Q3 2021 Microchip Technology Inc Earnings Call

[music].

Good day, everyone and welcome to Microchip third quarter of fiscal 2021 financial results Conference call. As a reminder, today's call is being recorded at this time I would like to turn the call over to Chief Financial Officer, Eric You on Holt. Please go ahead.

Thanks, Paul and good afternoon, everyone.

During the course of this conference call, we'll be making projections on other forward looking statements regarding future events or the future financial performance of the company.

Just 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 debt.

Identify important risk factors that may impact microchip business and results of operations.

In attendance with me today are Steve, saying, Microchips, chairman and CEO, and Ganesh Moorthy Microchips, President and COO.

I will comment on our third quarter financial performance and Steve I'm going to ask will then give their comments on the results and discuss the current business environment as well as our guidance. We will then be available to respond to specific investor and analyst questions.

We had an unintentional posting of our earnings release on our website shortly before the normally scheduled timing today. Once we determined that's occurred we moved quickly to get the release was sent out over a normal distribution processes.

We are including information in our press release on our 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 Dot Microchip Dot com, which we believe you will find useful when comparing our GAAP and non-GAAP results.

We have also posted a summary of our outstanding debt on our leverage metrics on our website.

I will now go through some of the operating results, including net sales gross margin on operating expenses.

Other than net sales I'll be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our press release.

Net sales in the December quarter were 135, 2 billion, which was up three 3% sequentially and above the midpoint of our quarterly guidance. We have posted a summary of our GAAP net sales by product line and geography as well as our total end market demand on our website for your reference.

On a non-GAAP basis gross margins were a record at 63%.

Operating expenses were at 23, 2% and operating income was a record 39, 8%.

Our factory Underutilization charges decreased from $12 2 million to $3 $7 million sequentially as we continued to ramp our factories to respond to the strong business conditions.

We expect the continued ramp of our factories to lead to no underutilization charges on the March quarter.

Non-GAAP net income was $444 9 million non-GAAP earnings per diluted share was $1 62, five cents above the midpoint of our guidance.

On a GAAP basis from the December quarter gross margins were a record at 62 six per cent and include the impact of $6 4 million of share based compensation expense.

Total operating expenses were $600 2 million and include acquisition intangible amortization of $231 6 million.

Special charges of $4 3 million.

$5 4 million of acquisition related and other costs.

And share based compensation of $44 8 million.

The GAAP net income was $36 2 million or 13 cents per diluted share and was adversely impacted by $142 $1 million loss on debt subtle amounts associated with debt refinancing activities in the quarter.

Our December quarter, GAAP tax expense was impacted by a variety of factors, notably the tax benefit recorded on the convertible debt exchange transactions occurring during the period.

Our non-GAAP cash tax rate was 4.25% from the December quarter.

We expect on non-GAAP cash tax rate for fiscal 'twenty, one to be about four 8%.

Exclusive of the transition tax on it.

Any potential tax associated with restructuring the microsemi operations and on the Microchip global structure.

And any tax audit settlements related to taxes accrued in prior fiscal years.

We have many tax attributes and net operating losses and tax credits as well as U S interest deductions that we believe will keep our cash taxes LOE in the future.

Our inventory balance at December 31, 2020 was $666 1 million.

We had 120 days of inventory at the end of the December quarter, which was flat with the prior quarter's level.

Inventory at our distributors in the December quarter were at <unk>.

26 days, which is a record low level and down from 30 days at the end of the prior quarter and the.

The current environment it is quite challenging for microchip.

Its distributors to increase days of inventories.

In the December quarter, we exchanged 1.86 billion of our 2025 2027, and 2037 convertible subordinated notes for cash shares of our common stock on a new convertible bond that matures in 2020 for.

While these transactions did not impact the overall level of debt on our balance sheet. We believe that these convertible exchanges will benefit stockholders by significantly reducing share count dilution to the extent our stock price appreciates over time, which Steve will comment on further in his prepared remarks.

In calendar year, 2020 will reduce the amount of convertible bonds on microchip balance sheet by approximately $2 9 billion.

In the December quarter, we also issued a $1 4 billion dollar senior secured bonds with a maturity date of February 15th 2024, and an interest rate on point to 97, 2% and.

And used the proceeds from that transaction to pay off our term loan b, which we were paying an interest rate of about 215% on.

Our cash flow from operating activities was $509 7 million in the December quarter.

As of December 31, our consolidated cash and total investment position was $372 7 million.

We paid down $289 7 million of total debt in the December quarter, but please remember that this is inclusive of the cash paid for our various debt financing activities in the quarter, including putting a cap Colin place for our newly issued convertible bonds.

Over the last 10 full quarters since we closed on Microsemi acquisition and incurred over $8 billion on debt to do so we have paid down $3. Two 4 billion of debt and continue to allocate substantially all of our excess cash beyond dividends to aggressively bring down this debt.

We have accomplished this despite the adverse macro and market conditions. During most of this period, which we feel is a testimony to the cash generation capabilities of our business as well as the ongoing operating discipline we have.

We continue to expect our debt levels to reduce significantly over the next several years.

Our adjusted EBITDA in the December quarter was a record $593 4 million and our trailing 12 month adjusted EBITDA was 2.271 billion.

Our net debt to adjusted EBITDA, excluding our very long dated convertible debt that matures in 2037 and is more equity like in nature was $3 93 at December 31, 2020 day.

Down from 4.04 at September 30 of 2020, but please note that the amount of the 2037 bonds will reduce by $407 7 million during the December quarter, that's part of the financing transactions, which has impacted this metric our.

Our dividend payment on the December quarter was $96 million.

Capital expenditures were $21 4 million in the December 2020 quarter.

We expect between 50 and $60 million on capital spending in the March quarter, and overall capital expenditures for fiscal 'twenty, one to be between $87 million on $97 million.

In last quarter's conference call, we explained that our capital expenditure plan for fiscal 'twenty. One had increased as we more rapidly prepared for growth in our business as well as actions we were taking to increase our internal capacity on the face of constraints or outsourcing partners are experiencing.

Our fiscal 'twenty, one capital expenditures are coming in lower than we indicated last quarter due to longer equipment lead times and deliveries pushing out due to overall industry conditions.

We continue to add capital to maintain and operate our internal manufacturing operations.

Pork production capabilities for our new products and technologies as well to selectively bring in house some of the wafer fabrication Assembly and test operations that are currently outsourced.

We expect these capital investments will bring gross margin improvement to our business and give us increased control over our destiny during periods of industry wide constraints.

Depreciation expense in the December quarter was $43 million.

I will now turn it over to <unk> to give his comments on the performance of the business on the December quarter Ganesh.

Thank you Eric and good afternoon, everyone, let's start by taking a closer look at Microcontrollers.

On a microcontroller revenue performed well with revenues sequentially up three three per cent compared to the September quarter.

On a year over year basis, our microcontroller revenue was up five 9%.

We continue to introduce a steady stream of innovative new microcontroller solutions.

Including the first safety certified capacitive touchscreen controllers for the home appliance market.

First trust and go Wi Fi module, delivering powerful creditor book microcontroller functionality.

There are five identity.

Industry. Its highest density secured Ethernet switching solution for Hyperscale data center and Telecom service providers.

And last but not least pre new broad market eight bit microcontrollers families to extend our leadership in this product line.

Microcontrollers overall represented 53, 7% of our revenue and debt.

Remember quarter.

Moving to analog.

Analog revenue also performed well and was sequentially up three 1% as compared to the September quarter.

On a year over year basis, our analog revenue was up two 6%.

During the quarter, we continued to introduce a steady stream of innovative analog products too.

Including our first cryptographic companion device supporting in vehicle network Security solutions.

Our new family of Configurable cloud debt digital to analog converter.

Our first highly integrated radiation hardened motor controller, and finally, a family of low latency.

<unk> five point out and computer Express link re timer.

Analog represented 27, 6% of our revenue from the December quarter.

Our FPGA revenue was down eight 5% sequentially.

As compared to the September quarter.

On a year over year basis, our FPGA revenue was up seven 1%.

I've been cautioned on our prior conference calls.

P. J revenue does have some lumpiness associated with it because it's a large exposure to the aerospace and defense market.

On the associated purchasing pattern.

During the quarter, we announced a radiation hardened fourth generation FPGA family.

On a low power radiation tolerant.

Generation qualifier FPGA salary.

After he had represented seven 3% of our revenue from the December quarter.

Our licensing memory and other product line, which we refer to as Tylenol was up 13% and revenue.

Net of the September quarter with strength in licensing revenue driving this growth.

I Dunno represented 11, 4% of our revenue in the September quarter.

A quick note about our product line reported.

Given the relatively smaller size of our FPGA product line.

<unk> seven per kind of our revenue as compared to other microcontroller and analog product line.

We have decided that starting in calendar year 2021, we will no longer break out the FPGA product line separately.

Our FPGA products remain important to our overall total system solutions growth.

We continue to make significant investments in our FPGA products and expect those investments will help drive our long term growth and total system solutions initiatives.

Going forward, we will combine our FPGA revenue with our Alamo our licensing memory on other revenue into a new category that was just from other.

From an end market standpoint.

Continue to see the automotive industrial and consumer markets strengthened further in the December quarter approximating a V shaped recovery in the second half of calendar year 2020, as compared to the first half.

The end markets that benefited earlier in the year from the work from home related demand surge, namely computing Communications and data center remained at more normal demand pattern has a third we saw on the June quarter dissipated.

[noise] Huawei ban, which was in effect for all of the December quarter.

And represented 1% to 2% off on overall revenue had a more pronounced negative impact on our data center business, where it was a more meaningful percentage of that business.

Finally demand for our products that go into the office environment, which we refer to as enterprise demand remained weak as most businesses remain predominantly with a work from home policies. That's the front end of enterprise spending from the office environment.

The supply chain constraints that started in the September quarter continue to growth for the December quarter.

A robust overall business environment.

Central aided by rising demand from the automotive industrial and consumer markets.

Bind with low levels of inventories in the distribution channel.

It's also been constrained on practically all of our income and external factors.

Since September we have been ramping on internal factories or.

The other investing in capital additions.

Further expand our internal capacity.

We have also worked with our supply chain partners to increase our fab Assembly and test capacity allocation.

However, based on the current strength of the business environment. We expect other constraints. We're currently seeing are likely to continue for much of calendar year, 2021, and possibly into calendar year 2022.

As a result, we have seen our lead times stretch out from any of our products or the constraints on most acute.

We also experienced increases in material and subcontract that manufacturing cost.

Can step to secure capacity for 2021.

Steve will discuss more on his prepared remarks about our actions to address the current environment, increasing manufacturing costs and seemingly insatiable demand.

Let me now pass it to <unk> comments about our business and our guidance going forward Steve.

Thank you Ganesh and good afternoon, everyone.

Today I would like to first reflect on the results of the fiscal third quarter of 2021, I will then provide guidance for the fiscal fourth quarter of 2021.

The December quarter represented the shift of the business cycle.

Back to revenue growth with a three 3% sequential growth in a quarter.

Relatedly, we would see a 3% sequential decline from typical seasonal factors.

December quarter revenue also grew over prior year's December quarter by 5%.

We started ramping our internal factories in September as well as investing in capital additions to expand our incremental capacity.

We also started working with our supply chain partners to receive more allocation from wafer foundries and assembly test subcontractors.

These efforts improved product availability.

In the December quarter, but still constrained from a revenue upside.

We delivered a record non-GAAP gross margin of 63% health.

Helped by a significant reduction in factory under utilization and better overhead utilization from revenue growth.

We also achieved non-GAAP operating margin of 39, 8%.

And all time record and getting very close to and an emotional 40% Mark.

We also hit a record EBITDA of 593 $4 million despite revenue not debt if that occurred.

Net showing robust shrink, but from a business model.

Our consolidated non-GAAP EPS was $1 62, five cents above the midpoint of our guidance.

This was also our 120 <unk> consecutive quarter of non-GAAP profitability.

Now I will discuss other guidance for the March quarter.

Our bookings were exceptionally strong in the December quarter and growth and all time record.

We received bookings book for short term as well as into the future quarters.

The backlog was also an all time record.

Please remember that bookings as well as the backlog is what is shippable in.

On the next 12 months.

The backlog for the March quarter is the strongest starting backlog I have ever seen.

Our bookings have remained strong in January on the.

The Attritional say the December quarter was constrained by a product availability.

We will have more internal and external capacity in the March quarter. Since we have had multiple months to zone, although I believe that wafer fab as well as back income streams are here to stay with us through calendar year 2021.

In response to the business environment, we have taken three actions.

First in the Middle of December we changed our rig cancellations and pushout terms with our customers and distributors. The standard terms used to be debt in order cannot be cancelled or pushed out once it is within 45 days of shipment we.

We changed our standard terms, so that in order to not be cancelled or pushed out within 90 days of shipment effective January one 2021.

We gave customers a couple of weeks towards adjusted backlog before it went firm for 90 days interest.

In response to a change in terms, we did not see any unusual cancellations or push outs, which indicates to us that the backlog of the phone muted by other customers.

That gave us a solid backlog for the March quarter, which cannot be cancelled or pushed out.

Therefore, we can batch process the orders when you use other manufacturing assets.

Currently knowing that what we do will get shipped.

The second action, we took was that we sent a letter to our customers on January four 2020 run.

Forming them of their business environment.

Also inform them that we are seeing broad based cost increases and some aggressive commercial terms from our supplier base and.

And we must pass these cost increases to our customers through our broad based price increase.

The current action we took just this morning.

We have posted a letter on our website and send it to our customers and distributors and announcing a new program called the Microchip preferred supply program or PSP. This program offers our customers the ability to receive prioritize capacity in the second half 'twenty 'twenty, one and first half.

2022, the program has the following elements.

Customers participating in this program, we will have to place 12 months of orders, which will be noncancelable and non reschedule liberal.

The capacity priority will begin for shipments in July 2021.

<unk> will not be a guarantee of supply.

However, it will provide the highest priority for those orders, which are under this PSP program.

And the capacity priority will be on a first come first served basis until the available capacities book, We will of course reserve a portion of FERC capacity from new customers small long tail customers.

New designs.

We expect debt a significant portion of our capacity will be booked under this new program.

We're the largest committed noncancelable backlog for 12 months microchip will be in a stronger position to make capacity because raw material commitments to our suppliers by capital equipment with confidence hire employees and ramp up manufacturing and manufactured products more efficiently.

Taking all these factors into consideration, we expect our net sales for March quarter to be up.

5% to 10% sequentially.

March quarter guidance at the midpoint would represent a record GAAP net sales with the prior to their current being in the September quarter of 2018 is.

The September quarter of 2018 based on GAAP sell in revenue recognition was $1 43 2 billion.

Some of you may still carry a sell through this number.

$151 3 billion.

For September 2018 can you on historical financial margin spreadsheets.

The March quarter will also be limited by product availability.

On many product lines.

Our guidance assumes a working through a myriad of capacity constraints qualifying incremental equipment installed qualifying alternate subcontractors in some cases and still dealing with the risk of production constraints with a new wave of Covid cases, plaguing the planet and at the same time ramping effect.

Emissions.

For the March quarter, we expect our non-GAAP gross margin to be between 63, 3% and 63, 7% of sales, which would be a new all time record.

We expect non-GAAP operating expenses to be between 23, 2%.

And 23, 6% offices, and we expect non-GAAP operating profit percentage to be between 39, 7% and 45% of sales.

We expect over non-GAAP earnings per share to be between $1 67 per share per dollars 79 per share.

We also expect to pay down and other.

Ultimately $350 million of our debt in the March quarter.

Finally, I want to cover one other area, which is over future cash return strategy.

At the rate, we're paying down debt, we expect to break in net leverage of three within a year.

And continued to decrease from day.

At that time, we expect to begin with.

Distributing motor for a substantial amount of free cash flow to the investors in the form of dividends and stock buybacks.

Regarding buybacks.

Through multiple tranches of convertible debt buyback, we have essentially brought a substantial amount of stock back from the future.

This is because as the stock price rises and exceeds the conversion price of the debt convertible debt from the new X the share count.

Brian converged back prevents future dilution as the stock price rises.

Our first convert buyback was in March 2020.

On Microchip stock price was about $71. Since then we have done sort other buyback transactions at various stock prices.

By doing these various buyback transactions, we have purchased a total of $3 $5 billion to $5 billion in face value of our convertible bonds.

For the transactions from March 2020 to September 2020.

Issued a total of about 24 million shares.

Common stock to the investors for in the money value of their bonds. If these bonds has remained outstanding until an assumed stock price of $140 per share.

Stock price about now.

On the dilution would have been about $26 4 million shares.

Our repurchase it had the impact of creating a savings of about 6 million shares worth $840 million savings to our investors at $140 per share. This.

This calculation does not include over in November 2020 transaction, which was very recent and executed at $133 47 per share.

So it is not yet accretive therefore.

Therefore, while we have not done an open market stock buybacks in the last year.

Convert transactions have had the impact of the buyback.

Approximately 6 million shares at some point in the future we expect to start to your stock buyback from the open market.

We are also initiating a path to higher dividends and not waiting until our leverage reaches a given number before the dividends starts to increase.

In this regard we announced today.

The board of directors have approved a dividend increase of.

Five 8% sequentially to 39 per share up from 36 eight fractions previously we expect to continue to increase dividends quarterly as part of our cash return on strategy.

Given all of the complications of accounting for acquisitions, including amortization of intangibles restructuring charges and inventory write up on acquisitions Microchip will continue to provide guidance and track its reserves on non-GAAP basis, except for net sales, which will be on a GAAP.

GAAP basis.

Believe that non-GAAP results provide more meaningful comparison to prior quarters, and we expect that the analyst and we requested at the analyst.

Q3 reported non-GAAP estimates to first call.

With this clearly will you please poll for questions.

Certainly.

Sure.

Certainly if you would like to ask a question. Please signal by pressing star one on your telephone keypad due to time constraints, we ask that participants limit themselves to one question. At this time. If you have a follow up question. Please reenter the queue. If you are using a speaker phone. Please make sure. Your mute function is turned off legacy net to reach our equipment.

Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal.

And we will take the first question at this time caller. Please go ahead.

Steve and I didn't really hear you maybe it on mute.

Steve can you hear me.

Yes no.

On here My name your comments started caller I apologize for that.

Just really quickly we've lived through multiple times of you sending out customer letters and we kind of have an understanding of how the market responds to that I'd be kind of curious the preferred supplier agreement that you talked about in your opening remarks is this the first time that you have done that and if it's not what's what's been the historical response to <unk>.

Programs like this.

So the preferred supplier program is brand new I have not ever implemented it.

In my 42 years of for Korea, and I have never seen anybody else do that too.

The program is largely in response to the current environment.

Cause bookings level is just so strong and people are booking parks out in time, the industry seems to be you know 30% plus.

Sure to deliver it.

Capacity requirement is and many of our customers have been asking.

What can they do if they give us a longer term demand longer term orders.

Will that give them parts would that give them better support.

No you know customers can give us longer term orders.

But if the orders are canceled or rescheduled liberal after 90 days, which was their.

Their cash prior to the program.

Then I could have a lot of orders for September and December and Goodbye capital hired people to Rand, but just before I get to cancel if there was a double ordering people asking more than they need and they can sell part of the orders. So that is off from the problem always and you guys asked for.

Question is there any double ordering or whatever.

And this program basically eliminates all debt. It asked the customers took place 12 months backlog, which as the noncancelable non scheduled rescheduled liberal so I can take that one to the bank.

Bite on materials do batch processing growth of capacity and give them preferential supply. So this is the first time. We have implemented is it's just the just the need other times.

It was just this morning, but what do you expect the intended response to be from your customers.

Well.

Small number of customers, we already have feedback through the day.

Including a couple of distributors that response is positive they were.

They replace such orders in on.

Don't expect any customer.

Two placed entire backlog on every product on.

On the PSP program because customers themselves have.

Some programs, where they are solid that the demand is good they have a good market share on that particular design, but some others could be some new programs with the demand as yet not known so I think customers will really take a lot other product and put it on TSB and some other that they want.

Perfect. Thank you guys.

Okay.

And we'll take the next question comes from to share. How are you. Please go ahead.

Hi, good afternoon. Thanks, so much for taking the question Steve.

Steve and Ganesh.

Given the current supply and demand situation what are your thoughts on pricing across your microcontroller and analog business and if you can kind of speak to.

Gross margin on the back of that that would be helpful and I guess sort of related to that given the.

The preferred.

Preferred supplier program, how should we think about the economics of that program. Thank you.

So we sent a letter to our customers on January four really informing them first of the business environment and also informing them that we were seeing.

Broad based cost increases and some very aggressive commercial terms from other suppliers who were facing.

Similar issues from their suppliers really up and down the supply chain and we must pass these cost increases to our customers through really a broad based price increase so after writing that letter then we need to really develop that program and we've got <unk>.

Several hundred thousand Skus and going through the price increase on.

On which part and how much in passing on to their customers working through there.

Contracts on long term prices and stuff like that so all that really has been implemented at this point in time rather than debt.

Breaking out what portion of the guidance is price increase.

It's been a relatively difficult.

But the price increases have already been made effective.

As far as.

The economics of the PSP program.

The economics of the PSD programs really are in a.

And having a committed noncancelable non reschedule liberal backlog on the books.

We can build it in batches by are materially ahead, if we wanted.

<unk> increased the inventory if we wanted to serve that and build it when whenever we have a lull.

Essentially that's where the economics are to be able to serve their customers better who joined the program.

And microchip not be subject to ordering more than they need and double ordering because they're not going to double order and order more than they need if they cannot reschedule or cancel so that's where the economics are there is no price change with debt.

This program is totally separate.

Thank you that answers your question.

Thanks.

We'll take the next question comes from Vivek Arya. Please go ahead.

Thanks for taking my question, Steve you use this phrase significant revenue growth in calendar 'twenty, one and you are starting the year at about 10% year on year growth is that a significant number is it something higher than that and more importantly, what kind of growth can your supply chain support.

This year.

Right.

You must have not heard what I said I thought I talked about the question really was debt.

<unk> had 7% growth would you expect something higher than debt.

And my answer was yes, so you know whatever anybody interpret it I don't know what significant means and I can't really give you a number for the growth for the year. Although I think the revenue is more constrained by capacity than the demand at least now and for the next several quarters.

<unk>.

Which leads to your second question what Ken.

What kind of growth.

<unk> support.

I think one other one of the problem that we're dealing with the debt.

On the supply chain is not stable.

We're finding that.

The Assembly test subcontractor will commit that it can do X number of products per week.

And as we get the word change that number that would lower that number or push it out by a couple of weeks or what happened.

Well what happened was they got a day commitment from their suppliers. They didn't get some bundles day, we're expecting the current hire some people somebody tested positive for Covid. So they had to send 50 people home who had come in contact with it.

So there's no slack in the system everything that gets built to get shipped.

Absolutely no slack in the system. So any percolation there was an earthquake in Taiwan, we had it caused that hit our substation and a third in Oregon that knocked out about three or four it is partially on archived not complete.

None of those teams are making bill because all sectors are working seven days a week.

Total board so any delay in equipment just leads to a day commitment so I think.

Those are all the myriad of problems we're dealing with.

And adding equipment, adding people qualifying additional subcontractors getting our customers to live qualification other motive the hardest customers to qualify production in a different land or to approve a change.

And in the last six months, we have been so successful in getting even on the automotive customers that they would buy the products from this alternative assembly site or test site.

So we're getting help from that area, but it's still a very very complicated.

The process to put it altogether.

Therefore, we're not willing to deliver us a number on what percentage we could grow.

Not yet.

Thank you.

We'll take the next question comes from Greg heading back. Please go ahead.

Yes, Thanks, Steve just a question on the just the inventory at 2006 day.

When would you expect that to perhaps get back to kind of within normal ranges and any trends you could share just by geography in terms of Disney re sales.

So distribution would love to grow the inventory in this environment to serve their customers better.

But this.

<unk> seen them into the tent growth. There is just not enough product available to grow the inventories because prior to keeps getting shipped out.

Another point I would like to make is the other.

Other inventory as well as distributor inventory.

He is calculated based on last 90 days of sales. So it's based on the prior quarter.

Essentially.

You know if you.

The real value of the inventories to support the future. So if you take our guidance and take the midpoint of our guidance, let's say and calculate the days of distributor inventories at microchip inventory.

Based on debt guidance than the inventory number they're extremely low.

But theyre calculated as we report which is a standard convention based on 90.

In 90 days and a very stable environment flat sales it doesn't matter, but in a significant growth.

The real inventories actually much lower than the number we're reporting on.

We don't think it's going to grow I think on internal inventories will drop this quarter.

We expect by several days on this.

Traditionally do there soon.

Got it and then just a follow up to the Nash on debt total system solution and any progress there I think if you can share with us in terms of development.

Sure so.

It's not a <unk>.

One quarter on progress with a multi quarter activity that we've had.

The things that it needs to be put in place have been there from new processing for calling in and is reflected in how we see the design activity taking place.

As we've shared anecdotally in some of these conferences, we will share some more of this coming quarter as well.

I think the power of the whole coming together.

Putting all of the different parts of microchip on a customer's board zone.

My strong on a live on a key part of our growth strategy.

Got it thank you.

We'll take the next question comes from Gary Mobley. Please go ahead.

Yeah.

Hey, guys. Thanks for taking my question.

So I know you started the December quarter with your distributor inventory levels slightly below average.

And it looks like you.

Under shipped into the channel by about $26 million in the December quarter is that how we should think about perhaps what.

How much higher your revenue could've been if you had.

Available production capacity and whatnot, a similar amount as we look out into the March quarter.

Well.

We had unsupported orders.

For every geography for every product line.

For direct as well as for distributions. So just picking a number that the distribution inventory went down by interest.

And just seeing the extra revenue we missed for the December quarter will not be equity, we're not breaking out the number but.

The total amount of revenue that we that we missed also was also from direct and essentially in every geography.

Okay.

My follow up I wanted to ask about your philosophy towards M&A, when you get to that magical net leverage ratio of less than three times.

Is that should we take that to mean that you are also open to.

So on M&A transactions at that point as well.

I think we have spoken extensively.

Extensively about this from the past.

<unk> seen debt we believe.

There was an M&A as you know on the last 12 years or so we did.

16, 17, 18 acquisitions, a few large wounds public and lots of them small private and all day was intent to.

Scaled accompanying 10 excess on now there are over $5 $4 billion company.

And really not have a scale disadvantage to our competitors I think we have achieved that and today we have.

Our product line with which we can complete the customer's entire solution.

And essentially you have all the parts are built out on microchip products in other than resistors and capacitors and.

Connectors and battery everything else is really made for microchip.

So today there is not dead.

Debt need for M&A and there are no gaping holes. So we are really building a strategy going forward on organic growth.

Built from a really large amount of success in providing total system solutions to their customers.

Could be a tuck in acquisition here and there you know on private smaller.

We'll be buying some people which is <unk>.

<unk> pipeline on something like that but there is really no plans currently for doing any kind of larger acquisition, even activities or certain residents.

I appreciate it thank you.

We'll take the next question comes from Chris Caso. Please go ahead.

Yes. Thank you. The first question is about the some of the capacity additions that youre undertaking now could you talk about.

On the direction of Capex over the next couple of quarters.

As you tried to address these some of these supply constraints.

How long does it take to get the capacity in place and then lastly.

To what extent.

Are you looking to address these constraints through internal means as opposed to.

Getting them through outsourcing, what what's going to be the quicker and more sustainable path to getting some more product to your house customers.

Thank you undertake the Capex question.

Sure sure. So we indicated that in the very short term. So the March quarter, we're expecting to spend between 50 and $60 million on Capex.

Kind of given general guidance on the street that longer term, we expect our capex with a per signs of net sales to be somewhere between three and 4%.

This quarter, we will be going through our annual operating plan for next fiscal year, and we'll provide kind of a more detailed forecast from fiscal 'twenty, two but I wouldn't be surprised if we're on the high end of that range for next fiscal year, and we've done well below it for the last two fiscal years and so you know quick clean on the demand environment is driving that and I'll start with the second piece of it.

Question on Steve or Ganesh can add onto it but we have been making significant investments.

On Assembly and test expansion and actually this last quarter, we did 55% of our assembly in house, that's up significantly quarter on quarter and EBITDA, 57% of our final test in house. So you know these metrics tend to be slow moving but we are making progress on that.

Is allowing us to take a little bit more control of our own destiny, so with that I'll turn it back to Steve.

So I think when did your question implied debt what portion of the Capex, we were spending on it.

Internal versus external.

100% of our Capex is really being applied to grow the capacity internally the external capacity growth, we're getting it just by getting larger allocation on negotiating for a larger piece of the total capacity by half.

Foundries and subcontractors.

We're not really spending other capex dollars in growing their capacity.

But on capacity is growing significantly outside also.

But overall.

Rick mentioned.

You know, especially in the assembly and test area.

A large portion of the capacity growth is happening on site.

Alright.

As a follow up.

Given the strongly better than seasonal March the fact that.

You've got backlog debt that's difficult to.

Fill all of that.

How do we think about seasonality through the rest of the year and there are always different difficult questions right now but.

Any kind of qualitative comments that you can you can provide would be helpful.

I think the.

So seasonality has been difficult to define from microchip for some time.

Because of all these acquisitions and especially with Microsemi. The end market mix has changed so much debt, we said no to that a year or two years of stable environment.

Then one could figure out what the seasonality would be and we haven't gotten debt stable environment first of all the U S. China trade and last year was a COVID-19 and this year is this runaway growth for capacity constraints. So in this environment.

It's not the seasonal factor that's changing what you can or cannot do.

The combination of.

How much capacity you can grow with the overall demand is.

I'm, sorry, I can't really comment much on seasonality in this kind of environment.

Thank you.

Okay.

Yes.

We'll take the next question.

It comes from Harlan sur. Please go ahead.

Good afternoon. Thanks for taking my question, maybe as a follow up to the last question and I know the difficulties and complexities and quantifying full year revenue generation potential but.

Maybe more near term I assume that the team is almost fully booked for the June quarter. Maybe you guys can confirm that and that would include any unshipped delinquencies from March and June we could argue.

<unk> seasonality, but typically June is up sequentially. So your foundry away from requirements are probably already fixed for June given the lead times from your foundry partners, but wondering if you guys would be able to bring on.

And qualify additional wafer and assembly and test capacity in time to support higher levels of revenues from where you are here in March if it plays out that way in June.

So you can't qualify a different fabs in a matter of three months or six months.

Depending on what the process and product side. So you know it's a much longer effort. So a lot other capacity growth is really coming out of.

Growing capacity, where the processes are already installed.

We got some processes that install the outside as well as inside.

And most of the other the majority of our processes either than outside.

Run inside an amended on outside.

They usually only either than in one foundry or the other foundries. So there's really no no process that runs in three or four different foundries. They made on in three or four different fabs of defense foundry.

Like TSMC could run in three different tabs of TSMC.

But it doesn't run in TSMC as well as global as well as humans here something.

So the capacity growth is largely coming from where the processes are already installed from <unk> standpoint.

From an assembly test endpoint, yes, we're qualifying additional.

Net assembly subcontractors, which could give additional capacity.

But they're also a majority of the growth in assembly as well as test is coming from.

<unk> capital and installing and three.

Microchips Lodge facilities, two in Thailand, and in London, Philippines, There that's it.

During the record amount of Assembly and test every day and.

On an catastrophes is rising every week every month every quarter for the rest of the year.

So there again with my question.

The second comment there from Harlan I'm talking about are kind of implying that June quarter is fully book any of that debt.

It is not the case June quarter isn't fully book the March quarter is a fully book it can be fully booked on certain products and you. Maybe you can ask can expand on that a little debt.

Okay.

Yes, I mean.

From this quarter, we have strong backlog.

We have some tons yet to pay and.

Tons per day for the June quarter.

As Eric mentioned on our second product lines, which can be a.

On a much closer to being booked up.

That typically is starting at a much higher backlog than with technology and normal quarter would be administered on work to be done on this capacity coming online, which will help with some other growth both that's helping this quarter.

As you can see versus December and a more antigen.

Okay. So you see entered my what was going to be my third question or what was my third question and debt, which is irrespective of how the demand plays out.

If june quarter backlog ends up suggesting a higher June quarter, you guys would have the capabilities in place foundry or internal to drive higher revenue level sequentially in the June quarter.

Absolutely yes.

Okay. Thank you Steve Thank you Ganesh.

Okay.

We'll take the next question at this time it comes from Ambry Srivastava. Please go ahead.

Alright, thank you.

Wondering near term and debt either longer term Steve.

Just wanted to make sure I understood that part on the near term.

On the preferred supplier program you started just this morning, but debt.

Does the guide for March because it includes the change in cancellation from 45 to 90 is that part of.

Has that been implemented long enough to reflect can be March guide.

So that.

Was told to the customers in early December.

So on maybe where the middle of December.

Maybe as per 10th of December and we give them then the following three weeks or so to make any changes to the backlog. They wanted to make and on January one the backlog will go hard for the 90 days.

And there were very few changes made there was this meaningless very small changes so as of January one.

And then whatever it was on our books for the March quarter became from the no changes can be made and debt backlog position for the March quarter was very strong.

The strongest we have ever seen.

In our careers.

Now as Ganesh answered earlier, and Eric answer that doesn't mean, the March quarter was fully booked because you always have products, where there is product available on customers and distributors can continue to come and buy those products for the lead time is still fairly short and shippable within the quarter, but very large number.

Other products were also completely booked.

And nothing available from March on some products, even net being available for June.

So the impact of that 90 days was effective on January one.

And on <unk>.

And as you go as you finished the month of January and the backlog is now hard for February March April.

By the end of February the backlog will be hard for March April and May So that was the 90 day program.

<unk> program is an entirely new program. The 90 day program was applicable to all customers worldwide Delek for distributions.

The PSP program is the customer adoption.

It's not.

We can't force them to give us one year of backlog, so that one's an option given to their customer that they can have an ability to get preferred supplier support if they would give us 12 months of noncancelable backlog, which helps us in bringing capacity online and via capital.

<unk> hired people with confidence and it gives them preferential capacities within 17 unit per boat.

Got it got it just on it makes me wonder if this is clear.

I want to make sure. This is clear that that has zero impact on the March quarter.

Our June quarter for that matter.

Yeah, Yeah no interest.

I just wanted to make sure.

Dan.

The PSP program support starts from July.

The order they can place it now for 12 months weighted.

If they come up with a whole bunch of new orders from March April May June.

They can't get the supply ripped off from other people who are placed the backlog before so PSP.

Capacity support does not begin until July.

Okay got it I was confused about PSP I just wanted to make sure that the March quarter is it sounds like you were able to pull together a lot of internal and external to guide to what you did and it also has come back.

Commodity and lack of a better word because of the 90 day debt to start in December.

That's what I wanted to understand because there is the concern about double booking that sounds like the way you framed it in the way Youre running the business at this point Steve. Thank you you have quite a lot of visibility on that my.

Longer term question Steve.

And thanks for addressing that.

Our business model is transforming and you'll be talking about M&A being less of a priority given where the valuations are and focus on organic so no question.

You addressed it but I think the buyback, even though not directly you have been bringing down debt issue.

What was the point you made on dividend I missed that what the formula that you have in place for dividend growth.

We don't really have a formula in place so we just.

And our board will meet every quarter and decide the dividend per every quarter and.

In the current quarter, we grew the dividend by five 8%.

And you could expect debt board will grow the dividend every quarter.

And that's really our commitment.

Total in the last couple of quarters that we would build a glide path towards a higher dividend and this is a glide path towards a higher dividend. So if you accumulate the increase in dividend for 456 quarters, then by Middle of 2022, you already would have a significantly higher dividend after seeing six increases of decline we just.

Did you know.

That's really what we're trying to do to get to higher dividends and by that time leverage we have come down and as such it debt higher dividend will really be supported on at that point in time from the cash flow and still have enough cash available to keep gaining a debt down further.

Got it thank you.

We'll take the next question comes from Chris Danley from Citi. Please go ahead.

Hey, Thanks, guys, I guess, just a little bit of.

Some color on the capacity constraints on shortages so yes.

Steve you talked about it being in the automotive industrial and consumer sectors and markets.

Most of your competitors are just saying automotive would you expect this to spread to those other end markets.

For your competitors and other folks in <unk> and then when do you remember these shortages being this bad we have to go back to like 2010 or 2000.

I do not remember shortages being this bad ever.

So this is just like this is a six sigma is in terms of shortages.

Call It a black Swan event, although that's more meant from a negative.

Yes.

No I don't really know what other competitors are seeing growth, but our capacity.

For automotive products and industrial products and consumer products is really common dividends out of <unk>.

Same processes, sometimes they are the same parts that we've been shipping to them on automotive dealership, England on industrial.

So you know the capacity constraints would really be shared by all markets now the largest increase in demand has been in automotive.

We're in the June quarter, automotive demand went to 20% of normal because all the factories shut down and as that demand has gone back to a 95% of normal 100% of normal debt five X increase in other demand.

So day, Theyre seeing sort of other shortages because they didn't place that order they didn't really guide towards having as strong a V shaped recoveries for their classes of worse than that but the capacity is common.

Okay. Thanks.

There's also affect debt in automotive a $1 parts can prevent a $40000 cloud from shipping.

In industrial a $1 apart could just prevent 1999 power drill from that shifting.

So the whole sector is quite different so therefore, the noise from automotive.

The escalation of the management team on the pressure and all of that is really a different level.

Well take the next question that comes from harsh Kumar. Please go ahead.

Yeah, Hey, guys first of all congratulations.

Got it I guess kind of what Youre seeing Steve I'd add too and I'm, just going on lump them all into.

I wanted to go back to work hard on the stockpile.

As you get over your supply ish, let's say, whether it's June or July.

On an incorrect and shrinking based on your kind of what you mentioned cash can you just have some very strong year as you were able to supply.

So do not expect the second half of that is that has better R. R.

Or how can we think about linearity from here.

And then for the question is on <unk>.

Margin from.

It's not mistaken youre accurate target on very close to it.

No M&A would there not be a differentially to think about that gross margin.

She is getting more and more efficient.

So so I think.

Taking the question of capacity.

You mentioned somehow other we catch up by June July we don't expect to catch up on.

Demand capacity balance for the balance of the calendar year, 2021, and possibly go into 2022.

I mean, we already know.

The demand on lots and lots of products exceeds where we have no product available. If you place an order today, we're shipping year in September October.

And people are booking September October November.

Fast and with PSP program.

On a get backlog all the way through next January February So I don't think the capacity issue is getting sold in the next 456 months I think we're talking 12 months here.

At least to some debt to really have the capacity get in balance.

I don't remember the other part of your question.

Thank you.

Yes, I'll take the gross margin question. So we didn't actually update our long term targets for growth in operating margin back in December we took the gross margin target from 65%.

The operating margin targets of 42%. So we essentially achieved what was our prior target of 63% on the gross margin.

With these last quarter results on our guiding at the midpoint to about 63, 5% this quarter. So.

Gross margin has absolutely been a highlight over the last couple of years and we're continuing to do all the right things to be.

And our operations to drive improvements on.

I'm not sure if you have more follow up on that but we definitely have outlined.

<unk> expenses are going to help us continue to make improvement on gross margin into the future and we can go through that separately like Hertz.

I appreciate the clarification there thank you.

Yeah.

Well take the next question that comes from Janet Ramkissoon. Please go ahead.

Yeah.

Nice creativity guys from new program.

I was spun asked a question about the margins as well it just seems to me that if you have a lot of visibility on you couldn't procure supplies.

Timely and efficient manner.

And your interest.

Just planned better generally speaking.

As you exit 'twenty and 'twenty one.

You should be in a position where you would hit those target margins.

To hit those targets margins a lot sooner.

Mike correct in thinking that Steve or is there something I'm missing.

Well the.

The PSP program doesn't really do anything to the margin and it all digitally.

It could make us more efficient and if we get large amount of backlog lots and lots of customers pick up on debt offer.

And then we can build a product more efficiently.

Could help a little bit on the cost side of the equation, but PSP program.

Wasn't launch to drive margins to growth.

Whereas the launch too.

Get it firm customer backlog that.

We can be confident of.

Drilling on our capacity and not have any double ordering on excess ordering.

And that backlog, which could go away when we get there. So that's why it was launched shippers net lines for margin.

And I don't think it's going to have a lot of impact on margin.

Now as we are growing through this growth period.

Three or four things happening.

Number one all the under utilization is going away.

Or it has gone away in March, but some could be going on in June.

<unk> as the incremental capacity is being added.

<unk> interest capacity, usually is more productive because you're not adding the entire every machine youre, adding bottlenecks here and there. So when you when you add debt capacity the incremental margin turn for every dollar of revenue tends to be better and you could go back into the prior cycles in.

Calculate incremental margin.

To get some idea.

Third being.

We are bringing some products book in Fab and assembly and test from outside to inside and those moves that are accretive.

There could be something else.

The impact of price increase Inc.

We are going to be relatively benign because largely launched debt to offset.

The cost increases, but you can't always increase the price on a product where you have seen the cost increase you got to look at the product whether you know it is.

Competitive element.

It's a proprietary products, so that price increase and cost increase don't completely match product by product, but overall.

Might get some benefit suddenly and revenue per minute in margin.

That's very helpful. Thanks, very much great quarter.

Yeah.

We'll take the next question at this time it comes from Dennis Shannon. Please go ahead.

Hi, Thanks for taking my question I'm here to ask a question on behalf of Rajiv Gill.

Is there any chance you could provide us with some more color on the various kind of end market gross margin how did those move throughout the last quarter.

If you and maybe you can break it out by your reporting segments.

We don't breakout growth margin either by end market or by product line. So we reported a company level and Thats all we have.

You see on if they want to other.

A follow up on how do you expect kind of a day or the recent investments.

Into the internal capacity to <unk>.

Impact on your margins over the next three quarters would you say that there's going to be a noticeable impact of the internal capacity coming on line and you know how does that factor into your guidance or do you expect that to maybe head towards the debt.

That's kind of the end of the calendar year.

Yeah.

Alright, Thanks, Tim on Covid.

Correct correct.

No I was going to say I think these come on slowly they are not going to make big quarter to quarter changes from what they are at.

We're actually.

Each of them is a small step in the roadmap that we have said we want to improve our gross margins for the long term target.

I would not be looking for in a quarter by quarter. Please on making big changes on the gross margin on the company overall.

I think that was all thank you.

Yeah.

Well take the next question comes from Christopher Rolland from Susquehanna. Please go ahead.

Thanks for the question guys. Just two quick ones from me and then I'll get off.

I guess, Steve first of all PFT ultimately what percent of revenue do you expect to go through the P. F D program versus other.

Then secondly, as you bring some.

Internal capacity home, even on the wafer side does this bring up a conversation.

About 300 millimeter fab.

Or not is that.

What point does that become of interest to microchip.

So I think the first part of your question what portion of the revenue we expect to go through PSD, we really have no idea.

You know, it's a it's never been done before.

It is being launched by.

Now taking on questions from many large customers, saying what can you do to make sure they get the posture support in the second half from delinquent now you're not giving them. The other thing I need how can I ensure that I get that in future.

And so we came up with this program and seeing if you've come net net your orders for the next 12 months on noncancelable non reschedule growth. Then we will go with thompsons window product and give you potential support so we do not know what the uptake would be just purely guessing we just launched it this morning.

Right on tier four inputs since then.

One from a major distributor on queue from customers.

One customer that I talked to personally so I think this is hot off the cash so that's debt.

On the other part of your question was the 300 millimeter.

There is no plan to do any 300 millimeter inside.

We continue to have two logs on eight inch fabs and one large six inch fab.

And number of small.

Fortinet sort of Fabs that.

But we are transitioning product from those four inches to a six inch on eight inch fabs. The 12 inch capacity continues to be about foundries.

Any foreseeable future.

Okay.

Thanks, guys.

There are no further questions at that time on the answer a question and answer session for today I'd now like to turn the conference back over to Mr. Sankey. Please go ahead.

Yeah on the thank everyone for attending the call.

Also want to say that this is my last call as CEO.

Many of you know our Ganesh Moorthy would be the CEO starting March one I would still at Tenda calls I was to engage with investors.

But ganesh will take the lead role.

If for some of you were expecting to find a software version of Steve you may not get that internally is feistier than I am, but we'll see externally.

Hello goodness, yet so.

Thank you all.

Bye bye.

This concludes today's call. Thank you for your participation you may now disconnect.

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Good day, everyone and welcome to Microchip third quarter fiscal 2021 financial results Conference call. As a reminder, today's call is being recorded at this time I would like to turn the call over to Chief Financial Officer, Eric Yuan. Please go ahead.

Thanks, Chloe and good afternoon, everyone.

During the course of this conference call, we will be making projections on 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.

For you to our press releases on today as well as our recent filings with the SEC that identify important risk factors that may impact microchip business and results of operations.

In attendance with me today are Steve Sanger, Microchips, Chairman and CEO, and Ganesh Moorthy Microchips, President and COO I'm.

I will comment on our third quarter financial performance and Steve and good asphalt then give their comments on the results and discuss the current business environment as well as our guidance.

We'll then be available to respond to specific investor and analyst questions.

We had an unintentional posting of our earnings release on our website shortly before the normally scheduled timing today. Once we determined that's occurred we moved quickly to get the release was sent out over a normal distribution processes.

We are including information in our press release on our 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 Dot Microchip Dot com, which we believe you will find useful when comparing our GAAP and non-GAAP results.

We are also posed from the summary of our outstanding debt on our leverage metrics on our website.

I will now go through some of the operating results, including net sales gross margin on an operating expenses.

Other than net sales or were you referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our press release.

Net sales from the December quarter were 135, 2 billion, which was up three 3% sequentially and above the midpoint of our quarterly guidance. We have posted a summary of our GAAP net sales by product line and geography as well as our total end market demand on our website for your reference.

On a non-GAAP basis gross margins were a record at 63%.

Operating expenses were 23, 2% and operating income was a record 39, 8%.

Our factory under utilization charges decreased from $12 2 million to $3 $7 million sequentially as we continued to ramp our factories to respond to the strong business conditions.

We expect the continued ramp of our factories to lead to no underutilization charges on the March quarter.

Non-GAAP net income was $444 9 million non-GAAP earnings per diluted share was $1 62, five cents above the midpoint of our guidance.

On a GAAP basis from the December quarter gross margins were a record at 62, 6% and include the impact of $6 4 million of share based compensation expense.

Total operating expenses were $600 2 million and include acquisition intangible amortization of $231 6 million.

Special charges of $4 3 million.

$5 4 million of acquisition related and other costs.

Share based compensation of $44 8 million.

The GAAP net income was $36 2 million or <unk> 13 per diluted share and was adversely impacted by a $142 $1 million loss on debt settlement associated with debt refinancing activities on the quarter.

On December quarter, GAAP tax expense was impacted by a variety of factors, notably the tax benefit recorded on the convertible debt exchange transactions occurring during the period.

Our non-GAAP cash tax rate was $4 two 5% from the December quarter.

We expect on non-GAAP cash tax rate for fiscal 'twenty, one to be about four 8%.

Exclusive of the transition tax any potential tax associated with restructuring the microsemi operations and on the Microchip global structure and.

And any tax audit settlements related to taxes accrued in prior fiscal years.

We have many tax attributes and net operating losses and tax credits as well as U S interest deductions that we believe will keep our cash taxes LOE in the future.

Our inventory balance at December 31, 2020, with $666 1 million.

We had 120 days of inventory at the end of the December quarter, which was flat with the prior quarter's level.

Inventory at our distributors in the December quarter.

26 days, which is a record low level and down from 30 days at the end of the prior quarter.

In the current environment it is quite challenging for microchip.

Its distributors to increased days of inventory.

And then summer quarter, we exchanged 1.86 billion of our 2025 2027, and 2037 convertible subordinated notes for cash shares of our common stock on a new convertible bond that matures in 2020 for.

While these transactions did not impact the overall level of debt on our balance sheet. We believe that these convertible exchanges will benefit stockholders by significantly reducing share count dilution to the extent our stock price appreciates over time, which Steve will comment on further in his prepared remarks.

In calendar year, 2020 will reduce the amount of convertible bonds on microchip balance sheet by approximately $2 9 billion.

In the December quarter, we also issued a $1 4 billion senior secured bonds with a maturity date of February 15th 2024, and an interest rate point to 97, 2% and.

And used the proceeds from that transaction to pay off our term loan b, which we were paying an interest rate of about 2.15% on.

Our cash flow from operating activities was $509 7 million in the December quarter.

As of December 31, our consolidated cash and total investment position was $372 7 million.

We paid down $289 7 million of total debt in the December quarter, but please remember that this is inclusive of the cash paid for our various debt financing activities in the quarter, including putting a capped call on place for our newly issued convertible bonds.

Over the last 10 full quarters since we closed on Microsemi acquisition and incurred over $8 billion on debt to do so we have paid down $3. Two 4 billion of debt and continue to allocate substantially all of our excess cash beyond dividends to aggressively bring down the debt.

We have accomplished this despite the adverse macro and market conditions. During most of this period, which we feel is a testimony to the cash generation capabilities of our business as well as the ongoing operating discipline we have.

We continue to expect our debt levels to reduce significantly over the next several years.

Our adjusted EBITDA in the December quarter was a record $593 4 million.

And our trailing 12 month adjusted EBITDA was 2.2 dollars seven 1 billion.

Our net debt to adjusted EBITDA, excluding our very long dated people the whole debt that matures in 2037 and is more equity like in nature.

Was $3 93 at December 31, 2020 down.

Down from four point on four at September 30 of 2020, but please note that the amount of the 2037 bonds will reduce by $407 7 million during the December quarter, that's part of the financing transactions, which has impacted this metric on our.

Our dividend payment on the December quarter was $96 million.

Capital expenditures were $21 4 million in the December 2020 quarter.

We expect between 50 and $60 million on capital spending in the March quarter, and overall capital expenditures for fiscal 'twenty, one to be between $87 million and $97 million.

In last quarters conference call, we explained that our capital expenditure plan for fiscal 'twenty. One had increased as we more rapidly prepared for growth on our business as well as actions we were taking to increase our internal capacity on the face of constraints our outsourcing partners are experiencing.

Our fiscal 'twenty, one capital expenditures are coming in lower than we indicated last quarter due to longer equipment lead times and deliveries pushing out due to overall industry conditions.

We continue to add capital to maintain and operate our internal manufacturing operations.

<unk> production capabilities for our new products and technology as well to selectively bring in house some of the wafer fabrication Assembly and test operations that are currently outsourced.

We expect these capital investments will bring gross margin improvement to our business and give us increased control over our destiny during periods of industry wide constraints.

Depreciation expense in the December quarter was $43 million.

I will now turn it over to Ganesh to give his comments on the performance of the business on the December quarter Ganesh.

Thank you Eric and good afternoon, everyone, let's start by taking a closer look at Microcontrollers.

Our microcontroller revenue performed well with revenue sequentially up three 3% as compared to the September quarter on.

On a year over year basis, our microcontroller revenue was up five 9%.

We continue to introduce a steady stream of innovative new microcontroller solutions.

Including the first safety certified capacitive touch screen controllers for the home appliance market.

First trucks from golf Wi Fi module, delivering powerful 30 per bit microcontroller functionality.

There are five on identity.

Industry. Its highest density secured Ethernet switching solution for Hyperscale data centers and telecom service providers.

And last but not least pre new broad market APAC microcontroller families to extend our leadership in this product line.

Microcontrollers overall represented 53, 7% of our revenue in the December quarter.

Moving to analog.

Analog revenue also performed well and was sequentially up three 1% as compared to the September quarter.

On a year over year basis, our analog revenue was up two 6%.

During the quarter, we continued to introduce a steady stream of innovative analog products too.

Including the first cryptographic companion device supporting in vehicle network Security solutions.

Our new family of Configurable cloud debt digital to analog converter.

Our first highly integrated radiation hardened motor controller, and finally, a family of low latency.

<unk> five point out and compute express link re timers.

Analog represented 27, 6% of our revenue in the December quarter.

Our FPGA revenue was down eight 5% sequentially as compared to the September quarter on.

On a year over year basis, our FPGA revenue was up seven 1%.

As we cautioned on our prior conference calls.

<unk> revenue does have some lumpiness associated with that because of the large exposure on the aerospace and defense market and the associated purchasing patterns.

During the quarter, we announced a radiation hardened fourth generation FPGA family and a low power radiation tolerant fifth generation qualifier FPGA family.

After he had represented seven 3% of our revenue in the December quarter.

Our licensing memory and other product line, which we refer to as Alamo was up 13% in revenue as compared to the September quarter with.

With strength in licensing revenue driving this growth.

I don't know represented 11, 4% of our revenue in the September quarter.

A quick note about our product line reported.

Given the relatively smaller size of our FPGA product line at about seven from kind of on revenue as compared to our microcontroller and analog product line.

We have decided that our starting in calendar year 2021, we will no longer breakout the FPGA product line separately.

Our FPGA products remain important to on overall total system solution Gulf.

We continue to make significant investments in our FPGA products and expect growth investments will help drive our long term growth and total system solutions initiatives.

Going forward, we will combine our FPGA revenue with our LMR licensing memory and other revenue into a new category called other.

From an end market standpoint, we continue to see the automotive industrial and consumer markets strengthened further in the December quarter approximating a V shaped recovery in the second half of calendar year 2020, as compared to the first half.

The end markets that benefited early on the year from the work from home related demand search, namely computing Communications and data center remained at more normal demand pattern as a third we saw on the June quarter dissipated.

The quality of that which was in effect for all of the December quarter and.

And represented 1% to 2% of our overall revenue had a more pronounced negative impact on our data center business weighted towards a more meaningful percentage of that debt.

Finally demand from a product and go into the office environment, which we refer to as enterprise demand remained weak as most businesses remain predominantly with a work from home policies.

What's differing enterprise spending from the office environment.

The supply chain constraints that started in the September quarter continued to growth for the December quarter.

A robust overall business environment.

Central aided by rising demand from the automotive industrial and consumer markets.

Bind with low levels of inventory in the distribution channel.

Other than constraints and practically all of our income and external factors.

Since September we have been ramping on on kind of a factory has a lot of investing in capital additions to further expand our internal capacity.

We have also worked with our supply chain partners to increase our fab Assembly and test capacity allocation.

However, based on the current strength of the business environment. We expect other constraints currently seem unlikely to continue for much of calendar year, 2021, and possibly into calendar year 2022.

As a result, we haven't been on lead times stretch out from any of our products are the constraints on most acute.

We are also on experienced increases in material and subcontract that manufacturing cost.

We've taken steps to secure capacity for 2021.

Steve will discuss more on his prepared remarks about our actions to address the current environment, increasing manufacturing costs and seemingly insatiable demand.

Let me now pass it to <unk> comments about our business and our guidance going forward Steve.

Thank you Dinesh and good afternoon, everyone.

Today I would like to first reflect on the results of the fiscal third quarter of 2021.

I will then provide guidance for the fiscal fourth quarter of 2021.

The December quarter represented the shift of the business cycle back to revenue growth with a three 3% sequential growth in a quarter, where ordinarily we would see a 3% sequential decline from typical seasonal factors December.

December quarter revenue also grew over prior year's December quarter by 5%.

We started ramping our internal factories in September as well as investing in capital additions to expand our internal capacity.

We also started working with our supply chain partners to receive more allocation from wafer foundries and assembly test subcontractors.

These efforts improved product availability.

In the December quarter, but still constrained to some of the revenue upside.

We delivered a record non-GAAP gross margin of 63% helped.

Helped by a significant reduction in factory under utilization and better overhead utilization from revenue growth.

We also achieved non-GAAP operating margin of 39, 8%.

And all time record and getting very close to and an emotional 40% Mark.

We also hit a record EBITDA of $593 $40 million, despite revenue not get if that occurred.

Yet showing the robust strength of our business model.

Our consolidated non-GAAP EPS was $1 62, five cents above the midpoint of our guidance.

This was also our 120 <unk> consecutive quarter of non-GAAP profitability.

Now I will discuss our guidance for the March quarter.

Our bookings were exceptionally strong in the December quarter and growth and all time record.

We received bookings growth for short term as well as into the future quarters.

The backlog is also an all time record.

Please remember that bookings as well as the backlog is what is shippable in.

On the next 12 months.

The backlog for the March quarter is the strongest starting backlog I've ever seen.

Our bookings have remained strong in January on.

The Attritional side.

Remember quarter was constrained by product availability.

We even have more internal and external capacity in the March quarter. Since we have had multiple months to them, although I believe that wafer fab as well as back end constraints are here to stay with us through calendar year 2021.

Response to the business environment, we have taken three actions.

First in the Middle of December we changed other cancellations and pushout terms with our customers and distributors. The standard terms used to be debt in order it cannot be cancelled or pushed out once it is within 45 days of shipment we changed over standard terms, so that an order cannot be cancelled or pushed out.

Within 90 days of shipment effective January one 2021.

We gave customers a couple of weeks to adjusted backlog before it went firm for 90 days.

In response to our change in terms, we did not see any unusual cancellations or push outs, which indicates to us that the backlog was fun and needed by our customers.

That gave us a solid backlog for the March quarter, which cannot be cancelled or pushed out.

Therefore, we can batch process the orders on us over manufacturing assets.

Simply knowing that what we do will get shipped.

The second action, we took was that we sent a letter to our customers on January four 2021.

Informing them of the business environment.

Also inform them that we are seeing broad based cost increases and some aggressive commercial terms from our supplier base and.

And we must pass these cost increases to our customers through our broad based price increase.

The current action we took just this morning.

We have posted a letter on our website and send it to our customers and distributors announcing a new program called the Microchip preferred supply program or PSP. This program offers our customers the ability to receive prioritize capacity in the second half 2021 and first half.

2022 per program has the following elements.

Customers participating in this program will have to place 12 months of orders, which will be noncancelable and non reschedule liberal.

The capacity priority will begin for shipments in July 2021.

The program will not be a guarantee of supply.

However, it will provide the highest priority for those orders, which are under this PSP program.

And the capacity priority will be on it first come first served basis until the available capacities book, We will of course reserve a portion of our capacity for new customers small long tail customers and new designs.

We expect that a significant portion of our capacity will be booked under this new program with the largest committed noncancelable backlog for 12 months microchip will be in a stronger position to make capacity and raw material commitments to our suppliers by capital equipment, Wisconsin.

<unk> hired employees and ramp up manufacturing.

On manufactured products more efficiently.

Taking all these factors into consideration, we expect our net sales for March quarter to be up between 5% to 10% sequentially.

The March quarter guidance at the midpoint would represent a record GAAP net sales.

Prior to their current being in the September quarter of 2018.

The September quarter of 2018 based on GAAP sell in revenue recognition was $1 43 2 billion.

Some of you may still carry a sell through this number.

151 3 billion.

For September 2018 can you on historical financial margin spreadsheets.

The March quarter will also be limited by product availability.

On many product lines.

Our guidance assumes a working through a myriad of capacity constraints qualifying incremental equipment installed qualifying alternate subcontractors in some cases and still dealing with the risk of production constraints with a new wave of Covid cases, plaguing the planet and at the same time ramping of vaccine.

Nations.

For the March quarter, we expect other non-GAAP gross margin to be between <unk>.

63, 3% and 63, 7% of sales, which would be a new all time record.

We expect non-GAAP operating expenses to be between 23, 2%.

On 23, 6% of sales and we expect non-GAAP operating profit percentage to be between 39, 7% and 45% of sales.

We expect non-GAAP earnings per share to be between $1 67 per share per $1 79 per share.

We also expect to pay down and other.

Approximately $350 million of definitely in the March quarter.

Finally, I want to cover one other area, which is over future cash return strategy.

At the rate, we're paying down debt, we expect to break in net leverage of three within a year and.

And continue to decrease from day at.

At that time, we expect to begin distributing motor for a substantial amount of free cash flow to the investors in the form of dividends and stock buybacks.

Regarding buybacks.

Multiple tranches of convertible debt buyback.

Essentially BARDA substantial amount of stock back from the future.

This is because as the stock price rises and exceeds the conversion price of the debt convertible debt the Nu X the share count.

Brian converts back prevents future dilution as the stock price rises.

Our first to convert buyback was in March 2020, when Microchip stock price was about $71. Since then we have done for other buyback transactions at various stock prices.

By doing these various buyback transactions, we have purchased a total of three $5 billion to $5 billion in face value of our convertible bonds.

For their transactions from March 2020 to September 2020.

Issued a total of about 24 million shares.

Common stock to the investors for in the money value of their bonds. If these bonds remain outstanding until an assumed stock price of $140 per share.

Stock price about now.

The dilution would have been about $26 4 million shares.

Our repurchase it had the impact of creating the savings of about 6 million shares worth $840 million savings to our investors at $140 per share. This.

This calculation does not include over in November 2020 transaction, which was very recent and executed at $133 47 per share.

So it is not yet accretive therefore.

Therefore, while we have not done an open market stock buybacks in the last year.

Convert transactions have had the impact of the buyback.

Approximately 6 million shares at some point in the future we expect to start your stock buyback from the open market.

We are also initiating a path to higher dividends and not waiting until other leverage reaches a given number before the dividend starts to increase.

On this regard we announced today.

The board of directors have approved a dividend increase.

Five 8% sequentially from 39 per share up from 36 eight operations previously we expect to continue to increase dividends quarterly as part of our cash return on strategy.

Given all the complications of accounting for acquisitions, including amortization of intangibles restructuring charges and inventory write up on acquisitions Microchip will continue to provide guidance and track its reserves on non-GAAP EPS is except for Nexus, which will be on a GAAP.

GAAP basis.

Believe that non-GAAP results provide more meaningful comparison to prior quarters, and we expect that the analyst and we requested at the analyst.

We reported non-GAAP estimates to first call.

With this <unk> will you please poll for questions.

Certainly.

Certainly if you would like to ask a question. Please signal by pressing star one on your telephone keypad due to time constraints, we ask that participants limit themselves to one question. At this time. If you have a follow up question. Please reenter the queue, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow you seem not to retire.

<unk>.

Press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal.

And we will take the first question at this time caller. Please go ahead.

Steve and I didn't really hear you on mute.

Steve can you hear me.

Yes no.

On here my name <unk> color I apologize for that.

Really quickly we've lived through multiple times of you sending out customer letters and we kind of have an understanding of how the market responds to that I'd be kind of curious the preferred supplier agreement that you talked about in your opening remarks is this the first time debt.

You have done that and if it's not what's what's been the historical response.

Programs like this.

So the preferred supplier program is brand new I have not ever implemented it in my 42 years of for Korea, and I have never seen anybody else do that to the program is largely in response to the current environment.

Because bookings level is just so strong and people are booking parks out in time, the industry seems to be you know 30% plus.

Sure to deliver what.

The capacity requirement is.

And many of our customers have been asking what can they do if they give us longer term demand longer term orders.

Give them parts would that give them better support.

No you know customers can give us longer term orders, but if the orders are canceled or rescheduled liberal.

After 90 days, which was there.

Their cash prior to the program.

Then than I could have a lot of orders for September and December and Goodbye capital hired people to rent, but just before I get there people can sell if there was a double ordering people asking more than they need and they can sell part of the orders. So that is off from the problem always on you guys asked for.

Question is there any double ordering or whatever.

And this program basically eliminates all debt. It asked the customers took place 12 months backlog, which will be noncancelable non scheduled rescheduled liberal so I can take that one to the bank.

But on materials do batch processing grow their capacity and give them preferential supply. So this is the first time. We have implemented is it's just the just to need other times.

No. It was just this morning, but what do you expect the intended to response to be from your customers.

Well.

You know a small number of customers who already have feedback through the day.

Including a couple of distributors that response is positive they were.

They replace such orders in on I don't expect any customer.

To place their entire backlog on every product on.

On the PSP program because customers themselves have.

Some programs, where they are solid that the demand is good they have a good market share on that particular design, but some others could be some new programs with the demand as yet not known so I think customers will really take a lot other product and put it on TSB and some other that they want.

Perfect. Thank you guys.

Okay.

We'll take the next question comes from to share how are you. Please go ahead.

Hi, good afternoon. Thanks, so much for taking the question Steve.

Steve and Ganesh.

Given the current supply and demand situation what are your thoughts on pricing across your microcontroller and analog business and if you can kind of speak to.

Gross margins on the back of that that would be helpful and I guess sort of related to that given the.

The preferred supplier program, how should we think about the economics of that program. Thank you.

So we sent a letter to our customers on January four really informing them most of the business environment and also informing them that we were seeing.

Broad based cost increases and some very aggressive commercial terms from other suppliers who were facing.

Similar issues from their suppliers really up and down the supply chain and we must pass these cost increases to our customers through really a broad based price increase so after writing that letter then we need to really develop that program and we got you now.

Several hundred thousand Skus and going through their price increases on.

On which part and how much in passing on to their customers working through there.

Contracts on long term prices and stuff like that so all that really has been implemented at this point in time, we arent breaking out what portion of the guidance is price increase.

What's going on a relatively difficult.

But the price increases have already been net effective.

As far as.

The.

The economics of the PSP program.

On the economics of the PSD programs really are in.

In having a committed noncancelable non reschedule liberal backlog on the books.

We can build it in batches by raw material ahead, if we wanted Inc.

The inventory if we wanted to serve that and build it when you know whenever we have a lull.

Essentially that's where the economics are to be able to serve their customers better who joined the program.

And microchip non.

On the subject to ordering more than they need and double ordering because they're not going to double order and order more than they need if they can have reschedule or cancel so that's where the economics are there is no price change with that.

Price program is totally separate.

Thank you that answers your question.

Thanks.

We'll take the next question it comes from Vivek Arya. Please go ahead.

Thanks for taking my question Steve you.

It was just faced significant revenue growth in calendar 'twenty, one and you are starting the year at about 10% year on year growth is that a significant number is it something higher than that and more importantly, what kind of growth can your supply chain support this year.

Well you're right.

You must flow located what I said I thought I talked about the question really was debt.

Street had 7% growth would you expect something higher than debt.

And my answer was yes, so whatever anybody interpret it I don't know what significant means.

Can't really give you a number for the growth for the year, Although I think the revenue is more constrained by capacity than the demand at least now and for the next several quarters.

Which leads to your second question what Ken.

What kind of growth.

<unk> support.

I think one other one of the problem that we're dealing with is that.

On the supply chain is not stable.

We're finding that.

Yeah Assembly test subcontractors will commit that it can do X number of parks per week.

And as we get the they would change that number that would lower that number or push it out by a couple of weeks well what happened.

Well what happened was they got a decommitment from this supplier they didn't get some bundles day were expecting they couldn't hire some people somebody tested positive for COVID-19. So they had to send 50 people home who had come in contact with it.

So you know there's no slack in the system everything that gets built get shipped.

Absolutely no slack in the system. So any purchase nation, there was an earthquake in Taiwan.

We had a car that hit our substation and a fab in Oregon that knocked out about three or four it is partially knock on wood not complete.

None of those teams are making bill because all sectors are working seven days a week.

Full board so any delay in equipment just leads to a day commitment and so I think are those on all the myriad of problems we're dealing with.

And adding equipment, adding people qualifying additional subcontractors.

Getting our customers to live qualification you know.

Other motive the hardest customers to qualify production in the different gland or to approve a change.

And in the last six months, we have been so successful in getting even though the automotive customers that they would buy the products from this alternative assembly site or test side.

So we're getting healthy on that area, but it's still a very very complicated.

You know process to put it all together and.

And therefore, we're not willing to dollar value is the number on what percentage we could grow.

Not yet.

Thank you.

We'll take the next question comes from Greg heading back. Please go ahead.

Yes, Thanks, Steve just a question on the just the inventory 26 day.

When would you expect that to perhaps get back to kind of within normal ranges and any trends you could share just by geography in terms of just the resale.

So distribution would love to grow the inventory in this environment to serve their customers better.

But.

This inventory count growth there is there's not enough product available to grow the inventory because prior to keeps getting shipped out.

Another point I would like to make is debt.

Other inventory as well as distributor inventory.

Is calculated based on last 90 days of sales. So it's based on the prior quarter essentially.

If you.

The real value of the inventories to support the future. So if you take our guidance and take the midpoint of our guidance, let's say and calculate the days of distributor inventories at microchip inventory.

Based on debt guidance than the inventory numbers are extremely low.

But theyre calculated as we report which is the standard convention based on the 90 day is in a very stable environment flat sales it doesn't matter, but in a significant growth.

The real inventories actually much lower than the numbers we're reporting on.

We don't think it's going to grow I think on internal inventories will drop this quarter.

We expect by several days on distribution to do that soon.

Got it and then just a follow up tick in Nash on debt total system solution and any progress. There are things you can share with us in terms of development.

Sure so.

It's not a one quarter on progress with a multi quarter activity that's been pad.

The processes that need to be put in place have been their new processes are calling in.

Reflecting on how we see the design activity, taking place some of which we've shared anecdotally in some of these conferences, we will share some more of this coming quarter as well.

The power of the whole coming together.

Putting all of the different parts of Microchip on a customer's board is very much strong on a live on a key part of our growth strategy.

Got it thank you.

We'll take the next question comes from Gary Mobley. Please go ahead.

Yeah.

Hey, guys. Thanks for taking my question.

So I know you started the December quarter with your distributor inventory levels slightly below average and looks like you.

Under shipped into the channel by about $26 million in the December quarter is that how we should think about perhaps what.

How much higher your revenue could have been if you had.

Available production capacity and whatnot, a similar amount as we look out into the March quarter.

Well.

<unk>.

You know, we we had unsupported orders.

For every geography for every product line.

For direct as well as for distributions. So just picking a number that the distribution inventory went down by <unk>.

I'm just saying that's for revenue we missed for the December quarter will not be equity, we're not breaking out the number but.

The total amount of revenue that we have the mist also was also from direct and essentially in every geography.

Okay.

My follow up I wanted to ask about your philosophy towards M&A, when you get to that magical net leverage ratio of less than three times.

Is that should we take that to mean that you are also open to.

So on M&A transactions at that point as well.

I think we have spoken extensively.

Extensively about this from the past.

Saying that we believe.

There was an M&A as you know on the last 12 years or so we did <unk>.

16, 17, 18 acquisitions, a few large wounds public and lots of them small.

And all day was intent to scale.

Scaled accompanying 10 extra store and now we've got over $5 $4 billion company.

And really not have a scale disadvantage to our competitors I think we have achieved that and today we have.

On a product line with which we can complete our customers' entire solution.

Essentially you have all the parks built out on microchip products in other than resistors and capacitors and connect.

Connectors and battery everything else is really made for microchip.

So today there is not you know that need for M&A and there's no gaping holes. So we are really building a strategy going forward on organic growth.

From a really large amount of success in providing total system solutions to their customers it could be a tuck in acquisition hidden there in on private smaller.

On the buying some people, which is a technology pipeline on something like that but it didn't really.

No plans currently for day.

Any kind of larger acquisition, even after we reach a certain residents.

I appreciate it thank you.

We'll take the next question comes from Chris Caso. Please go ahead.

Yes. Thank you first question's about the some of the capacity additions that you're undertaking now could you talk about one the direction of Capex over the next couple of quarters as you try to address these some of these supply constraints.

How long does it take to get the capacity in place and then lastly.

You know to what extent.

Or are you looking to address these constraints through internal means as opposed to.

Getting them through outsourcing, what what's going to be the quicker and more sustainable path to getting some more product to your house customers.

Thank you undertake the Capex question.

Sure sure. So we indicated that on the very short term. So the March quarter, we're expecting to spend between 50 and $60 million on Capex.

We've kind of given general guidance on the street that longer term, we expect our capex of the per signs of net sales to be somewhere between three and 4%.

This quarter, we will be going through our annual operating plan for next fiscal year, and we'll provide kind of a more detailed forecast from fiscal 'twenty, two but I wouldn't be surprised if we're on the high end of that range for next fiscal year, and we've done well below it for the lab.

Last two fiscal years and so.

Clean on the demand environment is driving up on I'll start with the second piece of the question on Steve or Ganesh can add onto it but you know what we have been making significant investments.

Assembly and test expansion and actually this last quarter, we did 55% of our assembly.

In house, that's up significantly quarter on quarter every day and 57% of our final test on house. So these metrics tend to be slow moving but we are making progress on that and is allowing us to take a little bit more control of our own destiny, so with that I'll turn it back to Steve.

So I think when as your question implied debt what portion of the Capex we were spending.

Internal versus external.

I think 100 personnel from Capex is really being applied to grow the capacity internally.

External capacity growth, we're getting it just by getting larger allocation on negotiating for a larger piece of the total capacity by half.

Foundries and subcontractors are.

We're not really spending other capex dollars in growing their capacity.

But on capacity is growing significantly outside also.

But overall.

Eric mentioned.

You know, especially in the assembly and test area.

A large portion of the capacity growth is happening and so.

Alright.

As a follow up.

Given the strong lead better than seasonal March the fact that.

You've got backlog debt that's difficult to do.

To fill all of that.

How do we think about seasonality through the rest of the year and there are always different difficult questions right now but.

Any kind of qualitative comments that you can you can provide would be helpful.

I think the.

So seasonality has been difficult to define from microchip for some time.

Because of all these acquisitions and especially with Microsemi. The end market mix has changed so much debt, we said no to that a year or two years of stable environment.

And one could figure out what the seasonality would be and we haven't got them debt stable environment first of all the U S. China trade and last year was a COVID-19 and this year. This is on a weighted growth for capacity constrained. So in this environment.

It is not the seasonal factors thats changing what you can and cannot do.

The combination of <unk>.

Its capacity you can grow with the overall demand is.

Sorry, I can't really comment much on seasonality in this kind of environment.

Thank you.

Okay.

Yeah.

We'll take the next question.

It comes from Harlan sur. Please go ahead.

Good afternoon, and thanks for taking my question.

Maybe as a follow up from the last question and I know the difficulties and complexities and quantifying full year revenue generation potential but.

Maybe more near term you know I assume that the team is almost fully booked for the June quarter. Maybe you guys can confirm that and that would include any unshipped delinquencies from March and June we could argue about seasonality, but typically June is up sequentially. So your foundry away from <unk>.

Farmers are probably already fixed for June given the lead times from your foundry partners, but wondering if you guys would be able to bring on.

And qualify additional wafer and assembly and test capacity in time to support higher levels of revenues from where you are here in March if it plays out that way in June.

So you can't qualify different fabs in a matter of three months or six months.

Depending on what the process on products.

Much longer effort. So a lot other capacity growth is really coming out of.

Growing capacity, where the processes are already installed.

We got some processes other install the outside as well as inside.

And most of the other the majority of our processes either on outside.

On inside and outside.

They usually only either than in one foundry or the other foundries, where there's really no no process that runs in three or four different foundries. They made on in three or four different fabs of the same foundry.

Like TSMC could run in three different tabs of TSMC.

But it doesn't run in TSMC as well as global as well as UMC or something.

So the capacity growth is largely coming from where the processes are already installed from a tax standpoint.

From an assembly test standpoint, yes, we are.

Qualifying additional.

Automated assembly subcontractors, which could give additional capacity.

But then also majority of the growth in assembly as well as test is coming from.

<unk> capital and installing and three.

Microchips Lodge facilities, two in Thailand, and one in Philippines there.

During the record amount of Assembly and test every day.

And catastrophes is rising every week every month every quarter for the rest of the year.

So there again with my question.

The second comment there from Harlan I'm talking about are kind of implying that June quarter is fully book things of that that is not the case in June quarter isn't fully book. The March quarter is a fully book it can be fully booked on certain products and you. Maybe you can ask can expand on that debt.

Okay.

Yes, I mean.

This quarter, we have strong backlog.

We have some tons yet to pay and other.

Tons per day for the June quarter.

As Eric mentioned on our second product lines, which can be a.

Much closer to being booked up.

That's typically starting at a much higher backlog than with technology and normal quarter would be total.

Book to be done on this capacity coming online, which will help us some other growth both that's helping this quarter.

As you can see versus December.

On more antigen.

Okay Cc entered my what was going to be my third question or what was my third question and debt, which is irrespective of how the demand plays out.

If june quarter backlog ends up suggesting a higher June quarter, you guys would have the capabilities in place foundry or internal to drive higher revenue level sequentially in the June quarter.

Absolutely yes.

Okay. Thank you Steve Thank you Ganesh.

Okay.

We'll take the next question at this time it comes from Bruce Srivastava. Please go ahead.

Alright, thank you.

Wondering near term and then other longer trends.

And really just wanted to make sure I understood that part on the near term.

The preferred supplier program you started just this morning, but does the guide for March does it include the change in cancellations from 45 to 90, it is that part of it.

Has that been implemented long enough to reflect can be March guide.

So that.

Was told to the customers in early December.

So maybe it was the middle of December.

EBITDA per 10th of December and we give them then the following three weeks or so to make any changes to the backlog. They wanted to make in on January one the backlog will go hard for the 90 days.

And there were very few changes made it it was meaningless very small changes so as of January one.

And whatever it was on our books for the March quarter became from but no changes can be made in debt backlog position for the March quarter was very strong.

The strongest we have ever seen.

In our careers.

As Ganesh answered earlier and Eddie cancer that doesn't mean, the March quarter was fully booked because you always have products, where there's product available and customers and distributors can continue to come and buy those products for the lead time is still fairly short and shippable within the quarter, but very large number.

Other products were also completely booked.

And nothing available from March on some products, even net being available for June.

So the impact of that 90 days was effective on January one.

And.

As you go as you finished the month of January and the backlog is now hard for February March April.

By the end of February the backlog will be hard for March April and May So that was the 90 day program.

<unk> program is an entirely new program. The 90 day program was applicable to all customers worldwide Delek for distributions.

The PSP program is the customer adoption.

It's not.

We can't force them to give us one year of backlog, so that one's an option given to their customer that they can have an ability to get preferred supply support if they would give us 12 months of noncancelable backlog, which helps us in bringing capacity online.

And by capital and hire people with confidence and it gives them preferential capacities within of 17 units per boat.

Got it got it just want to make sure.

Make sure it's clear.

I want to make sure. This is clear that that has zero impact on the March quarter.

August June quarter for that matter.

Yeah, Yeah net interest I'm not sure if you wanted to make sure.

On the.

The PSP program support starts from July.

No the order they can place it now for 12 months weighted.

If they come up with a whole bunch of new orders from March April May June.

They can't get the supply is EBITDA from other people who are placed a backlog with tour. So PSP.

Capacity support does not begin until July.

Okay got it I wasn't confused about PSP I just wanted to make sure that the March quarter is it sounds like you were able to pull together a lot of internal and external to guide to what you did and it also has come back.

Solidity and lack of a better word the cause of the 90 day debt to start in December.

That's what I wanted to understand because theres a concern about double booking that sounds like the way you framed it in the way Youre running the business at this point Steve. Thank you you have quite a lot of visibility on that on my.

Longer term question, Steve and thanks for addressing that.

Business model is transforming and you'll be talking about M&A being less of a priority given where the valuations are.

And focus on organic so no question.

You addressed it but I think the buyback even though not directly you have been bringing down division.

What was the point you made on dividend I missed that what the formula that you have in place for dividend growth.

We don't really have a formula in place we just.

And our board will meet every quarter and decide the dividend per every quarter.

On the current quarter, we grew the dividend by five 8%.

And you could expect debt board will grow the dividend every quarter.

And that's really our commitment.

Total in the last couple of quarters that we would build a glide path towards a higher dividend and this is a glide path towards a higher dividend. So if you accumulate the increase in dividend for a 456 quarters then by Middle of 2022, you already would have a significantly higher dividend.

After seeing six increases of defined we just did.

Really what we're trying to do to get to higher dividends and by that time leverage would have come down and as such it debt higher dividend would really be supportable at that point in time from the cash flow and still have enough cash available to keep bringing the debt down sort of book.

Got it thank you.

We'll take the next question comes from Chris Danley from Citi. Please go ahead.

Hey, Thanks, guys, I guess, just a little bit of.

Color on the capacity constraints on shortages so.

Steve you talked about it being in the automotive industrial and consumer sectors or end markets.

Most of your competitors are just saying automotive would you expect this to spread to those other end markets.

For your competitors and other folks incentive and then when do you remember these.

Shortly just being this bad debt, we have to go back to like 2010 or 2000.

I do not remember shortages being this debt ever.

This is just like this is a six sigma event in terms of shortages.

Call It a black Swan event, although that's more meant from a negative.

The.

I don't really know what other competitors are seeing growth, but our capacity.

Our automotive products and industrial products and consumer products is really common cause under other seem to have this.

Same processes, sometimes they are the same parts that we couldn't ship into an automotive or shipping Glenn industrial.

So you know the capacity constraints will really be shared by all markets now the largest increase in demand has been in automotive.

Other than the June quarter, automotive demand went to 20% of normal because all the factories shut down.

And as that demand has gone back to a 95 per cent of normal 100% of normal debt sits five X increase in other demand So day theyre.

They're seeing sort of other shortages because they didn't place that order they didn't really guide towards having the strongest V shaped recoveries with their cartilage are worse than that but the capacity has come on.

Okay. Thanks.

There's also affect debt in automotive $1 part can prevent a $40000 cloud from shipping in.

In industrial at $1 part.

Just prevent a 1999 public drill from that shifting.

So the whole sector is quite different so therefore, the noise from automotive.

Escalations on the management team on the pressure on all of that is really a different level.

Well take the next question that comes from harsh Kumar. Please go ahead.

Yeah, Hey, guys first of all congratulations.

Right I guess sign up from what Youre seeing Steve I'd add too and I'm, just kind of lump them all into.

Wanted to go back to work hard on this talking about it earlier.

As you get over your supply ish, let's say, whether it's June or July.

On the incorrect and shrinking based on your kind of what you mentioned cash Steve just ask very strong year as you were able to supply.

<unk> do not expect the second half of that is that is better our strong balance our housekeeping things about linearity from here.

And then for the question is on gross margin from.

It's not the states that youre accurate target on pretty close to it.

M&A would there not be essentially to think about that gross margin.

As you get more and more.

So so I think.

Taking the question of capacity.

You mentioned somehow other we catch up by June July we don't expect to catch up on.

Demand capacity balance for the balance of the calendar year 2021, and could possibly go into 2022.

I mean, we already know.

The demand on lots and lots of products exceeds where we have no product available. If you place an order today, we're shipping you're in September October.

And people are booking September October November.

Fast and with PSP program.

On a good backlog all the way through next January February So I don't think the capacity issue is getting sold in the next 456 months I think we're talking 12 months here.

At least to solve that COVID-19 has the capacity and balance.

I don't remember the other part of your question.

Thank you.

Yes, I'll take the gross margin question. So we did actually updated our long term targets for growth in operating margin back in December we took the gross margin target from 65%.

The operating margin targets of 42%. So we essentially achieved what was our prior target of 63% on the gross margin.

With the last quarter results on our guiding at the midpoint to about 63, 5% this quarter. So.

Gross margin has absolutely been a highlight over the last couple of years and we're continuing to do all the right things to be.

<unk> and our operations to drive improvements on.

I'm not sure if you have more follow up on that but we definitely have outlined.

<unk> expenses are going to help us continue to make improvement on gross margin in the future and we can go through that separately like Hertz.

I appreciate the clarification there no I'm good thank you.

We'll take the next question that comes from Janet Ramkissoon. Please go ahead.

Yeah.

Nice creativity guys from across our new program.

I was spud on ask a question about the margin as well it just seems to me.

If you have a lot of visibility on you could procure supplies.

Timely and efficient manner.

And your interest.

Trust plan better generally speaking.

As you exit 'twenty and 'twenty, one you should be in a position where you would hit those target margins.

On a hit those topics margin a lot sooner on.

On my correct in thinking that stable or is there something I'm missing.

Well.

The PSP program doesn't really do anything to the margin and it tore digitally.

You know it.

It could make us more efficient and if we get large amount of backlog lots and lots of customers pick up on debt offer.

And then we can build a product more efficiently.

It could help a little bit on the cost side of the equation, but PSP program.

Wasn't launched to drive margin it was it.

It was a launch too.

Get it firm customer backlog that we can be confident.

Drilling on our capacity and not have any double ordering on excess ordering in that backlog, which could go away when we get there, but that's why it was launch not launch for margin and I don't think it's going to have a lot of impact on margin.

Now as we are growing through this growth period.

Have three or four things happening.

On a number one all the under utilization is going away.

Most of it has gone away in March, but some could be going on there in June.

<unk> as the incremental capacity is being added.

<unk> interest capacity, usually is more productive because you're not adding the entire every machine youre, adding bottlenecks here and there. So when you when you add debt capacity the incremental margin turn for every dollar of revenue tends to be better and you could go back in the cycle then.

Calculate incremental margin.

To get some idea.

Third being.

We are we are bringing some products book in Fab and assembly and test from outside to inside and those moves that are accretive.

There could be something else.

The impact of price increases I think there's going to be relatively benign because largely launched debt to offset.

The cost increases, but you can't always increased the price on a product where you have seen the cost increase you got to look at the product rather you know on visits.

Competitive element there.

It's a proprietary products so the price increase and cost increase.