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Micrel, Incorporated (NASDAQ:MCRL)

Q2 2009 Earnings Call

July 23, 2009 4:30 pm ET

Executives

Raymond Zinn – Chairman, President and Chief Executive Officer

Raymond Wallin –Chief Financial Officer and Vice President of Finance

[Hank Pennington] – (Facts and Research)

Analysts

Tore Svanberg – Thomas Weisel Partners

Doug Freedman – Broadpoint AmTech

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Micrel Incorporated 2009 second quarter results conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions)

This conference call is being recorded today, Thursday, July 23rd of 2009.

I would now like to turn the conference over to Ray Zinn, President and Chief Executive Officer of Micrel. Please go ahead, sir.

Ray Zinn

Well, thank you. Appreciate you joining with us today. With me today is Ray Wallin, who is our Vice President of Finance and he is Chief Executive Officer and he will – our Chief Financial Officer, I’m sorry and he would be one that would be giving us the script. So again, thank you for joining with us and I will turn the time over to Ray Wallin, here Ray.

Ray Wallin

Thank you Ray, and welcome to Micrel’s second quarter 2009 conference call. In conjunction with this conference call, a number of supplemental charts will be made available on Micrel's website during the following prepared remarks. To access these charts, go to www.micrel.com and click on the link to the second quarter 2009 conference call slides.

We will begin today's call with the legal disclaimers and safe harbor statement. All material contained in the webcast is the sole property and copyright of Micrel Inc., with all rights reserved.

Certain statements in this conference call, which are not historical facts, maybe considered forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements regarding future business results, future levels of sales and profitability and future customer demand. Various factors could cause actual results to differ materially from what is set forth in such forward-looking statements.

Some of the factors that could affect the company’s results have been set forth in our press release dated July 23rd, 2009, and are also described in detail in the company's SEC filings, including but not limited to our Annual Report on Form 10-K for the year ended December 31st, 2008.

Listeners who do not have a copy of our second quarter earnings press release may view the press release on the company's website at www.micrel.com.

We will review the financial results for the second quarter ending June 30th, 2009 and then discuss our outlook for the third quarter of 2009. Our prepared remarks will then be followed by a question-and-answer session with the financial community.

Now, lets begin with some highlights of Micrel's second quarter financial results. Given the current economic environment, this was an exceptional quarter for Micrel with growth at both the top and bottom line, along with solid bookings that resulted in a book to bill ratio above 1.

We are encouraged by the increasing customer demand for Micrel’s products. Second quarter revenues exceeded our expectations and grew on a sequential quarter basis for the first time in four quarters. The company saw strengths in all major segments of its business with primary growth coming from markets in China. In particular, the build out of China’s 3G infrastructure was an important driver for the company in the second quarter. The cell phone market was also strong growing 19%.

The company’s industrial market only grew 4% sequentially, which demonstrates the continued weakness in the general semiconductor market. Europe was especially weak down 5% contributing to overall sluggish growth for distribution. We believe the general worldwide slowdown is continuing to have an impact on the overall market for semiconductors, moreover, we believe that restocking due to lower inventories coming out of the first quarter of 2009, represented about a third of this sequential growth for the quarter.

We are particularly pleased with our operating execution in expense management in the quarter. Operating expenses were down by another 4% and net income more than doubled on a sequential quarterly basis, reflecting the operating leverage in our business model. In addition to the solid financial performance, we continued to make progress in enhancing shareholder value with our stock buyback program.

With average shares outstanding in the second quarter decreasing 4%, compared to the prior quarter, and importantly, we also maintained our quarterly $0.035 per share dividend. We’d like to note, that over the last five years, Micrel has returned 64% of its market capitalization to its shareholders. This is the fourth highest in the analog industry.

Moving to the financial details, Micrel’s second quarter revenues were $51.8 million, compared to $47.0 million in the first quarter of 2009, and $70.6 million in the year ago period. The 10% sequential increase in the quarter, exceeding our expectations; was due to strength in all segments of company’s business with growth coming from markets in China.

The year-over-year decrease in revenues was due to the reduction in overall demand from customers in nearly all geographies, as a result of the worldwide economic slowdown that has significantly impacted all consumer related markets.

Standard product sales accounted for 97% of total second quarter revenues, with custom and foundry sales comprising 3%. The second quarter sales mix by product area was: analog 70%, high bandwidth, 14%, Ethernet, 14% and foundry 2%. OEM turns filled for the quarter was approximately 54%, compared to 55% in the first quarter of 2009 and 50% in the year ago quarter.

Micrel's sales remain widely diversified with our top ten direct customers accounting for 26% of sales in the most recent quarter compared to 23% of first quarter 2009 sales.

Our second quarter revenue by end market was as follows: wireline communications, 28%, compared to 30% in the prior quarter; wireless handsets, 17%, compared to 16% in Q1; computing, 16% compared to 13% in the first quarter; industrial, 35%, compared to 37% in the previous quarter; military and other, 4%, compared to 4% in Q1.

Sales by region were as follows: North America, 26%, compared to 27% in Q1 2009; Asia, 62%, compared to 59% last quarter; and finally Europe, 12%, compared to 14% in the first quarter.

Second quarter gross margin was 51.3% or up one percentage point from 50.3% in the first quarter, inline with our financial model of approximately 0.25% per million of revenue growth. The improvement in gross margin was due to better utilization of fab capacity due to the higher revenues. However, the company took a capacity charge of $0.6 million, which affected gross margin by more than one percentage point.

Research and development spending decreased quarter-to-quarter to $11.5 million or 22.2% of second quarter revenues from 12.5 million or 26.6% of first quarter revenues, as Micrel continued to reduce expenses in all areas, including research and development, while at the same time developing more world-class products.

In analogs, we released a total of 17 new products including the family of portable PM ICs for Application Coprocessors used in handheld portables and cellular phones with high speed I-Squared-C control and dynamic voltage scaling which provides extremely high efficiency and extended battery life.

We also rolled out a 10 amps synchronous buck controller with integrated Mosfets for high power density applications including high-end server, routers, and networking equipment. We released a low input voltage, high drop-out regulator allowing high efficiency conversion for powering next generation ASICs, microprocessors, and FPGAs that require lower core voltages.

In our high bandwidth product line, we introduced six products in the second quarter including a new product that is thought to be smallest footprint laser diode driver in the industry.

This part of ultra dense chipset designed to go into a new generation of smaller optical modules. Additionally, we introduced a fourth generation optical transceiver controller. This controls all functions of the optical transceiver including its output power under all environmental conditions and allows for digital diagnostics by monitoring all key transceiver operating parameters including transmit and receive power temperatures of high voltage and laser operating hours to name a few.

Additional new high bandwidth products included two fan-out buffers, the first of which can accept inputs from any logic family and provides equalization to normalize it and fan it out to four different receivers. The second fan-out buffer takes the single source and replicates it 16 times.

Finally, we introduced a very tiny footprint differential clock, Data Flip-Flop along with a new variable output line receiver that has an adjustable control, which controls its output voltage.

Moving down the income statement. Second quarter SG&A spending was $8.9 million approximately the same as in the first quarter. Second quarter operating income was $6.2 million, or 11.9% of sales. This compares to operating income of $2.3 million or 4.8% of sales in the first quarter and $11.1 million or 15.7% of sales in the year ago period.

Other income, net was $0.2 million, down from $0.3 million in the first quarter, due to lower interest income. The effective tax rate in the quarter was 39%. Second quarter GAAP net income was $3.9 million or $0.06 per basic and diluted share. This compares with first quarter 2009 GAAP net income of $1.5 million or $0.02 per basic and diluted share, and GAAP net income of $7.4 million or $0.10 per basic and diluted share in the year ago period.

The sequential growth in net income in the latest quarter was significantly higher than revenue growth, which reflects our ongoing commitment to expense management and in leverage inherent in our business model.

Turning to the balance sheet, our liquidity position remains very strong. Second quarter cash flows from operations were 10.6 million. Cash and short-term investments were 59.9 million at the end of June up $1.7 million from the prior quarter.

During the quarter, we entered into a new unsecured credit facility with Bank of the West for an amount up to $20 million in aggregate consisting of a $15 million term loan facility to repurchase shares of the company’s common stock and a $5 million line of credit for working capital needs. This new facility terminated and replaced the company’s previously undrawn $6 million credit facility, that was set forth by on June 30th 2009.

The new term-loan facility and new line of credit facility, both mature on April 30th 2011. With proceeds from the $15 million term-loan along with $5 million of existing cash on hand during the second quarter, we entered into a purchase agreement with Obrem Capital Management to purchase 3.075 million shares of Micrel common stock at $6.50 per share, for an aggregate price of $20 million. The purchase was made as part of the company’s existing share repurchase program. No additional shares were repurchased by the company during the quarter.

Average fully diluted shares outstanding during the second quarter was 63.6 million, a decrease of 4% compared to fully diluted shares outstanding of 66.2 million during the first quarter.

As of the end of the second quarter, total debt amounted to $15 million, consisting entirely of the aforementioned term loan. The $5 million line of credit was undrawn. Capital expenditures totaled $2.1 million in the second quarter, compared to $1.2 million in the previous quarter and $3.4 million in the year ago quarter.

During the second quarter, the company also paid a dividend of $2.2 million or 3.5 cents per share. Accounts receivable balances increased on a sequential basis by $4.7 million in the second quarter to $26.2 million. The increase was due primarily to higher shipments to distributors at the end of the quarter.

Days sales outstanding were 46 days at the end of the second quarter, compared to 41 days at the end of the first quarter, an increase of approximately 5 days due to skewing of shipments to the back half of the quarter.

Net inventory decreased slightly by $25 million during the second quarter to $35.4 million reflecting solid execution in controlling inventories. Second quarter days of inventory decreased to 128 days from 138 days in the first quarter due primarily to higher sales in the quarter. Inventories in the sales and distribution channel represent approximately 8 weeks of inventory compared to approximately 7 weeks in the first quarter.

Second quarter depreciation and amortization, excluding the amortization of stock-based compensation was $4.1 million down from $4.4 million from the prior quarter. As we indicated in the press release, the company’s Board of Directors has authorized a quarterly dividend of 3.5 cents per share to be paid on August 26th 2009 to shareholders of record as of August 12th 2009.

Now turning to the outlook for Micrel and the rest of the semiconductor industry. The strength of the Q2 quarter-over-quarter results not only for Micrel, but for the rest of the industry can be partly attributed to the fact that revenues were down so significantly during both the fourth quarter of 2008 and the first quarter of 2009, and it is safe to assume that some of the sequential growth in revenue during the second quarter was due to some restocking of inventories.

Typical growth for the second quarter was normal seasonality would have been in the 4% to 6% range.

Let’s turn to slide number 1 which is Micrel’s semiconductor barometer. You will note that our barometer slide remains unchanged from we showed in our conference call last quarter. From a macro perspective, the third quarter looks to be normal that is we should see revenue growth in the 3% to 5% range. Europe still remains weak and we do not expect it to show any reasonable recovery due to the normal summer vacation and continued weakness in the European economy. We predict that Europe will not resume positive growth until later this year.

In addition, the 3G build up in China may slow down during the third quarter. We are currently expecting china to be relatively flat on a quarter-over-quarter basis, compared to the second quarter. The North America economy still remains sluggish as the macro indicators of home sales, oil prices, and increasing unemployment indicated continued downward pressure on the North American economies.

Now, lets turn to slide number 2. Our worldwide semiconductor industry cycle chart. As you can see from this slide, our recovery remains about the same as it did in our first quarter conference call. We still anticipate that the semiconductor industry will be down 15 to 20% year-over-year. We are estimating that the third quarter will have normal seasonality, and as such that we can expect it to be up 3% to 5%.

We expect that fourth quarter to be flat to slightly down. We are seeing some ASP erosion as customers are taking advantage of the weakness in the overall world economies. Therefore we are estimating ASPs will erode 5% to 8% compared to the normal 3% to 5%.

While the over all world economic picture still remains uncertain and depressed, we at Micrel are optimistic and enthusiastic with respect to growth opportunities even under these difficult circumstances.

So, to that end, Micrel estimate that third quarter revenues will increase between up 3% to 7% on a sequential basis. Micrel will therefore require turns fill in the mid-50s range to hit mid point of the guidance. Gross profit margin is expected to be in the 51% range.

We anticipate total operating expenses will be approximately flat on a sequential basis in the third quarter. Other income is projected to be about $0.2 million and diluted shares outstanding are estimated to be 62.3 million shares for the third quarter. We estimate that FAS 123R will result in approximately $1 million of pretax stock compensation expense in the third quarter. We continue to anticipate that 2009 effective tax rate will be approximately 35% on a GAAP basis.

Based on these aforementioned projections, we believe third quarter 2009 GAAP diluted earnings per share will be approximately $0.06 to $0.08 per share, based on an anticipated fully diluted share count of 62.3 million. We are hedging a little bit as our earnings for the third quarter take into account our concerns for pricing pressure that we anticipate critical as the quarter progresses.

In conclusion, we would like to summarize some of the key financial and operational highlights from this past quarter. First, Micrel generated sequential quarterly growth for the first time in four quarters and we had another solid quarter bookings with a book-to-bill ratio above 1 for the second quarter in a row. Second, even in the face of the challenging economic environment, our operational results both at the top and bottom line exceeded our expectations. Third, we continue to carefully manage our expenses and focus on operational execution.

Total operating expenses were down 5% and net income more than doubled compared to the prior quarter. And finally, we continue to be focused on driving shareholder value. As evidenced by this buyback, the stock buyback effort completed during the quarter, and maintenance of the dividend, financially, the company remains very healthy as evidenced by our strong cash flow from operations of $10.6 million in the quarter. We believe that we are poised to grow as the global economic climate stabilizes and improves.

Thank you. We will now go to the question and answer portion of our conference call.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question-and-answer session (Operator Instructions). And our first question comes from the line of Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Yes thank you and congratulations on the quarter. A few questions, first of all Ray Wallin, what was the utilization in the quarter?

Raymond Wallin

Utilization was in the low-to-mid 40’s.

Tore Svanberg – Thomas Weisel Partners

Okay very good. And as we look at the September quarter you guided gross margin to be above 51. I’m just wondering why it wouldn’t go up sequentially, given that, I assume you are not going to have that same charge to gross margin in the September quarter?

Raymond Wallin

We will have the same charge because again the impairments could remain – we are not trying to build inventory. And so, but the revenue is not going up significantly as you would end the pressure on pricing we are just hedging a little bit.

Tore Svanberg – Thomas Weisel Partners

Right. Okay fair enough, and then you mentioned the 3G infrastructure market in Asia that’s been doing so well this year, will probably take a pause here in Q3. Could you just elaborate a little bit more on that please?

Raymond Wallin

Well have been told that I think at the 60 Year Anniversary of the Mainland China, and there are – they are stopping all building of the - of their 3G infrastructure systems. And don’t expect to resume they said until mid to late September. So that puts us toward the end of Q2.

Tore Svanberg – Thomas Weisel Partners

I think you mentioned industrial up four percent sequentially. It looks like that has stabilized. Can you comment on how your bookings have been in that market so far this quarter.

Raymond Wallin

The bookings for..

Tore Svanberg – Thomas Weisel Partners

Industrial

Raymond Wallin

Industrial. Okay and that’s mainly POS. So that means that we are, we don’t recognize revenue until it’s sold through the channel. And even though bookings are normal from them, it doesn’t really mean anything until, they sell them. Sure anyway because we are a POS distributor. So, I mean a POS supplier. So, that bookings are, as far as the bookings from distribution they’re spot on, what they were in Q2..

Tore Svanberg – Thomas Weisel Partners

Great and then finally it looks like, communications just maybe still lagging a little bit some of the other markets. The range is based on conversations you have with your customers there, what, how are they feeling about the second half?

Raymond Wallin

Well, we are at the bottom of food chain. So while our customers are probably seeing less impact on their numbers than we are, they still are cautious, they’re especially in U.S. So, the people are holding back purchasing. I have – my son-in-law actually sells Cisco and HP equipment and he is saying that it’s pretty tough that people are holding off, making these purchases. So, there is still some, I think some reticence to get out and spending in.

Tore Svanberg – Thomas Weisel Partners

Great, thank you very much and congratulations on the results.

Raymond Zinn

Thank you.

Raymond Wallin

You’re welcome Tore.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Doug Freedman with Broadpoint. Please go ahead.

Doug Freedman – Broadpoint AmTech

Hi, guys, thanks for taking my question. Can you give the number of new products that were introduced in the quarter?

Raymond Zinn

There are 23 new products, 17 in the analog space and 6 in the high bandwidth space.

Doug Freedman – Broadpoint AmTech

All right, terrific. And is there an expectation for a similar number next quarter?

Raymond Zinn

Yes, it’ll be very similar.

Doug Freedman – Broadpoint AmTech

And can you talk a little bit about what you are seeing in the handset space and what your expectation are there?

Raymond Zinn

The handset space is improving for us for Q3 over Q2.

Doug Freedman – Broadpoint AmTech

And is that being driven by Asian, European markets?

Raymond Zinn

Primarily Asian.

Doug Freedman – Broadpoint AmTech

And if we were to move on a little bit and look at, you mentioned that you’re not looking to build inventory, do you think your internal inventories will go down in the quarter?

Raymond Zinn

It just depends upon how strong the second half of the quarter is. So, we – it’s always a guess on our part, because we have to – have the stuff into finished goods to make the shipments and so, it depends upon where we are ending up in the bottom end of my revenue projection, then I might build a little inventory and if I’m at the high end of my projections and I’ll probably drop inventory.

Raymond Wallin

Yeah, it should be within a narrow range however, we think.

Doug Freedman – Broadpoint AmTech

Okay, so you’re giving not a lot of…

Raymond Wallin

Yeah, we are not intentionally trying to build inventory kind of keep it stable. Maybe that’s the best way to put it.

Doug Freedman – Broadpoint AmTech

Okay, so not a lot of change on either utilizations or inventories in the quarter?

Raymond Wallin

No, that’s why the gross margins are held where they are.

Doug Freedman – Broadpoint AmTech

If we look at your, your operating expenses it really do seem to be amazingly well controlled right now. Can you give us some insights onto what restructuring actions you’ve taken to allow the operating expenses to be at this level? And just talk a little bit about, if these are permanent actions or temporary actions? We are seeing just a lot of temporary actions throughout your peer group and trying to figure out when those temporary actions are undone is proving challenging for the analyst community. So, any color you can offer on how you are trying to manage around that would be helpful?

Raymond Zinn

Well I’m the only one just going to give you that color.

Doug Freedman – Broadpoint AmTech

Well, they attempt to let’s put it that way.

Raymond Zinn

Okay, well you have to tell me then how good a job I do, as far as if I’m attempting to or not. The operating expenses are controllable and whereas, the other are not such, because there is a lot of fixed expenses associated with the - our wafer fabrication facility because we are not fabless, we have our own fabs. So, there are - there is less control that I have on my fab expenses because, the only thing there is I can control is the variable expense. And so, all of my operating expense is to a major degree are controllable, and since we are trying to remain profit, we are trying to tighten our belt and make sure we have a good cash flow. We have chosen to rig, go after these controllable operating expenses and well, some of my people may not appreciate that, nonetheless desire that that was the best strategy for us given the current economic environment. So, ours are permanent as you were until the economy at least show some sign of recovery, at least worldwide economy shows some kind of recovery on a permanent basis, then we will feel more free there to bump up these operating expenses. Another thing that I will tell you is that the efficiencies that we are going to try to achieve. We are not, we are not going to try to reduce the number of new products we get out, we are trying to either hold or expand those products or, we are actually putting more pressure on our guys to get out more of less and it seems to be working. So, we tend to run a little fast as you would during good times because that’s just the nature of human beings and during the lean times, they’re concerned about holding onto their job and helping the company to succeed. And so, that’s also working for us during these tougher times. So, we are just asking a lot more from our people and are giving it to us and helping us control these cost. So, I would say ours are permanent Doug unless the economy turns around pretty quickly.

Doug Freedman – Broadpoint AmTech

All right. And then my last question really goes to...

Raymond Zinn

Well did I do a good job?

Doug Freedman – Broadpoint AmTech

Yeah.I think you’ve been basically saying that it is permanent is the answer. You are not having one week off or forced vacations and many actions like that, that I see in many of your peer group going. And so, being permanent, you’re now I think it’s when you say you’ll take expense back up it would be increased salaries and some headcount additions possibly?

Raymond Zinn

Right.

Doug Freedman – Broadpoint AmTech

Okay. I just wanted to dig in on one of your comments as far as preparing for lower ASPs potentially, are you seeing any ASP pressures in any particular, I mean, much of your product line is proprietary?

Raymond Zinn

We – since it’s a product is - there is no second source for it, of course there is less pressure on it. And naturally, we do have a number of products that are second source, not that were second sourced, but they have second sources to our products. And they do use that as leverage to move the products. So I think we said in the prepared remarks, that we are seeing a pretty dramatic increase in cost in ASP erosion right now, as customers take advantage of these weaker markets for ICs. So, we said that I think we said 5 to 8, compared to 3 to 5 is what we are saying.

Doug Freedman – Broadpoint AmTech

Okay, great. Thank you.

Raymond Zinn

You’re welcome.

Doug Freedman – Broadpoint AmTech

Congratulations on a good quarter.

Raymond Zinn

Well, thanks, Doug.

Raymond Wallin

You’re welcome.

Operator

Thank you. And our next question comes from the line of Hank Pennington with Facts and Research. Please go ahead.

Unidentified Analyst

Hello Ray.

Raymond Wallin

Hi, Hanks,

Raymond Zinn

Hi, long time no talk to.

Unidentified Analyst

Yeah. I’ve been hiding under my table for the year or so. Hey, my major question was just talked about a little bit which was the ASP pressure. I got on the call a little bit late and we just wondering if you could even give a little bit more color about, what product arenas you are seeing that from any particular or are there any kind of irrational pricing going on there? Or is it just a function of its really tough environment so everybody is hammering down on prices?

Raymond Zinn

Well, it’s primarily in the consumer market, is where we are seeing most of it. Not that we are not seeing it in other markets, we are just seeing it more so on the consumer side, and with all of my competitors out there trying to show increasing revenues, I guess they are not too concerning about their bottom line, but because they trying to show better revenue numbers. We are seeing them being more aggressive on pricing and I don’t think you can blame totally the customer on this, because I think my peers are out there just trying to stay alive. So they’ve got kind of one of those hunker down mentalities on pricing.

Unidentified Analyst

Gotcha and If I would, I haven’t looked at at your slides and I will go back and analyze them. Your little barometric chart, which I appreciate a lot and it’s just curious, I’m interested in you’re just sort of speaking off from the hip what you are seeing. Is it appears like in the last two, three weeks and what’s been sort of happening is a number people been reporting pretty good numbers, but just yourself showing exceptional operational cost controls and pretty decent bottom line and you are also starting to hear that in the industrial and maybe even enterprise, although most have people have their foot on the break there, that there is a little bit of improvement, not in Europe necessarily, but even domestically. Are you seeing that? I mean, you mentioned a couple of things. But any sensibilities we go into you this period when supposedly the stimulus is going to hit in Q3 et cetera. Are you seeing any things starting to loosen up a little bit?

Raymond Zinn

Well, I don’t know that I’m seeing it per say from like a stimulus sort of thing you’re referring to probably the U.S stimulus, because I don’t know of any coming out of Europe. China has had a stimulus package going and we are seeing the benefit of that, but I don’t know of any stimulus related to buying that’s going on. I think that, that as we mentioned in the, in the prepared remarks, that we saw such as a dramatic drop-off in revenue in Q2. Excuse me, Q4 and Q1, that far below what our customers are seeing. But let’s say our customers are reporting a flat to slightly down revenue numbers, because we are at the bottom end of the food chain, they take us down even further. So if they see 5% down, we’ll see 10% to 15% down. And so you are just seeing them inventory wise having to pickup some of the inventory because they needed to build their product. And so, I think some of the growth that you are seeing, we have to attribute to somewhat restocking. So I don’t want you guys to get carried away with oh boy this is fantastic growth and all because maybe a third of it is kind of an inventory restocking as you would. That’s our closest guesstimate Hank and, but making no mistake about,I think things are improving. I mean, I’m not just trying to sell you on the fact this is just an artifact of the downturn of Q4 and Q1. We do see things improving because it’s across all our markets and so we are, we are encouraged by at least and we should mention not only for ourselves, but also for our entire industry. We are seeing a more normal seasonality. Now there is a big delta, the drop off of, a 15% to 25% year-over-year drop that the industry saw, that’s not necessarily coming bouncing back, because I think the artifact is the overall economic slowdown. That the fact that we are seeing normal seasonality now with the Q1 as typically weak as it was and then Q2 a little stronger and then Q3 is stronger, and then Q4 is flat or down, that’s normal seasonality. So we are kind of back as you would normal a business albeit, there is some 15% to 25% offset, just because that the whole world is slowed down. And to recover back that 15 to 25 is going to take some time, either as you would the stimulus packages of America - U.S. as well as other countries or it just it will just recover on its own. And as they say Newton's law, first law of economics is every pressure you push down there is going to be a pressure up. And so, right now there is a pressure to get back to normal and we are seeing the effect of it. So some of this growth that you’re seeing including Micrel and in Q2 and forecast it for Q3, could be some just inventory replenishment, because of such a huge downturn in Q4 and Q1.

Unidentified Analyst

I have heard from the couple on the other semiconductor companies that they believe maybe there has been a little bit of restocking, but this inventory is really pretty rational, if not even still below - a little bit below normal, do you have any.

Raymond Zinn

I agree. I mean, I am not disagreeing with that.

Unidentified Analyst

Okay. Thanks very much Ray.

Raymond Zinn

You’re welcome Hank.

Operator

Thank you. (Operator Instructions). And there are no further questions in the queue. I would like to turn the call back to management for any closing comments at this time.

Raymond Zinn

Well thank you for joining with us today. We are very pleased with at least how we are holding up during these uncertain economy times and Micrel’s commitment is we are going to remain profitable, and we are going to do whatever it takes to grow our business. So, thanks and look forward to seeing you, talking to you in October.

Operator

Thank you. Ladies and gentlemen this concludes the Micrel Incorporated 2009 second quarter results conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or 1-800-406-7325 and enter access code 4118648 followed by the £ sign.

ACT likes to thank you for your participation. You may now disconnect.

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