Q3 2022 Microchip Technology Inc Earnings Call
Ladies and gentlemen, you're currently on hold for today's microchips third quarter of fiscal 2022 financial results call. At this time, we're still gaining additional participants and do you plan to be underway momentarily. We appreciate your patience and ask you. Please minimum on.
[music].
Please standby we're about to begin.
Good day, everyone and welcome to Microchips third quarter fiscal 2022 financial results.
As a reminder, today's call is being recorded.
At this time I'd like to turn the call over to Michael Microchips, Chief Financial Officer, Mr. Eric <unk>. Please go ahead Sir.
Thank you and good afternoon, everyone. During the course of this conference call, we'll be making projections and other forward looking statements regarding future events or the future financial performance of the company.
We wish to caution you that such statements are predictions and that actual events or results may differ materially.
Refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact microchips business and results of operations.
And in terms with me today are Ganesh Moorthy microchips, President and CEO .
Steve, saying Microchips executive chair and Sajid Dowdy Microchips head of Investor Relations.
I will comment on our third quarter fiscal year 2022 financial performance. Dennis will then provide commentary on our results and discuss the current business environment as well as our guidance.
Steve will provide an update on our cash return strategy.
We will then be available to respond to specific investor and analyst questions.
We are including information in our press release on this conference call on various GAAP and non-GAAP measures.
We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip Dot com and.
And included reconciliation information in our press release, which we believe you will find useful when comparing GAAP and non-GAAP results.
Also posted a summary of our outstanding debt and leverage metrics on our website.
Okay.
I will now go through some of the operating results, including net sales gross margin and operating expenses.
Other than net sales I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation.
And certain other adjustments as described in our press release.
Net sales in the December quarter were 176 billion, which was up six 5% sequentially and up 30% compared to the December quarter of fiscal 2021.
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 66, 1% and operating income was a record 44, 6%.
non-GAAP net income was a record $681 7 million.
Our non-GAAP cash tax rate was six 7% in the December quarter non-GAAP earnings per diluted share was at the high end of our guidance and was a record $1 20.
On a GAAP basis in the December quarter gross margins were a record at 65, 6% and include the impact of $8 4 million of share based compensation expense.
Total operating expenses were $638 3 million and include acquisition intangible amortization of $215 7 million.
Special income of <unk> 3 million.
$3 2 million of acquisition related and other costs and share based compensation of 42, and a half million dollars.
GAAP net income was $352 8 million or <unk> 62 cents per diluted share and was negatively impacted by the GAAP loss on the convertible debt exchanges, we executed in the quarter, which were not included in our guidance.
Our December quarter, GAAP tax expense was impacted by a variety of factors most notably the tax expense recorded from touring up estimated taxes to actual amounts based on tax returns filed during the quarter.
Our inventory balance at December 31, 2021 was $768 2 million.
We had 116 days of inventory at the end of the quarter.
Which was up four days from the prior quarter's level.
Our levels of raw materials and work in progress increased in the quarter, which helps position us for increased production.
We are expecting from our internal factories and helps buffer us against unexpected shortages or changes in material material lead times.
The days of inventory on our balance sheet go up with our gross margin improvement with each 100 basis points of gross margins margin improvement translating into approximately two to three days have increased inventory on our balance sheet.
The carrying cost of our inventory has been and will be increasing due to rising input costs from our supply chain.
We are continuing to ramp capacity in our internal and external factories. So we can ship as much product as possible to support customer requirements.
Inventory at our distributors in the December quarter was at 19 days, which is a record low level and in line with where it was at the end of the prior quarter.
During the December 2021 quarter, we achieved the milestone of becoming an investment grade rated company. This.
This is a goal we have been pursuing since we acquired Microsemi in may of 2018, and it positions us well for our capital return strategy that we detailed for investors at our Investor and Analyst day back in November .
In the December quarter, we exchanged a total of $96 2 million of principal value of 2025, 2027, and 2037 convertible subordinated notes for cash and shares of our common stock.
We used cash generation during the quarter to fund the principal amount of the convertible debt exchanges and we believe that these transactions will benefit stockholders.
Difficultly, reducing share count dilution to the extent our stock price appreciates over time.
The principal amount of the convertible debt on our balance sheet at December 31 was $903 million compared to 4.481 billion at the beginning of calendar 2020.
Putting our overall capital structure and a much better long term position.
During the December quarter, we also refinanced our revolving line of credit to be in line with our investment grade rating and decrease the size of that facility from $3 6 billion to $2 75 billion.
Our cash flow from operating activities was a record $853 4 million in the December quarter, our free cash flow was a record $762 7 million.
And 43, 4% of net sales.
As of December 31st our consolidated cash and total investment position was $315 5 million.
We paid down $362 $7 million of total debt in the December quarter and.
And over the last 14 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down almost $4 $8 billion of debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt.
We have accomplished this despite the adverse macro and market conditions. During the earlier years of this period, which we feel is a testimony to the cash generation capabilities of our business as well as our ongoing operating discipline.
We continue to expect our debt levels to reduce significantly over the next several years our.
Our adjusted EBITDA in the December quarter was a record $869 4 million and 49, 5% of net sales.
Our trailing 12 month adjusted EBITDA was also a record at $3 billion and 46, 5% of net sales.
Our net debt to adjusted EBITDA was 2.58 at December 31, 2021 down from $2 99 at September 30th 2021.
Our dividend payment in the September quarter was $128 $7 million, and we repurchased $166 million of stock during the quarter.
Capital expenditures were $90 7 million in the December quarter.
Expectation for the March 2022 quarters capital expenditures is between 135 million and $145 million.
Our capital expenditures for fiscal 2022 are expected to be between 390 and $400 million.
As a reminder, our fiscal year 2021 capital expenditures came in lower than originally planned due to longer equipment lead times and deliveries pushing out as a result of overall industry conditions.
We continue to prudently add capital equipment to maintain grow and operate our internal manufacturing operations two to support the expected long term growth of the business.
We expect these capital investments will bring gross margin improvement to our business and give us increased control over our protection during periods of industry wide constraints.
Depreciation expense in the December quarter was $64 9 million.
I will now turn it over to Ganesh to give his comments on the quarter.
On the performance of the business.
As well as our guidance for the March quarter Ganesh.
Great. Thank you, Eric and good afternoon, everyone.
Our December quarter results continued the string of strong growth quarters with revenue growing six 5% sequentially to achieve another all time record at $1 76 billion breaking through the $7 billion annualized revenue milestone.
On a year over year basis, our December quarter revenue was up 30%.
Registering the fifth consecutive quarter of rising year over year revenue growth rate.
non-GAAP gross margin was another record of 66, 1% up 80 basis points from 65, 3% in the September quarter and above the midpoint of our guidance.
As we continue to ramp our internal factories and benefit from improved fixed cost absorption as well as product mix changes.
non-GAAP operating margin was also a record at 44, 6% up 210 basis points from 42, 5% in the September quarter, and well above the high end of our guidance.
The large increase in operating margin percentage was helped by the rapid growth in revenue and the additional time. It is taking to hire new employees, that's delaying expected operating expenses.
At 21, 5% operating expenses were 100 basis points below the low end of our long term model of 22, 5% to 23, 5% and operating expenses.
Our long term business model will continue to guide our actions to enable the long term growth and profitability of our business.
Our consolidated non-GAAP diluted EPS was a record dollars 20 per share at the high end of our guidance and up 49% from the year ago quarter.
Adjusted EBITDA at 49, 5% of revenue and free cash flow at 43, 4% of revenue were both very strong continuing to demonstrate the robust cash generation capabilities of our business.
This enabled us to pay down another $362 7 million in debt.
Brought down our net debt by.
By $422 million $422 $1 million driving our net leverage ratio down to 258 in the December quarter.
This reduction in net debt and net leverage ratio was achieved despite our also buying back $166 million of our shares under our $4 billion stock buyback program, which we initiated soon after we achieved investment grade ratings for our debt in November .
The December quarter marked a 125th consecutive quarter of non-GAAP profitability and I would like to thank all of our stakeholders, who enabled us to achieve these outstanding and record results and especially thank the worldwide Microchip team, whose tireless efforts are what made these results possible.
Taking a look at our revenue from a product line perspective.
Our microcontroller revenue was sequentially up a strong eight 7% as compared to the September quarter and wasn't all time record.
On an annualized basis, our December quarter microcontroller revenue at $3 $9 billion is closing in on $4 billion.
On a year over year basis, our December quarter microcontroller revenue was up 33, 9%.
All microcontroller product lines, eight bit 16 bit and 32 bit had over 30% year over year revenue growth in the December quarter, with 32 bit microcontrollers, having the highest year over year growth.
Eight bit microcontrollers and 32 bit microcontrollers.
Both of which are about the same size in revenue each also achieve record revenue milestones.
Microcontrollers represented 55, 3% of our revenue in the December quarter.
Coming off strong sequential growth in the September quarter, our analog revenue increased one 9% in the December quarter.
Setting another record in the process.
On an annualized basis, our December quarter analog revenue broke through the $2 billion Mark for the first time.
On a year over year basis, our December quarter analog revenue was up 34, 3% almost the same year over year growth rate How's that microcontroller revenue.
Analog represented 28, 5% of our revenue in the December quarter.
While we no longer break out our FPGA or licensing revenue. They both remain a key focus for Microsoft as long term growth.
In the December quarter, our FPGA revenue hit an all time record by a wide margin and our licensing royalty revenue also hit an all time record.
Taking a look at our revenue from a geographic and end market perspective.
<unk> was up four 6% sequentially.
Europe was up 11% sequentially, which is significantly better than typical seasonal performance for the December quarter.
Asia was up five 8% sequentially and all end markets with strong and supply constrained.
Business conditions continue to be exceptionally strong through the quarter, our preferred supply program or PSP backlog continues to grow and is well over 50% of our aggregates backlog and a 100% of our backlog and the most constrained capacity product areas.
<unk> far outpaced the capacity improvements and increased shipments we achieved in the quarter.
As a result, our unsupported backlog, which represents backlog customers want it shipped to them in the December quarter.
We could not deliver in the December quarter continued to climb significantly as compared to the unsupportive backlog exiting the September quarter.
To illustrate the magnitude.
Oh, so the demand supply imbalance.
Despite our December quarter revenue, having grown 30% as compared to the year ago quarter. We.
We exited the December quarter, with the highest unsupported backlog ever.
We continue to experience constraints in all of our manufacturing internal and external factories and their related manufacturing supply chains.
We're also experiencing some adverse impact from the rapid rise in the omicron Varian cases of the COVID-19 virus.
We continue to ramp our internal factories as fast as possible and we are working closely with our supply chain partners, who provide wafer foundry assembly test and materials to secure additional capacity wherever possible.
Looking at the magnitude of the demand supply imbalance the size of a noncancelable backlog and the rate at which we're able to bring on new capacity.
We continue to expect that we will remain supply constrained throughout 2022 and possibly beyond that.
We believe our backlog position, especially the proportion of PSP backlog is giving us a solid foundation to prudently acquired constrained raw materials invest in expanding factory capability capacity.
His hire employees to support our factory ramps.
Our planned capital spending continues to rise in response to growth opportunities in our business as well as to fill gaps in the level of capacity investments being made by our outsourced manufacturing partners and technologies, they considered to be trailing edge, but which we believe will be workhorse technologies for us for many years to come.
In the December quarter, we signed a definitive agreement to purchase an assembly test factory shell in the Philippines, near where we already operate our manufacturing facilities.
How does the facilities and build out this shelf with equipment, we will be able to grow our internal backend capacity for many years to come.
We believe our increase in capital spending will enable us to capitalize on growth opportunities improve our gross margins increase our market share and give us more control over our destiny, especially for trailing edge technologies.
We will of course continue to utilize the capacity available from our outsource partners.
But our goal is to be less constrained by their investment priorities in areas, where they don't align with our business needs.
Now, let's get into the guidance for the March quarter.
Our backlog for the March quarter is very strong and we have more capacity improvements coming into effect.
However, our supply in the March quarter is expected to be adversely impacted by the COVID-19, Omicron variant, which has increased the level of factory workforce absentees.
We also have challenges in staffing several of our factories at the rate we would like to.
Taking all these factors we have discussed on the call today into consideration.
We expect our net sales for the March quarter to be up between two and 5% sequentially.
Our guidance range assumes some capacity additions as well as continued capacity constraints some of which we expect to work during the quarter and others that we will carry over into future quarters.
At the midpoint of our revenue guidance, our year over year growth for the March quarter would be a strong 24%.
For the March quarter, we expect our non-GAAP gross margin to be between 66, 2% and 66, 6% of sales.
We expect non-GAAP operating expenses to be between 21, 8% and 22, 2%.
And we expect non-GAAP operating profit to be between 44 and 48% of sales.
We expect our non-GAAP diluted earnings per share to be between $1 22 per share and $1 28 per share.
Given all the complications of accounting for our acquisitions, including amortization of intangibles restructuring charges and inventory write up on acquisitions Microchip will continue to provide guidance and track its results on a non-GAAP basis, except for net sales, which will be on a GAAP basis.
We believe that non-GAAP results provide more meaningful comparison to prior quarters, and we request that analysts continue to report their non-GAAP estimates to first call.
Finally at our Investor Day on November eight last year, we unveiled a Microsoft three point O strategy, which builds on a microchip two <unk> strategy that we successfully executed over the last decade, employing serial acquisitions to give us a solid foundation to build scale and breadth of solutions.
While significantly improving our gross and operating margin model.
To summarize the essential elements of Microsoft three point until we announce war and.
And organic growth target of two <unk> the industry growth.
Focusing on total system solutions and the six key market Mega trends.
Long term non-GAAP operating margin target of 44% to 46% and free cash flow target of 38%.
Increased capital return to shareholders to 50% of free cash flow and further increase this every quarter to do it on 100% of free cash flow to shareholders has net leverage drops to 1.5 X.
Increase our capex investment to 3% to 6% of revenue and investing a 130 to 150 days of inventory over the business cycles.
And finally to maintain a strong company foundation built on culture and sustainability.
As you can see from our December quarter results and the March quarter guidance, we are laser focused on executing our Microsoft three point of the strategy.
Let me now pass the baton to Steve to talk more about our capital return to shareholders Steve.
Thank you Ganesh and good afternoon, everyone.
Today, I would like to reflect on our financial reserves.
Announced today and provide you further updates on our capital return strategy.
Reflecting on our financial results I continue to be very proud of all employees of microchip.
<unk> delivered another exceptional quarter, and making new records in many respects.
Emily record net sales record non-GAAP gross margin percentage.
Record non-GAAP operating margin percentage.
Record non-GAAP EPS.
Cash flow from operations and record adjusted EBITDA.
The board of directors announced an increase in the dividend of nine 1%.
Last quarter or.
Two of $25 three per share.
This is an increase of 29, 7% from a year ago quarter.
Last quarter, we received an investment grade rating from both Moody's and Fitch.
After receiving saturating, we initiated our enhanced capital return strategy that we described at our Investor and Analyst day on November eight 2021.
During the last quarter.
We purchased $166 million, our first stock in the open market.
We also paid out $129 million in dividends.
That's the total cash return tortured $295 million.
This was 51% of our free cash flow projection.
The start of the quarter.
$189 million consistent with us targeting 50% of free cash flow.
As it returned to our investors.
However, our cash collections in the final month of the quarter were exceptional.
Due to a very strong and linear shipping corridor and record non-GAAP gross and operating margins and record adjusted EBITDA.
Being well above our forecast.
Actual free cash flow last quarter, it was $763 million.
Which was $174 million higher than our projection.
Towards the end of the quarter the stock buyback window had already close.
So we use the extra free cash flow towards further paying down the debt.
This extra pay down of debt as well as record adjusted EBITDA.
Drove down or December net leverage to 2.58 from $2 99 at the end of September .
Our strategy for cash returned to their shareholders was to execute based on forecasts.
And then true up in the following quarter.
Because of the unpredictability of the free cash flow.
We are simplifying the process.
Going forward, we will use the actual free cash flow for the prior quarter and as it turns our target percentage of that free cash flow to shareholders in the current quarter.
So based on this revised a process.
We will use over the last quarters actual free cash flow of $763 million.
This quarter, we plan to return 52, 5% of the $763 million.
Which is $400 million to the shareholders.
Out of this $400 million the dividend is expected to be.
Approximately $141 million and the stock buyback is expected to be approximately $259 million.
I will also like to note that on January 13, 2022.
Moodys further raise microchips unsecured debt credit rating.
From prior B, a three positive.
Two there couldn't be a too positive.
As you know Moody's be a two rating is equivalent to <unk>.
Triple B on the rating scale of S&P and Fitch.
With that operator will you please poll for questions.
Absolutely. Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to lay your signal to reach our equipment.
Due to time constraints in order to accommodate as many questions as possible USC. Please limit yourself to one question before re entering the queue. Once again Thats star one if you'd like to ask a question.
We'll take our first question from John Pitzer with Credit Suisse.
Yes. Good afternoon, guys. Thanks for letting me ask the question can I ask just relative to the supply issues that you're seeing in the March quarter.
Way to quantify that and as you think about the balance of the year do you have enough visibility of backlog and scheduled supply growth to make the argument that you should be able to grow sequentially every quarter in the calendar year 'twenty two.
So you know the the supply issues in the March quarter are comprehended in our guidance and.
So theres nothing more to say other than we are working through it they're just natural issues that come with them with.
With Covid and in some of the disruptions that happened with it.
Our backlog position as I mentioned is extremely strong you know we have much of 2022 backlog already on the books and really it's bringing supply on AR that.
That we expect will continue to drive the growth there is no shortage of demand.
<unk> been working on in every quarter, we continue to leave more of the backlog that is unsupported has happened five quarters in a row.
So if you look at the size of the the imbalance.
The size of the non cancel backlog are the rate at which we're bringing on new capacity. We expect we're gonna be constrained throughout 2022.
Yeah.
Thank you.
Thank you we'll take our next question from Pradeep Ramani with UBS.
Hi, Thanks for taking my question.
Wanted to sort of.
A follow up on the prior question.
In the past you talked about visibility being solid for four quarters of sequential growth.
How do we interpret your comments that you just made in terms of whether you have that visibility now both in terms of demand and supply.
We have visibility in terms of demand that exceeds four quarters, we have supply coming on every single quarter.
You know, where we're trying to guide you a quarter at a time, but at this point there is no demand signal that has any concerns for us are the PSB backlog makes it all noncancelable Oh, that's a very high percentage of our backlog some of the PSP backlog is going well beyond 12 months at this point in time.
So it's really a supply driven equation for at least all of 2022 and likely into 2023.
Thank you.
Thank you we'll take our next question from Gary Mobley with Wells Fargo Securities.
Okay.
Okay. We're unable to hear you. Please check your mute function.
I apologize for that.
Thanks for taking my question guys.
As your Unsupportive backlog continues to grow each and every quarter.
I'm presuming that you're having to make tough decisions with respect to <unk>.
Supporting perhaps or not supporting some some lower margin.
Alex and in our strategy for maximizing the mix and whatnot.
Longer term.
Does that deferred product shipment go into backlog is it is it temporarily or permanently lost what sort of what are sort of the long term considerations in.
In terms of mix contribution from our from the supply constrained environment that we're in.
Well, a constrained environment clearly gives us an opportunity to rich in the mix and use the capacity we have but you know you can't just be short term oriented and that you have to look at who the customers are what markets. They're in what the long term prospects are that.
With them.
As demand goes unfulfilled in any quarter.
It remains for the most part noncancelable backlog.
Anything in 90 days with or without PSB has already noncancelable.
And what we do is we just squeeze out some into the following quarter or some into the quarter after that.
<unk> is coming on and we were able to respond to some of it with that.
And you know there could be on the fringes some of the demand that eventually does not materialize, but the vast majority of the backlog stays as noncancelable backlog, but serviced at a later point in time.
The biggest doesn't make are now in terms of what we're shipping is based on the PSP backlog that we've had in place and how long it's been in place.
Yes sure.
Yes.
Your question was more like.
You know are we not shipping the low margin backlog and when we eventually ship is that a negative gross margin.
I think you know operations don't know what the gross margin as they look at units in backlog in dollars and as shipping allocated. So you know there's a much lower level of emphasis to not ship. The low margin backlog is much more to do with who the customer is what the market segment is.
Who the strategic accounts were shifting the PSP backlog and constraining the non PSP backlog. So I think your concern is really not well placed there.
Alright, Thank you Steve.
Thank you we'll hear next from does she arrow with Goldman Sachs.
Hi, Thank you so much for taking my question I wanted to get your thoughts on an industry supply demand.
Clearly as of today and as you guys say for the rest of the year things most likely stay very tight.
At the same time, you were seeing you know pretty significant increases in capex from.
Most players, including yourselves your peers.
With capacity coming online late 'twenty, two and definitely into 'twenty three.
You know is it way too early to be concerned about supply demand going into 'twenty, three or how do you think about that internally and what would you need to see for you to kind of pumped the brakes on.
On Capex decisions. Thank you.
You know after five quarters and now into the sixth quarter.
Theres really no line of sight to.
Two having demand supply coming back into some form of a equilibrium. So we continue to the gap between demand and supply despite adding supply continues to grow we know that's not a permanent.
You know factor, but it is at this point in time.
Demand continues to be strong every customer I speak to.
Every CEO that expresses their needs.
<unk> continues to see strength in their business is in fact, you know many many of them wanting to go into something more off noncancelable nature.
Nature into 'twenty, three many cases into 'twenty four as they see their business. So there are many many factors driving semiconductor growth.
On the short term supply demand you know there are secular factors that we've talked about are the megatrends with how digitization that's taking place.
You know at some point it will have a supply balance supply demand balance that does occur we don't see it in 'twenty two we don't see it in our numbers that we see for 'twenty three at this point.
Thank you.
Youre welcome.
Thank you we'll take our next question from Vivek Arya with Bank of America Securities.
Okay.
Alright, Thanks for taking my question.
Dennis I wanted to ask this supply demand question in a different way can you increase supply every quarter for the next three or four quarters, obviously barring any any macro issues. Because if you can increase supply and demand is not an issue then growing sales every quarter should we do it right or what part of that equation.
Am I missing.
Well, we are absolutely increasing capacity every single quarter.
Youre not missing any part of that equation.
Got it so that's what I wanted to confirm because I thought there was some confusion that.
I used to sticking with the potential for improving revenue every quarter all else being equal.
You know what we're driving in that direction, we got plenty of demand. So demand side is not the issue of capacity as we are building capacity that will continue to grow.
Throughout 2022 and into 2023.
We're trying to provide you more.
General direction of where are we going.
Without trying to make this a every quarter you know what are we trying to do.
Clearly the guidance, we're providing specific specifically is for this quarter, but the demand supply.
Equation driven by the demand we have the supply we are bringing on continues to have many quarters of legs.
Got it thank you guys.
Yeah.
Thank you we'll take our next question from Harlan sur with J P. Morgan.
Good afternoon, and congratulations on the solid results and execution.
Past earnings season, all three of the large U S state semi equipment suppliers.
Coming up a bit short on shipments to their customers because.
They are being constrained by component availability logistics, and labor issues and well and they all expect.
Slightly under ship their customers' manufacturing requirements at least through the first half of this year. So I'm wondering if this is maybe slowing your ability to improve their own internal and wafer capacity or even capacity plans by your outsourced wafer cloud partners and maybe just a little bit versus what you expected maybe six.
<unk> 90 days ago.
So it is true that our equipment in general and we've been saying this on prior calls as well lead times have been stretching.
Some part of that is just the equipment manufacturers imbalance between supply and demand.
All of it is semiconductor shortages that feed into the equipment that is built for semiconductor manufacturers. So yeah, our lead times for receiving equipment have continued to stretch.
Okay.
Thanks Connor.
Welcome.
Thank you we'll take our next question from harsh Kumar with Piper Sandler.
Yeah, Hey, guys a lot of people have asked about supply I wanted to ask a question about demand. So this is the fifth or the sixth quarter.
Steve and Ganesh exceptional demand.
I understand at the beginning of the Covid time frame. There was some particular mismatch, but can you help us understand what is fundamentally going on in the end markets that this demand continues to strengthen.
And now you're looking at a year's worth of non E plus worth of Noncancelable orders.
So as to help us with that if you don't mind.
So demand in.
All geographies in all end markets.
<unk> continues to be strong and I think they're driven by different requirements.
And at different times right.
If you take automotive some of it was shortages and then as they have tried to solve some of the shortages as content.
And there is a richness mix after cars are that is driving our consumption.
Consumption of semiconductors.
You take our office automation you know there was the return to work from home at first and now there's some amount of returning.
Now returning to the office and what needs to be done so segment by segment by segment. When you go into that what we find is that the demand drivers some of them. So the mega trends, we have talked about.
Some of that is still catch up demand that people are trying to put in place.
Demand continues to be extremely strong as reflected in the bookings we see the backlog we have the period of time over which people are willing to place backlog and the percentages that they may they are willing to have as noncancelable.
Appreciate it guys. Thanks.
Thank you, we'll hear next from tore Svanberg with Stifel.
Yes, Thank you and congratulations on the results.
One of your competitors just had a call. This morning out there are talking about some pretty big Capex numbers.
No basically regardless of the economic climate.
Just wondering philosophically as you think about your capacity additions over the next few years. It does sound like the plans are a bit more measured.
And then also the other capex number for fiscal 'twenty three.
So we don't have a fifth a capex for fiscal 'twenty three if that was your question you know we will share some of that when we have a may call itself. You know capex decisions are long term decisions and not driven by just you know what does the next calendar year look like.
Its decisions about capacity that we want to be able to serve a 510 year window of time as we look at it and so you know, perhaps we have been more measured and we do want to be.
<unk> and what capacity and what capital are we bringing online, but we have also been aggressive over the last year as you have seen in the level of our capital expenses that we have put in and the raising of the capex targets that we have had into capacity that we believe is long term good capacity for microchip to have both to be able to serve customers.
But also to be able to replenish some of the inventory, we think we need to.
Has some level of normalization in demand and supply come about.
Thank you I was asking ourselves you know, we're not going to give you a fiscal 'twenty three capital plan today, what we'll put that together as part of our annual operating plan process. We go through this quarter, but I think investors should expect that given the environment that we're seeing our intention to increase the percentage of manufacturing that we do internally.
Capex will continue to be kind of on the high end of our guidance that we've given them on a long term basis next year and we'll give you more more firm number next quarter.
That's good thank you Eric.
Thank you we'll hear next from William Stein with true Securities.
Great. Thanks for taking my question I'll add my congratulations to the very strong execution.
There's a comment in the press release that I I don't know if you've touched on during this discussion I don't quite understand.
Certainly understand work capacity constrained microchip is the whole industry is demand is very strong.
Revenue is going up next quarter I think the press release noted that inventory days, you expect to increase next quarter.
Or are you building demand for product that has.
Building inventory for product that has demand in future quarters. That's just happen to not be required to be delivered during Q1 or is it with versus finished goods can you help me understand that thank you.
Yes, I mean, we're ramping our factories, we're seeing input cost increase to the supply chain, you know and all of those things are impacting our costs and you know we we we.
Demonstrated in our analyst and Investor day that we want to increase the days of inventory on the balance sheet to be able to better support customers. So raw materials work in process is absolutely going up in input costs continue to rise and we're positioning ourselves to be able to continue to grow the businesses can ask as described before.
You know if we can build it.
Shipping it so, but we're not trying to build inventory in coal shipments back.
Clearly theres more whip a work in progress as more materials that we're gonna need we're in a growing environment. So what we have to have internally is to be able to feed forward looking demand not just backward looking demand.
And also as I as I mentioned in my prepared remarks is as gross margin improves you that essentially increases the days of inventory on the on the balance sheet just the way the math works there.
Yes, I understand great. Thanks, guys.
Thank you we'll take our next question from Chris Danley with Citi.
Hey, Thanks, guys.
So our sequential revenue growth is slowing down a little bit you said that there are some omicron.
Omicron issues other hiring issues assuming that yet.
In the March quarter, or does that mean that revenue growth.
It should accelerate in the June quarter, and will you be able to start to catch up and maybe trying to boost this unsupported backlog if that happens.
So Chris the limitation is not on the demand side, it's on the supply side, we're working on CAC to address the of the supply constraints.
Covid was extra factor that we had not built into our plans obviously no one knew about it until the December timeframe.
We will hopefully cleared through some of that going through this quarter, but there are also challenges on earlier on we talked about you know getting equipment in on time has been a challenge hiring all the people has been a challenge. So we're running like Heck I'm you know we expect that the.
June quarter, we will have more favorable case.
Our capabilities are barring any unknown in terms of where we might go.
Okay. Thanks, guys.
Youre welcome.
Well hear next from Chris Caso with Raymond James.
Yes. Thank you my question is on pricing and I know.
As input costs were rising last year, you were quick to pass along those price increases.
Yes.
Well just that.
<unk> three sub question to that one.
Do you believe that the price the input price increases have are behind us now or is that potential for those to go higher as the year goes on or are those price increases now fully baked into the quarterly results now that youre guiding for for the.
The March quarter, and then you know at what point do we start to kind of anniversary these price increases and I'm guessing you're not going to want to give us.
The magnitude of how much pricing has gone up but it kind of what point does that is that no longer a factor year on year comps.
Okay.
So let me try and parse your three questions and and see how best to answer it. So firstly input prices for us are our costs.
You need to go up are there happening from different suppliers at different points in time with different magnitude. So.
What you see reflected in our Cogs, our days of inventory and all that is in fact, an aggregation of what is taking place every quarter, but our costs are going up and will continue to go up as we go through the year as there are structural cost increases built into 2022.
Our pricing.
You know we have done them at a specific points to try and not have a price increase every time there is a cost increase on us.
We'll also continue at some.
As we collect cost increases that we have incurred and pass them on as price increases to a customer.
You know our intention is to be able to make sure that we're able to cover.
The increase that we are that we have taken on.
It's hard to know in the current environment when does.
Adjustment mechanisms that we have stopped.
It's an inflationary environment.
We know that our suppliers are facing that inflation.
They are passing on that inflation to us.
There are large capital cost that they have incurred the large capital costs. We are incurring that are building into the cost structure of the way the labor.
Costs have gone up quite significantly the material costs have gone up quite significantly.
And that Hasnt stemmed as of yet and I don't know if.
A year from now we might be in better tie.
<unk> from an inflationary standpoint, but as long as that inflation.
Fair and cost increases are passed on to US we will pass them on as price increases.
That's very helpful. Thank you.
Great. Thanks, Chris.
Thank you and once again Thats star one if you'd like to ask a question.
Your next from Joe Moore with Morgan Stanley .
Great. Thank you.
Wonder if you could talk about your customer level of inventory I know, we're dealing with the shortage situations, but it seems like in the past we get into incomplete kitting, where maybe they have inventory of other people's components waiting for yours do you have any sense for that and our use of bottleneck component and enough of these cases that you feel pretty confident that year that the inventories as long as it looks.
So we get inventory visibility through our channel because they report that on a regular basis to us.
To our OEM customers, we really don't get and they don't report to US you know we might be able to look through their balance sheets as they report them and see where it's high but it's certainly not specific to us.
The intensity of customer Escalations.
Not really you know.
Backed off.
You know that every single day I'm, you know I'm involved in a half a dozen or more personally which means that the rest of the company.
As you know in order to magnitude higher than that that are involved in those are all the places where something that microchip provides them is holding up that customer's ability to complete what they're doing.
Now we are of course aware of this what I, what what has been termed the Golden screw syndrome, where our customers may be building inventory on product. They can get shipments off wildly await shipments of the product that they need to complete the bill of materials.
You know, it's reasonable to assume there's some part of that that it would apply to us as well, but given our 90 day noncancelable times for standard backlog.
A minimum of 12 months of noncancelable for PSP backlog.
We believe that our significant disincentives for our customers to order meaningfully more.
And what they need.
Yeah.
Great. Thank you very much.
Youre welcome.
Thank you we'll take our next question from Sweden.
Three the stopper.
M L.
Hey, Thank you finish I had a question on Opex you mentioned that you were.
Below the long term target range of 22 and a half.
23, and a half should we expect opex tend to catch up to the lower end at least to the lower end of that range as we go through the next few quarters.
You know it will go slowly you can see we topped it up in this quarter, Eric maybe you want to talk a little bit more about kind of how the the rate at which we would do that.
Yeah, I think it's very much dependent on our hiring success right. I mean, we're we're we're challenged in getting the labor that we need throughout the company. That's just the market right now and we're working hard with our HR teams to to make that happen. So I think I think it's gonna be a gradual increase but the way we want you Mark.
Rolling long term is within our long term model, which is 22 and a half to 23, 5% and were below that this quarter and there's wage inflation as well, which is a higher than historical and we expect that will continue for some time.
Okay got it thank you.
Okay.
Thank you we'll hear next question from Christopher Rolland with S. I G.
Hey, guys. Thanks for the question and one for a nash or or Steve.
So we are coming off of the T I update and they're gonna have somewhere between five to eight 300 millimeter fabs, which is pretty unbelievable.
But do you, guys, where and and and and and they're not the only are adding 300 millimeter fabs. So do you guys worry about a flood of.
Super efficient analog and embedded products hitting the market. Eventually here I guess first of all secondly does this change your thinking about getting your own 300 millimeter fab to compete.
<unk>.
You know if you look.
Over time, I mean capacity has come on at different points in the industry.
At this point in time, we're not feeling a particular concern about our 12 inch capacity and what it might do to our analog business.
We do build some analog products through our foundry partners that are on 12 inch.
You know.
A 12 inch fab at some point might be in microchips future. It isn't one that we're looking at today.
And we'll just have to evaluate where the situation is and what makes sense.
But today, we're focused on the technology that we built in house. The work that we're doing to ensure that that trailing edge technology, which is really a limitation not just in our growth, but actually part of the industry's growth is there is not enough investment going in to those product lines that limit.
Large and equipment.
And we want to make sure that we have our capacity well lined up to participate in that growth.
And help our customers as well.
Oh sure.
I would just add that you know.
Based on what we know the number of Fabs being added.
By probably the company that you named.
There is going to be a period of substantial.
Under utilization and substantial underperformance any significant headwind to the gross margin delivered by all of the costs that they have to absorb.
So I think.
You're talking about really low cost capacity I think I look at it just the opposite.
There's going to be significant cost problem for them.
And then not having all the you know 12 inch capacity, we're making enormous gross margins your operating margins are higher than our long term target.
So really really it's getting close to it.
Sure.
So you know and we can.
Turning to make further improvements with.
Bringing test inside the technology, we license last quarter, which will be producing inside so we got plenty of buttons on ourself to push.
And I'm really not concerned about somebody else's capacity coming in.
You recently learned through the port.
Due to the $150 billion off.
Investment that would be required.
To bring the trailing.
Trailing edge capacity online for the next five years.
The capacities that much shortened our trailing edge right because new foundry is putting additional trailing edge capacity, they only putting leading edge sort of trailing it has to be done by whoever.
And given that there is not $150 billion of capital being put into a trailing edge technology in the coming five years. So I think I see this capacity to be short.
You know as far as you can see right now.
Insightful thanks, Steve.
Yeah.
Thank you we'll take our next question from Nik Todorov with Longbow Research.
Okay.
Yeah. Thanks, Thanks for giving me the opportunity to ask the question I have a little bit more philosophical question.
How would you characterize the level of trust in the supply chain between suppliers and customers the channel.
There has been damage sustained and given all the disruptions and what kind of impact that potentially having.
Trust is built over.
Over many many years it isn't something that you either gain or lose in the course of a short period of time, which is what I would refer to the last six to 12 months out so.
And trust us as a function of communication managing expectations treating each other with respect.
And all of those are consistent with how we work with our customers and we work with our suppliers and what we do so no I don't think trust has been saying I think there's clearly no stress points people are looking to grow more we're looking to grow more we want more our customers are looking to grow more they want more but there is a realistic sense that.
You know we're doing the best that we can within the constraints that we have just as our suppliers are working as best as they can within the constraints that they have and we both share some responsibility and how we've you know.
Manage the pipe going forward.
But so I don't see any any trust issues on either the customer side or the supplier side, that's an issue.
Well you know it's a it's also a relative equation, if we were not shipping.
Everything at customer needs, but they were getting.
All the product from our competitors you know whenever they're designed with our competitors.
Then it would be a problem in a bigger problem for us and losing trust because.
We're letting them down more than anybody else, but that's not the case, it's actually just the obvious opposite cause.
Customer after customer we are being told that despite the constraints you know we have enable their success in the last year or two years more than the others had a constraint.
You know there are many competitors, who won't even take an escalation call.
They would say doing bothered us there's nothing we can do that's all we can give you.
And microchip weird on numerous calls all day every day of the week.
And taking customers call explaining the situation, improving we can but giving shoulders, giving a shoulder to cry on for their customers.
And that MTS is helpful. So I think in general.
We are building trust relative to our competitors and destroying truth.
Got it thanks guys.
Thank you we'll take our final question from harsh Kumar with Piper Sandler.
Yeah, Hey, guys.
Tactical one here.
I believe when you gave the commentary you may not have provided any color on how you expect these segments to perform in the March quarter ever.
Curious if you would take a second to just kind of give us whatever words you visit them you can and how you expect the microcontroller and analog.
The profile in March.
So we don't break out our product line.
For each quarter in terms of the guidance. They all work together on it right now.
All of them are supply limited all end markets are supply limited, it's really how effectively we can bring capacity on fight through some of the COVID-19 issues and all of that.
And the demand is there in all product lines, all end markets for what we need to do and for.
For the.
For at least many more quarters that that's really what determines what the strength is seen in our product line or in an end market.
I think it's probably helpful to them.
Got a few quarters last calendar year, where your microcontroller analog out four performed each other but overall for the year I can ask gave the year over year numbers, they've really performed right in line with exactly the growth.
Got it Okay fair enough. Thanks, guys appreciate it congrats.
Thank you.
Thank you and that does conclude today's question and answer session I'd like to turn the conference back over to Mr. Moorthy for any additional or closing remarks.
Great well, thank you everybody for attending we.
We do have our meetings and conferences and all that coming up in the next several weeks and we look forward to speaking to you at some so thank you good afternoon.
Thank you and that does conclude today's conference. We do thank you all for your participation you may now disconnect.
Okay.
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Yes.
Okay.
Yeah.