Q4 2022 Microchip Technology Inc Earnings Call

May 9, 2022

Yes.

Okay.

Please standby.

Good day, everyone and welcome to Microchips fourth 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 Microchips, Chief Financial Officer, Mr. Eric Beyond Holt. Please go ahead Sir.

Thanks, Sarah 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, who wish to caution you that such statements are predictions and that actual events or results may differ materially.

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

In attendance with me today are Ganesh Moorthy, Microchips, President and CEO , Steve Sanger, Microchips Executive Chair and Sajid Dowdy Microchips head of Investor Relations.

I will comment on our fourth quarter and full fiscal year 2022 financial performance and will then provide commentary on our results and discuss the current business environment as well as our guidance and 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 and this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on our Investor Relations page of our website at Www Dot Microchip Dot com.

And included reconciliation information in our press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We've also also posted a summary of our outstanding debt and leverage metrics on our website.

I will now go through some of the operating results, including net sales gross margin operating expenses other than net sales I will be referring to these results on a non-GAAP basis, which is based on expenses, partly effects of our acquisition activities share based compensation and certain other adjustments as described in our press release.

Net sales in the March quarter were 184, 4 billion, which was up four 9% sequentially and near the high end of our quarterly guidance.

We have posted a summary of our GAAP net sales by product line and geography as well as our total end market demand on our website for your reference.

Going forward, we will only be providing GAAP net sales by product line and geography, consistent with the standard practice by our peer companies. We will continue to provide information each quarter on changes in distribution inventory levels.

On a non-GAAP basis gross margins were a record 66, 6% operating expenses were at 21, 9% and operating income was a record 44, 7%.

non-GAAP net income was a record $764 6 million.

non-GAAP earnings per diluted share was a record $1 35, 10 cents above the midpoint of our guidance seven of which was driven by favorable events in the March quarter benefiting our cash tax expense.

On a GAAP basis in the March quarter gross margins were a record at 66, 2% total operating expenses were $670 9 million and included acquisition intangible amortization of $215 5 million special charges of $9 1 million $3 8 million of acquisition related and other costs and share base.

Compensation of $39 million.

GAAP net income was $437 9 million or <unk> 77 per diluted share and was adversely impacted by an $11 $8 million loss on debt settlement associated with our convertible debt refinancing activities.

Our March quarter, GAAP tax expense was impacted by a variety of factors, notably the tax benefits recorded as a result of releasing the unrecognized tax benefit due to the closing of an audit in Europe .

For fiscal year 2022, net sales were a record $6 eight 2 billion and were up 25, 4% from net sales in fiscal year 2021.

On a non-GAAP basis gross margins were a record 65, 7% operating expenses were 22, 2% of sales and operating income was a record 43, 5% of sales.

non-GAAP net income was a record 261 1 billion and EPS was a record at $4 61 per diluted share.

On a GAAP basis gross margins were a record 65, 2% operating expenses were 38, 1% of sales and operating income was 27, 1% of sales.

Net income was $1 $2 6 billion and EPS was $2 27 per diluted share.

Our non-GAAP cash tax rate was one 3% in the March quarter, and four 9% for fiscal year 2022.

The non-GAAP cash tax rate in the March quarter was lower than originally forecasted due to a variety of factors, including the receipt of a tax refund that had been forecasted to receive that had not had that had not been forecasted to be received until a later date.

Lower taxes in certain jurisdictions and tax benefits from our convertible debt exchanges.

We expect our non-GAAP cash tax rate for fiscal 'twenty three to be between seven five and 11, 5% exclusive of the transition tax any potential tax associated with restructuring the microsemi operations into the microchip global structure and any tax audit settlements related to taxes accrued in prior fiscal years.

The midpoint of our June quarter to tax rate guidance is nine 5%.

Our fiscal 'twenty three cash tax rate is higher than our fiscal 'twenty two tax cash rate for a variety of factors, including lower availability of tax attributes such as net operating losses and tax credits as well as the impact of current tax rules, requiring the capitalization of R&D expenses for tax purposes.

Our inventory balance at March 31, 2022 was $854 4 million, we had 125 days of inventory at the end of the March quarter, which was up nine days from the prior quarter's level or.

Our levels of raw materials and work in progress increased in the quarter, which helps position us for the increased production, we are expecting from our internal factories and helps buffer us against.

Unexpected shortages or changes in material lead times.

The carrying cost of our inventory has been and will be increasing due to the 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 March quarter were at 17 days, which is a record low level and down from 19 days at the end of the prior quarter.

Following on the heels of our upgrade to investment grade or Triple B minus and the December 2021 quarter. During the March 2022 quarter, we were upgraded to the equivalents of triple B by both Moody's and Fitch, reflecting the strength of our balance sheet.

Financial results in our franchise.

In the March quarter, we exchanged a total of $64 9 million of principal value of our 2027 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 by significantly reducing share count dilution to the extent our stock price appreciates over time.

The principal amount of convertible debt on our balance sheet at March 31 was $838 1 million. This includes $665 5 million of convertible bonds maturing in November of 2024 with a capped call option in place that offsets any potential dilution from these convertibles up the stock prices of one <unk>.

Hundred $16 79.

At the beginning of calendar year, 2020, Microchip had $4 $4 1 billion in convertible bonds outstanding. So today, our overall capital structure is in a much better long term position.

Our cash flow from operating activities was $747 7 million in the March quarter.

Our free cash flow was $633 1 million and 34, 3% of net sales as.

As of March 31, our consolidated cash and total investment position was $319 4 million, we paid down $205 9 million of total debt in the March quarter.

Over the last 15 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down almost $5 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 adjusted EBITDA in the March quarter was a record at $902 6 million and 48, 9% of net sales.

Our trailing 12 month adjusted EBITDA was also a record at three to $4 6 billion and 47, 6% of net sales.

Our net debt to adjusted EBITDA was 232 at March 31, 2022 down from $2 $5 eight at December 31, 2021, and down from $3 76 at March 31 2021.

Our dividend payment in the March quarter was $148 million, and we repurchased $259 $6 million of our stock during the quarter.

Capital expenditures were $114 6 million in the March quarter, and $370 1 million for fiscal year 2022.

We had originally forecasted capital expenditures of about $140 million in the March quarter, and we experienced delays in receiving some of our capital equipment from our suppliers.

Our expectation for capital expenditures for fiscal year 2023 is between 450 and $550 million as we continue to take actions to support the growth of our business and ramp our manufacturing operations.

We continue to prudently add capital equipment to maintain grow and operate our internal manufacturing operations to support the expected long term growth of our business. We expect these capital investments will bring gross margin improvement to our business and give us increased control over our production during periods of industry wide constraints.

Depreciation expense in the March quarter was $59 3 million.

I will now turn it over to Ganesh to give his comments on the performance of the business in the March quarter as well as our guidance for the June quarter Ganesh.

Thank you Eric and good afternoon, everyone.

Our March quarter results were very strong across the board and set several records in the process.

Revenue grew four 9% sequentially and 25, 7% on a year over year basis to achieve an all time record of $1 eight 4 billion.

Despite a number of operational challenges, including the rapid spread of the Covid omicron virus, which affected several of our factories.

Shutdowns in several cities in China, and the suspension of shipments to Russia. We finished just shy at the high end of our revenue guidance.

This was our fifth consecutive quarter of new revenue Records.

non-GAAP gross margin was another record at 66, 6% up 50 basis points from the December quarter and at the high end of our guidance.

As we continue to ramp our internal factories and benefit from improved operational efficiencies.

Well as product mix changes.

non-GAAP operating margin was also a record at 44, 7% very close to the high end of our guidance.

At 21, 9% operating expenses.

We have 60 basis point below the low end of our long term model of 22, 5% to 23, 5%.

Our long term operating expense model will continue to guide our actions to invest for the long term growth and profitability of our business.

Our consolidated non-GAAP diluted EPS was a record $1 35 per share well over the high end of our guidance and up 45, 2% from the year ago quarter.

Even after excluding the tax benefit we received our March quarter non-GAAP diluted EPS at $1 28 was at the high end of our guidance.

Adjusted EBITDA at 48, 9% of revenue and free cash flow at 34, 3% of revenue were both very strong in the March quarter.

Continuing to demonstrate the robust cash generation capabilities of our business.

Net debt declined by $209 8 million driving our net leverage ratio down to $2 32 in the March quarter, as we continue to relentlessly drive down our net leverage.

During the March quarter, we returned $400 $4 million to shareholders.

Representing 52, 5% of the prior quarter's free cash flow.

Reflecting on our fiscal year 'twenty two results. It was one for the record books and one of our best years ever.

We made dramatic progress on all fronts revenue growth gross and operating margins earnings per share free cash flow generation debt and leverage reduction and last but not least we significantly increased the capital returned to shareholders through dividend increases and the initiation of our programmatic share buyback program.

At our Investor Day in November 2021, we outlined our plan to increase the capital return to shareholders every quarter as our net leverage continues to drop.

We are making consistent and meaningful progress towards our net leverage grow every quarter.

I would like to take this opportunity to profusely. Thank all our stakeholders, who enabled us to achieve these outstanding results and especially thank the worldwide microchip team for their never give up attitude and concerted effort to consistently deliver results to support our customers in the face of a historic and persistent imbalance between.

Supply and demand.

Taking a look at our revenue from a product line perspective, our microcontroller revenue was sequentially up a strong seven 6% as compared to the December quarter and was another all time record on an annualized basis, our March quarter microcontroller revenue broke through the $4 billion Mark for the first time.

On a year over year basis, our March quarter microcontroller revenue was up 28, 3%.

All microcontroller product lines, eight bit 16 bit and 32 bit experienced strong growth and achieved record revenue milestones.

32 bit Microcontrollers had the highest growth and is now the largest microcontroller product line for us at 46, 5% of our microcontroller revenue.

Microcontrollers represented 56, 7% of our revenue in the March quarter.

Our analog revenue sequentially increased 3% in the March quarter setting another record in the process on a year over year basis, our March quarter analog revenue was up a strong 24, 2%.

Analog represented 27, 9% of our revenue in the March quarter.

Taking a look at our revenue from a geographic and end market perspective.

<unk> was up 21, 4% over the prior year quarter, Europe was up 25% over the prior year quarter.

Asia was up 27, 9% over the prior year quarter.

All end markets remains strong and were supply constrained.

Business conditions continue to be exceptionally strong through the quarter.

Our preferred supply program or PSP backlog continued to grow and remain well over 50% of our aggregate backlog at 100% of our backlog in the most constrained capacity product areas.

Demand continued to be insatiable, despite the significant capacity increases we have implemented so far.

As a result, our unsupported backlog, which represents customer backlog.

Backlog that customers want it shipped to them in the March quarter.

But which we could not deliver in the March quarter climbed substantially again as we exited the march quarter with our highest unsupported backlog ever.

We continue to experience constraints in all our internal and external factories and their related manufacturing supply chains.

We are ramping our internal factories as fast as reasonably possible.

And we are working closely with our supply chain partners to secure additional capacity wherever possible.

Our supply chain partners as well as some of our customers were adversely impacted by the Lockdowns in China During March which continued into April and May.

Our operations team worked to redirect our manufacturing activities and sourcing wherever possible to other locations that are not locked down.

Looking at the magnitude of the demand supply imbalance.

Size of a noncancelable backlog the rate at which new backlog continues to come in and the rate at which we're able to bring on new capacity. We expect that we will remain supply constrained throughout 2022 and into 2023.

Our growth is predominantly limited by how quickly we can bring on additional capacity to support demand.

To reiterate what we first shared with you in March this year, we expect our five year compounded annual growth rate using fiscal year 2021, as a baseline to be 10% to 15%.

We expect our capital spending in fiscal year 'twenty three to be at the high end of the range, we have shared with you.

As we respond to growth opportunities in our business as well as fill gaps in the level of capacity investments being made by our outsource manufacturing partners in specialized technologies, they consider to be trailing edge, but which we believe will be workhorse technologies for us for many years to come.

We believe our calibrated increase in capital spending will enable us to capitalize on growth opportunities and serve our customers better increase our market share improve our gross margins and give us more control over our destiny, especially for specialized 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 and areas, where they don't align with our business needs.

Now, let's get into the guidance for the June quarter.

Our backlog for the June quarter is very strong and we have more capacity improvements coming into effect.

All the factors, we have discussed on the call today into consideration.

We expect our net sales for the June quarter to be up between 4% and 8% sequentially.

Our guidance range assumes capacity additions as well as continued materials and capacity challenges.

Some of which will work I expect to work through during the quarter, others that will carryover to be worked in future quarters.

We have also included the anticipated effects of the Lockdowns in China on our supply chain partners as well as our customers.

At the midpoint of our revenue guidance, our year over year growth for the June quarter would be a strong 24, 6%.

For the June quarter, we expect our non-GAAP gross margin to be between 66, 8% and 67, 2% of sales we.

We expect our non-GAAP operating expenses to be between 21, 6% and 22% of sales.

We expect our non-GAAP operating profit to be between 44, 8% and 45, 6% of sales.

We expect our non-GAAP diluted earnings per share to be between $1 32 per share and $1 36 per share after comprehending the higher tax rate that Eric shared with you.

Finally, as you can see from our March quarter results and the June quarter guidance every element of our Microsoft three point of this strategy is firing on all cylinders as we continue to build and improve what we believe is one of the most diversified defensible high growth high margin high cash generating businesses in the semiconductor industry.

To summarize the essential elements of Microsoft three pointed out they are organic growth rate of 10% to 15% in the fiscal year 'twenty two to 'twenty six timeframe by focusing on total system solutions and our six key market Mega trends.

Long term non-GAAP operating margin target of 44% to 46% and free cash flow target of 38%.

Consistently increasing capital returned to shareholders has net leverage drops such that 100% of free cash flow is returned to shareholders by the time net leverage drops to one and a half X.

Our capex investment of 3% to 6% of revenue and an inventory investment of 130 to 150 days over the business cycles.

And last but not least a strong company foundation built on culture and sustainability.

Let me now pass the baton to Steve to talk more about our cash return to shareholders.

Thank you Ganesh.

Good afternoon, everyone.

I'd like to reflect on our financial results announced today and provide you further updates on our cash return strategy.

Reflecting on our financial results.

To be very proud of all employees of microchip.

<unk> delivered another exceptional quarter and fiscal year, while making new records in many respects, namely that could net sales non-GAAP gross margin percentage record non-GAAP operating margin percentage.

non-GAAP EPS and record adjusted EBITDA.

And all of that in a very challenging supply environment.

The board of Directors announced an increase in the dividend of nine 1% from last quarter.

27 <unk> per share.

This is an increase of 33, 7% from a year ago quarter.

During the last quarter, we purchased $259 $6 million off our stock in the open market.

Also paid out $148 million in dividend.

Thus the total cash return was $440 million.

This amount was 52% of our actual free cash flow of $762 7 million.

During the December 2021 quarter.

Our paydown of debt as well as record adjusted EBITDA drove down our net leverage at the end of March 2022 quarter to 2324.

258 at the end of December .

In the current June quarter, we will use last quarter's actual free cash flow of $633 1 million and.

And expect to return $348 $2 million.

Which is 55% of that amount to our shareholders.

Out of this $348 2 million.

The dividend is expected to be approximately $153 $2 million and the stock buyback is expected to be approximately $195 million.

With that operator will you please poll for questions.

Yeah.

Yes. Thank you. Thank you I would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

We do ask that you limit yourself to one question.

Again, Please press star one to ask a question.

And we will take our first question from Joe Moore with Morgan Stanley .

Great. Thank.

Thank you for letting me ask the question what have you just talked to you your visibility into the supply remaining.

In the context of markets that you guys don't sorry, I guess youre seeing smartphones.

Weaker you should be seeing foundry capacity free up in other places do you see that showing light at the end of the tunnel and the supply situation or no.

So because we're not in the end markets. You described like smartphones, we don't have direct visibility into what they are facing we do read the same industry reports.

As to what might be happening.

There is some times a delay between when something is perceived to be in the market to when it actually filters into the supply chain and at this point in time, we do not see any major relief in the capacity.

As a result of some other end market that is weak that may happen in time, but not at this point.

Okay. Thank you very much.

Thank you.

Our next question will come from Gary Mobley with Wells Fargo Securities.

Hey, guys, let me extend my congratulations to a strong finish to the fiscal year.

You mentioned that your first quarter guide contemplate a lot of different issues that we're all dealing with including supply chain issues and customers an ability to manufacture I was hoping maybe you could break that down and quantify the total impact that you haven't been in your first quarter guidance and what the split maybe between cut.

<unk> specific issues in your own supply chain issues.

I'd say its a good question, but it's a very difficult question to quantify the way that youre looking for.

There are upsides and downsides in the different risks that we're dealing with.

What we haven't applied as a way to look at all of that and come up with an aggregate risks that we have built into the guidance.

So I don't have a specific breakdown that would be helpful to you on China customer of China supply or Russia et cetera. It's all built in to what we have and we know that theyre going to come at us. So it's slightly different twist on what we're thinking about and all of that is built into the guidance we've provided.

Okay, Eric if I can ask a follow up question you mentioned that distribution.

Inventory is at an all time record low down two days sequentially, but I think you've now had maybe three quarters in a row.

Sell into distribution channel greater than sell out, albeit.

Minor difference what's the.

Reason for the divergence here.

Well I just view the differences really small if you look at our fiscal year I think there's an $11 million difference between.

GAAP revenue in what sell through was through distribution channels. So I think I think it's minor.

Distributors are challenged just like customers are today in terms of getting the product that they need to support their customers. We're generally seeing that what we're shipping into them is shipping out almost immediately to support their customers and they also have a lower percentage of their backlog typically that is on the PSP program and that has.

<unk> of their availability to get supply some of the direct customers that got into PSP earlier, where have a stronger presence in PSP have that priority of supply.

Gary what I would also add is that.

As business grows distribution almost by definition needs more products shipped into them.

In order for them to be able to prepare for that growth that days of inventory as a more normalizing.

The indicator that tells you how is what they are getting as a function of what is it that they are shipping through so there is no concern with the fact that we are shipping in slightly more and as Eric mentioned is pretty small in the Grand scheme of things despite that and despite the growth that days of inventory are declining quite significantly going from 19% to 17.

And I think that is a more meaningful indicator is what's going on in distribution.

Thanks, guys.

Youre welcome.

And our next question will come from Vivek Arya with Bank of America.

Hello, Thanks for taking my question.

Theres a lot of concern about the possible.

Downturn, but it's late this year or next year. So I just wanted to get your thoughts on reality versus perception than let's say in a scenario of microchip sales were to decline by about 10% next year and hypothetically what happens to gross margins because if I go back in history. The last time, there was a meaningful sales decline.

It was in 2009 and gross margins declined about six points or so is that the kind of decline that that could potentially happen. So just give us your thoughts on a potential for a downturn if youre seeing anything and then if there were to be one what happens to gross margins. Thank you.

It's a hard question to taken the.

In the hypothetical but lets look at where some of the cushions are.

If and when that change happens right. So I think we were just talking about distribution inventory at 17 days right I mean distribution is running on fumes.

And to run healthy they need to be in that high <unk> kind of.

Days of inventory, sometimes slightly higher than that so I think that is the first part of what we would need to do is utilize.

Utilize the opportunity if there is this down cycle at some point to replenish distribution to run healthy for a normal normal business second is when you look at our inventory right, we really our inventory is.

In a few days, but really when you look at the inventory at the points that are in die Bank and finished goods. Those are all still running on fumes for us given the mix of our products. We have a significant amount of internal inventory replenishment et cetera to be done.

And finally, I think we have conveyed that while our products are such long lasting products that we intend to build inventory in a down cycle because that is the most effective capacity, we can have rather than trying to get capex to go up.

When the next up cycle comes about.

We had constraints in doing that.

In the last cycle, when we were more cash constrained given.

Given the debt what we have we don't have those same constraints and so our products last 10, 15, 20 years and we fully expect that we will utilize our capacity and be more capital efficient through the cycle whenever that cycle happens.

I'd like to add to that.

Your question begin with.

If I could shift goes down 5% to 7%.

And then you compared it to 2009 when over a six months period industry and micro chips revenue was down 35%.

In the middle of a global financial crisis.

So I don't think anybody is looking for that kind of downturn last next year with the revenue goes down that much percentage.

So.

Zinc.

6% gross margin drop in 2009 environment is Katy and I don't think we ought to be expecting that kind next year.

Even if the sales were to drop 5% for the elements that Ganesh pointed out it will take us.

In a period of a year it leads to really rebuild our own inventory restock distribution and get everything healthy.

So I don't really think there is detriments concern about gross margin dropping that much.

Thank you.

And Tory Steinberg with Stifel has our next question.

Yes, and congrats on all the record numbers.

A question on Capex, you didn't quite get to the number you wanted this quarter you cited some delays in equipment sales I was just wondering if the situation there is improving or not.

Just just quarter over quarter, because clearly last quarter things still pretty constrained to get equipment, but are you seeing any improvement there at all.

No I think it's still a challenge to get equipment and over the last four or five quarters has become more challenging.

To get equipment and on time, so delays are there it's a bit of a vicious cycle in many of the delays that caused by shortages in semiconductor components.

Those <unk> delay the equipment, which delays the ability to solve that problem.

We have in fact taken the initiative to.

Prioritize supply for many of the semiconductor equipment manufacturers. So that we do our part to both help the industry and help ourselves in doing that.

And I believe others are doing it as well, but at the moment.

The equipment lead times are getting worse not better.

Great. Thank you.

Youre welcome.

Okay.

And our next question comes from Chris Caso with Raymond James.

Yes. Thank you question about some of the capacity additions.

Specifically the timing of when we can expect more substantial capacity to come online I think what <unk> said previously is that your capacity would come on in a fairly linear even fashion as you brought on more supply.

Some of the Capex jumped that you'd have into fiscal 'twenty three.

When does that start to have an impact and then there was a bit of an inflection point and your ability supply and therefore, our revenue once that capex turns into.

Actual capacity.

So Chris there's no single point at which there is a step function change in our capacity, we are getting capacity increases every quarter.

Equipment comes in it gets qualified installs and begins to run production. Some of that is in our front end fab. Some of that is not backend factories as the case might be.

In certain cases, we are expanding clean room in that clean room space comes on.

At a certain point in time, which allows us to put in place more equipment, but it's more of a continuum of capacity increases that is taking place in every quarter.

We are increasing capacity in some cases it requires equipment in other cases, it's really just hiring the people to run the equipment that we have.

And all of that is kind of a more.

Continuous process every quarter, rather than a step function in any given quarter.

Got it.

As a follow up I was wondering if you could give some color on.

On some of your end markets.

And.

Are there any areas, where you've seen demand substantially increase or decrease elsewhere from other earnings reports.

Where we've seen some changes are largely a regional participate very much enhanced.

Handset and PC, but interesting if <unk> seen anything of note within your end markets that you'd wish to talk about.

As I mentioned in all end markets are strong maybe the one of note would be we are seeing more strength in the defense aerospace and of the market commercial aviation is coming back and so some of the folks have we're not building are starting to build more.

There are going to be some defense related items, given some of what's going on geopolitically that will come through.

That's a small part of our overall business so.

It's still got significant strength in the other five end markets that we're in.

Thank you.

Welcome.

Okay.

And our next question comes from Chris Danley with Citi.

Hey, Thanks, guys.

But of a longer term question. So in the past I guess in the recent past I need to ask you about additional acquisitions, you said that that that Avenue has pretty much been closed because theirs.

To paraphrase you not much out there and things are expensive.

Wondering if your thought process has changed at all.

Given that the stocks have sold off that.

You think that this apparently more sustainable than in the past.

Extra capacity seems like it's at a premium out there has anything changed as far as the process goes.

Not really I think what we had said is we've met the major objectives. We had when we went on our multi year acquisition.

<unk>.

The two big ones at that time was to be able to build scale and the other one was to build out the portfolio to be broader than what it was 10 years ago.

<unk> reached both those objectives. We think there is more to be had in focusing and harnessing organically, what we have and getting the best of what we have so we were doing more acquisitions. When the available growth was also limited and we wanted to augment our organic growth with the acquisitions we believe.

We are at a point in time, where there is a substantially higher organic growth opportunity available.

And the most cost effective growth, we think is organic and that is where we're focused with dominion.

Specific strategies that we have put in place for that.

As I said large acquisitions and of course, we still do small pinpoint acquisitions that are tuck ins intended for technology market, our customers from time to time.

Yes, thanks, guys.

Youre welcome.

In today's environment, you Couldnt get the benefit.

Cross selling on a new acquisition, because theres no capacity to simply be inheriting the capacity challenges.

After an acquiree.

If there are any cross selling opportunities to grow revenue you won't have capacity quoted because we were constrained even just shifting our organic growth.

Got it thanks, Steve.

Yeah.

And once again, if you'd like to ask a question. Please press star one.

We will now hear from William Stein with curious securities.

Great. Thanks, so much for taking my question and congrats on the great results and outlook.

I'm, hoping you might dissect the growth either year over year or sequentially.

By units versus pricing and.

If you could also comment on the effect that that's having on gross margins because of course pretty sure you guys use.

FIFO inventory, so you have lower cost product flowing through the P&L on higher priced.

Products to customers.

Any clarity on that as it really help thank you.

So directionally when I look at it year over year.

Is there a component of the growth that comes from price yes.

The majority of the growth is coming from units.

And.

As we have talked about before.

Is predominantly for us to be able to address cost increases that we have incurred which we batch and pass on from time to time to our customers.

The gross margin benefits of the price increase.

Really not something we target to go get I'll, let Eric speak to maybe the timing of the.

FIFO inventory and all that but which largely we're not trying to goose up gross margins through the price changes that we're making.

Yes, so from a from a timing perspective is going to as I said, we try to batch. These price increases as things are starting to flow through the P&L and it's not a perfect process, but that's what we try to do again, we're not we're not trying to gouge customers were trying to pass along the cost and earn what I would call a standard margin on that but not be a <unk>.

Margin percentage enhancer, so with.

100000, skus in the portfolio again, it's not a perfect process, but I think we've done a good job of doing that and being fair with our customers.

Thank you.

Okay.

And our next question will come from harsh Kumar with Piper Sandler.

Yeah, Hey, guys first of all congratulations great results Great Guide, Steve the question that a lot of us have been China, asking variety of different ways.

I think as Dan is that when you look at the revenue growth of not just microchip, but the industry associated with the auto business overall, the chip business overall, when you look at the growth rate in.

And you try and compare that with the growth rate in autos and you account for the content gains, which I know already strong we still end up with a lot of gap and that's probably the area that I get the most amount of questions on the buy side I was curious if you might have some thoughts on what is happening why is the semiconductor industry benefiting to such a great degree.

That gap is so wide.

So let me take that.

Sure I think if you look at the automotive industry in some ways I look at their results over the last four or five quarters and I think our semiconductor shortage, probably the best what happened to them every one of them has record results our record profitability, whether that is at the OEM level or the tier one level.

Why what they.

We have done is really utilized the available semiconductor supply they have to build the richest product line that they can build.

And if you try to go to a dealer today and try to buy a D featured car. It's not available you can get it in a year's time or whenever they tell you it is and.

So the semiconductor content per car on average has grown up because of mix has become much richer.

Things that perhaps were optional not available before are becoming more standard because in a smaller number of cars. They want to sell they are utilizing as many semiconductors as become available for that smaller number of cars to have the richest product line and secondly.

From an automotive standpoint.

There are no discounts available so all of the discounting that took place is a gross margin tailwind for the automotive guys. So the chips, we're selling and by the way our.

Shortages that we deal with with the automotive customers Hasnt really abated in the last year.

We still have significant escalations and issues that we're working with.

Not just automotive, but just about every industry, but automotive specifics since you asked that so there is no indication that all is quiet on the automotive front with respect to the getting product that they need they are still fighting through shortages in.

In order to be able to build exactly the cars in the mix of product that they want to make.

Very helpful guys. Thank you so much.

Okay.

Our next question will come from Christopher Rolland with Susquehanna.

Hey, guys. Thanks for the question also congrats.

Microcontrollers you guys had some interesting revelations, there I guess on 32 bit.

Becoming the majority there.

Would love to know kind of how you see longer term growth rates.

Between maybe a bit.

32 bit.

32 bit accelerates is that.

Tailwind for you guys for gross margin. Thanks.

So first maybe to parse out all three eight bit 16 bit and 32 bit are still setting new records. So all are growing.

Clearly there is a higher growth rate on the 32 bit which is why it grew the most in.

Now we're approaching almost half after microcontroller revenue.

Now.

We continue to expect that the usage of Microcontrollers and the embedding of intelligence and lots and lots of end applications is a critical secular trend that has tailwind for our business overall, we've kind of represented and shown that in the six megatrends and how what we do fits.

In those kind of end markets and applications and drives growth for us.

Now to your second question on gross margin.

The gross margin of the microcontroller business is not dramatically different between 816, and 30 twos and so we go to market with an approach that allows any one of our products to be utilized depending on what is most appropriate in a customer situation.

And the pricing is to the value that we bring into that application and so the general gross margin. We don't believe is affected by the mix of 816 and 32 bit.

Great. Thank you and then one for either you or Steve.

A lot of people have talked about potential over capacity for the industry in 'twenty three 'twenty four would love to get kind of your views on.

Whether you think that's a thing or not and what its effect on industry pricing might be thanks.

So I'll give you my view and then maybe Steve will add to it as well so.

It's a bit of a misnomer when you talk about overcapacity in 'twenty three 'twenty four when you look at where is the capex being spent by the industry REIT industry spend over 100 billion of Capex last year.

Vast majority of that Capex over 90% of it is being spent on the bleeding edge nodes.

These are the nodes that are 16 nanometer and smaller 16, 10, 75, III et cetera is where all of that is being spent where the capacity is not being invested in at the rates that are required and where for example, all of the constraints that the industry is fighting through short medium and long term.

Our on the trailing edge specialty technologies on 300 millimeter that is typically anything which is 40 nanometer and larger in size very little capacity investments coming online to be able to help them on 200 millimeter or eight inch wafers is almost nothing that is being done outside of what some of the ibms have been doing and which.

Really it's still a far cry from what is needed.

So while there is capex spending taking place of quite significant amount. It is being spent disproportionately on the bleeding edge technologies.

And there is still significant constraints left on the trailing edge specialty technologies that we don't see easing up into 'twenty, three and 'twenty four Steve.

Steve you want to add some water.

Yes, yes, I would so what has happened historically.

Is that the foundry has built a leading edge fab.

It depreciated fully over 40 years, providing leading edge chips too.

Mix of Qualcomm and AMD and others.

And when the leading edge guys move to the <unk>.

Next node then they took that capacity depreciated fab.

And repurpose it for microcontroller mixed signal.

Connectivity and those kind of products.

And that's how.

Over many many years.

Trailing edge capacity became available.

Now what has happened now is that link is broken.

The leading edge lithography has gone to 14 nanometer 10 nanometer, even seven five and three nanometer.

While the microcontrollers and analog because of <unk>.

Functionality needed are still in the range of 65 nanometer to 180 nanometer.

And so therefore, the trailing edge capacity no longer easily becomes available because somebody moved to the next node.

Secondly.

Starting at 90 nanometer wafers became 12 inch and less than 90 nanometer wafers at eight inch and agencies largely aluminum back in 12 inch is largely copper to Bakken and one is not compatible with the others. So the 12 inch fab, becoming available and easily give the capacity for.

And agents product to move to 12 inch so combination of those factors and the fact that the foundries that adding almost no capacity on the trailing edge.

It is quite possible.

The trailing edge capacity is for ever constrained.

And Thats, why we are making aggressive or teams.

To add capacity internally to provide growth to our business and to our customers and youre seeing some of our competitors do the same thing.

Very illuminating thanks, guys.

Thank you.

We'll now take a question from Harlan sur with Jpmorgan.

Good afternoon, congratulations on the strong margins and overall execution currently youre not quite where you want to be on Opex as a percent of sales, but the business is growing strongly so it's hard to bring on personnel at a faster.

Taste in your business is growing but once you guys have the same challenge longer term given your new long term revenue CAGR of 10% to 15% given your revenue scale and the team really grow its opex by double digit percentage points going forward to maintain your opex target I guess my point is with the accelerated weighted revenue.

New growth target and $8 billion of revenue scale. It would seem that you'll be driving stronger leverage on the operating margin than what your model implies because you kept your operating margin targets unchanged. When you increased your <unk>.

Full year revenue CAGR.

Missing something.

I will give you might.

We will want to add to that as well.

<unk> investments in the operating expense are not just in people alone that is clearly one of the large investments we've got to make but beyond that there is.

Intellectual property work, we have to do this research and development work.

And that takes place, which has wafers and other things we have to do so we do believe that.

Strong gross margin and strong growth businesses don't fall out of the sky They.

They need to be thought through invested in and executed.

And.

We need to make sure that while today as gross margins are strong and where they are at that we continue to build for the future in a competitive world that ensures that continued new products and technologies.

And the associated marketing and other activities, we need to do we'll be able to keep those gross margins high and keep the growth rates high and where we're at and today's environment is a bit challenging also because of the availability of people is a thing that won't be there forever. So.

So we do expect that in time.

We will solve some of those shortages of being able to hire people et cetera, and do need to get back into the range that we've provided.

That's what creates a sustainable high growth high gross margin business.

I think the only other thing I would add is just a point of clarification on the statement that you made in your question. Harlan is that we are targeting this 10% to 15% CAGR.

On revenue based on fiscal 'twenty, one as a baseline right. We just completed fiscal 'twenty, two which is a very strong growth here, we're expecting another strong growth year.

But I don't want you our investors that necessarily just put in your model, 10% to 15% on a perpetual basis going forward, we'll have to see how that plays out over time, but that's a five year CAGR based off of fiscal 'twenty, one as the baseline.

Understood. Thank you.

Thank you.

Our next question comes from <unk> <unk> with UBS.

Hi, Thanks for taking my question.

Can you speak to maybe the trends.

Respect to how your backlog.

Now the unsupported backhaul.

Total grew in June versus March.

And they even address it from that perspective.

European duration, I think quarter over quarter or is it about the same.

Thanks.

So the PSP program requires 12 months of continuous noncancelable backlog, many customers choose to go longer than that and we don't really track what is the what.

Percentage that is above or below where it is we make sure that everybody is in compliance with the program, but we do have a meaningful amount of that backlog that is more than 12 months and we do have overall PSP backlog continuing to grow.

So that's one part of the question on the other part of it is.

Exiting the March quarter, our unsupported backlog grew again quite significantly.

And that is the $6 seven for some consecutive quarter of continuing expansion of unsupported just giving you the sense of how no matter how much incremental capacity we have brought on.

We continue to be falling behind versus the intensity of demand. So it's just it's not supply isn't coming online as demand is outgrowing supply multiple quarters, and expanding that gap between supply and demand.

I would just add two points.

One of these already but in the quarter total backlog grew on supported backlog grew and PSP backlog grew so all of them were up quarter on quarter.

Thank you.

And we will now take a question from embraced srivastava with BMO.

Hi, Thank you for fitting me in I had a question on <unk>.

Lead times have lead times stabilize you folks have been adding capacity, which should translate into some alleviation. So just a question on lead times.

And then as you talked about the price increase.

And as it relates to the PSP what has been the reaction to the price increase program that you have in place. Thank you.

So lead times are long I wouldn't say that they are stabilized some of the constraints.

Are still quite acute and to the extent that demand continues to grow faster than supply. The only way to solve is on lead time. So lead times have been stretching out more so on some products, perhaps in other products and where they're at.

Yeah.

The pricing increase.

And PSP, so anytime we increase prices.

Our customers have a small window in which they have the opportunity to refuse the price increase and cancel the backlog if they so wish and we have the opportunity to adjust the price if we so wish which we have not done.

What.

Customers have.

In the course of the price increase that we have done.

The amount of backlog that they have chosen to cancel is so small.

It's almost immeasurable in the Grand scheme of what we have.

So there has been no final impact of the price increase in our PSP backlog.

Yes, just sorry, just a clarification what I meant to ask on lead times once that our lead times continuing to go up.

Or or the rate of increase has slowed down considerably because.

What is the capacity that you brought online on a year over year basis.

There's no easy answer to give you on what the capacity is a function of our internal capacity, our external capacity specific packages, some materials, which have constraints in the industry like substrates et cetera, so in any given product package.

Combination the constraints can be quite large and can be well over a year in lead time and.

In others as we are alleviating them, we may get to where it is not pushing out as much or at least stabilizing there so but.

But in the aggregate I would say that lead times have not stabilized and that constraints continue to grow and as our imbalance between supply and demand grows every quarter. It solves on time.

Got it got it thank you.

Okay.

Our next question will come from Chris Danley with Citi.

Hey, guys. Thanks for letting me ask a follow up just a quick one I guess for a good next year may be the best.

So semiconductor is Steve Zhang who will take a shot at it did you guys quantify the.

The impact from the China Covid shutdowns on your business and then also.

Any insights as to how come you are managing to have it affect you a little bit less than some of your peers.

So we did not break out what the China Covid impact is clearly there are impacts from both supply where we have manufacturing partners and supply chains that are affected and there are customers who are in the regions that are shut down and unable to.

To conduct business and what they're doing.

We have comprehended.

The impact from both the supply and the demand side into the guidance that we've provided.

And beyond that we're not trying to break it down any further than that.

As far as.

What other people have done and how do we think I honestly don't know because it's all a function of what percent of their manufacturing our customer base is in the affected area and that is not very knowable for us. So I presume each company has the insight into their business to provide the guidance that they think is right.

Thank you Ed.

I think the I think the amount.

China exposure, both on the supply chain as well as.

Customers is different for different company.

When it comes to supply chain.

<unk> moved a fair amount of supply chain out of China when.

When there were tariffs put on China and back in 2019.

A lot of them, we left outside of China. So we had.

Substantially lowered our exposure for the supply chain.

That could be one.

In terms of the impact we're having on Chinese customers in Shanghai.

Yes, we have finite impact on that but we were able to take that supply and ship. It elsewhere because of the larger delinquencies. So we were largely able to mitigate the.

The impact of customers not wanting to accept the product because they were closed.

Okay. Thanks, Steve.

Broker.

Our next question will come from David O'connor with BNP Paribas.

Great. Good afternoon, Thanks for taking my question.

Maybe you can ask your question on that Silicon Carbide is you had some new product announcements on silicon carbide.

<unk> pretty mature charging stations and on the industrial side.

Can you just talk about microchip strategy and position their within Silicon carbide is that just really focus on high voltage very particular application and released it does as well.

As seen it probably ramps up is that a headwind.

Gross margin.

That's my first question and then maybe just to follow up on the Capex for next year, you mentioned at the high end of the range could you give us any sense of what portion of that is maintenance versus capacity expansion. Thank you.

Sure so.

Our silicon carbide technology came to us from the Microsemi acquisition.

Has a heritage started in.

Aerospace and defense and therefore has a substantial DNA that is built around robustness and reliability for where it's at we have since <unk>.

Continue to build that technology out and expand its focus into industrial and automotive with a higher interest in industrial.

Because it's faster time to market.

But also because it has a far more.

Gross margin characteristics that align with where microchip interests are at.

And so that's what we have done is continue to bring out new products that have higher voltage capabilities high voltage is a indication of.

Robustness and its ability to operate in these.

Harsh environments.

Bring out more product categories I think we at this point probably have one of the larger catalog of silicon carbide products in the market.

And we are prosecuting these in a broad range of applications with obviously, a high degree of industrial customers some in automotive.

And in industrial the one example, you just cited which is EV Chargers is a key.

The reference design for us for our total system solutions, not just for silicon carbide, but for many other parts of tap solution that we bring that we're finding great success in.

The second piece of your question was on Capex and it was maintenance versus expansion I would say the majority of our capital is going to be expansion. There is always some maintenance you can look at some down years.

We've seen or the industry has seen in the past and our capex is relatively minimal might be 60, $70 $75 million, but.

We're also running our factories very hard now and with that and you know that there is required maintenance that has to happen. So I don't have a specific percentage for you, but the largest portion of it will be expansion capital.

Very helpful. Thank you.

Thank you.

Yeah.

Our next question will come from Nik Todorov with Longbow Research.

Yes, Thanks for squeezing me in and congrats on great results.

I wanted to go back on the question about lagging edge capacity, Steve I think your comments were very illuminating and to explaining one of the reasons why lagging edge capacity.

But just probably historically, but I just wonder why do you think.

It's going to remain constrained given the fact that you and other peers are seeing substantial Mahato fund supported backlog.

On some orders and some visibility in four years ahead. So it seems like there is definitely demand out there and also profitability for you and peers that are operating in that lagging edge capacity is an all time high. So can you talk maybe one of the other factors why is lagging edge.

Investments are lagging edge investment is not going up.

So when you talk to the foundry companies.

Are there opportunity cost of investing in trailing edge.

As high as compared to making that St investment in leading edge.

And so they have finite resources.

<unk> bandwidth and they need to decide where to put it and right now what we see and what they tell US is that is going in the way that they are investing their capex, which is mostly <unk>.

The bleeding edge, where they're at.

There is also not always sufficient understanding.

How trailing edge is a critical part of certain markets.

Particularly for certain product types, where the benefits are going to leading edge are a very small two sometimes it's a negative to go take it to leading edge in terms of cost and performance et cetera. So that understanding is among a smaller set of companies and typically they will be the ones that are.

Closer to their own manufacturing and understand what it takes and so we just don't see a broad based.

Capacity investment by external foundries in trailing edge capacity given both their knowledge of the market, but also their priority in a constrained environment for their people their capex and their bandwidth.

Got it I appreciate the answer.

We'll take a question from Craig Ellis with B Riley security.

Yes, thanks for taking the question and congratulations on the real strong margins team.

Wanted to follow up on that last point and a few of the capacity related points, but my question is really around external supply.

Can you just talk about some of the gives and takes very recently with external supply in and given the commentary around foundries not investing as intensively help us understand how the company feels about the external supplies contribution, but the 10% to 15% longer term.

Both rate do you feel like that with your partners you've got commitments to supply that can get you to that 10% to 15% or.

What will what will that part of supply do you.

If you can't.

Get the supply.

Yes, so we have every confidence that the cap the capacity that we need to support our growth through a combination of internal and external actions will be there.

We will continue to work with existing partners in some cases, we will work with new partners. We will in many cases partner in new and unique ways, where we need to to ensure that the capacity is there and we're doing quite a bit on our internal capacity, that's where the whole. The capex that we've talked about is also aimed at.

In order to be to ensure that.

High growth high margin long term business can continue to be done internally, where we can do it cost effectively.

Great. Thank you.

And we have no further questions queued at this time, so I'll turn things back over to Dennis Martin for any additional or closing remarks.

Great well. Thank you everyone for joining us this afternoon.

Look forward to seeing many of you on the circuit over the next couple of months as we were out of the different conferences.

Thank you bye bye.

And that does conclude today's conference call. Once again, thanks, everyone for joining US you may now disconnect.

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Good day, everyone and welcome to micro chips fourth quarter fiscal 2022 financial results.

As a reminder, today's call is being recorded.

At this time I would like to turn the call over to Mike <unk>, Chief Financial Officer, Mr. Eric Beyond Holt. Please go ahead Sir.

Thanks, Barry and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward looking statements regarding future events or the future financial performance of the company, who wish to caution you that such statements are predictions and that actual events or results may differ materially.

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

Attendance with me today are Ganesh Moorthy, Microchips, President and CEO , Steve Sanger, Microchips Executive Chair and Sajid Dowdy Microchips head of Investor Relations.

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

I will now go through some of the operating results, including net sales gross margin 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 March quarter were $1 $84 4 billion, which was up four 9% sequentially and near the high end of our quarterly guidance.

We have posted a summary of our GAAP net sales by product line and geography as well as our total end market demand on our website for your reference.

On a non-GAAP basis gross margins were a record 66, 6% operating expenses were at 21, 9% and operating income was a record 44, 7%.

non-GAAP net income was a record $764 6 million.

non-GAAP earnings per diluted share was a record $1 35, 10 cents above the midpoint of our guidance.

Seven of which was driven by favorable events in the March quarter benefiting our cash tax expense.

Compensation of $39 million.

GAAP net income was $437 9 million or <unk> 77 per diluted share and was adversely impacted by an $11 $8 million loss on debt settlement associated with our convertible debt refinancing activities.

For fiscal year 2022, net sales were a record 682 billion and were up 25, 4% from net sales in fiscal year 2021.

On a non-GAAP basis gross margins were a record 65, 7% operating expenses were 22, 2% of sales and operating income was a record 43, 5% of sales.

non-GAAP net income was a record 261 1 billion and EPS was a record at $4 61 per diluted share.

On a GAAP basis gross margins were a record 65, 2% operating expenses were 38, 1% of sales and operating income was 27, 1% of sales.

Net income was $1 $2 6 billion and EPS was $2 27 per diluted share.

Our non-GAAP cash tax rate was one 3% in the March quarter, and four 9% for fiscal year 2022.

Lower taxes in certain jurisdictions and tax benefits from our convertible debt exchanges.

We expect our non-GAAP cash tax rate for fiscal 'twenty three to be between seven and a half and 11, 5% exclusive of the transition tax any potential tax associated with restructuring the microsemi operations into the microchip global structure and any tax audit settlements related to taxes accrued in prior fiscal years.

The midpoint of our June quarter tax rate guidance is nine 5%.

Our inventory balance at March 31, 2022 was $854 4 million, we had 125 days of inventory at the end of the March quarter, which was up nine days from the prior quarter's level or.

Unexpected shortages or changes in material lead times.

Inventory at our distributors in the March quarter were at 17 days, which is a record low level and down from 19 days at the end of the prior quarter.

Financial results in our franchise.

In the March quarter, we exchanged a total of $64 9 million of principal value of our 2027 convertible subordinated notes for cash and shares of our common stock.

<unk> hundred $16 79.

At the beginning of calendar year 2020, Microchip had 448 1 billion in convertible bonds outstanding. So today, our overall capital structure is in a much better long term position.

Our cash flow from operating activities was $747 7 million in the March quarter.

Our free cash flow was $633 1 million and 34, 3% of net sales as.

As of March 31, our consolidated cash and total investment position was $319 4 million, we paid down $205 9 million of total debt in the March quarter.

Over the last 15 full quarter since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down almost $5 billion of debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt.