Q4 2021 Microchip Technology Inc Earnings Call
And <unk> chips fourth quarter of fiscal 2021 financial results call. At this time of your I said, many additional participants and do you plan to be on the way momentarily. We appreciate your patience and ask that you. Please wait on the line.
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Please stay on by.
Good day of you wanted to walk into the microchips fourth quarter of fiscal 2021 and financial results call. As a reminder of today's call is being recorded.
At this time I'd like to turn the call over the micro chops Microchips, Chief Financial Officer, Mr. Eric The Arnholt. Please go ahead Sir.
Thank you and good afternoon, everyone.
During the course of this conference call will be making projections on the other forward looking statements regarding the future events or the future financial performance of of the company. We wish the caution you that such statements and and our predictions and the actual results and events may differ materially.
The refer you to our press release of today as well as our recent filings with the SEC [noise] that identify important risk factors that may impact the microchip business and the results of the operations.
And and tenants with me today, Oregon, Esworthy, Microchips, President and CEO, and Steve Saggy Microchips Executive Chairman.
I won't comment on our fourth quarter and full fiscal year, 2021, and financial performance and.
And that's will then give commentary on our results and discuss the current business environment as well as our guidance and Steve will provide and update on our cash returned strategy, we will that'd be available to respond the specific investor and analysts questions.
We are including information on our press release and and this conference call on various GAAP and non-GAAP measures we of posted a full GAAP to non-GAAP reconciliation on the Investor Relations pays for the website at Www Dot Microchip Dot com.
Which we believe you will find useful when comparing our GAAP and non-GAAP results.
We've also posted the summary of her outstanding depth, our leverage and our and our leverage metrics on our website.
I will now go through some of the operating results, including net sales gross margin and the operating expenses other than that sales are we referring to these results on a non-GAAP basis, which is based on expenses proud of the effects of our acquisition activities share based compensation and certain other adjustments as described on our press release.
Net sales and the March quarter were 1.467 billion, which were up eight and a half per cent sequentially and above the midpoint of our quarterly guidance.
We have posted the summary of our GAAP net sales by product line and geography, as well as our total and market demand on our website for your reference.
On and on that basis gross margins were of record at 64.1 per cent operating expenses were at 23.4%.
And operating income was of record 47 per cent.
Non-GAAP net income was of record 521.4 million.
Non-GAAP earnings per diluted share was of record dollar 80, 512 cents above the mid point of our guidance.
On a GAAP basis on the March quarter, gross margins, where a record of 63.2%.
Total operating expenses were $618.8 million and include acquisition and tangible amortization of 232.4 million special income of 7.2 million two.
$2.9 million of acquisition related and other costs and share based compensation of 47.2 million.
The gap net income was 116 million or 41 per diluted share and was adversely impacted by a 85 6 million dollar loss on debt settlement associated with our convertible debt refinancing activities.
Or of March quarter, GAAP tax expense was impacted by a variety of factors, notably the tax benefit reported on the convertible debt exchange transactions occurring during the period.
For fiscal year 2021, net sales were of record 543 $8 billion.
And of non-GAAP basis, gross margins where of record 62.8% operating expenses were twenty-three 2% of sales and operating income was of record 39, 6% of sales.
Non-GAAP net income was the record 178, 4 billion and EPS was the record of $6 and 59 per diluted share.
On a GAAP basis gross margins where of record 62.1% operating expenses were 43, 7% of sales and operating income was 18.4% of sales net.
Net income was $349 4 million and EPS was $1.29 per diluted share.
Are non-GAAP cash tax rate was 1.8% and the March quarter, and 4.1% of the script fiscal year 2021 and.
The non-GAAP cash tax rate on the March quarter was lower than originally forecast the due to a variety of factors, including the receipt of of tax refund. The had not been forecasted of received until a later date we.
We expect our non-GAAP cash tax rate for fiscal 22 to be about 6% exclusive of the transition tax any potential tax associated with the restructuring and the microsemi operations into the microchip global structure and any tax audits settlements related of taxes accrued and prior fiscal years.
Our inventory balance at March 31, 2021 was $665 million, we had 112 days of inventory at the end of the March quarter, which was down and eight days from the prior quarters level.
[noise] inventory of our distributors at the end of the March quarter were of 22 days, which.
Which is of record low level and down from 26 days at the end of the prior quarter.
We're ramping capacity and our internal and external factories. So we can ship as much product as possible to support customer requirements.
And the March quarter, we exchanged 359.2 million of our 2025, 2027, and 20 and 37 convertible subordinated notes for cash and shares of common stock.
While these transactions did not impact the overall level of of that on a balance sheet. We believe that these convertible exchanges will benefit stockholders by significantly reducing share count dilution to the extent of our stock price appreciates over time the.
The principal amount of convertible debt on our balance sheet at the end of fiscal year 2021.
Is 126 3 billion compared to 448 1 billion at the beginning of calendar year of 2020, putting our overall capital structure and a much better longterm position.
Our cash flow from operating activities was $449 2 million and the March quarter.
As of March 31 are consolidated cash and total investment position was $282 million.
We paid down $369 2 million of total debt and the March quarter.
Over the last 11 and four quarters since we closed the microsemi acquisition and incurred over $8 billion and that to do so we have paid down $361 billion of debt and continue to allocate substantially all of our excess cash be on dividends to aggressively bring down this debt.
We've accomplished this despite the adverse macro and market conditions. During most of this period, which we feel of the testimony to the cash generation capabilities of our business as well as our ongoing operating discipline.
We continue to expect our debt levels to reduce significantly over the next several years.
[noise] are adjusted EBITDA and the March quarter was of record $652 3 million and are trailing 12 months. Adjusted EBITDA was also of record at $2 375 billion.
Our net debt to adjusted EBITDA, excluding are very long dated convertible that the matures and 2037 and is more equity like and nature was 371 at March 31 2021.
Down from 393 at December 31 2020. Please.
Please note that the amount of the outstanding 2037 bonds were reduced by $156 million. During the March quarter is part of our financing transaction and without this transaction, our net debt to EBITDA would of been lower.
Our dividend payment and the March quarter was 106 6 million.
Capital expenditures were 55 $4 million and the March 21 quarter and.
And $92 6 million for fiscal year of 2021.
Our fiscal year 2021 capital expenditures came and lower than originally planned do the longer equipment lead times and deliveries pushing out due to overall industry conditions.
Our capital expenditures for fiscal 2022 are expected to be between $225 million and $275 million.
Our forecast for the June 2021 quarters capital expenditures is between 70 and $90 million we.
We continue to add capital equipment to maintain grow and operate our internal manufacturing operations to support the growth of our business.
We expect these capital investments will bring gross margin improvement to our business and give us increased control of our production during periods of industrywide constraints dip.
Depreciation expense and the March quarter was $40 $2 million I.
I will now turn it over to Ganesh to give us comments on the performance of the business and the March quarter as well as our June quarter guidance Ganesh.
Thank you, Eric and good afternoon, everyone and.
Or March quarter results with strong by every key metric closing out of tumultuous fiscal year on a very positive note, which was otherwise dominated by the effects of the COVID-19 pandemic.
March cleared of revenue was and all the time record at 1.467 billion growing by eight 5% of sequentially.
Non-GAAP gross margin what another record of 64, 1% of 110 basis points from the December quarter as the benefited from improved factory utilization and product mix.
Non-GAAP operating margin is also the record of 47% the <unk>.
First time, we have broken through the 40% Mark.
Our journey towards a long term business model of 65% of gross margin and 42% of operating margin is off to a good start but still has a lot of hard work ahead of us to achieve.
Our consolidated non-GAAP EPS was above the high end of our guidance at a record dollar 85.
EBITDA was very strong and achieved on on the record of $652 3 million continue.
Continuing to demonstrate the robust profitability and cash generation capabilities of our business through the business cycles.
The March quarter also marked of 122nd consecutive quarter of non-GAAP profitability.
I would like to take this location to tank all of our stakeholders, who enabled us to achieve these outstanding and record the results and the March quarter and.
And especially thank the worldwide microchip team who's tireless efforts not only delivered or find a strong financial results.
But also supported our customers to navigate a difficult environment and who work constructively with our supply chain partners to find creative solutions and the hyper constrained environment.
Reflecting on our fiscal year 2021 results, we achieved the number of highlights and records and the last year.
Revenue was a record of 543 8 billion non-GAAP gross margin was the record at 62, 8%.
Non-GAAP operating margin was a record of 39, 6% and non-GAAP EPS was the record.
$6 and 59.
All in all of the record March quarter results and on the record March ending fiscal year 2021 results.
March the seamless transition between Steven I and.
The each embarked on on new roles to build the next phase of Microchip long term success.
And I am truly fortunate to be the beneficiary of Steve years of managing microchip for the long term.
Taking a look at our business from of product line and perspective.
Our microcontroller revenue of sequentially up 12, 2% as compared to the December quarter, and set new quarterly and fiscally of records.
On a year over year basis on March quarter microcontroller revenue was up 12.3%.
Microcontrollers represented 55, 6% of our revenue and the March quarter.
Our analog revenue of sequentially 11, 3% as compared to the December quarter.
Analog represented of 28 three per cent of our revenue and the March quarter.
Ah revenue of sequentially down and six 4% for other as compared to the December quarter and represented 16, 1% of our revenue and the March quarter.
Last month, Gardner released and microcontroller market share to report for calendar year of 2020.
Gardner continues to have a large discrepancy vs on publicly reported microcontroller revenue.
To the tune of 428 million of those of the revenue understatement for all of 2020, predominantly and the 32 bit microcontroller revenue category and.
Just in the garden and number to use our actual microcontroller revenue. We are pleased to report that.
For Microcontrollers overall, we remain the number three spot. However in 2020, the substantially closed the gap between us and the two players ahead of us.
We are now within striking distance of each of the two players who had just three 6% ahead of us and revenue.
As we continue our relentless march towards the number one spot.
The begin market share it and each of the 816 bit and 32 book microcontroller markets.
While our 816, but the microcontroller businesses continue to do well or 32 bit microcontroller business was on fastest growing microcontroller business.
On microcontroller portfolio and roadmap has never been stronger.
We believe we have the new product momentum and customer engagement. The continue to gain share and 2021 as the farther build the best performing microcontroller franchise on the industry.
Taking a look at our business from the geographic perspective, and America's was up 0.8% sequentially.
Europe was up 34% sequentially stronger than what is normally the seasonally strongest quarter.
Asia was up 5% sequentially and a quarter and businesses normally down due to the lunar new year holidays.
Taking a look at our business from and and market perspective, the automotive industrial and consumer market remain the strongest markets the.
The computing and market was strong while the data center and communications and markets were flat top of little the.
And the aerospace and defense market, which tend to be lumpy was the only and market that was weak.
Business conditions remain exceptionally strong through the quarter with the record bookings and backlog for productivity shipped over multiple quarters.
Demand outpaced the capacity improvements, we were able to implement resulting and lead times continuing to extend out.
And my 40 years and the semiconductor of industry I cannot recall of the time when the imbalance between the supply and demand has been more acute.
And response, we launched our preferred supply program are PSP to provide customers with supply priority beginning six months after their order in exchange for at least 12 months of Noncancelable orders.
Customer response of the program is exceeded our expectations with direct customers and distributors of like.
And about 44% of our backlog is now and the PSB category.
Although it is almost 100 per cent of our backlog and some of the most constrained capacity corridors.
And additional PSP backlog continues to come in every week.
This gives us a solid foundation to enable us to prudently acquire constrained raw materials invest and expanding factory capacity and hire employees to support our factory Rams.
With the strong demand, we're experiencing constraints and all of our internal and external factories and the related manufacturing supply chains.
We started ramping our internal factories and September as well as investing and capital additions to expand our internal capacity.
We are making incremental capacity decisions for our internal factories, where possible based on the strength of our backlog, especially on noncancelable PSP backlog.
Which is reflected and a fiscal year 22 of capital forecast of $225 million the $275 million.
We also work closely with our supply chain partners, who provide wafer foundry assembly test and materials to secure additional capacity whenever possible.
Through the combination of internal and external capacity actions. We have taken we expect on overall capacity will continue to grow every quarter and calendar year of 2021.
While our capacity will continue to grow every quarter. We also believe that wafer fab as well as the assembly and test constraints book persist through 2021.
And quite likely into 2022.
Now, let's get into the guidance for the June quarter.
Our backlog for the June quarter is very strong.
In addition, we have considerable backlog requested by customers and the June quarter. The currently cannot be fulfilled until late of quarters.
Despite the growing capacity from the last quarter.
This is because the entire semiconductor supply chain remains constrained.
All of the factors, we have discussed on the call today into consideration we expect on net sales for the June quarter to be up between three and 5% and seven 5% sequentially.
Our guidance range assumes continued operational constraints.
Some of which we will work through during the quarter and other that will carry over to be work and the future quarters.
For the June quarter, we expect on non-GAAP gross margin to be between 64, 1% and $64 five per cent of sales we.
And we expect non-GAAP operating expenses to be between 23, 1% and $23 5% of sales we.
We expect non-GAAP operating profit percentage to be between 46% and 41, 4% of sales.
And we expect on non-GAAP earnings per share to be between $1 and $85 and 95.
Please keep in mind that are non-GAAP EPS forecasts for the <unk> for the June quarter includes a 420 basis points higher tax rate assumption and the March quarter.
And we also expect to pay down and other approximately $325 million of our debt and the June quarter.
Given all of the complications of accounting for our acquisitions, including amortization and intangibles restructuring charges and inventory right up on acquisitions Microchip will continue to provide guidance and track of the results on of non-GAAP basis, except the net sales, which will be on the gap basis.
We believe that non-GAAP results provide more meaningful competitors into prior quarters and the request at the analysts continue to report the and non-GAAP estimates the first call.
Finally, as we announced on our February conference call based on the strong cash generation characteristics of our business and up cycles and Downcycled, we have modified our capital allocation talk process to pivot to his cash return strategy.
Which has received very positive investor feedback.
Stephen though provide more details on the strategy as well as the long term thinking that informs our actions and disregard Steve.
Thank you and age and good afternoon, everyone.
Today I would like to provide you further updates on a rope cash returns strategy.
But before I do that I would like to see how I continued to be very proud of all employees of microchip.
Of delivered of flawless quarter, and making new records in many respects.
Namely record Netsuite the record non-GAAP gross margin percentage.
Non-GAAP operating margin percentage and record EBITDA.
No I returned to updating you on the cash returned strategy we.
And we completed the March quarter with a net that leverage ratio of 371.
Excluding the long day to 2037 maturity converge and.
And there are more equity like and nature.
The rate, we're paying down debt, we expect to break and net that leverage of issue of.
Of three within a year.
And continue to decrease from there and.
Around the time, we would also expect to achieve and investment grade reading book, the exact timing will depend on the analysis of the rating agencies.
At that time, we expect to begin distributing more of for a substantial amount of free cash flow to other investors and the form of of dividends and stock buybacks.
Regarding buybacks.
True over various convertible that exchanges, we have essentially book is substantial amount of stock back from the future.
And this is because of the stock price rises and exceeds the conversion price of the dead.
And workable that dilutes the share count.
Buying converts back prevents future dilution as the stock price rises.
Our first to convert buyback was in March of 2020, where and Microchip stock price was about $71. Since then we have done five other buyback transactions at radius stock prices.
By doing these videos buyback transactions and we have purchased.
The total of $3.884 billion in face value of of convertible bonds.
For the transactions from March 2022 December 2020.
The issued a total of about 27, and a half sheet 27, and a half million shares of of common start to the investors.
Four in the money value of the bonds.
If these bonds and had remained outstanding until the until and assumed stock price of $160 per share the.
The dilution would have been about 36 4 million shares.
Thus Ah repurchases had the impact of.
Creating a savings or for about eight 9 million shares.
Worth 142 $4 billion savings to other investors.
And that assumed the price of $160 per share.
This calculation does not include our February 20, and 21 transaction, which was ready of recent and executed at 163 to five per share. So it has not yet accretive.
And while we have not done any open market stock buybacks from the last year or convert transactions had the impact of the buyback of approximately eight 9 million shoes or the about 3% of the outstanding shares we expect to start stock buybacks from the open market. After we.
Achieved and investment grade reading, which we expect within the U depending on the rating agencies.
Meanwhile, we did not want to wait for starting higher dividends until our leverage of issued each of the given the number. So we initiated the path to hire dividends in our of February 2021 dividend and announcement with the 5% of dividend increase we of.
Renewing on this pack as we announced today that the board of directors have approve of dividend increase of five 9% of sequentially 241.3 cents per share up from 39 cents previously we expect to continue to increase the dividends quarterly as part of our cash.
Sure and strategy.
With that operator will you please pull for the question.
Absolutely. Thank you and if you'd like to ask a question. Please Sigma pressing star one on your telephone keypad and if you're using a speaker phone. Please make sure that you meet function is turned off to allow your signal to reach our equipment do.
Due to time constraints, we'd like to ask the please limit yourself to one question you made and we into the queue to ask a follow up on skin and it started wondering if you'd like to ask the question will take the first question from work with patterns with Jeffries.
Hi, Thanks for taking my question and congratulations on the great execution on.
The Steve how the question for you about the PSP program on the surface. It seems like you instituted this program to help customers on the more tactical based on but I Wonder. If you believe there are secular drivers that ultimately ultimately may have led you to of PSP kind of of program anyway.
And do you think is the now that you have this program do you think it becomes the more permanent part of your standard operating model going forward. Thank you.
Well.
Going back to as we implemented the the program and why we implemented of the program.
Kind of the visit that history.
The the backlog was so strong and.
And can screens were so widespread.
As Ganesh mentioned and his 40 year could of year and mind 42, plus you could he is.
We have never seen this kind of shortage and constraints and the semiconductor industry.
So the question really became how.
How do we take over.
Key customers and video segments, not only automotive, but the industrial and communications and data centers and pieces and all and.
And allow them some mechanism, where they can get preferred supply of parks, and it's something and it for them and something and it for us and the design of that program became this drift toward supply program.
And which we ask that if you could give us 12 months of noncancelable non reschedule of level backlog.
And the tremendous benefit to microchip, we could buy supplies ahead, we could.
Hi people, we could make capital investment.
We could do all of these things with the assure DRP very very large solid noncancelable non reschedule liberal backlog the or.
The benefit to us and work the customer Gibson.
After the six months PDA.
And and we did that six month period, because we don't Wanna create a lot of the June and the first six months.
And there was more availability of.
Capacity of to six months of of that point in time, we said anybody who gives the PSP backlog they will get the preferred supply.
And if there's any shortage of that time and it will be spread among the non PSB customers, so long and but that's really how the program came about and.
And not knowing what the assistance would be and the results just has been absolutely tremendous we of billions of dollars of PSP backlog, 44% of the total of a backlog of.
On some of the most constrained the supply of quota doors and.
The PSP backlog is almost equal to 100 per cent of capacity. So you can see the advantage where we could go ahead make those investments with by additional equipment.
No leading the into your question could this become.
Permanent landscape.
I think it will depend largely on the experience of our customers and microchip together.
And the year as we progress and.
When.
When the cycle and on the other cycle when the there's a lot of capacity available.
Customers may not be willing to make a year long commitment and that is non change of blue. So that's what the customers would be thinking with the environment school come back and forth.
So odd intent would be to show other customers, how well we serve them because the head PSP and what the benefits out of the continue with the program going forward.
And <unk>.
Let the Ganesh comment on that it's really going to be produce hello images of going forward. So my view is we are in the early innings of PSP. We've just launched it. It's a couple of months, it's going extremely well.
I think we continue to make fine tuning of the program and.
And it's too early to tell how long term it will be I think for many many customers. They have learned in the cycle that running low on inventory on low on backlog visibility kind of of extreme impact on the business and so.
Give it a few more months, let's see how it looks.
And on a lot of.
Those words the program the industry develops some of them less too for the short period of time and and cycle or so and some of them lots of very long period of time I think you are seeing the beginning of the end of the word.
And the losses and the industry by our customers due to constraints of so laws that they have lost more money than all of the money to save for the decade on it.
And that could be the long term benefit with.
And the industry plans, but other than just just in time give me, 50% more where does it come from and the lead tons of very long.
Yeah, Let's go to the next question and.
Thank you will take the next question from Vicario with Bank of America Securities.
Alright, Thanks for taking my question.
When the investors look at this extreme on level of supply and demand and balance that their reaction is that this was surely create a hard landing and I'm curious to get your perspective.
Ganesha Steve that.
Will the situation be resolved and an orderly way of when does the industry get back to a more balanced environment.
What is your visibility and two inventory at yard and customers.
Just when do we get back to normal and what does the normal looked like or is that a hard or soft landing that we have to go through thank you.
We do not have a line of sight for when things get to be normal as I mentioned the gap between demand and supply grew and the March quarter and continues to be quite large.
But we have taken a number of steps to get ahead of when would ever change and cycle will come to soften how that the landing will take place. So we just discuss the PSP and quite quite a bit of detail and that gives us 12 months of continuous noncancelable backlog.
And that will that will enable us to spot.
And plan for whenever that change becomes apparent to us on longer term backlog the.
The capacity additions, we're making we're not trying to solve the entire GAAP all in one quarter, we're making measured steps every quarter and improvements over multiple quarters and to the extent, we see a change we will taper off the.
The bill plans and capacity additions.
Consistent with that.
It is if you look at where our inventory is and where you look at the channel inventories are kind of.
At at historic lows from the channel perspective, and pretty low for us as well and that gives us time and the ability to continue to replenish that inventory it.
And it will help to minimize any under absorption of that might of happened, otherwise and and positions as well to capitalize on whatever the subsequent upcycle will be that is going to be on upcycled to whatever the next town cycle, there's going to be and when that happens, we actually push out capital requirements. Because we will have replenished some of that inventory.
And finally on that.
And if and when there is that next hard lending are soft landing.
For us what we are doing is our bonus programs and other variable compensation programs.
And you have seen and prior cycles give us a fair amount of ability to mitigate which way out of expenses go as we go through the cycles and that flexibility and operating expenses is one more item that helps us in terms of getting to the soft landing.
Thank you.
You're welcome.
Thank you and your next from game of Mobley from Wells Fargo Securities.
Hey, guys. Thanks for taking my question and congrats on the strong finish of the year with the difference of year makes.
I wanted to ask about your target margin goals 65, 42% on gross and operating margin respectively.
Seem to be that you are in the most optimal of conditions to to see the achievement of of those goals with respect the revenue mix and manufacturing utilization and so my question to you is is that target a best case scenario.
Or is it sustainable over the long term and what revenue level are you looking forward to achieve those those targets.
We're making good progress.
Towards that.
We obviously from quarter to quarter can make rap.
Rapid progress and sometimes it will be a little slower beyond that so I wouldn't take last quarter and apply that is how it is going to be every quarter going forward.
Each of the introduced this new model and December so it's not been that long.
And we've made a good start here of conditions of strong for where we're at our executing well and the many different areas, we outline for investors as to how will we achieve the gross margins.
There are also other pressures that are cost pressures and some of the materials and the.
Input costs as well and we are working through.
And then the operating expenses, we continue to have investments we need to make so that the long term growth and profitability of the business can be realized so let's.
Let's continue to have the several more quarters as we go through this but.
But we feel good about the long term targets and we think we are working on the right things operationally as well as and our business units and on other.
Operating expenses to get to the place where we have a combination of a good balance between growth and profitability.
Thanks goodness.
Thank you and your next from harsh Tomorrow with Piper Sandler.
Yeah, Hey.
Steve Congratulations as well and to Nash congratulations on strong quite ahead of philosophical question with this kind of a supply and demand environment.
And seasonality out the door in the near to mid term.
And then I of a follow up.
So the seasonality has been hard for us for many quarters, there hasn't been of normal environment for quite a while we went through.
And our trade and tariff which was a.
And overriding issues and we went to the COVID-19, which was and overriding issue, where now and this and a significant demand growth environment. Clearly there is an underlying seasonality of that has and a contribution but these externalities on driving a much higher.
Multiplier on that so for the moment, we don't have clear bearings on seasonality other than directional statements as to where there will be.
And Ganesh one more for you, but the PFT program and are you seeing tremendous amount of success are you seeing that backlog and the Vap program PSP program, mostly for the sole source kind of items are the ones that most of the very constrained and it also of risks that human and lose some of the cut.
Estimate that are not able to commit or is simply.
Supplies and bleed that bad that there's no place for these guys to go.
So pretty much.
Just about everything we do is sole source of proprietary products. So we don't have a commodity product line. That's a big piece of this thing on some of our memory products may come the closest and even there were often and very highly protected physicians and those sockets as well I think the short answer of exactly what you said.
There is not in other another place people can go to to get capacity of today in fact, there's a lot more coming to us trying to find ways in which we can help support them as a flea some of the other suppliers, we are not able to provide them capacity and today's environment.
Two of harsher, let me out of common too.
Psp's, not and absolute requirement sort.
The customer who does not have visibility into their own business and does not want to give us noncancelable 12 months backlog can just bliss normal orders over 12 months and.
And 90 days of those orders would be from noncancelable and after the other can change it the.
The only difference is they will not be preferred and and.
If there was a strong demand among the BSP customers and then they could get allocated and much more harshly book.
That doesn't mean, the the wound and get any parts and this should go really go with somebody of.
If the go with somebody else other people. The similarly constrained and may not have PSP program to to really help them. So sorry Tinker. There is no reason for the loss of business, we would actually gaming business and this environment people coming from other companies, where they can and get the support.
That's a good point and Steve Thank you.
Thank you.
Okay. Thank you will hear next from Chris Cassa with Raymond James.
Yes. Thank you.
I've got a two part question on the on some of the capacity editions that you spoke of first if you give us some sense of the timing of these capacity additions. We know you are growing capex all through the year, but this cook some constraints and getting tools. So so when does the capacity become available to you and then secondly, if you are adding the.
The capacity through the year and you're expecting to main supply constrained with I guess some visibility from the PSP program is there any reason why the revenue wouldn't just continue to grow sequentially as we go through the end of the calendar year.
Firstly on the capacity additions they are happening there's not a single discrete events and it's happening. It's happening every month every quarter, we have equivalent on order, we of materials and auto and hiring people. The number of activities and are all going and place to be able to do it so it'll be of more continuous process through the year.
Sometimes we get delays on equipment and sometimes we are able to get the equipment on the time, we have so that's the way we see it for the rest of the year and therefore, we are expecting that we will have capacity to be higher quarter and the prior quarter, which should give us the ability to have continued growth as you go into the second half of this.
Here.
And.
Thank you okay and.
And we'll take our next question.
Thank you I'll take our next question from the ambush Steve Estado from BMO.
Hi, Thank you very much.
The question on a follow up on the actually on the comments and capital of the location.
It could you that's a pretty substantial increase on DVD over the last couple of quarters, what's the range, where the sink until you get to the net level that you are targeting.
And then longer term.
What are your thoughts on DVD versus.
Buybacks any color or any thoughts you could share and that would be helpful. In it and then I have a quick follow up on PSP Ganesh how do you hedge for.
Assuming the pricing.
Said earlier on when the customer of the companies into this have you has for the cost side of had been and cost goes up on plan. So just help us understand that okay well. Thank you.
So let me take the capital of location part of that and then going on she will take the pricing on the PSD backlog.
So.
We have internally had discussions with the board and what.
It happens now till we get investment grade reading and what happens after.
As the bring the stock buyback into the mix, but we're not prepared to and.
All of that for you.
Well into the future regarding harmless start by the and how much dividend and when does it start and all the so I think it's directionally.
The the board is committed to continue to increase the dividend and record of.
And then as we get to the investment grade Reading then add.
On the stock buyback into the mix and.
And what that mix would be good also of change from time to time, depending on the market conditions and start price on on the.
So it's really not all figured out for the next five years the have been some discussions but I think of.
We will continue to advise you every quarter.
And as we make further decisions.
And I am bearish on now he is thinking.
Sorry, sorry, and go ahead and King dollars that was.
Sorry, I wasn't thinking dollars, Steve I was thinking more in terms of percent of free cash, but that's fine with weights as well so the.
And that's willing to just.
Disclose well into the future of what percentage of our free cash flow and we will give it to the investors back.
And we would still wouldn't be getting an investment grade reading, we would still have the level of is on the book So for about three and.
And and desires to continue to decrease the leverage further threes.
<unk> and not and number we we want to stop and and give 100% of cash back. So the level of it will continue to go down and.
But the rated which the level is go down could change as we started to give them more cash back.
That's true thank you.
Irish on your PSP question.
PSP is a priority for capacity it is not of guarantee of price.
And we will we will not be just making price changes without good reason and so if there are input costs that are unexpected the.
Need to be passed on PSP backlog can receive price changes at that point in time, and we're not anticipating that it needs to be.
Nothing and PSP backlog.
Precludes price adjustments, if there are significant cost increases.
Okay. Thank you.
Welcome.
Okay, and and once again, that's star one if you'd like to ask a question on here next from Harlan, Sir with J P. Morgan.
Good afternoon, and congratulations on the strong results and execution.
The current backlog TST backlog and people pretty good picture of four demand and based on that and combine that with your current bookings trends how far above your current supply capabilities of the overall demand trending of the 20% higher and the 30% higher and then given the strong dementia and it seems like you and your.
Distribution partners of building and buying products and and the shipping them all so given that and despite your capacity increase and do you guys and anticipate your date of the inventory and just the inventory declining again on the June quarter.
So firstly to give you a sense of the.
What is our unsupported and a given quarter look like I think a quarter ago. We had said hey, we have 30% more that we could be shipping than what we are planning to share and that number has since grown to over 40% of we could be shipping. So that's the puppy meant earlier as and.
And as we add capacity demand growth even faster. So that is a significant amount of unsupportive demand into each quarter and what happens is every quarter, we ship a little more and we squeezed some of it out into subsequent quarters.
The the second part of the questions and he was asking of of of what our expectations were for distribution inventory.
That's a very difficult thing to forecast went down for days last quarter the.
Distribution inventory is at record lows, what we're shipping and they're shipping out right away to meet their customers demand. So.
I don't anticipate it going up but it's.
It's a very very low of historic levels site on I don't anticipate on large change.
Okay, great. Thank you.
Thank you and we'll take our next question from John Pizza with the credit Suisse.
Yeah. Good afternoon, guys and I've got a two part question that speak to the supply and demand and balance that both Steve and can ask you have talked about.
I'm just kind of curious on the supply side, we've seen a significant amount of consolidation and the semi industry over the last decade, you guys had been a big driver of that I'm wondering Steve or can ask if you can comment on how that's impacting both yours and the the industry the ability to actually growth supply and then on the demand side I'm just kind of cute.
Typically when demand when you're demand as the strong, we're usually and and economy. That's firing on all cylinders and yet we're still have and economic backdrop, which is probably best described as under potential and so if we go on to the back half of the year, Steve and when we start to see a macro recovery is there a real risk that supply shortages <unk>.
Italy accelerate even further and why not get ahead of that with even more capex.
So let me start on the supply side and I know if you look at our eight.
810 years of.
Acquisitions that we have done and the consolidations from our perspective.
The percentage of what we build particularly of from of Fat standpoint internal of his his ex tunnel has changed we used to have a higher percentage of it in our in house Fabs and we're now down to about 39% of it is and how is the balance is done to the foundries.
And we obviously have a higher degree of control and the ability to influence and a shorter period of time the found record the the capacity that we built in house and then we do from of foundry standpoint, and so and that sense that is something that has changed over this period of time and it has never been an issue until this cycle where.
The the imbalance has been so large that the instantaneous response.
From foundry has been difficult and a high percentage of what microchip does through foundry, here's what foundry would consider to be the trailing edge of capacity. They have and that has also been not where all the investments of gone and they are making some but the majority of investments have been and leading edge, which is where.
A lot of our capacity requirements are into.
Packaging and testing, we've been able to do more and house and we of.
Reported on the increases were now into the mid fifties as a percentage of our packaging the had been as low as in the high thirties and low forties as a percentage so they're as and when we can we're going as fast as we can.
We are looking at our capital investments and what do we need to be doing and how and and a bit of this is finding the right mix between stepping on the accelerator, where we of high confidence PSP backlog for example gives us high confidence and being a little more thoughtful of where we have risk of of putting a lot of capital and place and then.
Perhaps having under absorb the capacity and that's always the judgment call. We make that every month every quarter.
With what should our car capital posture be and we could get change and have increased capital posture as we go into the second half of this year, if that demand imbalance continues and persist at the level of that it is Steve you on add some more.
Add to economic macro side of his question.
So John we're.
What happened last year was the biggest destruction of.
Demand really was on the on the service side.
Of the hospitality hotel the airlines Trevor.
That's true then golf courses basically the.
The the service side of the industry got the estimated last year because of the social distancing in on the.
The manufacturing side didn't do that bad I mean on there was really not a single quarter aware of revenue and.
And down 10%.
Most most comp.
Companies and the technology industry and manufacturing industry did reasonably well.
Automotive was really bad for one quarter, but overall not not too bad so now when you get to the recovery side of it and if.
Fair amount of recovery is likely to take place on the service say, which growth so decimated restaurants, and hotels and the airlines and travel and vacationers and cruise lines and all of that coming back now as they come back.
And people have more money in their pocket with more job certainly some of the.
Some of the money will flow to the hardware.
Electronics and cars and other things where are proud of goes and we will benefit from it but.
But the big part of the upcoming surge is really going to be on the service.
Having said all of that I think demand is very strong now and as you mentioned.
When the economy picks up further steam with all of these people coming back into the job.
Could it really even get more heated.
The answer that is definitely possible.
But the.
The other product of your question was why not add more capital now well we can get it.
And and we have so much capital on the order and lead time as long and some of the schedule and capital gets the delayed by a month and over the short notice because of.
On the supplier is also constrained so it's not a question of of what you're going to order we're willing to order more of the two question of of what you can get the can get everything we wanted.
That's really helpful call. The thanks guys.
Thank you.
Thank you and we'll take our next question from the <unk> with Goldman Sachs.
Hi, good afternoon. Thanks, so much for taking the question.
Ganesh you talked about higher utilization rates and better mix being.
Positive for gross margins and the quarter I'm curious what you saw from of pricing perspective, and March relative to the December I was a little surprised how fast you were able to grow your.
Microcontroller business and analog business on a sequential based on so I am guessing pricing played a role there, but if you can kind of speak to that that would be super helpful. And then separately, assuming you guys managed to execute on the Capex that you have planned today for the year, where do you see your internal capacity.
Exiting the fiscal year versus where it is today. Thank you.
So first on the the pricing front of we announced and we did raise prices and.
And the.
And the March quarter, it wasn't and place for the entire quarter, but it was plain place for a good amount of that quarter and not all of the price has changed all of the same time and there are contractual requirements different product line and different things. So the price of go out.
With that.
We also had cost co op that we were trying to offset with these price increases so.
And Ah and we continue to have increase is coming through in our supply chain.
So.
We think the price increases contributed some of it's really not the major part of withdrawal of growth.
And the March quarter.
Two and take the second part of Eric So the second part was on our what our internal capacity you can do and.
Fiscal 22, which were just entering and I don't expect the the fab mix to be much different we last last year of the year. We just finished with the 39% of our fab internally and don't expect that mixed the change.
For fiscal 21, and we did 53% of our assembly and 57 per cent of our test and the house.
Those percentages should go up as we're continuing to invest and and bring some more capacity internal but I don't have a specific number of by the end of the year and that's going to depend on what the what the demand environment is and how quickly we can respond with the capex.
And some of the and tunnel capacity takes time does it come through and it may have.
The ongoing impact as we go into the next fiscal year.
Yes. My question wasn't so much on the mix exiting the year, but again, assuming you you guys do get all the tools that.
You are asking for and and you managed to spend $250 million, how much higher could your internal capacity B and 12 months and the 10% and 20 per cent.
Rough ballpark number would be super helpful.
Yeah, I don't think that's the number we are willing to disclose his can ask says it takes time for the capacity of come on board at different stages, something and fab is kind of take longer than it might sound and assembly of your test and.
And I would say not giving revenue guidance outside of the current quarter. So out there of too many quoted orders of capacity both internally and externally.
By process by the way for size by technology complexity.
And some where the capacity of being added the other capacity of not being added and to and all that into the just general number of capacity of where the X percentage.
And when we are not really sure from foundries, what we can get.
We know what we can do and terminally in terms of the capital of Weird headings, where I think of.
I think that number of the complex and are not willing to share.
Got it thank you.
Thank you and we'll take our next question from VJ Rakesh from Mizuho.
Yes, hi, Thanks, guys just briefly I know you mentioned shortages.
Could you give us an idea of value of C, which segment of seeing the highest shortages and the.
And and things.
The starting more kind of.
On getting into more of an unrelated.
And <unk>.
I think if you.
If you listen to the media you would think that automotive is the only place within our shortages and I think clearly they've been the most vocal shortages on on every single segment and.
Then of taking place to varying degrees and.
And we do not see any segment.
Starting to come back to some form of the equilibrium where it is so there are shortages and growing.
Imbalances and every market segment, where it.
Alright, and and and you mentioned very strong backlog or the.
Yes.
I submitted the.
Jim quote on here wondering and should look into the back coffee tables and keep the.
Okay, and the cute Liang out and do you think and.
And you expecting a better than seasonal artwork and all of a strong demand this and the pretty strong and sign up on the Psp's items Smith.
We talked earlier on about seasonality and all of that and Ah right now on.
Sure revenue is not limited by the demand side of the equation and often seasonality speaks to where's the demand at and how does that come about our growth at this point is limited by how much can we manufacture and ship and that's where all hands on deck car. So seasonality by itself is not as meaningful and the current environment.
Got it thanks darkness.
Welcome.
Thank you and we'll take our next question from Craig Hitbox from Morgan Stanley.
Yes. Thanks had a question on data center and calm I mean and then.
Area of that and consolidating for a number of quarters just wanted to get a sense of what you're seeing that market and if there's any visibility is how do you think it will trend as we go through the year.
So we're not trying to provide guidance on how those are going to do by market segment as we go through the year.
Think clearly and the December quarter, we indicated to you that it seems to have bottomed out.
That came to be the way the March quarter ended up slight bit of.
Improve and from there. So we're quite optimistic about the datacenter segment and particular as we look into fiscal year 22.
And then the communications sector has its own set of infrastructure rollouts that are taking place, but that's about as much as we're able to provide and we don't really track at the level of specificity with the exact numbers, we have more of a directional statement, which is kind of of what we've included and our conference call notes.
Understood. Thanks.
Thank you we'll take our next question from of Rajiv Gil with need and the company.
Hi, This is down here asking a question for Roger.
And can you think of speak about you know as far as these components supply constraints go up which and the markets are currently maybe.
The kind of doing the best in terms of having some inventory available and also what proportion of these constraints and it's kind of on the front and the back and.
So there is no as I said and the earlier.
And there is no and market and wish that is.
Available supply, that's any better and now they're all constrained to varying degrees and.
And so there's nothing from and and market too.
And as far as back and and front and we have constraints and.
Both internal and external factories in the back and and in the front and and the material supply chain and depending on what exact combination what current capacity corridor and they might be more constraints and maybe less constrained, but they're all constrained.
Got it thank you.
Q and we'll take our next question from David O'connor from.
BNP per at this.
Great. Thanks for taking my question, maybe a follow up on the just in time and you that you mentioned earlier.
And what changes do you foresee and the level of inventory that the industry needs to hold on.
Who in the supply chain is going to be forced to carry more inventory. If that's the case and who's going to foot. The bill for these these higher and you've been trees, who could talk around the show you. How you see that that'd be great. Thank you.
Let me take a shot of that and Steve Mail and answer may want to add to this as well. So I think what inventory of people need to carry is going to have to be determined by the ultimate and.
And market and.
Equipment manufacturers, the Oems and I think it can be very different and different product line right. When you build a 80000 dollar car.
And you are constrained by $10 of the semiconductor content. The decision you may arrive there could be different from when you're building $200 consumer product.
That you have so each industry, depending on the value of the product of creating the profitability of that industry has to decide based on that experience. What is the inventory levels that they need to assure themselves of the value of the product that they are trying to share and those answers are going to be different I think some got.
Burned quite badly I suspect they will be the ones I wanted to do the most here.
But if there is not a single answer that comes with it and as far as who puts the bill ultimately the the manufacturer the.
The original equipment manufacturer will foot, the bill and more than likely have to pass on on in terms of what they're building two there and customer to the extent that they can.
But if the choices to.
Invest and inventory that is.
Two three orders of magnitude less and the value of of the product that they're creating.
Many of them will have to rethink that equation of what kind of just in time makes sense part of the of you want to add to that.
Don't really have a whole lot.
But I would say the too.
If you look at some of the Japanese car manufacturers did much better of this time around.
Because the learned the lesson and during the tsunami and.
And when a lot of the Renaissance and other factories were.
Shut down due to earthquake and.
Radiations and all of the.
So the.
And they learn from the time and built of structure would the would not as much of the lying on GH.
And the reach the current and time with the level of inventory on the semiconductor parks and they did a lot better.
And that's really the lesson, the us and European and other manufacturers need to learn and.
And time would toe and when the cycle go the other way is it all lost and is just the same standoff, we don't really know bird.
But they have to start thinking the building semiconductors is different than.
Getting bent metal for the.
None of us from doing.
Right no we get some comments that of of symptoms of laughable, what's the big deal about the lead food and and just to win the medal and make my part and you're just not the simple building semiconductors. So so I think a lot of learning needs to happen and.
And we don't directly shipped the parts to the current manufacturers we have the people in between like the country's and Gentex and apt is and.
Hello, and all of these people there and between.
So it's really so we have a buffer, but the crowd and manufacture really need to really take the take the bull by the horn and drive the process.
To get out of it and I don't know, whether they will but on November.
Of positive step as many of the carmakers have been at the forefront of embracing the PSP program and requiring the tier ones to participate.
At least for the moment you can see how they're trying to drive towards having the level of inventory of that assures them. They can build the very expensive very.
Highly valuable and products and how that will persist year or two years from now we don't know.
Okay. Thank you didn't take on.
Thanks and move on to the next question from Christopher rule and from discount on on.
Hey, guys. Thanks for the question and a little bit more open ended here, but can actually.
He said and 40 years, you haven't seen such an imbalance between supply and demand as the cute as this one and Steve.
May want to chime in here as well, but can can you guys talk about.
Maybe something that was similar the number two most of cute time or and number three and.
And are there any and analogies to death and.
How did that eventually unwind, where we had that that match of supply and demand and and do you see something like that taking place here.
<unk>.
Now all cycles, eventually come to and and as.
The the participants and the battlefield work on.
How the adjust to where the situation is.
And prior cycles, the semiconductor companies put in the additional capacity and place and began to get closer and their self interest to be able to grow and the players on the market began to adjust with what they were building and how they were building.
I would say in my timeframe, probably the sharpest.
Rebound and there's probably 202009.
And and again, we were extremely fortunate and that time, because we did not shutdown on our factories and we kept things running and we grew out of inventory but.
But not of not all people did that and we know it did create.
Dislocations as a result of doing that.
Steve do you want to add to that.
Finishing you talk you know.
In 2000, and 2009 and we.
We didn't shut down the factory and continue to run the factories, although we had from rotating time of and.
And then we entered the upcycle with the really good amount of inventory position and through that we grew larger and we did very well.
We did and repeat the this time because this time, we had a very very substantial that leverage which was really high and therefore, we.
We didn't choose to really put the money into inventory and keep the factories and.
Running and all that.
At that time, I recall investor concern was what happens if you demand goes down and 35% do you Miss the government. So from from your memories can be short Burke this environment and presented different challenges. So we were not able to repeat the experience.
Of 2009 and did not reach this time with the high inventory and.
Internally, so and we're trying to build it now but unsuccessful because we're shipping as we build.
The the other point of wanting to make is.
On people use this word double ordering.
We don't really get double ordering because of parts of of all proprietary you cannot value from us and from another company for the same circuit nautica and two distributors ship the product into the same circuit and the way, we registered and make it economically and possible for the non designing distributor to ship the box into their target.
So the only other the meaning avenue is and customer orders of little more than what they need.
Which we never know and we cannot detect.
If you want to call it the real ordering.
There could be some excess ordering by the customers.
We can't be sure of but one thing we assure of is there is no double fulfillment.
We are in daily phone calls the escalation meetings with the number of customers.
Threatened line downs and actual lines down for many of the card and manufacturers and others. There is no double fulfillment people of everybody's getting a fraction of of what they need. So therefore, there is a fair amount of run the way ahead.
Such a large amount of demand 19, and it's going to be the rest of the fiscal year. We're just trying to get ahead above the water.
And unlike prior cycles right, we have noncancelable windows and a significantly longer and we have had in other cycles and that puts a little bit of a lot more responsibility on the customer to have orders that they need and not orders of they don't need.
Thank you guys droning playful.
Thank you. Thank you will take a follow up question from John Pitts of from Credit Suisse.
Yeah, guys. Thanks for the let me ask another question just Eric on the target model of I'm, just kind of curious on the gross margin line, what's been really impressive visit the incremental margins you guys have been able to put up over the last call at six to eight quarters on quarters, where you've had sequential growth I think the incremental gross margins of been right around that 80% Mark.
And so was there something unusual about the last kind of 68 quarters that drove such high incremental gross margins and where should we think about that going forward.
Well I think there's a couple of things on the and the more recent quarters, we had significant under utilization charges, which have now gone away right. So the.
Costs are now being capitalize the inventory of the running the factories more false of that's gone away and then we had a large acquisition and microsemi that we were integrating over that timeframe too and and you'll finding ways to improve margins on the acquired business. Those of the two things that I would point to Steve organized and anything else from the other thing I would add as we continue to.
Add value and to many many of our products or a combination of hardware and software, which makes them more valuable has improved the gross margins we have on those products and.
And as you didn't get to a weighted average of all of these products and what are we doing to make the more valuable.
It shows up and the aggregate gross margin.
Thank you.
You're welcome.
Thank you and the does conclude today's question and answer session like to turn the conference back over to Mister Knish morality for any additional closing remarks.
Okay, and we want to thank everyone for taking the time to join US. We do have investor meetings that are coming up that we look forward to meeting and talking to more of you have a good afternoon. Thank you.
And that does conclude today's conference will do thank you all of your participation you may now disconnect.
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