley. Sir, your line is open.

Question for Steve just on kind of the downturn playbook and so that the employee cost cuts, pay reduction in CapEx you’ve done it in prior cycles, as you mentioned this is a very different cycle. So just trying to gauge how you're thinking about the depth of this cycle and similar things you're doing to protect margin as it plays out.

So I think we learn a little bit through every cycle and one of our goal is to never let a cycle go to waste. What happened in 2008, 2009 was the cycle really hit in early part of October of 2008 and the business was down very substantially in that December quarter and down lot more even in the March quarter and we didn't implement pay cuts and all that till we were well into the cycle where the strong authority there and we were being better just.So this time what we've done in understanding that with 33 million people I think already lost jobs in US alone, I don’t know how many around the world. These people are not going to be buying cars and refrigerators and other stuff that really would have our product. So this time we bend down the hatches and got it up the window. They're ahead of time before the storm really hit.So we finished the March quarter actually sequentially up 3% and we implemented the pay cut starting April 20 and at that time our business really hasn't even weakened. Where our June quarter was still backlog higher than the March quarter backlog at the same point in time. So what we have really done is really out of abundance of caution just thinking that this storm internally at Microchip we have described that to be a category fixed storm waiting in the wing where category five is the highest category because we have never seen this before and a simultaneous demand and supply shock the pandemic and no place to hide and 33 million people laid up in the five weeks in US alone.So we have prepared the company with a cost structure in the June guidance we have given you has the paycheck now pay cuts for June quarter dialed in but not for the whole quarter because we started in the middle of the quarter and September expense will be down even slightly further from that. So we essentially have positioned it for any extreme case that may materialize.It's a lot easy to give the money back undo the cuts on the salary, change them from X% to Y% lower that. It's much easier to do that than you have spent all the money and then really fight and you have the supply. So that's really how we're looking at it. We're looking at it as don't know and until anybody knows, anybody says he knows. they're lying. They don't. So what we've done in really out of abundance of caution prepared the company for a worst case analysis and we'll give the money back if we didn’t need it.

Just as a follow-up on the push outs and cancellations, is it pretty broad based are there any certain products that are you're seeing more than others?

It's not by product. It is more by end market. The worst is automotive, the second would be industrial and general consumer like appliances and all that I think that Ganesh described all those areas, where the strength is the strongest area is data center. I would think the next is really 5G related, work from home related, PCs, printers, computers and all that. Medical is extremely strong. So those are the areas we're not seeing push outs and cancellation. We're seeing those in the automotive and some general industry.

The next question comes from the line of John Pitzer from Credit Suisse. Sir, your line is open.

Steve you said in your prepared comments, that clearly, the June backlog is deteriorating, but at least through the month of April, it would still suggest the potential for sequential growth in the June quarter. So I am just curious when you think about the range of revenue you've given for June. What's the expectation as we go into May and June? Does the rate of deterioration, the backlog needs to accelerate from here to kind of hit your midpoint or just kind of give us any sort of color you feel comfortable with helping us understand what you're embedding in further deterioration of the backlog from here?

There is a way to model it. So there are two challenges, maybe three. One is that the existing backlog further cancels or pushes out the following quarter. Second is we still need turns to take. If there is zero cancellation from here on, but we get no more turns for the quarter, that's not a good scenario either. So that would be fairly soft too and the third is a supply depending on what product the demand comes on.The products where if you place an order today the earliest I can give you is July, August and those are from the most constrained areas or factories that have had a six weeks for six weeks they haven’t been able to run full production and now as they're coming back to production, we are so far behind in delinquency. We'll leave the June quarter with a fairly large amount of product delinquent. Same thing happened at the end of March quarter.So in a way some day when we catch up on that product get shipped, it's a good news but for now we're not going to be able to ship all the backlog in the June quarter, neither will be able to ship that all in March quarter. In fact, if just the supply side shock had not happened and our factories were running, for March quarter we would have met or exceeded our original guidance, which was about 5%, 5.5%. We only did three and I was largely because we couldn’t supply the product.

That's helpful Steve and you also mentioned that some of the OpEx control that you put in place this quarter or not even for the full quarter so it will have a positive effect on OpEx declining again in September. I'm curious, are there more leverage you can pull on OpEx and should we take OpEx being down sequentially in September as a sign that you feel like revenue might be down again in September as well?

So the only reason that the September OpEx will be down below June would be because the pickup would be for the entire quarter and the pickups didn’t kick in until June 20 in US and probably May 1 for some of the international geographies depending on the various international laws but the September quarter we get the full quarter.If your question is what if we didn’t need it and the business as well then you remodel it and you change the pickup from 10% to 6% to 5% or if you see growth you make it zero. Anything is possible, but I'm saying right now in the game prepared for the category fixed on we are structured to take the June quarter expenses below the March quarter because of the full quarter saying and then December compared to September will be about the same if you don’t make any change in and the pickup and at the end of December that's currently the case.We've announced the employees that the pickup ends at the end of December, So the March quarter OpEx will rise again and hopefully we're well out of the words from the site and if we're not then we do something different.

The next question comes from the line of Chris Danely from Citi. Sir your line is open.

Can you just expend on I guess what percentage of your revenue is dealing with the supply issues and are the supply issues worsening as we speak or do you think you got a handle on them and they should get better as the quarter progresses?

Let me have Ganesh comment on it. I don’t think we have quantitative numbers but Ganesh can talk qualitatively.

So it's not our entire product line right. So we build a lot of product in many countries Thailand, Philippines, Malaysia depending on our factory or subcontracted factories. Our principal issues from a constraint standpoint were in the Philippines and in Malaysia. Malaysia at this point effectively has turned on 100%. They don't have -- it's running at 100% but there are no restriction and they are as fast as they can bring their direct labor workforce how they would catch up on the quarter.Philippines has done operating under restriction. We have been able to improve from March to the June quarter by having more people residing in our factories. So this is we got 500, 600 employees living full-time inside the factory to be able to get the utilization to be higher. We expect that that will get turned -- those restrictions will come off as we go into the latter part of May, the middle of May as part of our control and as that happens, we will have more output that come out of it.So I believe the constraint -- manufacturing constraints are coming off and coming off rapidly, but there's catch up to what was left from where the constraints were there plus ongoing support there.

And for my follow-up, so Steve you call this weakness after a little bit of strength last quarter. What is your spider sense tell you on how long this weakness could last? Do you think that some of these end markets that are very strong right now like data center, did they start getting weaker in the second half of the year. Any guesses to how long this weakness could last because it last in the next quarter.

I don’t currently expect the data center to weaken and I think 90% of the world data has been created in the last two years and any company that's related together I just got off the Board of Mellanox, you've got finally the deal closed and they're video on April 27 and then announced the prior quarter their March quarter just couple of days before the deal closed. It was a very, very strong quarter. You’ve seen it in the results and video also.So I just think data center market is very, very strong and I think how we've designed in our print position and the customers board. So that one looks very, very good. But I think as the automotive factories go back to work and people start buying cars again, that market is the most destroyed today. That market will show huge potential for getting back to normal and industrial will be the same way.

The next question comes from the line of Vivek Arya from Bank of America Securities. Go ahead. Your line is open.

I had two as well. Steve when I look at your peak to trough share decline say from September last year to hopefully the tough in June or if I just take the midpoint of what you're guiding to in June or even take the low end of that, it's a introduction of 7% to 11% that's actually much better than what we have seen at some of your analogue and microcontroller peers that are down 25% in that same period.So the question to you is what is helping you stay more resilient and I appreciate the visibility is not there but if let's say those competitors start to come in September, is there anything that prevents Microchip sales to also rebound in September?

I think I little bit answered that question earlier that we think what we're seeing is you referred and building is stronger same position and customer's boards with total system solutions and also acquiring product lines with synergy products what we have gotten from Atmel and Micrel and Microsemi with all the discrete product line with various steps that can grow into similar border microcontroller and much stronger distributor relationships I think some others have been tweaking their distribution policies maybe to the detriment, maybe not now. Time will tell but I think we are seeing a stronger effect of a stronger distributor relationships and the effect of end markets like we discussed.So I don't really know why anybody else is doing better or worse than us. I am sure there are other companies doing better than us and rather more closer competitors that are doing worst than us. So we're happy to be gaining share but I don’t know we can totally allocate percentage how much is because of what reason.

And for my follow-up, gross margin say you're guiding down about 120 basis points or so down to 61%. I understand that there are supply chain disruptions etcetera, but the last time your gross margins were under or around these 61%-ish or below levels, your revenues were 20% lower right. They were closer to $1 billion or so over two years ago and at that time you did not even have Microsemi which has been accretive to margin since then.So I am curious why this conservatism and gross margin as with utilization is there anything else right and then how should gross margins behave assuming that sales start to rebound in September? Thank you.

So the midpoint of our guidance this quarter is 60.8%. Our long-term model is 63%. So quite honestly I think margins have held up extraordinarily well. If you look at the fall we had in gross margins back in 2008, 2009 that margins went down significantly. Now we've got a little more balance between what we do internally versus what we do externally from a production standpoint.Bottom line is with revenue being down as you mentioned 7% to 11% from people trough we have to run our factories at low level and I think we've done a very good job of controlling inventory levels and in this last quarter 122 days that's a very good position to be in with what's in front of us. So I think this comes down to utilization of our factory footprint that we have as we go back into it, we can be very cost effective.

It's just a trough though.

I think the question revenue is so much higher than last time our revenue was -- last time our margin was just kind of number. So why is margin not higher I think that's your question. Going back two years ago was a different company. We didn’t have Microsemi all of their factories around the world they're probably a different cost structure. Some of those factories have lower demand. Some of those are okay and it's not the same company. Combined with Microsemi now, Microsemi was about between 40% to 50% of our revenue and company has totally changed.

The next question comes from the line of William Stein from SunTrust. Sir please go ahead.

Steve I apologize if you’ve answered this already. It seems clear you are expecting some further order cancels or push out or downsizing, so I totally understand that but when we think about the pace of cancellations, have you commented on that yet? Is that starting to slow down where the reduction in backlog is getting to point where those changes are smaller and smaller?

I don’t know if I can definitely say that. I think end market by end market and it's geography by geography, but overall it may have slowed down somewhat but in some other geographies and in some other markets its continuing. So I don't think, if the calculations were over and the push outs were over, our revenue would be higher than March quarter. That's not what we're guiding and that's not where we're attempting.

Next one if I can, perhaps for Eric but whoever wants to take it, most semi companies in the past few months has couple of months have taken to try to term out debt and either protect themselves on the balance sheet. Microchip's moves here have been a little bit more I don’t know it looks like opportunistic or aggressive you might characterize by pulling down the revolver to pay off part of the convert. I am wondering if you can walk us what the thinking was the company the courage to do that in this environment.

Let me take that. So we begin the effort by some of our convert debt when the stock to hit about $60 like low $60 and that was down about a peak of $110. The amount of dilution we get from these converts when the stock goes from let's say $65 to $110 is so large because it has a hyper future where the stock competes at 1.5 times that it will be $1 increase in stock price and was just very, very dilutive.So when the stock price because of the recession went down from $110 into low $60, we decided not to waste that recession and to try to pushing up our convert, but to do so we needed the money and this year we took the money out of the line, we did not. We didn’t take any money out of the line of credit. We first wanted to raise the money in the public market through a debt but with extreme volatility the debt market is closed for a period of time and so we went to the action of getting a 364 day bridge. So we got $615 million of bridge at very, very low interest rates, same interest rate as the line of credit and with that we bought $615 million worth of face value convertible and by the time we executed those convertible stock had already been rebounded to about $70.70 where we average where we bought them and where the stock is now at $85.50 you could just imagine how much dilution we have saved that we would have incurred.So we think it was very, very opportunistic good move and we didn't stress the credit line to do that. We got a separate bridge, so it was a venue money separate bridge that we've prepared within a year.

Got it. I didn't maybe I didn't appreciate the distinction, thank you.

I just would say I wish I was able to raise more money than I would have brought even more but it was a very, very difficult time. There were companies there was a run on the banks, people were drawing their credit line completely and banks were under lot of stress and that environment I was able to raise $615 million in new money something like miracle at that time.

The next question comes from the line of Christopher Rolland from Susquehanna. Sir please go ahead.

I guess first maybe talk about cycle times and lead times some of our data suggest that your leads are up a little bit. I think you did talk about the Philippine, Malaysia. Maybe just talk about lead times from that perspective. I know they're low historically, but talk about where you are there with any increases and then I guess balance that with inventory it looks like you're not increasing any inventory. So I guess you guys are super worried, but maybe talk about that lead times and the balance of inventory as well.

Ganesh let me have you take lead time question.

So lead time for most of our products from relatively are stable. Lead times in these factory that have been constrained by shelves in place have gone out and they've gone out by I would say on average about a couple of weeks and so whatever you are hearing or seeing is on certain product lines I think a little ones that go to Philippines or Malaysia where we've seen it. But for the most part lead times outside of that are remaining stable and we expect that lead times will catch back to normal by probably closer to the end of the quarter as we catch up stock will usually open and we're able to both ship normal but also do any catch-up shipments.

Steve you're the big picture guy and you touched on this a bit already, but looking forward what do you think that the biggest risks are to your business here and if you have to start pulling some contingencies to lessen the blow, what are you thinking you can -- what's in your control from here that you plan on doing. Thank you.

Well the biggest risk to the business is that COVID19 is not contained as we are talking about from state to state and you're internationally – nationally and internationally from Washington and other places as people go back to work here in the coming month, the question is do we see it way for COVID19 cases starting to go back up as people are willing to go back to work. I think as people go back to work, there will be all the precautions of NASH and cleaning and others. And hopefully, we will not have a second wave but it's tucking away requiring to go back to sheltering place and that would be the largest risk that we're seeing because that would have prove on the time spend during which the factories will be shut down, the demand would be low. People will be buying cars and other stuff. That I see as the biggest risk.Now in terms of what levers do we have, I think we've already implemented those levers that are while our business in March quarter was not even last stressed we sequentially grew but we implemented these measures to essentially finite categories six times and those are the levers that already have implemented and we'll just continue with those and look for even occurring more discretion and the expenses and see if that could go down further and any other discretion of the expense to go down further.Ganesh and I and others are willing to take a larger pick but usually it's a volume up to predict pick up that helps and I don’t think we can ask the word while incurring larger pick up, but you're also have policies to play with and capital and other things. But like I mentioned I think in an answer to an earlier question we try to model a scenario to try to see how much of revenue has to go down before we become cash flow negative or dividend comes through a questionable it's way too low and when I get there I think it's just -- our business is too strong today. The formation of the business is so good that we're not going to burn cash and the dividend is not at risk and I think we're in a pretty good place.

Thank you and congrats on buying that convert bonds, nice price.

The next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.

Just sort of geographical question back in March when we saw the team downshifted that time the downshift was driven by shortfall in China rights, it's a country starting to open back up but at a slower pace but you also did point out at that time that orders in business activity at that time in China was starting to pick back up and since then we've seen more cleanup of activity in China leasing auto production picking up this order, factories are starting to open up, consumer starting to spend. So have you seen follow through of that China improvement trend as maybe versus the world demand is weakening into the June quarter or are you also seeing degradation and deterioration in China orders and bookings as well?

So I think depending on when you look at monthly or you look at it by quarter when you look at it by quarter China was very weak for the March quarter because Chinese New Year first of all was extended to two to three weeks from one week and then all these factories were closed. So the China business was horrible. if you really look at for the quarter but if you look at it on a monthly basis as the COVID19 situation got contained and people went back to work, China business almost seems like it's back to normal.However, the concern is that it may look like back to normal because it's really making up for some of the shortfall and all that it had and once that demand is met is a steady state demand in China back to normal or not. I think that needs to be answered in the month of May and June, but April China was very strong and late product margin in China was very strong as if it would be normal or even better.

Okay. I appreciate the insights there Steve and then just on the backend operation you talked about Malaysia, you talked about Philippines but you guys actually have a pretty large in Thailand they are locked down to the end of this month. So how is the team been able to manage quite nicely to the movement control in Thailand and is Thailand running at full run rate?

Yeah so Thailand did not have any strong ordinance, let me have Ganesh comment on that. Ganesh?

So the time of the lockdown are really a curfew at night from about 10 PM and 8 AM. It doesn't affect our shifts, our ability to operate our plans and so under the new logistic or other issues that we run into. So thankfully kind of the entire episode has been running full steam no issues.

The next question comes from the line of Ari Shusterman from…

So I first wanted to talk about automotive. So in auto which products have shown the greatest strength and can you talk about traction you've been seeing in silicon carbide?

Let me have Ganesh for that.

So I think when you have such a large demand reduction in automotive there is no segment I can pull out and say this is strong and so automotive across the board when we look at our many different product lines, they are going to automatic drill down in this. Now to your question of silicon carbide it's early days, and silicon carbide predominantly a new technology that is aimed at electric cars from a high-volume standpoint. Electric cars as a percentage of the total automobiles produced are sold and it's 1% to 2% and so it's still a small percentage.We're making good inroads with our products to be new designs and new activity that are taking place. So it's really not a factor in any revenue that is taking place for automotive today, but we're making very good progress because the silicon carbide solution for Microchip are extremely robust and in an automotive environment which is very harsh, the voltage and temperature standpoint we're about as one of the most important factors that take into account for using silicon carbide products.

And as a quick follow-up with regards to FPGA business, what are trends that you’ve been seeing in and how would you say your FPGA is compared to ionic Altera. Thank you.

Go ahead Ganesh.

So our FPGA business continues to be reasonably strong. It had a nice growth as we showed during the March quarter results that we announced. Our FPGA also has a reasonably good exposure into defense and space applications. Those end markets are not as badly affected as some of the other end markets that we have and to be quite honest we don’t really see lot of it in some of the other names that frequently and what we run up into the market.We play predominantly into the mid range and missed the lower end of the FPGA market, we have some unique positioning relative to security, low power, robustness and in those areas, we do extremely well.

Yes, the next question comes from the line of Craig Ellis from B. Riley FBR. Sir, go ahead.

Team, thanks for all of the detailed information so far. Steve I wanted to go back to a couple comments that you made about how unique this environment is and the fact that we got multiple dynamic and capacity had to content with those and the question for you is given how dynamic things are, what's Microchip doing, what are you doing to kind of assess where we are as demand compresses overall and then potentially reaccelerates and orders in backlog or have you expanded the things that you look at see when we'll get the turn and you have a view on when turn whether it be June or September some of the time?

Management team Ganesh and I and the other members of the management team really keep a very, very strong finger on the pulse of the business. We watch a very large number of indicators internal and external on a weekly basis and more often than that if needed on specific indicators. So through that large stack up for indicators and graphs that we constantly monitor, we have added a few to really further assess that situation frequently and some of the things we're looking at it much more frequently are things like dollars or push outs and cancellation number of coronavirus cases and various geographies where factories are and customer are.Whether they're peaking, they're stable, they're growing, they're coming down. We're also just watching a number of other indicators employment related, first-time unemployment claims and all that. So there is really a large amount of data that we're absorbing and this certainly will include the data we get from our own customers to salespeople regularly with monthly bookings and design wins and our customers, customers comments on whether the business is growing or falling, where would it go and what's happening. So there is so much more intelligence that goes into really before we continue and we're even more focused on getting all that intelligence today.

And that give me any sense for when we could be at the bottom?

No, I think that is too early to really have that kind of confidence at the bottom. The numbers are so broad just have a guidance of minus two to minus 10 it's just so broad that we cannot yet say what September will bring. It will largely depend on whether as the people go back to work there is the coronavirus that kind of dies down or there is a second wave if coronavirus coming back and we're dealing with it with our factory shut down even in August and September. If that happens then the bottom isn’t here yet.

Certainly, if I could ask a follow-up just relating to some of the things that are happening inside of the business given how dynamic things are one, because it cause the team to think any differently will be the inventory that should be stocked to properly to pull customers and two given, Ganesh's characterization of what's wrong and squeezed does it cause the team to think any differently about where it's emphasizing incremental R&D on products and that kind of thing. Thank you very much.

So long-term target for inventory level is 115 to 120 and we finished the March quarter and 122. I don’t know you get any more precise than that. So inventory is really like that. So inventory is right exactly where we want the inventory to be I really tell you it got a little bit high earlier during the US China trade related and then we have been bringing it down. So March quarter inventory was nearly perfect and because of this coronavirus situation now, we didn't want inventory to substantially grow. So therefore we put our factories on reduced workload rotating time off or reduced hours of work or whatever.And to call it so that as the revenue in the June quarter is declining, we don't want the inventories to grow very substantially. So I think our inventories are in the right range and we're comfortable with it. In terms of R&D Ganesh will comment on that.

So I think no one should take short term positive and negative that's the way in which we're investing from an R&D perspective and that's what we're seeing in this cycle at this point in time. R&D is really a longer-term view of where are the markets going, where are the opportunity and we're guided by the six megatrends that we have shared with you.We believe over the next 5 to 10 years growth is going to be available at a faster level or higher level in 5G data centers, autonomous driving, IOT, electric vehicle and artificial intelligence and machine learning and so the main product lines at Microchip are working on how can they create complete solutions total system solutions for these megatrends and what maybe strong today and maybe not so strong in six months or 12 month is how we do our R&D spend.

I am showing no further questions at this time.

Okay. Thank you, operator and thanks all the investors and analyst who were on this call. The travel is really totally banned. So we'll be attending some of the conferences this quarter but they will all be virtual conferences. We'll do it out of our home. So we'll talk to some of you more at those conferences. So thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.