J. Eric Bjornholt - Chief Financial Officer & Vice President Ganesh Moorthy - President & Chief Operating Officer Steve Sanghi - Chairman & Chief Executive Officer.

Craig M. Hettenbach - Morgan Stanley & Co. LLC Vivek Arya - Bank of America Merrill Lynch Christopher Caso - CLSA Americas LLC John William Pitzer - Credit Suisse Securities (USA) LLC (Broker) Harlan Sur - JPMorgan Securities LLC William Stein - SunTrust Robinson Humphrey, Inc. Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc. Rajvindra S.

Gill - Needham & Co. LLC Christopher B. Danely - Citigroup Global Markets, Inc. (Broker) Harsh V. Kumar - Stephens, Inc. Craig A. Ellis - B. Riley & Co. LLC Lena Zhang - Summit Redstone Partners LLC.

Good day, everyone, and welcome to this Microchip Technology First Quarter and Fiscal Year 2017 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. Eric Bjornholt. Please go ahead, sir..

Thank you. Good afternoon, everyone. During the course of this conference call, we'll 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 and fiscal 2017 financial performance, and Steve and Ganesh will then give their comments on the results, discuss the current business environment as well as our guidance, and provide an update on the integration activities associated with the Atmel acquisition.

We will then be available to respond to specific investor and analyst questions. I want to remind you that we are including information in our press release and this conference call on various GAAP and non-GAAP measures.

We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at www.microchip.com, which we believe you will find useful when comparing GAAP and non-GAAP results. I will now go through some of the operating results, including net sales, gross margin, and operating expenses.

I will be referring to these results on a non-GAAP basis prior to the effects of our acquisition activities and share-based compensation. Non-GAAP net sales in the June quarter of $844 million were well above the high end of our guidance and were up 48.5% sequentially from net sales of $568.4 million in the immediately preceding quarter.

Non-GAAP net sales were $44.6 million higher than GAAP net sales as we are reporting non-GAAP net sales on a full sell-through revenue recognition basis, while GAAP does not recognize revenue on sell-through of product sitting in the distribution channel on the date an acquisition occurs and additionally, some of the Atmel distribution network is on sell-in revenue recognition of the GAAP, primarily in Asia.

We will convert the Atmel sell-in distributors to the Microchip contracts when business systems integrate later this year. Our non-GAAP results are being presented on a full sell-through basis to provide investors with a better view of the true end market demand for our product.

We have posted a summary of our revenue by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were 55.8% in the June quarter and above the high end of our guidance, which was 55.2%.

Non-GAAP operating expenses were 28.4% of sales, below the bottom end of our guidance range of 29.1% and non-GAAP operating income was 27.4%, well above the high end of our guidance of 26.1%.

Non-GAAP net income was a record $194 million, resulting in record earnings per diluted share of $0.84, which was $0.05 higher than the high end of our guidance of $0.79. On a GAAP basis, net sales were $799.4 million, and gross margins including share-based compensation and acquisition related expenses were 43.6% in the June quarter.

GAAP gross margins include the impact of $7.9 million of share-based compensation, $23.4 million of GAAP gross margin effect from the distributor revenue adjustments I mentioned earlier, $90.5 million acquired inventory valuation cost and $0.8 million of other items.

Total operating expenses were $407.6 million and include acquisition intangible amortization of $80.2 million, share-based compensation of $51.7 million, $13.7 million of acquisition related and other costs, and special charges of $22 million.

With all the purchase accounting adjustments, the Atmel acquisitions related charges and the related tax impact, we had a GAAP net loss from continuing operations of $109.2 million, or $0.51 per diluted share. In the June quarter, the non-GAAP tax rate was 8.3% and the GAAP tax rate was negative 20.4%.

We expect our long-term forward-looking non-GAAP effective tax rate to be between 8% and 9%. Moving on to the balance sheet. Our inventory balance at June 30, 2016 was $518.4 million, including $80.9 million of fair value markup on the Atmel inventory as required for GAAP purchase accounting.

Excluding the purchase accounting adjustments Microchip had 107 days of inventory at June 30, 2016, which puts our inventory in an outstanding position. Excluding purchase accounting adjustments, inventory at our distributors was at 32 days, which is flat to the March quarter levels.

The cash generation in the June quarter, excluding our acquisition activities, our dividend payment and changes in borrowing levels under our revolving line of credit was $184 million. As of June 30, the consolidated cash and total investment position was $601.8 million.

Our borrowings under our revolving line of credit at June 30 was $1.922 billion, excluding dividend payments, changes in borrowing levels and our acquisition-related activities, we expect our total cash generation to be approximately $175 million to $200 million in the September quarter.

Prior to the Atmel acquisition closing, we had provided a three-year forecast for how we expected Microchip's total net to EBITDA to trend over time. In those prior forecasts, we had projected that our total net leverage at the closing of the Atmel transaction would be 3.51 and improve to 3.04 times by March 2017.

We are pleased to report that we are ahead of schedule on this plan with our total net leverage ending the June quarter being 3.22 times. Capital spending was approximately $18.5 million in the June quarter.

We expect about $30 million in capital spending in the September quarter and overall capital expenditures for fiscal year 2017 to be about $110 million.

We are selectively adding capital to support the growth of our production capabilities for our fast-growing new products and technologies and to bring in-house more of the assembly and test operations that are currently outsourced. Depreciation expense in the June quarter was $30.6 million.

For several years prior to fiscal 2016, Microchip's dividends paid to its shareholders had been treated as return of capital, as Microchip did not have earnings and profits in the United States. In fiscal 2016, about 60% were treated as taxable dividends and about 40% were treated as return of capital.

In fiscal 2017, we expect our dividends paid to shareholders to be treated as return of capital. Please note that the first quarter of calendar year 2016 will have approximately the same 60% taxable dividend and 40% return of capital split as of fiscal 2016 dividends I mentioned earlier.

We will keep investors updated if anything changes on our expectations of the dividend treatment as we progress throughout the year. I will now ask Ganesh to give his comments on the performance of the business in the June quarter.

Ganesh?.

Thank you, Eric, and good afternoon, everyone. With the addition of Atmel results for the June quarter and the significant size of Atmel's business, the normal quarter-over-quarter or year-over-year comparisons we've typically provided are not quite as meaningful.

Therefore, today I shall give you more of a qualitative summary of our product line performance along with select quantitative summaries and also provide you an update as to how we're progressing with the Atmel integration. Now let's take a closer look at the performance of each of our product lines starting with microcontrollers.

Our core microcontroller business, excluding Atmel as well as Atmel's microcontroller business, were both up strongly in the June quarter, as compared to the March quarter, as we continue to experience broad-based growth in our business.

Strength in Atmel's microcontroller business was in part due to seasonal strength and in part because customers with completed designs felt reassured about Microchip's plans going forward and, therefore, launched their new product with confidence.

All microcontroller business units for Microchip as well as for Atmel outperformed our expectations in the June quarter. Microcontrollers had over $2.15 billion in annualized revenue, represented 63.7% of Microchip's overall revenue in the June quarter. We made significant progress integrating Atmel's microcontroller business over the last quarter.

We combined Atmel's 8-bit AVR microcontroller business along with Microchip's 8-bit PIC microcontroller business under an experienced Microchip leader. Atmel's 8-bit AVR microcontroller business, which is still very popular among a broad-based of engineers, have been starved of investment and hence atrophied over the last five years.

We have reprioritized resources to reinvigorate this product line, established clear new product roadmaps, formed combined teams to execute the roadmaps and expect to release a steady stream of innovative new AVR microcontrollers that will lead its resurgence.

We have also received very positive feedback from AVR customers who have longed for more innovative new products and were concerned about support for the existing products. All this while we continue to develop and introduce innovative new 8-bit PIC microcontrollers at a steady pace as before.

We also combined Atmel's SAM 32-bit microcontroller business along with Microchip's PIC 32-bit microcontroller business under an experienced Microchip leader.

We have established clear joint product roadmaps, formed combined teams to execute the roadmaps, and expect to continue to release a steady stream of new, innovative PIC 32 and SAM 32 microcontrollers to drive future growth. We carved out Atmel's 32-bit microprocessors as a separate business to give it additional focus.

This business continues to be led by the Atmel executive who used to run the business before, who is working well with the Microchip leadership team to grow this very profitable business.

This business is a good example of finding the right Microchip answer for the combined company whereby Microchip terminated our investment in a microprocessor product family that started prior to the acquisition and instead adopted Atmel's microprocessor roadmap as our future roadmap.

We combined Atmel's wireless business and Microchip's wireless business under an experienced Microchip leader. This business was running at a large loss and required significant surgery to combine roadmaps, reduce redundant spending and rationalize priorities.

We have made substantial progress towards this end and expect to finish the restructuring for this business in the December quarter.

Atmel's touch business was organizationally and operationally split into an automotive an and industrial business which has consistent growth and profitability characteristics which we will retain and a mobile business which does not fit our business goals as we have been marketing for sale to interested buyers.

An area of opportunity we identified early in April which we have worked diligently since is pricing discipline. While Atmel has many strong products and technologies, tragically in too many cases these products were sold at prices that did not recognize the value of these products.

We have implemented Microchip's disciplined pricing process to ensure that not only are we competitive but that we also get appropriately rewarded for providing innovative solutions that enable our clients to achieve success in their business goals.

We remain pleased with the performance and competitiveness of our 8-bit, 16-bit and 32-bit microcontrollers in the broad-based market, which have been augmented by the addition of Atmel's products.

We continue to gain market share and have the new product momentum and customer engagement to gain even more share as we further build the best performing microcontroller franchise in the industry. Moving now to our analog business.

Our analog business, excluding Atmel as well as including Atmel, were both up nicely in the June quarter as compared to the March quarter.

Microchip's vast portfolio of analog products is one of our greatest growth opportunities as our sales teams and channel partners incrementally attach them to Atmel microcontrollers at customers and applications that we otherwise did not have visibility into.

Our analog business at approximately $860 million in annualized revenue represented 25.5% of Microchip's overall revenue in the June quarter. We continue to develop and introduce a wide range of innovative and proprietary new linear, mixed signal, power, interface, and timing products to fuel the future growth of our analog business.

And now have the line of sight for analog to be a greater than $1 billion revenue business for Microchip. Moving to our memory products, our combined Microchip and Atmel memory business, which is comprised of Serial E-square memory products as well as SuperFlash memory products performed well in the June quarter as compared to the March quarter.

We made significant progress integrating Atmel's memory business over the last quarter. We combined Atmel's memory business and Microchip's memory business under an experienced Microchip leader. The product lines offer many substitutable products and while we will continue to support both product lines for customers who don't wish to switch.

For the great majority of customers we will converge to a best of breed memory product, which has the lowest overall cost and the best overall customer value.

We have also rationalized the going forward R&D investment to eliminate redundant projects either at Microchip or at Atmel, establish clear new product road maps and form combined teams to execute the road maps. In the memory business too, we identified early in April that pricing discipline was a significant improvement opportunity.

We have, therefore, implemented Microchip's disciplined pricing process for this business to, to ensure that we are competitive and don't chase bad business in the pursuit of profitless prosperity. Our sales integration is well underway with Microchip and Atmel teams reporting to common leadership in every region of the world.

We have begun extensive cross-training of the teams and we are actively working to ensure that we maximize the cross-selling of products for new customer design activity. We have also started franchising Microchip channel partners to carry Atmel products and Atmel channel partners to carry Microchip products.

We are in the midst of planning to integrate our business systems and are working towards making this happen in the December quarter.

We are also systematically reviewing our internal and outsourced manufacturing activities, as well as our overall procurement activities to find the efficiencies that will reduce cost and also position us better for future growth. All-in-all, I have to say that our first quarter of integrating Atmel has gone well despite challenges along the way.

Our thanks go out to many employees across the globe who have gone above and beyond to contribute to the rapid integration and help deliver synergy results that are ahead of forecast. Let me now pass it to Steve for general comments about our business, our guidance going forward, and some more about the Atmel integration.

Steve?.

Thank you, Ganesh, and good afternoon, everyone. Today, I would like to first comment on the results of the fiscal first quarter of 2017 and then provide guidance for the fiscal second quarter of 2017. I will also make comments b on the progress of integration for Micrel and make extensive comments on Atmel.

Our June quarter financial results were extremely strong. Our non-GAAP net sales, gross margin percentage, operating profit percentage, and earnings per share were all above the high end of our guidance.

Our non-GAAP earnings per share was $0.095 per share, better than the midpoint of our guidance and up 19.6% sequentially from the March quarter due to improving sales, gross margin, operating expense leverage, and accretion from both Micrel and Atmel. We achieved excellent results both from our core business at Microchip as well as from Atmel.

This was also our 103 consecutive profitable quarter. Last month we made our first 100 day assessment of Atmel, its products and its operations, and we shared them with the employees of Atmel. Today, I would summarize and share that first 100 day assessment with the investors and analysts. First, let me cover Atmel's strength.

Atmel has good products and technologies. This is what was visible to us from the outside when we competed with Atmel and we have confirmed that, in general, Atmel has very good products in microcontrollers, microprocessors, memory, wireless, high-voltage analog, car access, security and touch products.

As we have come up with common roadmap and common technologies to design future products, Atmel's products and technologies have strong presence in those joint roadmaps.

The vast majority of the people left at Atmel after our initial restructuring, we have found are strong in the areas of expertise, recognize that the business was run poorly and are eager to adopt our culture and create a strong, results-based future for the combined company.

Then as we look into Atmel's weaknesses, we have summarized those weaknesses in six major areas. First is accountability. Atmel had a culture of poor accountability. The dismal financial results of the last few years say it all. That is why we had to make drastic leadership changes at Atmel early on. Second area was poor teamwork.

Atmel did not have a culture of teamwork. Instead, the company was highly siloed into various business units and other functional groups. The business units, sales and operations did not constantly communicate to adjust the factory build rates to changing demand.

This routinely resulted in very high inventory buildup and significant inventory write-offs. We have put the entire company on a Microchip type of common incentive program that values sales growth, gross margins, operating expense, and operating profit.

With our managers role modeling the culture of accountability and teamwork, we believe that we will turn this situation around rapidly. Third area was that Atmel had a culture of high operating expenses, which routinely ran over 40% of sales. The culture was one of spending what is needed versus what can be afforded.

Atmel had a very top-heavy management structure with very poor accountability, leading to significant underperformance. Since the acquisition, we have removed 33 of the 41 vice presidents in the company. That layer is not needed and will not be replaced. Second, Atmel had a very poor operating expense discipline in R&D.

Many R&D projects were continuing despite low gross margins and poor return on investment. Combining the roadmaps of Microchip and Atmel, we terminated many projects with poor return on investment and restructured the expenses that were no longer needed.

And the worst performance of any business unit was in wireless where Atmel lost $32 million on sales of $40 million in 2015, all in the name of the buzzword, IoT, or Internet of Things. Microchip's IoT portfolio is very strong and we merged Atmel's wireless roadmap with Microchip's.

We have been doing substantial restructuring to get the expenses in line with what the business can afford and which is consistent with the merged roadmap. And third on the operating expense side was sales and distribution.

Atmel had a sell-in driven sales model and a commission-driven sales force that made commissions irrespective of company profitability. A few former sales employees have told us that the customers liked Atmel. Well, if you allow me to sell a large amounts of $1 bills for $0.90, I can get a lot of love from the customers too.

Microchip's customer relations are built on charging a fair price for our proprietary value-added products. There's nothing wrong with some healthy and constructive tension with customers on the pricing front. Our customer relations are generally healthy and our success can be seen in our numbers and our market share.

We have received some criticism from ex-employees that we're happy shipping at low prices and low margins. We believe that such criticism was expected from the employees who were vested in the status quo. The fourth area is swinging for a home run.

Atmel had a culture of swinging for the fences in terms of going after large accounts and often signed onerous contracts with them. Atmel often struck out and lost many of the designs or won them at very low gross margin. Microchip will expand Atmel's customer base and target a very broad base of 100,000-plus customers like at Microchip.

The fifth area is the lack of pricing discipline that Ganesh also commented on. Atmel had a very poor pricing discipline. We immediately expired a lot of low margin and negative margin quotes to bring some sanity to the pricing.

We have also implemented a new price book beginning July 1 and we now begin the hard work of implementing the new prices, customer by customer. We will see the positive effects on gross margins in the coming quarters. This is something we have done successfully in our previous acquisitions.

In case of Atmel, most of the products are proprietary and, therefore, we will not be concerned about losing a lot of business. We have also heard a concern that customers would have bought a lot of product early ahead of the price increases.

At the direct OEM customers, the pattern of customer orders and shipments into July has continued after the new prices went in effect. So the concern is unfounded. In case of distribution, we only recognize non-GAAP revenue on sell-through basis and we wrote up the distribution inventory to the new prices on July 1.

So any previously purchased inventory, if still on the distribution shelf, would have been marked up on July 1. The point of sale trends in July are not showing any noticeable negative effects from the pricing changes. And number six, Atmel made no investment in training and development of employees.

At the higher level of the company it was largely a revolving door with an average tenure of executives at less than three years. In contrast, the average tenure of executives at Microchip is over 20 years.

We make substantial investment in training and development of employees and then promote largely from within, thus retaining substantial talent base and experience. We have begun implementing Microchip's training and development curriculum at Atmel.

Now, after giving you this 100-day assessment of Atmel, now let me continue with deciphering the financial results of Microchip from the fiscal first quarter of 2017.

While we recognize that some analysts have interest in breaking down organic and non-organic net sales, we have made a decision to not provide the breakdown between organic and non-organic sales. We have seen such data largely misinterpreted.

In some of my interactions with investors, I have seen them taking our GAAP sales from the SEC filings, subtracting the non-GAAP sales from acquisitions that we broke out previously and then conclude that organic sales were down or flat.

GAAP net sales in the SEC filings ignore the sales out from distribution that are from the products shipped into distribution prior to the close of the acquisition. This confuses the investors since GAAP net sales look lower.

And if you then make the assumption that the sales from an acquisition was a given number that we provide, then the natural and wrong conclusion that you reach is that organic sales were down. This confusion is partially the result of wacky accounting rules on acquisitions related to distribution sales.

In case of Atmel, this will be even more confusing, because GAAP net sales in the SEC filings will be based on sell-in revenue recognition in Asia, while the non-GAAP net sales that we are focusing on is based on sell-through revenue recognition in Asia.

Now, when we acquire a company our focus is to grow the sales and earnings of the new joint company. And we focus our resources on the best opportunities from the combined company.

For example, in case of Atmel, as Ganesh also pointed out, we have fully combined each of the 8-bit microcontrollers, 32-bit microcontrollers, wireless and memory businesses of both companies.

Each of these business units are now headed by a Microchip executive, who is managing it as one business, taking the lowest cost product, manufacturing through to the lowest cost supply chain and then shipping it at the highest ASP opportunity irrespective of whether the die, assembly or test comes from core Microchip side or Atmel side.

Trying to artificially balance both businesses of Microchip and Atmel is less than optimum solution and makes no business sense once we are one company, and we will not do it. Therefore, we will refrain from providing a line-by-line breakdown of our results between core Microchip and Atmel.

We will, however, provide some useful nuggets of information on Atmel as well as Microchip. So here are some of those nuggets. We achieved all-time record net sales in our core Microchip business.

Gross margin from core Microchip business was very strong at 59.75%, up 130 basis points sequentially, and operating profit from our core Microchip business was 33.4% of sales. Gross margin on Atmel improved significantly from the March 2016 quarter prior to the acquisition.

March 2016 quarter, while never formally announced, was a very weak quarter in sales as well as gross margin percentage. Now, let us decipher the operating expense where we made very significant progress. Microchip's operating expense in the March quarter was $153.5 million, and Atmel's operating expense in the March quarter was $100 million.

So adding them together, our starting point is $253.5 million. The total operating expense in the June quarter was $246.4 million, a reduction of $7.1 million for the quarter, or $28.4 million annualized. Out of this $246.4 million OpEx, $6.4 million was attributed to mobile touch business which is an asset held for sale.

Therefore, the operating expense on our continuing business was $240 million per quarter, or 28.4% of continuing sales. With the combined effect of better than expected net sales, higher gross margin percentage and lower OpEx, we achieved an accretion from Atmel of $0.08 per share versus our guidance of 0 to $0.05 per share.

We worked very hard to make up for how much Atmel's business had atrophied prior to the close of the acquisition. On the core Microchip side, without Atmel, we achieved a record non-GAAP earnings per share of $0.76 per share versus the $0.72 per share midpoint that was embedded in our guidance.

So, again, summarizing, we achieved $0.08 accretion from Atmel, and the non-GAAP earnings per share on the Microchip side was $0.76 versus $0.72 per share, which was embedded in our guidance. By any measure, our June quarter results were stellar.

We performed excellently on our organic business, as well as from Atmel and we reversed the sales decline for Atmel, marking the March 2016 quarter as the bottom. One quarter does not make a trend, so we are working hard to make sure that it does become a trend. So, now let us go into the non-GAAP guidance for September quarter.

We expect total net sales, including Atmel, to be up between zero and 4% sequentially. We expect gross margin to be between 55.6% and 56.2%. We expect overall operating expenses from continuing operations to be between 27.2% and 27.9% of sales, marking another significant reduction in Atmel's operating expenses.

We expect operating profit percentage to be between 27.7% and 29% of sales. And we expect earnings per share to be between $0.83 and $0.91 per share. The earnings per share guidance includes an accretion from Atmel of between $0.09 and $0.11 per share.

Now, if you combine the accretion from Atmel for first quarter, which was $0.08 and the midpoint for the second quarter, which is $0.10, then $0.18 of accretion from the first two quarters against our guidance of $0.25 accretion from Atmel for the entire fiscal year 2017, the fiscal year 2017 guidance seemed like a gimmie.

So we are increasing the accretion target from Atmel from $0.25 previously to $0.40 now for our fiscal year 2017. We are not changing Atmel accretion guidance for the outer years yet. We have not yet completely analyzed how much of the upside is pull-in of the accretion and how much is upside. And there's likely some of each.

Moving to Micrel, we are essentially in the final stages of completing the integration. The last wafer starts in the Micrel 6-inch fab are being made this week. With the last wafer starts this week, we should be closing the Micrel fab in late October. This is about two months ahead of what we guided last quarter.

After closing the Micrel fab, we save approximately $26 million in annual wafer cost, which will find its way into the profit and loss statement over the coming quarters as we ship more and more 8-inch wafers and deplete the 6-inch inventory.

After we close the fab, the final operating profit model for Micrel will meet or exceed our long-term target of 33%. I also have an update on the sale process for the mobile touch business unit. As of the deadline to receive offers for that business last week, we have several offers for the mobile touch business unit.

We have a board review of the process later this week. Depending on the party we select and depending on the remaining diligence needed, we expect to be able to complete the sale of the mobile touch business unit well before the end of the calendar year.

With this, operator, will you please poll for questions?.

We'll go first to Craig Hettenbach with Morgan Stanley..

Yes. Thank you. First question – just encouraging to see the Atmel accretion level but there has also been some questions just on sales, so just your point that it bottomed in the March quarter, Ganesh also made the point that customer confidence is helping.

So anything else you could add in terms of context from a visibility perspective as you look at Atmel's sales as we go forward?.

We basically see no issues. We do not see a decline in Atmel sales. We think we have turned around the decline of Atmel sales rapidly. A lot of the sales decline was happening during all the time when Atmel was on sale, starting almost May of last year when the CEO first told the world that he was going to step down, which began the sales process.

And there were some sales decline related to the touch business even happened in the previous years.

We think the meetings we have had with the major customers, the messages we have given to the Street, the messages we have given to the sales force, the meetings we have had with the distribution, rapidly we have given the market confidence that number one, we're not obsoleting a large number of products like many times acquisitions companies tend to do.

Microchip has a culture of not obsoleting products and providing long-term service to the clients.

The only business we put on sale was just this mobile touch business which was a relatively small business and the other concerns, which actually investors had more than the customers, was what was going to happen to the 8-bit AVR business, what was going to happen to Atmel's microcontroller together with Microchip's microcontrollers, who were competitive.

All that has worked out extremely well. We have given customers the confidence that we're going to continue promoting those products, introduce new products; in fact, take many of the great features that we have added on our 8-bit microcontrollers, while Atmel's 8-bit microcontroller has atrophied.

We're introducing new products with many great features and giving the messages that the brand of Atmel AVR is here to stay..

Got it. Thanks for that color.

Just as a follow-up, on the manufacturing side, and understanding it's just one quarter, but any color on their kind of front-end wafer fab from a cost perspective, and then also potential synergies on the back end longer term?.

So we have found Atmel's wafer fab in Colorado Springs was a very cost-effective fab. It may be one of the most cost-effective fabs in the world at a 6-inch level. Not very many 6-inch fabs can effectively compete with 8-inch output where a lot of the Microchip output was 8-inch. This is a very competitive fab.

So, after a very thorough analysis – and we've got good manufacturing head on us, I think you've seen it over the years, we have decided and told the Colorado fab people and the community that we will keep Colorado fabs where some of the rumors were something else could happen. That's a very, very good fab. We're going to keep it.

We have – also using Atmel's 6-inch fab to transfer some of the more sticky Micrel 6-inch products where we had had trouble bringing them on to 8-inch. It seems like the 6-inch to 6-inch transfer has been smoother than the 6-inch to 8-inch transfer on just a handful of products. We're talking about two process technologies and a few products.

85%, 90% of the products from Micrel really have been transferred to Microchip 8-inch fabs, and it is really the Atmel 6-inch fab that came to the rescue which then allowed us to not only close the Micrel fab and actually close it two months ahead of the schedule we gave you last time..

And on the back end, Atmel has an excellent facility in the Philippines that adds to our two facilities in Thailand. We are continuing to operate that and intend to do that for a long time. There are no transfers yet of bringing product in. Those are all in the planning stages and as we get farther into the business integration, we'll do more there.

In the meanwhile, as I mentioned, we are working to get the best overall pricing when we have outsourced assembly or test, where either one of us is using a particular source, and that type of cost-reduction work which is quite common in the early stages of an acquisition..

Got it. Thank you..

We'll go next to Vivek Arya with Bank of America Merrill Lynch..

Thank you for taking my question.

I was just wondering, Steve, if you would call the current demand environment seasonal and if you could give us some color on end markets which are behaving at or better or different than what you would expect from a seasonal perspective in the current quarter?.

Well, I'm not going to call the demand environment anything. The demand environment is what it is, and based on the guidance we have given. Because any adjective I add to it and everybody tries to read that and apply that to the rest of the industry and other people and I'm just not going to do that..

And just in terms of end markets that you are seeing, which are different than – or instead of comparing it versus seasonal, if you could just give us some color on an absolute basis that as we look from Q2 to Q3 and we look at the midpoint of your outlook of about 2% sequential growth, what end markets could be above or below that number? Thank you..

We serve such a large number of customers and a broad base of applications that we're not end-market-focused on what we go do. So I think what you're seeing in both our guidance and the relative comparisons are, it's normal business. There is nothing that stands out as bad, or stands out at good. It's just normal..

Got it. And then just maybe as a follow-up, if you look at M&A, that has been a key part of your strategy longer term.

But with all the consolidation that has taken place in semis, do you see enough interesting targets to go after – I realize Atmel will probably occupy your attention for some period of time, but what's your view overall on the consolidation in the sector and do you see enough interesting targets to go after?.

Well, there is no shortage of interesting targets. The shortage right now I have is basically one financial shortage for the leverage which is already 3.22 as we reported today. So I don't really have sufficient more cash to do anything short term. And the second issue is the management bandwidth.

As you mentioned, it's really very, very busy on consolidating seven different business units of Atmel and all the financial and IT and other systems. So those are the challenges, financial as well as the management bandwidth. There is no shortage of target..

Thank you..

We'll go next to Chris Caso with CLSA..

Thank you. Good afternoon. First question is regarding some of your efforts to instill some pricing discipline. You talked about this at length in your prepared remarks.

How long does it take for some of this price discipline to work its way through the system and is that included in the accretion target that you've already provided or would that be potentially be a source of upside for those targets?.

Those are included in us taking the accretion targets up from $0.25 before to $0.40 now. They're not all driven by price. They're driven by just being so far ahead in the first two quarters and then modeling the third and fourth quarter.

Some of the price increases are embedded in there but it's really very hard to model it really, because it could take a few quarters for it to really get in based on new projects, new orders, new quotes, some of the old quotes have an expiry and so on and so forth. So it's probably at least a nine-months process..

Okay. That's helpful. As a follow-on question, obviously the business has changed quite a bit with the acquisition.

Can you help us in how we should think about seasonality over, say, the December quarter and even into the March quarter, how has the integration of the acquisition changed what we would be considered...?.

Well, first of all, we haven't seen a full year of Atmel under our clock. So the correct answer would be I don't know. But based on what we have seen, we believe that I don't think seasonality will change a whole lot. Q1, the calendar Q1 usually Microchip has been sequentially up in Q1.

And because of a little more consumer exposure, Atmel's Q1, calendar Q1 has not been up, has been down. But they're about less than half of our business. So you combine it together, I think you take a little bit from the Q1 and where you add it we've got to figure out where you add it. Maybe you add it in the June.

Maybe you add some in December, maybe we're not down as much. We've just got to kind of figure it out over time..

Okay. That's helpful though. Thank you..

We'll take our next question from John Pitzer with Credit Suisse..

Yeah. Good afternoon, guys. Thanks for letting me ask the question and congratulations on the strong result. I guess my first question is for either Steve or Eric. Stock-based comps in the quarter was a lot higher than I would have thought. It was a lot higher if I just added Microchip plus Atmel coming out of the March quarter.

So is there something related to the acquisition going on there and is close to $60 million a quarter the new baseline or how should I think about that?.

So there is a lot of Atmel-specific related activity in there related to – Steve talked about 31 of the 40 something VPs no longer being with us and change of control and acceleration of equity and things like that. So that had a significant impact on the share-based comp in the quarter. So that is not the ongoing run rate.

If you give me a minute I can kind of look up what it will be, estimated, for the next couple quarters and give you that as the baseline..

That's helpful. And then guys, maybe as my follow-on question, just going back to the $0.40 of accretion, Steve, you gave us $0.08 in June, you're guiding midpoint to sort of $0.10 in September. It sort of implies only $0.11 and $0.11 in the next two quarters, if I'm doing the math properly.

And just given sort of everything you've talked about on the hard work you guys have done on integrating Atmel, it seems like there could be significant upside to that.

Is there a reason why the accretion starts to level off here?.

I knew that you will get there..

No good deed goes unpunished..

No good deed goes unpunished. I think that's the answer..

Then maybe if I could just sneak one last one in, Steve.

Help me understand now with all the acquisitions under your belt where you think industry growth is and given the portfolio you have, how would you expect the longer term growth of Microchip to look relative to industry?.

Well, I think in most businesses, microcontrollers and analog, we have outperformed the industry for years and years, and by combining one of the two best microcontroller franchises, Microchip and Atmel, even though Atmel didn't perform financially that well because of a number of reasons that we highlighted, we did say that the products and technologies were good.

I think we are the strong microcontroller franchise, they are a very strong analog franchise; the whole wireless franchise, IoT and all that has gotten stronger with both of them combined and the memory franchise has gotten stronger, I think we should continue to exceed the growth rate of the industry, and gain market share in each of those business segments..

Okay. Thanks, guys..

So, just as a follow-up to your question on share-based comp, I'd expect share-based comp in the current quarter, this is a pre-tax number, to be somewhere in the $24 million to $25 million range and that would probably trend down a little bit as we get to the balance of the fiscal year on a quarterly basis..

Okay. Thanks, Eric..

So, from $60 million that you mentioned last quarter to $24 million kind of going forward, you could kind of see how heavily the company was top-heavy and how much the equity comp and acceleration and all that was..

Thanks, guys..

We'll go next to Harlan Sur with JPMorgan..

Good afternoon, and congratulations on the solid quarterly performance. On the increased accretion targets for fiscal year 2017, you're analyzing first half at about $0.36.

And so on the better results and the potential for more to get to your $0.40 target for the full fiscal year, can you guys just help us understand what specific product segments or business process rationalizations, or manufacturing initiatives you've executed on to drive these accelerated synergies?.

Well, these will be very long answers. I think what we said, both Ganesh and I in our prepared remarks, some of the things we did. I laid out how much we took out in the operating expense, how we combined the businesses.

We took nearly – 500 people are no longer on the payroll, among them about 33 executives, so there was a large amount of expense taken out, large amount of other things done. Mix is improving, product mix is improving, less focus on low margin mobile touch products, and high focus on high margin micro and others and adjustment of prices.

There were just hundreds of line items. And we just, Ganesh and I and many of our executives, that's all we did last quarter, we worked on Atmel..

Yes, good insight there. Thanks for that. And then the channel strategy for both companies, as you mentioned before have been somewhat complementary, although you've mentioned about a much broader channel presence for Microchip.

You've also talked about cross-franchising distributors, getting the Atmel products fully integrated into the order system, field sales trained, et cetera. I think you previously talked about a target of November 1 for the go live initiative. Maybe, Steve, you could just give us an update on this initiative..

So it is still on schedule for go live on November 1. There are 100 different milestones, weekly milestones for really what needs to be accomplished for that to stay on schedule. And it's on schedule right now. After this call we have another review of the Atmel integration plan for November when we go live.

And I'm sure I'll hear that in the last week since I heard the report, the next set of milestones have been met and we're on schedule..

Great. Thank you..

Yeah..

We'll take our next question from William Stein with SunTrust Humphrey..

Great. Thanks for taking my question and congrats on the very strong results and outlook. I'm wondering if you can characterize the upside in the quarter on the top-line or detail for us whether there was anything in that that resulted from higher prices as you alluded to negative gross margins on the Atmel business.

Did that correction help revenue in the quarter or is this more of an organic sort of unit-driven upside?.

So when you're saying higher prices, are you saying customers trying to buy ahead or are you saying just the effect of higher prices on revenue?.

Either..

So I don't think either of them, because you couldn't really have any meaningful impact on prices within the quarter.

Many times it's raise the prices, it's you expire a quote, the new prices on a new quote, and it just takes some time to have an effect; to have its impact that moves the needle in the very first quarter, I don't think there was any of that.

Regarding the second part where expecting price increase where the customers buy product at lower prices ahead of time, we had heard that concern from the Street, maybe one of the analysts. And we don't really find evidence of that. Six weeks have gone into the quarter and the OEM bookings and shipment patterns and all that are really continuing good.

We're marching well towards our guidance. And on the distribution, as I mentioned in my prepared remarks, we marked the distribution inventory up on July 1 with a new price book. And the point of sales in the last six weeks in the quarter is – does not show any problem..

That's very helpful, Steve. Thanks. One more if I can. It seems very early to talking about cross-selling opportunities, but I think you talked about either, I forget, in the press release or in the prepared remarks about cross-selling analog.

Can you remind us what the expectations are from a timing and magnitude perspective for cross-selling analog or other product?.

So the cross-selling is already visible at the design-in level – in one of Atmel's socket, let's say, there was Atmel microcontroller, there was an Atmel wireless chip but – the LDO, the A to D converter or some sort of power management was from some other company.

And there are already signs as we go through reviews of customers with the salespeople, they're already showing evidence of where some of those have been replaced by Microchip at the design level. Those are not in production at the design level in the funnel. So that's already visible. In terms of dollarizing it, it's very hard to dollarize.

But when I was at a conference in New York last quarter, I essentially – what they are modeling is that there is a $300 million attach opportunity on Microchip's analog products attaching it to microcontrollers and wireless products of Atmel. And it's about $1 billion of business, $0.30 of attach rate. That's really kind of how we came about.

It's not as scientific, but those are experiences on other opportunities we have done where we have attached analog..

Thank you..

We'll take our next question from Kevin Cassidy with Stifel..

Thanks for letting me ask a question.

The pricing in the new price book, maybe to help answer some of my questions, what percentage increase were you putting in for the Atmel product?.

We're not going to tell you that..

Okay. And one thing, well, you haven't talked much about the licensing business.

Can you say what the – are there new contracts in process or can you talk about the licensing business?.

So licensing business is doing very well.

Essentially, in the licensing business, we have won the entire enchilada at the 55-nanometer and 40-nanometer, essentially every major foundry, all three large foundries, and many of the smaller foundries, they have all adopted our technology at the 90-nanometer, our technology at the 55-nanometer, our technology at the 40-nanometer.

Main foundries have adopted what has been won in the last two or three years is 55-nanometer and 40-nanometer. And half of them have also signed up on the 28-nanometer and that's still under works. So I mean, basically it's all being designed with our technology.

Now, it's a question of, in the microcontroller world, the technology kind of lags the microprocessor world by quite a few years. So what portion of the microcontrollers are built on 55-nanometer and 40-nanometer. If you ask the question today, that's a very small number.

But it's on a very fast curve as all the new products being designed are in 55-nanometer and 40-nanometer. So as they go into production, the royalty rates will increase dramatically. So we're very positive on that business. The coming year – this year should be record, fiscal year 2017 should be record..

Okay. Maybe just expand on that.

You expect that the market will stay at 28-nanometers for quite a few years, especially considering price per transistor goes up as you get lower than that?.

When you look at an embedded control, I think the center of gravity of microcontrollers today is probably 0.13. So a lot of people are migrating to 90-nanometer. 90-nanometer is probably the most ramping in terms of technology, in terms of wafers and royalty. 55 is barely beginning.

I think we're going to get our first 55-nanometer check, either got it last quarter, or we're going to get it next quarter. So – and then you got 40-nanometer, then you got 28-nanometer.

What we're seeing is we've got a decade of royalty stream coming up here on 90-nanometer, 55-nanometer, 40-nanometer and 28-nanometer, which will continue to grow that business. And we're already filing patents to 22-nanometer, 20-nanometer and engaging with foundries and high-k/metal gate and all that. None of this is licensed yet.

It's advanced work, but 28-nanometer covers the next decade..

Okay, great. Thank you..

Yeah..

We'll take our next question from Rajvindra Gill with Needham & Company..

Yeah. Thanks for taking my questions and congratulations on excellent results. Steve, you talked about in the past when you look at acquired companies that you kind of focus on 50% of the portfolio or so and try to expand on that.

With respect to Atmel, using that kind of logic, how are you approaching Atmel's new products – Atmel's products and kind of end markets based on that framework?.

What's that framework? 50% of what? I didn't understand your question..

I think in the past when you had made an acquisition – when you made acquisitions, you've talked about focusing, I believe, you had said either 50% or majority of the revenue where you feel there's the most growth..

Raji, I think what you're referring to is, we've made some comments about the top 50% of opportunities of acquired companies are better than the bottom 50%. I think that's what you're getting at..

I remember that when I said that and subsequently I saw it in a report, which was a gross mischaracterization of really what I had said. So let me clarify it. So, let's say we have 100 opportunities at Microchip. And the company we acquire has 100 opportunities.

To make the assumption that all of our 100 opportunities are better than all of their 100 opportunities and they should be at the bottom would be highly egotistical and would be incorrect. So what I said is that many times we find that the top 50% of the acquired companies' opportunities are actually better opportunities than the bottom 15% of ours.

And therefore, when we mish-mash it together, it results in to taking some of Microchip resources and rather than harvesting the bottom 15% of our opportunities, it's better to harvest top 50% of the other company's opportunities because they may be better in whatever way. I think that's what I said. It was just a – it was a metaphor.

Those are not exact numbers..

But it's absolutely the case with Atmel..

Now, that's really the case. As we look at Atmel we mishmash all the products and roadmaps, we have discontinued probably 15% of our roadmap and we have filled that in with a lot of the better products coming from Atmel..

Right.

And that was the point I was trying to make and ask you was, given that Atmel did have a lot of underperforming product lines and assets and it was somewhat of a fragmented business, I was just wondering using this approach that you talked about, 50% of acquired companies opportunities, how that processes is now developing?.

Well, it's going very, very well. As Ganesh mentioned, we're running 8-bit microcontrollers as one business unit, 32-bit as one business unit, wireless as one business unit, memory as one business unit. So the business unit leader gets both sides together, comes up with a joint roadmap.

We will discontinue these of our products, they'll discontinue those of their products, it's a joint road map that joint teams work together in accelerating those road maps. There're some redundant resources which are let go. So all that process is going very well. I think on 8-bit micro, 32-bit micro and memory, we're largely done..

Yeah..

We're largely done. Wireless, as Ganesh said, will take us through the end of the year, calendar year, which was very complex. And on the analog, high voltage, RF front, it's in the same timeframe, end of the year or early next year. So that process is really going very, very well.

Where I caution investors and analysts is, if I remember reading the commentary on what I said, they kind of look at – they looked at it like, so Microchip's bottom 15% of the revenue would go away or something like that. We're going to let go bottom 15% of our revenue, which will be a huge number.

This is not the bottom 15% of our revenue, there's no change in our revenue. Our revenue is not going to go down. This is in terms of activity..

Projects..

Projects. So we are doing some projects, there're some higher priority projects and some lower priority projects. We will take the lowest priority projects of ours and substitute by the acquired company's better projects which meld in.

So, overall, the portfolio becomes stronger and generates even higher revenue, more competitive pricing, better margins and all that and not equate that to – we should take combined company and take 15% of the revenue and say it's going to go away. That's where it was highly misinterpreted..

Right. I wasn't implying that at all. And just last question from me.

In terms of your strategic approach of your analog products, your connectivity products, are we going to see, particularly targeting IoT, more of a focus to attach analog and connectivity product to your microcontroller portfolio whether it's Atmel's ARM based products or your own base – microcontroller-based products as you focus on IoT?.

We do that every day. We do that every day. Today we've been doing it on our products for years and including Atmel we're already seeing in the funnel that customer level we're in the new products, Microchip's analog, memory, LAN, networking, other products, being attached to Atmel's microcontroller products and some other cases.

If they have the right wireless chip is being attached to Microchip's microcontroller. So yeah, that began day one as we acquired the company and it's been happening for years at Microchip. So it's not something we need to focus on. It's something we have been focusing on..

Day one after the acquisition, the best product from either company that attaches to either microcontroller are classic for Microchip or the new from Atmel becomes the natural order in which we go to market as we take the best of the best so that we win the largest amount at a given application for a customer..

Raji, we're not buzzword driven company, never have been, and go back a year ago if you would have asked an average investor who had a stronger IoT portfolio, Atmel or Microchip, the answer probably would have been Atmel. And as we look at their business, it was a disaster. As I said, it was losing $32 million on sales of 40-nanometer.

And our business was more than two, two-and-a-half times the size and much better performing and all that. So lot of that restructuring kind of has been on their side. So that doesn't mean we're not doing well in those areas. We at Microchip navigate a very, very broad beach front, we're calling on 100,000 customers, we've got to do all these things.

So we can't take all of our microcontroller business and we name it IoT, like somebody else has done. That doesn't mean we are shy of IoT applications or not competitive or don't have the products and don't have the focus. We've got all of that..

Great. Thank you very much and congratulations..

You're welcome..

We'll take our next question from Chris Danely with Citi..

Hey. Thanks for squeezing me in, guys. I'll be brief. Just two quick clarifications.

Steve, on the upside from Atmel and Microchip, was there anything in common in terms of the upside between the two businesses, whether it's by geography or end market, or where there any areas where things were a little bit worse than you expected?.

Well, end markets we didn't look at. I mean, we don't really do that breakdown. But when I look at geographies and product lines, I would say everything was pretty broad-based..

Okay. And then on the pricing where you talked....

Much across the board..

Okay, great.

And then on the pricing where you talked about improving the pricing, have you ever done that with any previous acquisitions, maybe give us some examples of have you done that in the past?.

We've done that pretty much with every acquisition. Micrel was the most recent one before Atmel and the pricing practices were also very sell-in driven to distribution, making quarter end deals on heavy discounts and some of the OEM pricing were very low in Asia and we did exactly the same thing.

You'll take – there were some very equivalent products from Microchip and Micrel whether they were LAN or they were in the power management area, I mean, those products, customers could choose one product or the other. And our prices would be substantially better than theirs.

And after we combined Micrel, we essentially changed the pricing to our pricing. And so whether you buy their product or you buy our product, you're going to buy at our price. So we did that. We did some other things with Supertex. We did a fair amount of it with SMSC..

With SST..

We did it with SST..

At the end of the day if it's bad business, it's bad business. We're not interested in continuing to go forward with it. So price increases – and not all business is bad. There's always a percentage at the low end of the distribution that we have to go correct..

SST was making some negative gross margins on flash business, taking very low margins and we sold some bad business. In a couple of deals we did back then and rest of it we raised the prices.

We brought some into our testing, our system, our assembly and lowered the cost, and for years now that was 2010 and we have been running the flash business very profitably. So there's no business at Microchip is entitled to lose money..

Great. Thanks, guys. Congratulations..

Thanks..

So next to Harsh Kumar with Stephens..

Hey. Most of my questions have been answered. Just a quick question for Eric.

Eric, this difference between the GAAP and non-GAAP revenues, how many more quarters do you expect this to last if you didn't say that already?.

Well, there's going to be another leg of that that happens when we integrate business systems, because that's generally the point in time where we actually change the contracts with the distributors that historically had sell-in revenue recognitions change them to a Microchip-like contract. And so we're targeting that now to happen in Q3.

And depending on the date that we integrate, that can continue for a couple of quarters though. You're going to see bits and pieces of that for the rest of the fiscal year..

Got it. Great. And otherwise great quarter, great guide, guys. Congratulations..

Thanks Harsh..

Thank you..

Next question comes from Craig Ellis with B. Riley..

Yeah. Thanks for taking the question and congratulations on the good start to Atmel integration. Steve, I just thought I'd take a more qualitative follow-up on the point you made regarding the upside on accretion and not wanting to be too precise on whether it was a pull-in or upside to synergies.

But can you give us some examples that would indicate that it's either, A, a pull-in of what you had outlined for fiscal 2018 or it's upside to what you and the team had been expecting?.

Well, I think – so if you look at the elements of it, there is revenue, there is gross margin, and there's OpEx, really only those three things. And then there is attach rate, let's say, attaching analog and all that.

If you take those four major components where the long-term accretion would come from, the upside in the quarters from a revenue side was real. That's not a pull-in. That's a real revenue upside which will continue quarter after quarter.

The OpEx piece is, there's a certain amount of OpEx you need to take out and remove the bad R&D and remove the bad stuff. So any accretion we would get on OpEx if we get the job done in one year rather than two years or three years and that push-in will not have further upside, because there's a certain amount OpEx correction we got to do.

And we're doing it much faster than we thought. And honestly, one of the reasons for that, in my mind, is our earlier expectation was that we will find a disaster in Europe, and Europe is harder to restructure as you all know with European laws and Works Council and all that. And that's not what we found.

We found very good running businesses in Europe and we found a disaster in U.S. on the business unit side. And that's why we were able to do a lot of the restructuring in a very rapid fashion and that's largely we're kind of ahead of the OpEx goal there. On the gross margin, we haven't gotten upside in the gross margin side yet.

As we talked earlier, it takes a while for price increases and cost reductions to take place. So that so far is on pace with what we guided earlier. But if you get ahead, we'll let you know. And the last one is attach. There, attach is not at a revenue stage today, it's only at the funnel stage. So maybe that helps you a little bit..

Yeah. I appreciate that. And then the follow-up is to Eric.

Eric, can you provide some color just on how you're thinking about approaching debt and debt reduction given the strength that we're seeing in the business mid-year?.

We shared the information on how the net leverage looks compared to our expectations and we're ahead of schedule there, taking the net debt to EBITDA to 3.22 at the end of June. So that's good.

The planning that we did on the use of offshore cash worked very well and we're probably a little bit further ahead of schedule in terms of the timing of when all that happened and that allowed that level to leave the quarter not as high as we thought it might have been. So I think we're progressing well there.

We haven't updated those targets that we provided on the net levers that we shared earlier but those are still all very achievable and we hopefully will do better and get there quicker..

Thanks, guys..

I will twist Eric's arm to update those maybe at conferences that are coming up..

We will take our final question from Lena Zhang with Summit Redstone..

Thank you for taking my questions and congratulations on the results and the guidance and also very decent work on the integrating Atmel business. I apologize if I missed this.

Just as to note your pricing strategy on the Atmel products, are these prices effective for the shipping in this quarter or it will be affecting for the future orders – the timeframe?.

It's all over the place. We work with 100,000 customers, and some you do it in two steps, and some you're able to do it all, in some there was a contract in place, you couldn't do it at all. So it has to be with a new quote next year on January 1, it's all over the place..

And also some were already started, for example, in tail end of Q2..

Some increased prices are already in effect..

Okay. Thank you..

I would look at it as a glide path from July 1 to March 31 or something like that..

It's an analog change that's going to be continuous over time..

I see. Thanks..

And as we have no further questions, I would like to turn the conference back over to Steve Sanghi for any additional or closing remarks..

Well, thank you, everyone, for attending the conference call today and we'll see some of you on the road as we go to a couple of conferences later on this quarter. Thanks..

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect..