Good day, everyone, and welcome to this Microchip Technology Q1 and fiscal year 2007 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 Mr. Gordon Parnell, please go ahead.

Thank you and welcome everybody to our Q1 2007 Conference Call. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press release of today as well as our 10K for the fiscal year ended March 31st 2006 and our 8-K current reports that we have filed 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 Vice President, Advanced Microcontroller and Memory division. I will comment on our Q1 performance, reviewing geographic data and discussing balance sheet and cash information, and Steve will then give his comments on the results, outline our guidance for the September quarter, and update other pertinent matters regarding our business. We'll then be available to respond to specific investor and analyst questions. Let’s begin with net sales, our net sales for the June quarter were at record levels of $262.6 million up approximately 6.2% from net sales of $247.2 million in the immediately preceding quarter and up approximately 20.2% from net sales of $218.5 million in the prior year’s Q1. In our earnings per share this is the first period that Microchip has adopted FAS 123R. We have included additional information in our press release and will continue to furnish additional data to assist investors during this transition period. Non-GAAP income excludes the affect of the adoption of this accounting standard providing comparability to prior GAAP results. Our non-GAAP net income for the June quarter was at record levels of $81.4 million or $0.37 per diluted share, an increase of 7.7% from GAAP net income of $75.6 million or $0.35 per diluted share from the immediately preceding quarter, and an increase of 33.4% from GAAP net income of $61 million or $0.29 per share from the prior year’s first quarter. GAAP net income for the June quarter was $77 million or $0.35 per diluted share inclusive of all share based compensation expenses. In fact net income in this period exceeded the March reported levels of $75.6 million, establishing record levels inclusive of the share based compensation costs. The impact on the earnings related to the adoption of share based compensation in the June quarter was 5.6%. Looking ahead after the full effects of this adoption is reflected on our results we expect that the impact will be approximately 78% on net income. Clearly the impact from share base compensation for Microchip is in the lowest quarter for a technology company based on the results reported from our peers. Geographically, sales grew in all territories, sales in Asia grew by approximately 11%, Europe grew by about 3.8%, and the Americas grew by approximately 1.8%. Asia continues to be our largest geography representing approximately 44% of total sales while Americas and Europe were both at approximately 28%. This measurement is based on where the product is delivered for manufacturing purposes for our customer's but doesn't represent where the design activity has taken place. Looking at some of the operating parameters of our business, our gross margins continue to improve reaching 60.36% in the June quarter. Our longer term gross margin target that we have indicated to the street continues to be 52%, this being prior to the affects of share base compensation. Looking at the operating expenses for comparative purposes I’m using operating prior to the affects of share based compensation. Operating expenses were 24% of sales in the June quarter compared to operating expenses of 23.9% in the previous quarter. Research and development costs were $25.7 million, representing 9.8% of sales, sales and general administrative expenses were $37.3 million representing 14.2% of sales. Total operating expenses on a GAAP basis after the effects of share based compensation were 28.2%. our tax rate for the June quarter was in line with our guidance of 24% and we also declared a dividend today of $0.23-½ per share and this was an increase of approximately 9.3% sequentially and an increase of 88% over the same quarter in fiscal 2006. The dividend payments we made in the September quarter will be approximately $50.5 million. Let’s turn our attention to the balance sheet, initially looking at our inventory. In this balance sheet category we have a change in inventory levels related to the adoption of share base compensation and we’re measuring against last quarter on a comparable basis when inventories were $150 million and $160 million. Our June end inventories were essentially flat at $114.9 million representing 101 days of inventory, a decline of five days. Including the adoption of share based compensation inventories were $116.6 million or 102 days of inventory. Our distribution inventory continues to be at very moderate levels in all geographies. As of the end of June our distributors held about two months of inventory and this has been essentially flat over the last six months. Given the concerns from investors we have had related to growing inventory levels on company’s balance sheets and in channel inventories, our overall reductions in inventory levels reflects not only the strength of our business performance but the manner in which we are managing our inventory levels. During September we anticipate that inventories will continue to decline on our balance sheet reaching approximately 95 days, a further reduction six days from levels exiting the June period. We expect distributor inventories to remain essentially flat in the September quarter. Taking a look our receivables at June 30th, they were $137.2 million, this was lower than the levels at the end of March by about $2.1 million with improved shipment linearity in the period and strong collection performance which offset the net sales growth in the period of 6.2%, this area of our working capital contributed to the record cash flows that we experienced in the period. In our cash position as of June 30th, Microchip’s cash and total investment position was approximately $1.2 billion, with $137.5 million of short term debt on the balance sheet. This is related to the repatriation of $500 million under the American Jobs Creation Act that we discussed in our March Earnings Call. During the quarter Microchip generated net cash flow from the business of $136.5 million, establishing record cash generation levels for our business. Payments related to our cash dividend of $21.5, was approximately $46.1 million, and we also reduced our short-term borrowings by $131.5 million from the $269 million reported at the end of March. This reduction was predicated on both the new cash generation in our offshore locations as well as the maturity of investment positions in those locations during the quarter. We anticipate being down to short-term borrowings over the next three quarters. In capital spending and depreciation our capital spending in the June period was approximately $16 million, depreciation expense for the June quarter was $28 million versus $27.8 million for the same quarter last fiscal year and $26.9 million in the March quarter. We are maintaining our capital expenditure forecast of $80 million and the depreciation forecast of approximately $115 million for fiscal 2007. With that I’ll ask Steve to discuss the performance of our business, our guidance for September quarter and update of the business matters. Steve.

Thanks you Gordon and good afternoon everyone. Today I would like to reflect on the results of the June quarter, comment on the product line, update you on our distribution strategy and finally discuss the guidance for the September 2006 quarter. All of the figures in my comments will be prior to share base compensation expense in order to do a fair comparison to prior quarters. The figures with share base compensation expense are all available in the press release. I’m extremely proud of our continuing excellent execution in delivering yet another record quarter in every respect. Microchip has passed an extremely important milestone with net sales of record $262.6 million; Microchip for the first time is above a $1 billion run rate. This also concludes a year long internal program at Microchip called April Touchdown 2006, the primary goal of Touchdown 2006 was to drive Microchip pass the $1 billion mark. Net sales also exceeded the high end of our prior guidance. Our gross margin of 60.36% was also a record and was up 26 basis points sequentially, our operating profit was another record 36.4%, earnings per share was $0.37 and set another all time record, and we also generated a record free cash flow of $136.5 million in the June quarter. So now I shall talk about the product line, first, Microcontrollers. Microcontroller business grew a very robust 8.2% sequentially and was up 21% over a year ago quarter. Our Flash Microcontroller business was even stronger and grew by 12.2% sequentially and up over 46% over a year ago quarter. Flash Microcontrollers now represent over 60% of our Microcontroller business. Another interesting fact is that OTP Microcontrollers which is a majority of our non Flash Microcontroller business was also up 2.6% sequentially and it was down only 4.5% over a year ago quarter. We stopped the development of OTP based Microcontrollers more than four year ago, and moved all of our development to Flash based Microcontrollers. The resiliency of OTP based Microcontrollers revenue reveals the long product lifecycle of our product that we often talk about. The bulk of our growth in Flash Microcontrollers is incremental business gaining market share over competitors and not from converting our own business to Flash. We shipped another record $20,921 development tools last quarter, we are continuing to experience strong design activity with our 8-bit as well as 16-bit Flash Microcontrollers and we are seeing a significant number of new applications emerging which are utilizing our products. We are very well positioned to continue to gain marker share. Now 16-bit Microcontrollers. Our 16-bit Microcontroller business was up 10% sequentially in June quarter and up 85% over a year ago quarter. The growth of our 16-bit Microcontroller business continues to be similar to that of high-end 8-bit Microcontroller architecture PIC-18 at a similar stage of market ramp. The number of customers grew to 349 in the June quarter from 324 in the March quarter; we shipped 2,951 new development tools last quarter versus 1,284 shipped in the March quarter, an increase of 129% sequentially in development tool sales. This represents significant momentum in the acceptance of our 16-bit products and architecture; there are now 15,622 cumulative development tools shipped and supporting our 16-bit products. In terms of total number of products, we now have 65 16-bit Microcontrollers in production, 10 more are sampling and these 10 will be in production by the end of this quarter. I would like to point out one more fact on our 16 bit Microcontrollers. We had significantly larger backlogs for the quarter than the 10% sequential growth that we achieved. However we suffered from significant product mix issues. We largely build the product on a forecast of product mix; many of the 16-bit products are very new and have less history again the established 8-bit products. Therefore we left an additional 15% sequential growth on 16-bit microcontrollers in the back log. The starting back log for September quarter on 16-bit microcontrollers in quite strong, the book the build ration for our 16-bit microcontrollers was a whopping 1.5 last quarter. Therefore we see a very strong growth ahead based on the momentum with the customers we see, we expected that our 16-bit microcontrollers to be up another 25% to 35% sequentially in the September quarter. Serial E-Squared memory products. Serial E-Squared memory products net sales was down 2.3% sequentially, we are continuing to see memory business as weak, we are focusing on serving our strategic customers wherever we can attach Serial E-Squared to a microcontroller or analog product. Pricing remained essentially flat quarter over quarter. Analog Products. Analog products were up only 1% sequentially and up 48% over a year ago quarter, several customers took a pause last quarter yesterday after a torrid phase of growth for the last several quarters. The design momentum on analog products continuous to be strong and we do not see any fundamental shift in our value proposition. The number of customers buying our analog products grew to 11,369 from 10,808 in the previous quarter, a growth of 561 customers in the quarter. We see continuing growth ahead and expect a growth of about 4% to 8% sequentially in the analog products in the September quarter. So summarizing the product lines, the last quarter performance that reveal the strength of growth on our 8-bit microcontrollers. We have been guiding investors for some time now that the 8-bit microcontroller market continuous to convert to field programmable. Microchip is a leader and be see that this market is headed into the direction of our strength. With small growth an analog last quarter, negative growth in memories and mix issues that we suffered in the 16-bit, the dollar growth for the last quarter was provided primarily by our 8-bit microcontrollers. 8-bit microcontrollers let us to beat the high end of our estimate, the 8-bit business was very, very strong and we see continued growth ahead in that segment. Distribution Strategy. In the last quarter I updated the investors on our distribution strategy where Microchip defines our distribution network as global or regional distributors. Regional distributor the mainly in Asia and Europe and they usually do not carry competing lines. These regional distributors have significant dedicated technical resources applied to creating demands specifically for Microchip. Last quarter we added several new regional distributors and catalog houses in various parts of Europe. We will continue to add to this part of the channel in Europe and Asia. The second kind of distributor in our network is a global distributor. These distributors have hundreds of product lines and carry most if not all of our competitors’ products. Therefore, the focus and effort of these distributors is highly diluted and their sales and technical resources are pulled in too many different directions. Microchip has not seen these distributors being very effective in truly creating demand. On the other hand these global distributors are very efficient in fulfilling demand once a customer has designed in a product. So over the last three years Microchip has steadily taken more and more control of its demand creation by adding a significant number of technical sales and application engineering resources. This strategy has worked extremely well, our continued to success in 8-bit microcontrollers, a very strong growth in 16-bit microcontrollers, as well as analogue is essentially vindicating this strategy. We also have a very special relationship with Future Electronics, our largest distribution partner in the world. Future Electronics is of course a global distributor, but in fact they actually act more like regional. In microcontrollers they do not carry some of our competitors, Atmel, Texas Instruments and Renesas, and in analogue they so not carry four of our Microchip biggest competitors. They do not carry Maxim, Linear analogue devices and TI. So Future Electronics have committed a large number of resources to create demand for Microchip’s products. This is highlighted by the fact that they will have a very large number of their field application engineers attending Microchip’s 10th Annual Masters Event this month for comprehensive training on our products. And now I shall discuss our guidance for the September 2006 quarter. First of all, we are continuing to see positive signs in our business and we believe that the sky is not falling on the semiconductor industry. As we look at the September quarter, we took several factors in to account. We looked at our own booking and business activity in various product lines which continues to be good, our book to build ratio was 1.01 and the starting direct backlog for September quarter was higher than that of the June quarter. We also looked at the inventory situation. The inventory at our distributors continues to be at the lower end of the historical range. The historical range has been 1.9 months to 3.3 months, current distribution inventories two months. Our own inventories in the middle of our historical range, the historical range has been 74 to 134 days, the inventories currently at 101 days right in the middle and has been dropping for several quarters. We also looked at lead time. Despite strong bookings our lead times remain in the three to five weeks range which is the shortest among our competitors. We also note the global issues of oil prices increases and conflict in the Middle East. By the way Israel is less than 1% of our business. So taking all of these factors into account, we decided to keep our guidance conservative and we expect net sales in the September quarter to be up about 4% sequentially. With a decreasing inventory at Microchip and a forecast for continued growth, we are preparing our factories with equipment and personnel to execute the needed RAM, we are well-positioned from here to the end of December 2006, and we are evaluating equipment needs from January 2007 on, and some of that has to be ordered fairly soon based on the lead time. Our CapEx forecast for the fiscal year assumes this and our CapEx forecast stays at about $18 million. Gross margin for September quarter are expected to be about 60.6%. I remind investors that our long-term gross margin guidance is 62% and we are steadily making progress towards that goal. Earnings per share are expected to be about $0.39, this earnings per share is without the share-based compensation expense. EPS with share-based compensation expense should be about $0.37. We expect to build approximately $125 million of net cash flow before payment of $50.5 million of dividends just announced today, and we look forward to sharing this cash with investors with another healthy increase in dividends in the next quarter. Finally, I want to thank those investors and analysts who have taken the time to read my book titled ‘Driving Excellence,’ which was released three months ago, all the comments that I have received so far are very positive. I hope that all long-term investors and analysts will get a chance to read the book. It gets you inside Microchip to look at how the aggregate system of Microchip was built and implemented. It reveals the culture of Microchip Technology, which we believe is behind the exceptional performance of Microchip for so many years. So let me summarize a few key points. Our net sales are expected to be up about 4% sequentially and now without the equity compensation expense, our gross margins are expected to be about 60.6%. Operating expenses to be about 24% of sales, operating profit to be about 36.6% and earnings per share are expected to be about $0.39. With that operator, would you please call for questions? Operator?

Thank you. [Operator Instructions]. We will take our first question from Michael Masdea from Credit Suisse.

Hi, this is Mohammed Siraj calling in for Michael Masdea. Could you discuss if you have seen any change in customer mentality especially looking in the June month or even first couple of weeks of July?

We have not seen any change in customer mentality. Our July bookings month to date, are actually very strong so we are continuing the strength of bookings we have seen into June, and continuing into July.

Got it. And maybe a follow up question, could you discuss; why are you bringing in lead times, I guess especially in this environment? What was the driving force behind the light shortening in lead-time this quarter?

Our lead times never went out. We have substantial manufacturing capacity, because of large amount of capacity available in our FAS4, so to this entire cycle of lead times basically it has been three to five weeks, so the lead times are not coming in they never went out.

Never went out, okay, got it. And then just the final question. Looking more long-term, are you seeing any activity in the 32-bit microcontroller market, and if so is this is an area you see Microchip having interest in? And if so, when do you think you would see more activity in that area?

Our dsPIC products, our 16-bit products, in many cases have significantly higher performance than some other prevailing 32-bit microcontroller architecture. For example, our tPIC24 architecture and the dsPIC architecture have 50% higher performance in mid-speed compared to 7. So Microchip today is winning significant designs into the marketplace, which without for Microchip, would have gone into a 32-bit architecture. So we believe we already have a very, very competitive solution to many of the 32-bit products in the marketplace with our dsPIC and PIC24 architecture.

Okay, thanks a lot.

We will take our next question from Tore Svanberg from Piper Jaffray.

Yes, good afternoon. Can you talk a little bit about your bookings trends? You mentioned July had started quite strongly. How about the linearity in the actual June quarter?

Gordon…?

You know, I think booking trends you know, we operate a 4/4/5 model in terms of our monsoon bookings performed pretty much in line with that. There was nothing exceptional in any of the ones that would take -- that would have any issue with linearity. And that obviously helps to project on to our revenues being linear as I mentioned during my comment.

Okay and you mentioned the mix issues in the 16-bit business that will lead to some pretty strong growth here in the September quarter. Can you just add a little more color on that, please?

You know, we have 65 products in production today and you know, we only started about a little more than two years ago shipping products into that 16-bit, so many of the products are quite new although we have some sense into where the demand will come from because of the design wind pipeline. You know, however -- all these products are very compatible, they all work on the same architecture, they use same C-compiler, the pin-out is very compatible, so customers during their design very often move around and change their design from one product to another product looking for slightly different features or slightly lower cost or whatever. So we usually build the product to a mix of forecasts, which really comes bottoms-up from the sales with three to five weeks’ lead-time. You know, you are largely keeping those lead times because you usually get the mix right, we always get the mix right usually, but on brand new products where you do not have a lot of history and with a small size of the business, customers can relatively come in a different product then you have thought. So we suffered from mixed issues. A lot of that have already been shipped into July and some of that will be shipped into the balance of the quarter. If we did not have those mix issues, we would have achieved about 25% sequential growth on 16-bit microcontrollers last quarter and we brought it up to investors’ attention so you see the real design in momentum in growth and opportunity in our 16-bit business and see it at 25% level for the last quarter rather than 10%. The mixed issues have largely been addressed. There are lot of additional new products coming into production this quarter, so there is always a risk, but I think we are over killing it this time and should not suffer from the similar issues again.

Great. And then just finally, those seemed like you expect slightly lower terms this quarter than last. Is that because of the summer months or is it just pure conservatism?

Where do you get that?

Just thinking about your backlog being up and your bookings already being strong and with 4% growth it just feels or sounds like you did expect summers to be a little bit less this quarter, I could be wrong.

You know the prior quarter the book to bill ratio was 107 and 101 here and so you know, it turns us somewhere in that same range, give or take.

Okay, that’s all, thank you very much.

Next we will hear from Chris Caso, Friedman Billings Ramsey.

Thanks. Just as a follow up to that question, you made a comment that you took a bit of a conservative view towards the September quarter guidance in light of the macro condition. Could you kind of explain a bit; if you are expecting a similar amount of terms for the next quarter you know, how are you being conservative with the guidance? Could you just clarify it in a little bit, and then in terms of your customers either by their words or their actions, are they giving you any reason to be conservative other than you know, just we all reading in the papers everyday?

We are getting no such guidance from our customers or our distributors. We are just being conservative because there are a lot of you know, macro kind of talk we are hearing and a lot of response we are getting from investors and analysts and response to other company’s numbers and just general talk, we believe the investment community is determined to cause a problem even if there isn’t one, at least we don’t see any problem in our business.

Okay. So is that to mean then when you are providing guidance you did assumed the full level of bookings when you provided your guidance or are you assuming less terms? Just clarify …?

We internally ruled out better than what we guided, but we were conservative.

Okay, that’s fair. And then just with regard to the positive that you guys talked about n the analog space, could you give us some insight as to you know, why you’d see that in the analog space and why not in the microcontroller? Is that a function of different end markets between your analog businesses and your microcontroller businesses?

The analog business was up 48% over a year ago. The quarter before it was up like 52% over a year ago, it was up about 16% or 17% sequentially. I am just recalling some of these numbers, so many time you have any business going on at such a torrid pace, you can always have few customers get ahead and they take a pause, so it’s really driven by that. Our microcontroller business is growing very steadily, was up sequentially 8.2%, 21% over a year ago quarter so we didn’t really see any pause in the microcontroller business driven by that. Also, microcontroller business is much large you know, it’s a huge business with nearly 50,000 customers, so they’re much, much diversified than the analog businesses today.

Okay, fine. And just one final one, with regard to the size of the 16-bit market, I don’t think you guys -- don’t want to quantify that in the past. I guess, any guidance you can give us in terms of the size of that business relative to microcontrollers?

We are not willing to break it out soon.

Okay, thanks very much.

Our next question comes from Jeff Rosenberg from William Blair.

Good afternoon.

Hello Jeff.

I guess I just want to ask about the inventory trends, bringing them down five days or so for quarter. Does that reflect any change in your strategy in terms of the rate of ramp in your production or the way you are tying to manage margins you know, through any correction of whatever point we might see one?

What I like investors to look at is this you know, the center pulling offer inventory range over the last many, many years has been right around here about 101 days where we were last quarter and the distributor inventory is sitting on the lower end of the range of 1.9 to 3.3, so if you combine the channel inventory plus Microchip inventory together, they are less than the middle point of the inventory. So first of all, I do not understand where all the inventory concerns are coming form. And number two, our inventory has been steadily declining, so if you were to ramp up factories harder where the inventories were not declining the gross margins will even be higher. We are still producing record gross margins while the inventories are declining. So essentially what we are trying to do is get the inventories a little bit more than the midpoint, last quarter they were in the midpoint, get it a little bit more lower and then start to ramp the factories to the point where the inventories do not decline, essentially keep up, build as much as we feel.

And have you adjusted that level of ‘ramp it all’ from where you -- I mean, or has it been pretty stale. I guess, you have been bringing inventories down to pretty consistent level, but if you have done anything in terms of your planning differently than what you were thinking a quarter ago?

You know, we ramp every quarter. Every quarter we are producing more products than the prior quarter, but every quarter despite the ramp we have been producing product less than what we have been shipping. That’s why the inventory has been declining and I think Gordon guided that the next quarter our inventory drops again from 101 days to 95 days. So at that point in time we are coming to the point where almost the inventory is right. So you know, basically during this quarter, it will be -- and I mentioned we are putting things in place to essentially ramp harder where the inventory does not decline anymore after that, maybe decline a little bit, but not much.

Okay. And then the follow up I want to ask you was just if there is any color commentary on the relative strength of the different regions and the weakness, not weakness, but the much lower growth in the Americas versus Asia, is that just the traditional continuation of mix over to Asia or anything more that you could say about that?

Well you know, the overall activity in Asia is higher. It is a much stronger growth region I believe than in Americas or Europe, that’s one point. And second point is, like you mentioned there is a continuous transfer of designs, which are done in US and then if we go to Asia for manufacturing so it’s very, very hard to break out. I mean if you have ten customers you can do the analysis, even 50 customers you could do the analysis. For 50,000 customers it’s impossible, so we know a significant portion of that growth in Asia is because of designs in US, but we can’t quantify that.

Okay, yeah just seemed a little bit more diversion than usual, so that there is maybe something to add, perhaps not. Okay, thanks.

I remember Asia is coming off -- in the prior period as well in terms its growth, so you’ve got to compare that shipping period in the June or what drives the revenues in the June period versus the prior quarter also.

Okay, thank you.

Next we will hear from Simona Jankowski from Goldman Sachs.

Thanks, hi Steve. Just wanted to dig into your bookings number a little bit more. I think you have said your book to bill is 1.01 and then I think the 16-bit book to bill was 1.5, so I know that even through that’s a pretty small piece of your business filled out would seem to imply that the remaining business has a book to bill that maybe flatter, may be slightly bellow one, I just wanted to see that math make sense and also what that implies.

Well, without knowing exact price of 16-bit, it’s hard to do the calculation, but in generally you will be correct, yes. Our overall book to bill was 1.01 and 16-bit was 1.5.

So how about bookings for the rest of the business or maybe slightly bellow 1.0 book to bill and normally your September quarter tends to be an up 5% quarter kind of historically. And I think you had mentioned earlier you had record bookings in April and May, and July started off well. Can you maybe just piece it all together and just kind of give us a sense to why the bookings are maybe a bit mismatched for the guidance?

Well Simona, I’d say -- something I have said for ten years in the history of Microchip, our business has never correlated to book to bill ratio. I will tell you periods of four, five, six quarters in a row where book to bill is 1 or slightly less than 1 and business has grown 4%, 5%, 6% sequentially. When the lead times are three to five weeks we see absolutely no reason why customer has to place a large amount of bookings in the prior quarter. Customer can give us the order today and we will ship it to them in the next three weeks. So during that environment you know, whether the bookings are 1 or 0.99 or 1.01, I don’t think it makes any difference. That’s why we don’t break out the terms anymore because it just has never correlated in our business.

Okay, thank you very much.

We will take your next question from Chris Danely from JP Morgan.

Thanks guys. On the 16-bit mix, so Steve you are basically saying that the mix issue should be over by the end of this quarter?

That’s correct, yes.

Great. And then on the long-term gross margin target of 62%, can you give us a sense of I guess what revenue or what matrix we need to see to achieve this 62%?

I think we you know, we guided, you know couple of quarters ago we said in the next eight to ten quarters and we are basically maintaining that, so you know, you could see we were going up every quarter by you know, 20 to 25 basis points and one quarter could be little more, one quarter could be little less. We are ready to ramp our factories here with the inventory getting below than midpoint after this quarter so essentially, you should -- you know, we expect to achieve that over the next couple of years at least.

That’s fine and then any update on the Foundry business?

What update are you looking for there?

What products or what percent of revenue Foundry is right now?

It’s low single digits, it’s really a very small portion of the business.

Okay, great. And then last question you know, even though the book to bill doesn’t really matter, when was the last time your book to bill was below one for 8-bit micros, do you remember?

No, we don’t.

Has it been a while or …?

It has been below one probably in the last few quarters when we have even grown, so we have done substantial growth with less than one book to bill ratio in the past period.

Okay, thanks.

[Operator instructions]. We will take our next question from Eric Gomberg from Thomas Weisel.

Hey, guys nice result and nice job managing your inventories and the general inventories.

Thank you.

Most of my questions have been answered. Just one thing that stood out was the 16-bit development tools up by 129% sequentially; seems pretty huge. Could you talk a little about that and how that correlates to potential shipment growth of 16-bit products out of couple of quarters?

Well you know, the lead-time for developing a 16-bit product and taking into market is more like two years, it takes about two years. So the large growth of development tools does not really mean much for revenue in the next couple of quarters. The revenue that comes in the last couple of quarters is based on the work we did six quarters ago and there were substantial amount of work done six quarters ago, the backlog looks very healthy, the book to bill is extremely high on the 16-bit microcontroller. We are looking for very, very solid growth year. The new development tool simply tells you that just the party is continuing. The growth is continuing and there are more and more customers, designing with it and we are just opening a large number of new doors.

Planting the seeds for ‘08 and ’09?

What is that?

Planting the seeds for ‘08 and ‘09.

Yeah, yeah, ‘08 and ‘09 yes. Very late ‘07 calendar year, but really going into early ‘08.

Okay, thanks. And just on orders by geography, I think there is a lot of concern about that build up of inventory in Asia and don’t want to be a dead horse, and you had commented on overall inventory. Would you feel that there is any difference by geography, is there any difference in terms of what these or others might be holding in Asia?

No the distribution, the key categories have always been somewhat different. In Asia probably because of the matrix in their business have always tended to hold a little less than inventories and than the average. Their margins are quite lower, often they are looking to returns to earnings ratios, appropriate for their business. And while we have seen over the course of many, many quarters, the inventory moved down towards the low end of the range. We have moved down in all territories. I wouldn’t say exactly all the same page, but relatively speaking we have all behaved pretty much the same way as this tried out to be, I think improved asset managers.

So, I think what you were concerned about is that maybe the inventory in Asia is high, but Gordon is telling you is in our case, inventory in Asia is much lower than the inventory in distribution we have seen in US and Europe.

That was very helpful, thank you.

Yeah.

We will take our next question from Harsh Kumar from Morgan Keegan.

Hey guys, congratulations on a great quarter and then growth in a questionable economy, but had a kind of broader question. You are clearly taking share from other people but Steve, if I was to ask you to kind of characterize how you see the overall market maybe you can give us some color on whether you think the overall market is growing you know, your company aside?

You know, it’s very hard to tell as we are going through the quarters whether the market is growing or not. I think we get a report that looks at everybody’s numbers at the end of the year, which gives us some reflection, but we really are not paying attention whether the market is growing or not, we are paying attention to are we growing or not.

Great, thanks.

When you look at the 8-bit microcontrollers, it seems like you know number of players which are on the top you know, one, two, three, four, five they all you know, short-term here seemed to be doing well and each may claim they’re gaining market share from the other person, but I think they are really gaining market share from the middle of the pack or the people in the low end of the pack or they’re all gaining through new applications in their respective territories. You know I believe we are growing and the latest numbers we saw from Freescale, seems like they are growing, will hear from Atmel next week, and I think most likely, we will see they are growing. Slightest decline in that segment, I saw, but it’s possible that a couple of other guys may be growing. So it doesn’t mean the 8-bit microcontroller market is growing. We have always felt for years that 8-bit microcontroller is a very good market, but somehow that growth never seemed to correlate with the SIA numbers, which has been the age-old difference. So either SIA numbers are not correct because they don’t have the data from a lot of the non-members or it’s possible that many of these companies are gaining market share over much weaker competitors, which are really at the bottom of the middle of the pack.

Good, that’s very helpful. Just one follow-up, I think in the commentary guys, you might have given a 16-bit sequential growth number for September, and I might have missed that if you gave that, if you don’t mind repeating it?

Say it again …?

The 16-bit sequential growth number for September?

We made 25% to 35% sequential growth.

Thanks guys, great quarter.

Next we will hear from Adam Parker from Sanford Bernstein.

Yeah. Hi, just a couple of more quick questions here. Steve, I know the markets really appreciate the dividend increases, but given as you said, the market seems determined to you know, create bad news or keep the stock low, why wouldn’t you be more aggressive with the buybacks here? I know you guys have bought your stock well in the past. Why wouldn’t you a bit more aggressive here?

Well, some of the broken records here our strategy always is to give the money back to the investors, it is their money, and if they feel their stock is cheap they can buy more stock. Stock dividends go down by the good holders of the investors who keep this for long time. We will give the money back to them and they can invest the money into the stock, if they believe it is cheap or they can be give to their investors or do whatever they like with that. You know, our goal is in general, that we believe in dividend, we do not believe in stock buyback. We buy stock only at unusual locations and last time we bought significant amount of stock was during SARS when you know, stock was selling at half the price that it sold six months later. You know, you may make an argument such time may be approaching, I hope not. But in general, our values and where our board believes strongly is to a continuous growth of dividends to give the money back to the shareholders and let them invest it.

Well one -- I don’t know, corollary to that is as you all know your company’s fundamentals, the revenue growth, the stock and the margins are very stable among the best in the industry yet your stock itself, if you look at the standard deviation of volatility returns, is about an average or even slightly more volatile than average for broad semiconductor peer group. Why do you seem that is, do you think it is something you are doing, do you think there is something that market doesn’t get? How do you explain –- how do you think about the difference between the stability of your fundamentals and the stability of your stock?

Adam, I thought you were the analyst. I am the CEO, I don’t know. You know, I don’t understand the market. My job is to run the company, and I’m doing a damn good job at it.

I’m not doing a good job, but I was just trying to –- that’s why I was trying to get your help.

You know, analyzing what the stock does is neither my expertise nor my job. I deliver great results and you know, it’s now everybody else’s job to take these great results and analyze them and position it accordingly.

But you know, I mean all of us try to look internally and say it’s only worth doing. I mean, is it something where you think you are setting your near term expectations or you are optimistic to the point where people try to play against them in the near term or is it just -- look I can’t worry about it, just deliver the good results and screw it eventually, it will take care of itself.

I mean, it is not destroyed. I mean we are working hard. We went though a lot of conferences last quarter including yours and see a lot of investors and analysts and trying to explain the story, and I think we have explained the 8-bit story; conversion to flash microcontrollers, we are delivering that results on that. And the 16-bit story we are delivering that result from that. Analog was a little weak last quarter only 1% growth. We will come back and show you more growth there. We are delivering the margins, we are you know, making the ramp in the Fab. We have just generated record cash flow, increased the dividend again. Done all those things, but market always finds something to worry about. All quarter market has been worried about inventories. We come back and our own inventory has declined, the distribution inventory is flat. Somebody asked a question about Asia. Asia inventory is less than it is in US and Europe, and somebody else was further asking questions on the book to bill. You know, I just got this number in front of me. September quarter last year, September fiscal year ‘06, which will be September quarter last year, our book to bill ratio was 1, and in December quarter we grew 3.5% sequentially. So somebody had asked the question whether you know, have you had that cash before, so here was the quarter where the book to bill was barely one, it was only up to one and our growth was 3.5% in the following December quarter. We have done that lots and lots of different times. When the lead times are so short then book to bill and terms required don’t matter, whether people place the order on June 25th or you know July 3rd, it will absolutely make no difference. Does that help?

Yeah I appreciate. Steve, thanks.

We will take our final question from Craig Ellis from Citigroup.

Thank you, good afternoon guys. I will start just by approaching the dividend a little bit differently. Steve, you guys have done a great job, raising the dividends. The people I talked to, liked the job you’ve done with it. Can you talk about how comfortable you are continuing at the current pace in terms of that frequency with which you increased the quarterly dividend?

We have guided that we expect to generate about $500 million of free cash flow this quarter, this year. And if you look at the last two quarters, I think we are well on that pace to do that. So you know, as long as the earnings continue to rise which we are guiding towards and guiding for another $0.02 increase next quarter in earnings, we believe you know dividend is announced by the board and they are not here in the room, I believe they are comfortable with continuing to share that cash with investors. Now over time the rate of growth has to slow down -- off the dividend, you know as the numbers get larger and larger but you know we just increased it sequentially 9.3%, that’s really a pretty torrid pace.

It is, and as long as there is growth in the various businesses and we will obviously at different points see cyclical dynamics in play, but if we could expect you to continue to increase the dividends is what you’re saying.

Yeah, we expect to continue to increase dividend, yeah.

Okay, and then just cycling back on the 16-bit business, 20 new products in Q2, it sounds like there is going to be 10 new products in Q3, how should we think about the pace at which you want to bring out new products in that part of the business?

Well, you know, every new product development you know, doesn’t take the same time. It’s like you know they are platforms, it takes much longer to develop a platform and come up with the first -- you know, two or three products and after that you are proliferating it based on memory sizes and adding non-peripherals and stuff like that. So you know some times you are developing a brand new platform including new peripherals and other time you are proliferating existing peripherals, so don’t think of it like you know, 20 products last year, 10 products this year -- you know, like some thing is wrong. It’s just like this is you know, huge pipeline and some times people are working on tail end of releasing the products, other time they are working on the front end of developing new peripherals, new capability, new stuff that’s going to open new markets, this kind of happens all the time.

But is it reasonable to think that if over the last quarter and the current quarter you are doing 10-to 20 per quarter that over time that that pace would increase or you had a comfortable pace for how you see that business over the next 18 months or so?

Well, let me see if Ganesh is comfortable giving the number about the number of new products in having production by the end of the fiscal year.

Yeah, our -- we are in a pace where we will have somewhere between 90 and 100 products in production by the end of fiscal year itself.

There you go, some 65 now to you know 90 to 100 products by the end of March.

Okay, thanks guys.

Welcome.

We actually do have another question from Janet Ramkissoon from Quadra Capital

Hello Janet.

Hi guys, congratulations, another nice quarter, thanks for the dividend. Steve, just in terms of the expansion and buying equipment, is your strategy still to try to buy used equipment where you can? And given the growth in your business, when do you think you might have to visit the question of whether or not you pick up another facility, perhaps there might be an opportunity if we do have a real semiconductor downturn here?

Janet, you know first part of your question, yes we buy used equipment whenever we can. Our equipment needs are not very high here because we have largely the equipment available to what we need. We only need you know a little bit of equipment because the process which was running in fast-forward prior to our purchase was not identical to our process, it was close enough. So it’s like a 90% match so we really need a small amount of equipment here and there, but we also need -- a portion of the equipment expense is also in assembly and test, R&D and Care and other areas. So yes, we do buy used equipment wherever we can. In terms of looking at another Fab, we believe it is way too early because in the last quarter or so we have highlighted for investors our path to $1.9 billion where the two existing Fabs have current capacity of -- installed capacity of $1.4 billion. There is clean room available in our Fab4 to expand it further where the combined capacity of two Fabs becomes $1.7 billion, and we are outsourcing a portion of our product lines in, 8 bit, 16 bit analogue and all the different products which will give us about $200 million of output which will not be produced by us, but will be outsourced to professional foundries over the next five yeas, leading up to a total about $1.9 million. So I think it is quite early for us to think of any other Fab.

Okay, just on last little one if I may -- just in terms of the economy worldwide. Are you beginning to see any signs of slowdown any where or are there any particular -- you know, unusual strength in any area in your markets worldwide?

We are not seeing problems any where, we grew in all three geographies last quarter, in the current quarter we expect to grow in Americas we expect to grow in Asia, Europe obviously is you know, down low single digits usually in the summer quarter but Asia geography usually very strong this quarter, because the tail end of September they start to build all the products for the Christmas which has to get on the ships for -- you know six weeks journey back to US and Europe, so this is -- this should be usually a very, very good quarter and we are not seeing softness anywhere in the world driven by any of the Macro factories.

Thanks very much.

Welcome

There are no further questions at this time, I will now turn the call over to Mr. Steve Sanghi for closing remark.

Thank you very much to all the investors and analysts who joined this call today. We will be available here for a little while, if you have questions, give us a call on the investor line otherwise we will talk to you during the quarter either at the conferences or in our road shows or other things or talk to you next quarter. Thank you very much.

And that concludes today conference call and we thank you for joining us. At this time you may now disconnect your line.

Bye-bye.