Good day, everyone, and welcome to Microchip’s First Quarter Fiscal 2021 Financial Results Conference Call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Microchip’s Chief Financial Officer, Eric Bjornholt. Please go ahead, sir.

Thanks, Brandon, 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 first quarter 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 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 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 our acquisition activities, share-based compensation and certain other adjustments as described in our press release. Net sales in the June quarter were $1.31 billion, which was down 1.3% sequentially and above the midpoint of our upwardly revised guidance from June 2, 2020, when net sales were expected to be flat to down 6% sequentially. We have posted a summary of our GAAP net sales as well as end market demand by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were strong at 61.7%, operating expenses were at 23.1% and operating income was an outstanding 38.6%, all better than the high end of our upperly revised guidance. Non-GAAP net income was $401.9 million, non-GAAP earnings per diluted share was $1.56 and $0.03 above the high end of our upperly revised guidance from June 2nd. On a GAAP basis in the June quarter, gross margins were 61% and include the impact of $6.4 million of share-based compensation and $2.8 million of COVID-19 shelter-in-place restrictions on manufacturing activities. Total operating expenses were $580 million and include acquisition intangible amortization of $235.4 million, special charges of $0.3 million, $6 million of acquisition-related costs, and share-based compensation of $36 million. The GAAP net income was $123.6 million, or $0.48 per diluted share. Our June quarter GAAP tax benefit was impacted by a variety of factors, including tax reserve releases associated with the statute of limitation expiring, deferred tax adjustments related to intercompany movements of intellectual property rights, offset by tax reserve accruals associated with the outcome of the Altera case during the period and other matters. The non-GAAP cash tax rate was 6% in the June quarter. We expect our non-GAAP cash tax rate for fiscal 2021 to be about 6%, exclusive of the transition tax, any potential tax associated with restructuring the Microsemi operations into Microchip global structure and any tax audit settlements related to taxes accrued in prior fiscal years. We have many tax attributes and net operating losses and tax credits as well as U.S. tax interest deductions that we believe will keep our cash tax payments low. The cash tax payments beyond the June 2020 quarter associated with the transition tax are expected to be about $245 million and will be paid out over the next six years, including a payment that we made in July 2020 of $23.2 million. We have posted a schedule of our projected transition tax payments on the Investor Relations page of our website. Our inventory balance at June 30, 2020 was $657.2 million. We had 117 days of inventory at the end of the June quarter, which was down five days from the prior quarter’s level and right in the middle of our publicly stated inventory target of 115 to 120 days. Inventory at our distributors in the June quarter were 30 days compared to 29 days at the end of March. We believe distribution inventory levels for Microchip are still low compared to the historical range we have experienced over the past 10 years, which is between 27 and 47 days. The cash flow from operating activities was $501.8 million in the June quarter. As of June 30th, the consolidated cash and total investment position was $380.2 million. We paid down $394 million of total debt in the June quarter and over the last eight full quarters, since we closed the Microsemi acquisition and incurred over $8 billion of debt to do so. We have paid down $2.62 billion of debt and continue to allocate substantially all of our excess cash beyond dividends to aggressively bring down this debt. We have accomplished this despite the adverse macro and market conditions during most of this period, which we feel is a testimony to the cash generation capabilities of our business, as well as our ongoing operating discipline. We continue to expect our debt levels to reduce significantly over the next several years. Our adjusted EBITDA in the June quarter was $562.2 million and our trailing 12 month adjusted EBITDA was $2.154 billion. Our net debt to adjusted EBITDA, excluding our very long dated convertible debt that matures in 2037 and is more equity-like in nature, was 4.24 at the end of June 2020 down from 4.46 at the end of March 2020. Our dividend payment in the June quarter was $90.4 million. Capital expenditures were $9.5 million in the June 2020 quarter. We expect about $15 million in capital spending in the September quarter and overall capital expenditures for fiscal 2021 to be between $50 million and $70 million. We continue to add capital to maintain and operate our internal manufacturing operations, support the production capabilities for new products and technologies as well as to selectively bring in-house some of the assembly and test operations that are currently outsourced. We expect these capital investments will bring some gross margin improvement to our business, particularly for the outsourced Atmel and Microsemi manufacturing activities that we are bringing into our own factories. Depreciation expense in the June quarter was $41.1 million. I will now turn it over to Ganesh to give us comments on the performance of the business in the June quarter.

Great. Thank you, Eric, and good afternoon, everyone. Let’s start by taking a closer look at microcontrollers. In a weak macro environment, our microcontroller business performed better than we expected. On a GAAP basis, our microcontroller revenue was sequentially down 1.3% as compared to the March quarter, while from an end market demand standpoint, our microcontroller business was sequentially down 2.8%. On a GAAP year-over-year basis, our microcontroller business was up 1.2%. We continue to introduce a steady stream of innovative new microcontroller solutions, including the industry’s smallest automotive grade maXTouch controller family, the first functional safety ready, AVR microcontroller family with a peripheral touch controller, the Switchtec advanced fabric generation – Generation 4 PCIe switch family, which enables complex fabric topologies with greater scalability, lower latency and higher performance than traditional PCIe switches. And last but not least, the Adaptec SmartRAID 3100E RAID, which stands for Redundant Array of Inexpensive Disk adapters designed to provide reliable hardware RAID protection for customer data in cost-sensitive end applications that require no power and high performance. Microcontrollers overall represented 54.9% of our end market demand in the June quarter. Now moving to analog. On a GAAP basis, our analog revenue was sequentially up 0.7% as compared to the March quarter. While from an end market standpoint, our analog business is sequentially down 0.7%. In both scenarios, our analog business performed better than we expected in the midst of a weak macro environment. On a GAAP year-over-year basis, our analog business was down 4.2%. During the quarter, we continued to announce and introduce a steady stream of innovative analog products, including an expanded portfolio of over 25 transient voltage suppressor vertical rays, and a 32 channel high-voltage analog multiplexer, further enabling miniaturization of medical ultrasound applications. Analog represented 28.1% of our end-market demand in the June quarter. Our FPGA revenue, on a GAAP basis, was down 10.3% sequentially as compared to the March quarter. From an end-market demand standpoint, our FPGA business was sequentially down 6.5%. Our FPGA business in the June quarter had one significant aerospace customer who was shut down hard due to COVID-19 restrictions for pretty much the entire quarter, resulting in lower-than-expected results. Despite this customer being unlikely to resume production in the September quarter, we are expecting the FPGA business to sequentially grow meaningfully in the September quarter. On a GAAP year-over-year basis, our FPGA business was down 4.6%. During the quarter, we continued to introduce a steady stream of innovative FPGA products, including the vector blocks accelerator software development kit, which enables developers to take advantage of Microchip’s all fire FPGAs to easily create low-power neuro network applications. FPGA represented 6.7% of our end-market demand in the June quarter. Our licensing, memory and other product line, which we refer to as LMO, was flat as compared to the March quarter from an end-market demand standpoint. During the quarter, we introduced a new Phase Noise Analyzer, designed for engineers and scientists who rely on precise and accurate measurements of frequency signals generated for 5G networks, data centers, commercial and military aircraft systems, space vehicles, communication satellites, and metrology applications. LMO represented 10.4% of our end-market demand in the June quarter. An update regarding coronavirus and its impact on our operations. Most of our non-factory employee base continues to work from home. Our global teams have been highly engaged, collaborative, and productive under the circumstances, resulting in strong customer engagement for new designs and effectiveness in our new product development programs. We would like to thank our teams worldwide for adapting as needed to changing conditions while continuing to deliver results. Our manufacturing operations, especially those in the Philippines and our outsourced partners in Malaysia, worked through various constraints throughout the June quarter and delivered increased output as reflected in our better-than-expected results. By the end of the June quarter, we had dug out of most of the delinquencies in our shipments that accumulated in April and May when unpredictable constraints from government mandates were in effect. Our customers and our supply chain partners also endured some constraints of their factories and logistics, primarily during the month of April and May. As we progress through May and June, we experienced many short lead time orders from customers, some of which we could not support in the quarter, primarily due to three factors: First, customers whose business has strengthened due to COVID-19 conditions, such as work-from-home initiatives and medical devices; second, the partial recovery in May and June of some customers’ business, which experienced a sharp decline in the March-April time frame, automotive being the biggest example of that in some industrials; and third, unrealistic expectations from some customers that orders placed with short lead time can be supported by slack in the supply chain. We are working with our customers to improve the visibility of their backlog so that we may serve them better. Given the current market dynamics, we are providing some qualitative insights into our principal end markets. Now before we provide commentary for the June quarter, we would first like to share with you our best estimate for our fiscal year 2020 revenue by end market, with over 120,000 customers served by Microchip and given the complexity of our customer base, it is laborious to collect this data, and we only do so every few years. We remind you that this data is only estimated and it is not something we can track with high accuracy. Based on our analysis done in the June quarter for the fiscal year 2020 revenue, industrial remained our largest end market at 28% of revenue. Computing and data center was next at 18% of revenue, followed by automotive, 15% of revenue. Communications at 14% of revenue, consumer at 13%; and finally aerospace and defense at 12% of revenue. With that backdrop to provide context, here are some end-market trend insights for the June quarter that we’d like to share with you. Data center and computing continued to show strength from the shift to work-from-home requirements. However, we anticipate that these segments may revert to more normal demand patterns in the coming months as the surge in requirements starts to dissipate. Automotive car sales and production in China recovered nicely to grow, sequentially, and year-over-year, benefiting our China automotive business. Our automotive business everywhere else had a very poor quarter as April and May were adversely impacted by widespread automotive factory shutdowns. We began to see recovery in June and believe that the worst for automotive is behind us. Medical devices necessary to treat COVID patients, like ventilators, respirators, oxygen monitors, and portable ultrasound machines were all strong, in addition to a host of other hospital equipment needed for increased patient loads. Medical devices for elective procedures, such as hearing aids, pacemakers, defibrillators, and some of the large ultrasound MRI machines, experienced a slowdown as individuals and hospitals delayed elective procedures. Even within the broad-based industrial and consumer markets, which were generally weak, we did see pockets of strength related to COVID-19. In consumer, the strengths that are related to gaming, home improvement, and hobbyist projects for people sheltering at home. In industrial, the strengths were related to UV disinfection systems, air filtration systems, infrared temperature scanners, and a generally increasing trend towards touch rate controls. Let me now pass it to Steve for comments about our business and our guidance going forward.

Thank you, Ganesh, and good afternoon, everyone. Today, I would like to first reflect on the results of the fiscal first quarter of 2021. I will then provide guidance for the fiscal second quarter of 2021. The June quarter demonstrated what the best of Microchip culture and its people represent; our global team of operations, business units, sales and marketing, and support groups all came together in the middle of a global pandemic while working with a take cut and delivered a superb quarter. 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 could be well served, and our supply chain partners engaged to help ensure mutual success despite the challenges we faced. Despite the COVID-19 pandemic challenges, we delivered net sales of $1.31 billion, that was down only 1.3% sequentially and down only 1% from the year-ago quarter. Our original net sales guidance was to be down 6% sequentially at the midpoint. In early June, we revised it to be down 3% sequentially at the midpoint, and we ended at down only 1.3% sequentially. These are exceptional results against the backdrop of simultaneous supply and demand dislocations. We also delivered an outstanding non-GAAP gross margin of 61.7%, 90 basis points above the midpoint of our original guidance from May 7, 2020, and a non-GAAP operating margin of 38.6%, 260 basis points above the midpoint of our original guidance. And we did all this while reducing our days of inventory from 122 days to 117 days. I am particularly proud of producing 38.6% operating margin at near the bottom of the business cycle amidst a global pandemic. Our consolidated non-GAAP EPS was $1.56, $0.21 above the midpoint of our original guidance and $0.12 above the midpoint of our revised guidance. On a non-GAAP basis, this was also our 119th consecutive profitable quarter. In the June quarter, we paid down $394 million of our debt. Our total debt payment since the end of June 2018 has been about $2.62 billion bringing our net leverage ratio down to 4.24. The pace of debt payments has been strong, despite the weak and uncertain business conditions, underlining the strong cash generation characteristics of our business as well as our active efforts to continue to squeeze working capital efficiencies. Now I will discuss our guidance for the September quarter; after a strong March and April, our bookings were soft in May and June. But the bookings we received in May and June had a much higher mix of near-term requirements as the customers and distributors did not have the visibility to place longer-term orders. While the near-term aged bookings filled up the June quarter, it left the September quarter backlog on July 1, 2020, down 8% compared to the backlog for the June quarter on April 1, 2020. We also left a large amount of backlog unsupported out of the June quarter because those requirements came inside of our lead time and we were not able to ship them according to customer request dates. This all prompted us to write a letter to our customers and distributors, first informing them of the business environment and our cycle time to build their products. Then we ask them to place at least 12 weeks of backlog for their requirements. We also informed our customers and distributors that if they ask for expediting an order, we would need to charge an expedite service fee given the disruptive nature of such orders. Through the letter, we are just trying to encourage customers to give us more visibility so that we can better meet their requirements. The expedite charges have never been material in terms of our overall revenue. With another month under our belt now since the letter, we have seen some of the customers and distributors respond; the rate of bookings has increased. Our backlog for the September quarter is still well below the backlog for the June quarter at the same point in time, but we believe that the stronger bookings now compared to weak bookings of May and June will continue to improve the September quarter backlog compared to June quarter. From an end-market standpoint, as you heard during Ganesh’s remarks, we have several cross currents contributing strengths and weaknesses at the same time. The common denominator among them is whether COVID-19 was a tailwind or a headwind during the quarter for a given end market. The diversity of our end-market exposure, which we consider to be a strength, gives us the ability to capitalize on whatever strength there is during challenging market conditions. Taking all these factors into consideration, we expect our net sales for the September quarter to be between flat to down 8% sequentially. A relatively broad guidance range is to help account for the lack of visibility and uncertainty associated with the evolving COVID-19 situation. Based on the much better-than-expected financial results in the June quarter, we gave our employees half of their June quarter salary sacrifice back in the form of a bonus. However, we are maintaining the salary cuts in the September quarter due to continued uncertainty. Our inventory at 117 days is now right in the middle of our 115 to 120 days target. Hence, we are also adjusting the factory schedules and removing the rotating time off. For the September quarter, we expect our non-GAAP gross margin to be between 61.2% and 62.2% of sales. We expect non-GAAP operating expenses to be between 23.2% and 24.2% of sales. We expect non-GAAP operating profit percentage to be between 37% and 39% of sales. We expect non-GAAP earnings per share to be between $1.30 per share and $1.52 per share. We also expect to pay down another approximately $300 million of our debt in the September quarter. We believe that despite the near-term pandemic-driven challenges, we are confident in the strength and diversity of the businesses and end markets we are in to achieve long-term growth in excess of the average semiconductor market growth. Given all the complications of accounting for our acquisitions, including amortization of intangibles, restructuring charges and inventory write-up on acquisitions, Microchip will continue to provide guidance and track its results on a non-GAAP basis, except for net sales, which will be on a GAAP basis. We believe that GAAP results provide a more meaningful comparison to prior quarters, and we request that the analysts continue to report their non-GAAP estimates to first call. With this, operator, will you please poll for questions?

Thank you. The first question will come from Vivek Arya with Bank of America Securities. Please go ahead.

Thanks for taking my question. Steve, I think you mentioned bookings somewhat improved in July. Historically, what do August and September bookings do? And what are your assumptions in giving guidance for this quarter? Are you assuming that the bookings trend kind of stays where it is? Does it get better? Does it get worse? I’m just trying to frame the guidance versus some historical trends and what your assumptions are for what the environment does in the remaining months of the quarter?

So Vivek, first thing I would say is that you should not really be looking at any past trends, because this is just not a normal environment. Our bookings and backlogs and expedite orders from customers and distributors are really all driven by end market trends and how COVID-19 influences visibility. So really, bookings in a quarter would be stronger if you go into it with a weaker backlog and would be lower if you have a strong backlog depending on lead time and visibility. So we started this quarter with decreased visibility by our distributors and customers. Therefore, we had very, very weak backlog. If you recall, the June quarter started strong at the start. Coming from March, the turn of China from the Chinese New Year created strong bookings, but we saw bookings decline drastically in May and June, which was a reverse of what happens in a normal year. So again, in July, August, and September, July bookings were up significantly from the June run rate. June was very low and August is just starting, but based on just a couple of days of bookings, they’re also pretty good and even higher than the July average. So our expectation is that August and September bookings will be strong. Thus, the near-term returns from those bookings will be significant. This will make up for how the quarter looks against the same point in time versus June. It will improve, and that’s really what is included in our guidance.

Thank you. The next question will come from John Pitzer with Credit Suisse. Please go ahead.

Hi, Steve. Thanks for letting me ask the question. You said in your prepared comments that backlog heading into September is down about 8% from the comparable time period heading into the June quarter. But if I go back 90 days ago, you didn’t believe that backlog and at least your initial guidance for June took a fairly significant haircut to kind of the backlog and bookings. I’m just kind of curious, can you help us understand relative to the normal backlog coverage you have to your guide, how does sort of the September guidance look today?

So same thing, John. In this pandemic-driven environment, throw all the old graphs away because you will reach the wrong conclusion. If you recall, on April 1, our backlog was strong. The guidance we gave was based on the backlog that will deteriorate from being up near 9% to down 6%. This time, we’re expecting the backlog to improve compared to the last quarter because last quarter bookings declined during the quarter steadily while this quarter the bookings are increasing during the quarter. Therefore, we believe we’ll see the backlog improve in comparison to the last quarter.

That’s helpful. But Steve, if I could just add on there. We’ve all struggled, and I think you guys have internally with all the acquisitions, defining what’s normal seasonal. Any update on what you can give us on or what you think a normal seasonal September quarter would look like sequentially?

Well, first, the environment has to become normal, and we haven’t seen normal in the last couple of years with all the U.S.-China trade sanctions and the tariffs and now the global pandemic. So once we have a stable environment for a year or so, we can figure out what the new seasonality would be with our acquisitions. Right now, it would be anybody’s guess.

Thank you. The next question will come from Ambrish Srivastava with BMO. Please go ahead.

Hi. Thank you, Steve. I’m going to ask for a clarification as well. I just want to make sure I understand your comments correctly. So as the last quarter progressed based on what – how you explained it, it sounds like bookings deteriorated because you had a lot of short lead time orders that were not met. And now heading into the September quarter; is it fair to assume then that those quarters are now – those quarters are scrubbed? But then how do I reconcile with the fact that you still had delinquencies that you could not meet? Should they be coming up in this quarter? I’m just a little bit confused on trying to reconcile all your comments on the short lead time orders and the booking trends. That made sense that as the quarter progressed, bookings deteriorated, but then what about the shorter lead time orders that you could not meet in the last quarter?

Well, let me see if I can clear some of the confusion. So we started the June quarter with a fairly strong backlog, I recall up 9% or so, and then we got reasonable bookings in April. So April was a good month. But bookings slowed down significantly in May and then dramatically in June. The bookings were so low that if our orders from those bookings were normally aged in terms of near-term and outer-term, the quarter would have been very low. But the percentage of bookings that aged into the quarter were quite high. And even though we were not able to meet some of the bookings, some of those orders because of short lead time, we still beat the quarter. From an original guidance of minus 6% at the midpoint, we came in at minus 1.3%, which means we did meet a lot of the orders, but we still left a large amount of delinquent. And whatever was delinquent last quarter will get shipped this quarter. So today’s orders are not bad and we need to ship them. But since the bookings were so near-term, we started the quarter still down 8% from last quarter. And now the bookings are strengthening; bookings have largely – the slope of the bookings has been higher day after day in July. And therefore, we think at the rate the bookings are now, and continuing to increase, the shipments will improve from the minus 8% at the start of the quarter to the minus 4% at the midpoint that we’re guiding to. Does that make sense now?

It does, Steve. And if I just could ask one more clarification. Does that mean then that the visibility as you stand today is better than what it was at the same point in the prior quarter?

I don’t think visibility is any better. I think visibility is very low. That’s why it’s improved from May and June, but it hasn’t improved from March and April. Those had very strong bookings. The pandemic has dragged on longer and longer, and now there is no end in sight; nobody knows what’s going to happen. In many states, it’s re-emerging. Some countries are still going higher every week. So now the customers and distributors are not giving long-term orders. It’s slightly better than it was in May and June. The bookings are higher, and we believe it may continue to improve in August and September.

And I’m just going to add on to what Steve said there, just to confirm that the 9% that he is quoting in terms of our opening backlog entering the June quarter, that is the accurate number for comparison purposes compared to the minus 8% or down 8% heading into the September quarter.

So that’s a good comparison where June quarter started up 9%, and September quarter is starting down 8%.

Got it. Thank you.

Thank you. The next question will come from Craig Hettenbach with Morgan Stanley. Please go ahead.

Yes, thank you. Steve, just a question, just from a geographic perspective, the initial growth was driven by China, and as you mentioned, coming back from Chinese New Year. Do you think some of the China strength is sustainable? And then also, how are you feeling about other geographies like Europe and North America?

Yes. So China was certainly stronger last quarter than we expected. But China doesn’t live in isolation. China is affected by how other parts of the world do. And so as we go into the September quarter, it is still doing well, but we anticipate that weakness in Europe and weakness in the Americas would have some impact on China, and that’s all baked into the guidance that we have built.

Thank you. The next question will come from Harsh Kumar with Piper Sandler. Please go ahead.

Hey, Steve. So I’m going to ask about what everybody else is talking about. So it sounds like there’s good demand, but it sounds like towards the end of last quarter, you saw short-term demand, but now you’re seeing the customer pivot completely and they are starting to place orders. So my question to you is, as you guys talked, you guys do a great job. You’ve got lots of customers. You do a good job keeping up with them. What do you think is making the customer flip in this manner?

I think it’s all COVID-19. Customers are not sure. There is a resurgence of COVID in certain countries and certain states in the United States, and customers and distributors have low backlog from their end customers. Our direct customers are not really sure what the run rate would be. So we’re getting frequent orders for short-term delivery; they have the demand today, and they need to build a product to deliver to their customer, but they do not know whether that is sustainable in September, in October, in November. So we’re getting – we’re not getting as many longer-term orders to fill the pipeline. But we’re getting enough orders to have the strong billings as we go. As we saw last quarter, there was enough strength in the short-term orders that the billings were good and we ended fairly strong. And for all, we know that could happen this quarter, but we can’t say with certainty today with our backlog being low compared to the same point last quarter. We could get enough chance to fill the quarter, but there is lack of visibility. Therefore, we can’t guide with that certainty.

Fair enough, Steve. And from my follow-up, your revenues are down quite a bit based on your guidance, but your margin is pretty steady, pretty stable sequentially. Just curious if you have any thoughts on that?

Well, so you should look at the results and look at it a little bit year-over-year. So when you look at year-over-year, we’ll be kind of much more than the pack overall in the semiconductors and actually, year-over-year guidance for September is better than really most of our microcontroller and analog competitors. So, everybody’s seasonality is different. Our automotive business is only about, Ganesh, is it 12 now?

It’s probably 13%, 14% after the last quarter.

Yes. So, our automotive business is about 13%, 14% of our business and some of our competitors, it’s 40%, 45%. So, they took a much larger hit when automotive went down. Automotive was down 40% or so in the industry last quarter. So they are seeing a much larger recovery; our overall business is holding up pretty well. This quarter, we’re doing worse sequentially, but if you look at year-over-year, our results are better than all of our larger competitors, TI and others. And as far as the question on the margin is concerned, I mean margins, there have been a lot of moving parts, internalization, more advanced technologies, and restructuring of our factories we have talked about before. So, lots of things have been brought to bear, which has been a tailwind on margins, and this is really the best gross margin and operating margin performance of any cycle at Microchip, driven by all these self-help initiatives we've undertaken. When this business recovers and goes back to a new record on the top line, I think you will see record growth in operating margins.

Thank you. The next question will come from Shawn Harrison with Loop Capital. Please go ahead.

Hi, thanks for taking my question. Just a quick clarification, and then a follow-up. What was the underutilization charge this quarter, Eric?

The underutilization was about $13.9 million. That’s right in line with what it was in the March quarter. So flat-flat canceling.

Steve, to kind of beat the dead horse on the demand environment. But are there end markets where you’re seeing sharper contractions in demand? We know automotive production will be up sharply in the September quarter. But where are you seeing maybe, a contraction or more volatility in the bookings rate? If you could give some end market perspective, that would be helpful.

Ganesh? I’ll give it to Ganesh.

Yes. So in my prepared remarks, I gave you some flavor of by different end markets what are we seeing in the June quarter? As time goes on, some of these are going to start reverting to normal, which we think for example, data center, and work-from-home related items. You don’t need to continue to have a high level after you’ve gotten past the first several months of buying what you need. And those that were below in the initial phases, like automotive and industrial should be the ones that begin to recover. We’ve already seen the automotive parts put a bottom in the June quarter, and we’re expecting September to be good and we’re expecting December to be good and likewise, in some of the other segments. So, medical was another example, where some parts of medical did really well because of COVID-related items. Other parts, the elective parts got pushed out because people are not willing to go out of their homes for elective surgeries. Elective will come back; you can’t push it out forever. So that will be the general strength in these markets as time goes on.

Thank you.

Thank you. The next question will come from Gary Mobley with Wells Fargo Securities. Please go ahead.

Hey, guys. thanks for taking my question. I wanted to start with some questions for Eric. I wanted to ask about OpEx, it looks like for your guidance and what you delivered for the first quarter, you’re somewhere just south of $300 billion per quarter, that’s down, I believe more than 10% from last year. How much of that is the salary cuts in various other OpEx decreases like lower travel and just trying to get a sense of what oral might look like for you guys on the OpEx side once things begin to turn out?

So, the salary cuts, when at the levels we implemented, we quantified those last quarter, being about a $21 million per quarter run rate, that’s pulled out. And Steven talked about us giving some of that back to employees this last quarter because the results were really quite good. Things like travel are significant, and what I would say is, some of that is probably going to be more permanent than temporary. Some of that will come back, but we need to manage appropriately given where top-line growth is.

Okay. The follow-up, I wanted to ask about the debt structure; you guys refinanced and extended the maturity of a pretty hefty amount of your debt. As a result, your debt interest expense, the new norm might be substantially lower. Can you speak to what the new norm may look like for net interest expense and as well, given the low-interest rate environment that we’re in, what the additional opportunities might be to draw down your cost of capital?

Sure. We were active in the debt capital markets and in the quarter; we issued $2.2 billion of senior secured notes and paid off a bridge loan, paid off some of our converts and then used the remaining funds to pay off amounts under a line of credit. The guidance that you’ll see in our guidance table on the press release for other expenses, which is most of that is interest expense, is about $78 million on a non-GAAP basis for the quarter, and that’s a pretty good run rate since all these debt transactions had occurred last quarter and are factored into that guidance. And obviously, we’re using a significant amount of the cash that we’re generating to pay down debt early, everything beyond the dividend payment. And so Steve mentioned in his prepared remarks that in the current quarter, we expect to pay down another $300 million of debt. The debt is coming down nicely. We’ve done a lot to remove some of the dilution that comes from those convertibles that we’ve retired and we’re pretty happy with the transactions executed in the March quarter and June quarter. That ongoing run rate is about $78 million, and that will reduce as the interest expense comes down through debt repayments.

Thank you for the question. The next question will come from Chris Caso with Raymond James. Please go ahead.

Yes. Thank you. Just a couple of clarifications here. Your revenue guidance is suggesting about a 6% year-on-year decline with all of the puts and takes that we’ve talked about. Do you think that down 6% a year is an accurate reflection of what your customer’s consumption really is that sort of the baseline that we should be using here? And as we look forward into the December quarter, based on what you’re seeing in bookings, does that provide you with any degree of confidence that we’d see a sequential increase as we go into December? Or is that just too tough to call given the short nature of the orders that you’re receiving now?

I’ll take the first part of that question. The revenue based on selling that we report, we also tell you the end-market demand number, which is based on sell-through. They’re not that far apart now; those two numbers come fairly well together. If we’re down 6% in September quarter guidance versus September quarter of last year, that basically represents the market demand today. The second part was, what do we expect for numbers? Is that what you’re trying to say?

Yes. And given the fact, it sounded like the orders improved in July, I suppose that filling into the December quarter. But that you also mentioned that the order rates were – the aging of the orders was very short – it was very short. So perhaps you’re not getting the same visibility that you’re getting now that you would in a typical quarter. And perhaps that makes it more difficult to call.

I would say, in this kind of environment, we can barely call September; we can’t really call December. It will depend on what happens in the COVID situation; does the vaccine come out, will the fears go away? Do factories remain open and schools open? There is a lot of ground to cover between now and October before the December quarter starts. So I would say, I’m not willing to say much about December yet.

Thank you. The next question will come from Raji Gill with Needham and Company. Please go ahead with your question.

Yes. Thanks. You might have answered this in the past question, but just to kind of repeat. So we entered into the June quarter, we felt kind of a dramatic reversal from plus 9% going to minus 1.3%. And as we go into September, we’re seeing a reversal in the other direction going from minus 8% to about minus 4%. And so those were reversals either positive or negative. If you were to sum it up, it’s primarily based on this complete lack of visibility that your customers are getting and basically operating on very short lead times.

It’s basically there. We serve six end markets. Every end market is affected differently by COVID-19. Automotive being the worst and industrial being the next; on the other end, the best market was data center and medical, for some of the work-from-home computing. So each market is affected very differently by COVID-19. And backlog almost by end market, how the customers are behaving is quite different. So we are seeing today, the bookings today are not bad for what we need to ship this week and next week. But we’re not getting enough bookings to fill the next quarter, especially for the October quarter, so we expect that we will get plenty more, but lastly, all driven by COVID-19.

And so my follow-up, in terms of the gross margin; with revenue being down 4% sequentially, gross margins are holding flat sequentially despite revenue declining, even though data center is appearing to revert back to normal patterns. I presume data center might be a higher gross margin product. So can you just talk a little bit about the puts and takes in terms of the mix shift that’s happening – utilization rates that are happening? Why is margin being flat, which is a good thing, despite revenue coming down?

So Eric, do you want to take that one?

Sure. I can. So just maybe start by reiterating that we’re pretty proud about how the gross margins have held up. The last couple of years we’ve experienced the various things like the China trade and now COVID. Even with our $13.9 million underutilization charge, we still posted a 61.7% gross margin this last quarter. So there’s always things with product mix that impact gross margin utilization levels. We see pretty good stability this quarter; the midpoint of guidance, as you said, is flat sequentially. We’ve given a broader range of gross margin guidance than we normally do between 61.2% and 62.2%. So with a revenue guidance range also wide that we are guiding between flat and down 8%, there are lots of puts and takes, but we’re continuing to do all the right things to keep costs under control, bring things in-house where we can to improve the cost structure. Gross margin is really a highlight of the cycle in terms of maintaining stability.

Thank you.

Thank you. The next question will come from William Stein with SunTrust. Please go ahead.

Great. Thanks for taking my question. Steve, in the press release and in the comments that you made in your prepared remarks today, you seem to attribute the slower pace of bookings, at least partly to the resurgence in COVID. And I think what some investors are concerned about is that instead, the slowdown may be related to customers having over-ordered in the recent past, Microchip’s delivery against that, and then customers have to digest it. Meanwhile, you seem to have had some pretty deep conversations with customers to figure out sort of end market expectations for the full year. So I’m wondering if perhaps you have a sense from those discussions, what customer inventory levels are like now? It seems to me if they’re ordering on very short lead times, they’re probably ordering for production and not for safety stock, but any insight in this regard would really help. Thank you.

Well, we do business with 120,000 customers and long tail. Well over 100,000 of them buy from hundreds of distributors around the world. We’re not aware of any broad-based holding of inventory by our customers, and our distributor inventories are still in the range of being 15-year lows. Again, with 120,000 plus end customers, we’re really not able to assess the inventory situation in each one of our customers, but we have a generally good sense of the inventory in the market. We’ve done a good job of keeping our lead time short and maintaining our delivery performance at a reasonable level. If the customers were to hold their inventories in the prior quarter or so, we wouldn’t be getting so many short-term requests for orders. In many cases, customers are paying expedite charges to get those parts; and there’s no reason they will be paying for expedited charges if they didn’t need them for production. In many, many cases, we’re delivering right to the factory floor, and some customers are short-circuiting shipment methods to line up the order to the factory. So, if anything, inventory is not high out there; inventory is low.

Thank you. The next question will come from Chris Danely with Citigroup.

Thanks, guys, for squeezing me in. Just a quick one. Can you give us approximately what percentage of revenue goes through China and how that’s done over the last few quarters?

Yes, so it’s 21%, 22% of our revenue shifts into China. And obviously there’s some of that that’s local consumption and some of that that comes back to the Americas or Europe for consumption, but it’s in that 21%, 22% range.

So, Chris, in the June quarter, China revenue snapped back to a higher level as the COVID-19 situation improved in China and business activities supporting local consumption appear to be much more normal in China.

Thank you. The next question will come from Harlan Sur with JPMorgan. Please go ahead.

Hi, good afternoon. Thanks for taking the question. In response to the muted demand environment back in the June quarter, you guys did cut back the number of manufacturing hours for your fab employees in your two U.S. fabs. I think it went from like an – it went from like a 13-week work week – work quarter to like an 11-week work quarter. What’s the demand trend scheme muted? Are you guys continuing to drive an 11-week manufacturing work quarter? Or are you guys taking down work hours and utilizations further here in the September quarter? And then just as a follow-up, it looks like the Philippines is reimposing some of the regional lockdowns and the resurgence of COVID-19 is just having an impact on the Philippines test operations.

So, I’ll take that first part of the question. I think you may have missed the comment earlier, but I did say in my remarks that actually our inventory last quarter came down 217 days from 120 days before. Remember, we went into the quarter guiding to be down minus 6%. So if you were down minus 6%, our inventory would have gone up, which we did not want, so we put the rotating time off in the factory at least in the two largest fabs to allow operators to take some time off. We did better than projected because revenue was only being down minus 1.3%, and we cut back on the production. So the combined effect of that is that our inventory actually came down to 117 days and we have now adjusted the factory schedule. If we’re no longer working through short hours, and there are lots of small labs that we inherited from Microsemi around the world in Boston and Ireland and Germany and other places. Those are all small labs, and each one has their own schedule. Some of them are working short weeks because demand on certain products is weak. But the big plants are no longer working short hours. The second part of your question was the Philippines. Ganesh, you want to take that one?

Yes. So we are aware of the adjustments the Philippines is making. What we have not given you much color on is, at the May conference call, I mentioned that we had people who effectively lived in the Philippines factory; we ran our operations there for a significant portion of certainly March and April. At its peak, we had about 850 employees living in our factory to be able to work around constraints. It has come down since then; we still maintain a force of about 300 people that are there, that gives us strategic flexibility in any short-term constraints. And so we have planned for where this might go and what other actions may be taken, and that we are not, unless something different happens, but we expect to have control over what we need to do while keeping the Philippines running.

Yes. Thanks, Steve. Thanks, Ganesh.

Thank you. The next question will come from Vijay Rakesh with Mizuho. Please go ahead.

Yes. I guess good execution in a tough environment. Just wondering on your September quarter guide for down four to the midpoint, are you seeing any particular weakness when you look by segment? I’ve seen storage in the computer data center being a little bit more weaker or on industrial to give some more color then?

Ganesh, we answered that question before. Go ahead, take it again.

So, as I mentioned, some of the segments that were strong in the June quarter were driven by work-from-home and medical type of activities, which had a surge of demand that was required. So, that had us running in the June quarter to try and catch up with a lot of new orders that came in as well. We are anticipating the trends; we’re seeing some of that surge subside and demand begins to revert back to normal at that point in time. So in that sense, I wouldn’t call it weak demand, but I would call it, it doesn’t have the surge that the June quarter had required as you continue to go long in time. Likewise, on the opposite side, some of the things that were really weak, automotive being one such example, should also begin to correct in the opposite direction when it begins to make up for some of that weakness as factories run and demand returns, which will strengthen that part of business.

Got it. I know you’ve mentioned not being able to meet all the demand coming through given the short-term nature of these orders, spurt of orders, I guess. Do you see any risk of losing orders or losing share, or just wondering if that’s part of it or is it just limited visibility on the part of the customer? Thanks.

These are all proprietary products. These aren’t products that you switch overnight and go between suppliers. So, no, we don’t see any loss of share in what’s going on. As I said, we’re working constructively with our customers to try and get the best visibility they have to us as well and to serve them in order to meet their demand requirements. These are short-term issues caused by the demand and supply shocks in the system. I don’t expect these to be long-term issues.

Thanks a lot.

Thank you for the question. The next question will come from Christopher Rolland with Susquehanna. Please go ahead with your question.

Thanks for the question. And this one’s really for Steve. Switching gears, we now have ADI acquiring Maxim. Do you see this changing anything for the analog market? And what are your feelings generally on consolidation? Do you expect to continue this pace or even accelerate during COVID? And if you had a view of valuations for targets in the industry right now, that would be appreciated as well. Thank you.

Okay. Well, thanks for the question. We ourselves do not see any threat from the proposed acquisition of Maxim by ADI. They’re both strong competitors in the analog space and we compete against both of them on a regular basis. Anytime an acquisition happens, we always see incremental opportunities that arise because sometimes the customer wants to defend sources or don’t want to consolidate all their business with ADI and Maxim as they become one. So some opportunities appear that we’ll be able to take advantage of. In terms of the merger environment, it really – it looks at times like it could slow down. If large acquirers are digesting at one time, it looks like it will be difficult to get approvals from China, but then we got a flurry of approvals. And now it is Maxim and Cyprus got approved. So if China continues to approve these deals, and there are still buyers willing to acquire, then the consolidation in the industry will continue. I think that’s really for sure. The fundamental issue is this: if you look at it over a long period of time, the overall growth of the semiconductor industry has been low to mid-single-digit growth rates. It’s a tough environment to operate in. Anytime the industry struggles on the top line, the stronger will acquire the weaker, and consolidation will continue, so that’s really my view. As for valuation question, look at the valuation Cyprus went for and Maxim, and it keeps going higher and higher. For most targets in the remaining areas, their stock price already reflects significant acquisition premiums. But you wouldn’t convince their boards and management that the acquisition premium is in there, and that’s what drives our very, very high valuations. So that’s a problem.

Thank you. The next question will come from David O’Connor with Exane BNP Paribas. Please go ahead.

Great. Thanks for sneaking me in, guys. Maybe just a quick follow-up from a previous question, Steve. Can you just remind us what the order mix is? What percentage of orders are typically short lead versus long lead time, both historically versus currently, and I have one quick follow up. Thanks.

We don’t have the numeric, and I don’t think we would be willing to share that. It changes a lot week-to-week and month-to-month. It’s a fluid situation when you’re working with 100 of distributors and 120,000 plus customers. So we wouldn’t share that indicator.

Okay. Fair enough. And as my follow-on, last quarter you said that the U.S. Department of Commerce export ruling should be pretty much straightforward for you guys; you called out I think military, maybe some attention there. Is there anything that popped up from the implementation that you went to that was unexpected? Thanks.

Yes, there were no issues. There were obviously administrative procedures that need to be put in place or have our partners put in place, and all of that is done and behind us.

That’s helpful. Thank you.

Thank you. The question will come from Craig Ellis with B. Riley FBR. Please go ahead.

Yes. Thanks for taking the questions, guys. And the nice job on the execution of the quarter. Steve, I wanted to ask a question; I’ll start with you. It may ultimately go to Ganesh, but clearly, the company has executed a number of things tactically with COGS management and OpEx management to really protect margin leverage at historically high levels through last year, so now this year’s crisis. The question is, as we look ahead and think about things that the company might be doing, what are the ongoing continuous efforts to drive structural improvement in COGS and OpEx versus some of the things that may have some unwind? Employees going back to full salaries eventually as demand normalizes. How do we think about gives and takes there? And maybe you can just list for us what some of the key longer-term drivers for contraction in OpEx optimization are? That would be helpful. Thanks, guys.

Go ahead, Ganesh, if you want to take that?

So, obviously there are some costs that are short-term costs that we have taken out. We’ve listed many of them, I commented long, long, and as the fee revenue recurring is you should expect that some of those costs will come back. And you know, historically we have been disciplined about how we bring back some of these costs as revenue returns. You can go back and look at other cycles in terms of how the percentage of revenue we manage our operating expenses. I think one thing which we will do different as they come out of this crisis is also look at what did we learn out of this crisis in terms of managing more effectively from an operating expense standpoint. And there we will get into changes in methodology, Eric mentioned to you that perhaps travel will not be as high a rate as they used to; switching to more virtual methods for customer training and various other things as well. We are committed to the long-term targets we have, which is to get operating expenses down into the 23% range. That’s part of our 40.5% operating margin target that we’re working towards. Every bit and every quarter we learn things we can do more effectively where it’s in research and development, and sales and marketing or in the overall general and administrative areas that sequentially brings things a bit-by-bit down. We have been working on the last bit of the integration for Microsemi, which is predominantly at this point focused on business process and IT related items, and we’re about nine months away from wrapping that up as the last bits of those get done. There’s constant improvement incorporated into our DNA that is working on these in all three areas.

Thanks for letting me ask the follow-up. Ganesh, you had mentioned in your prepared comments that you thought FPGAs would be up pretty significantly in the September quarter. I’m just kind of curious, is that a business that’s more exposed to the auto market? And so what we’re seeing is weak June in auto to strong June and September, and that’s driving it or are there other drivers there? Can you kind of elaborate please?

So exposure to automotive for the FPGA business is low at this point. It’s one of the things that Microchip brought to that business with our historical strengths in terms of how we take advantage of each other’s end-market strengths. If other parts of the market respond, that provides growth in the September quarter. We even expect that there will be one large customer that created a bounce for a lower revenue in the June quarter and while we don’t expect to recover in the September quarter, we believe the other improvements in business will more than offset that in September. But again, it’s not automotive.

Thank you. I will now turn the conference back over to Steve Sanghi for any closing remarks. So there is one other indicator I wanted to give you. We hadn’t planned on it, but I think with all the questions we got in how the bookings happen in the last quarter versus what’s happened in this quarter, I’m going to go on a limb and give you this number. The July bookings were 15.5% higher than May bookings per day. Every month is not equal, there are minor differences, and July bookings were 36.6% higher per day than the June bookings. So you could see how last quarter bookings decreased in May and then really fell precipitously in June. But the bookings were very short-term oriented. So we made the quarter; we actually beat the guidance in last quarter, but it started this quarter in a hole. This quarter, however, July bookings were 15.5% better than May and 36.6% better than June. That’s why we have the confidence that even though we started down 8%, we’re going to end up better. Hopefully that helps you a little bit. With that, we will be attending a number of virtual conferences in the coming days and weeks. So we will talk to some of you in those conferences. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today’s event. Now disconnect your lines for the rest of your day.