Q1 2023 Microchip Technology Inc Earnings Call
[music].
Good day, everyone and welcome to Microchips first quarter fiscal 2023 financial results.
As a reminder, today's call is being recorded at this time I would like to turn the call over to Mr. John <unk>. Our CFO . Please go ahead Sir.
Thank you 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. We 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 <unk> business and results of operations.
And as tenants with me today are going to ask more than microchips, President and CEO , Steve Saggy, Microchips Executive Chair and Sajid Dowdy Microchips head of Investor Relations.
I will comment on our first quarter financial performance.
I'll 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 and 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 included reconciliation information in our press release, which we believe you will find useful when comparing our GAAP and non-GAAP results.
We have also posted a summary of our outstanding debt and our 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 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 June quarter were $1, 96, 4 billion, which was up six 5% sequentially.
We have posted a summary of our GAAP net sales by product line and geography on our website for your reference.
On a non-GAAP basis gross margins were a record at 67, 1% operating expenses were 21, 5%.
Operating income was a record 45, 6%.
non-GAAP net income was a record $767 2 million.
non-GAAP earnings per diluted share was a record $1 37, and a penny above the high end of our guidance range.
On a GAAP basis in the June quarter gross margins were a record at 66, 7% total operating expenses were $608 6 million and included acquisition intangible amortization of $167 6 million special income of $16 9 million.
$1 7 million of acquisition related and other costs and share based compensation of $33 5 million.
GAAP net income was a record $507 2 million, resulting in 90 cents per diluted share and was adversely impacted by a $6 $2 million loss on debt settlement associated with our convertible debt refinancing activities and positively impacted by a $22 million litigation.
Cool adjustments.
Our June quarter, GAAP tax expense was impacted by a variety of factors, notably the tax benefits recorded as a result of the loss on the debt settlement.
Our non-GAAP cash tax rate was nine 4% in the June quarter and was in line with our guidance.
The June quarter tax rate was up approximately 450 basis points from the rates in fiscal year 2022.
We expect our non-GAAP cash tax rate for fiscal 'twenty three to be between $8 five and 10, 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.
A reminder of what we communicated last quarter.
Our fiscal 'twenty three cash tax rate is higher than our fiscal 'twenty two tax 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 June 30 of 2022 was $911 8 million.
127 days of inventory at the end of the June quarter, which was up two days from the prior quarter's level.
A major part of the increase in days of inventory was driven by the 50 basis point sequential increase in gross margin.
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 to a degree.
Some against unexpected shortages or changes in material lead times.
The carrying cost of our inventory has been and will be increasing due to rising input costs from our supply chain as well as several last time buys were forced to make because of capacity restructuring actions being taken by our suppliers.
We're continuing to ramp capacity and our internal and external factories. So we can ship more product to support customer requirements.
Inventory at our distributors in the June quarter was at 19 days, which was up two days from the prior quarter's level.
In the June quarter, we repurchased $34 6 million of principal value of our 2027 and 2037 convertible subordinated notes for cash and we also paid cash for the value of these bonds above the principal amount.
We used cash generation during the quarter to fund the amounts of our convertible debt repurchases and we believe that these transactions will benefit stockholders by reducing share count dilution to the extent our stock price appreciates over time.
The principal amount of convertible debt on our balance sheet at June 30 was $803 5 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 to a stock price of $116 34 at.
At the beginning of calendar year 2020, Microchip had 448 1 billion of convertible bonds outstanding. So today, our overall capital structure is in a much better long term position.
Our cash flow from operating activities was $840 4 million in the June quarter.
Our free cash flow was $718 5 million and 36, 6% of net sales.
As of June 30th our consolidated cash and total investment position was $379 1 million.
We paid down $233 6 million of total debt in the June quarter, and our net debt was reduced by $293 3 million.
Over the last 16 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down almost $5 $2 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 June quarter was a record at $986 7 million and 52% of net sales.
Our trailing 12 month adjusted EBITDA was also a record at 352 1 billion.
Our net debt to adjusted EBITDA was 2.05 at June 30th 2022 down from 232 at March 31, 2022, and down from $3 34 at June 32021.
Capital expenditures were $121 9 million in the June quarter, our expectation for capital expenditures for fiscal year 'twenty. Three is between 500 and $550 million as we continued to take actions to support the growth of our business and ramp and the ramp of our manufacturing operations.
We continue to prudently add capital equipment to maintain grow and operate our internal manufacturing operations to support 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 constrain.
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Depreciation expense in the June quarter was $71 7 million.
I will now turn it over to Dan asked to give his comments on the performance of the business in the June quarter as well as our guidance for the September quarter Dinesh.
Thank you Eric and good afternoon, everyone.
Our June quarter results continued to be strong across the board setting several records in the process revenue grew six 5% sequentially and 25, 1% on a year over year basis to achieve another all time record at $1 96 billion.
This was our seventh consecutive quarter, where we achieved a record revenue mark.
During the quarter, we worked through several COVID-19 related operational challenges.
<unk>, but not limited to the shutdowns in Shanghai, which affected our customers and our supply chain partners.
non-GAAP gross margin was another record 67, 1% up 50 basis points from the March quarter, and up 230 basis points from the year ago quarter benefiting from improved operational efficiencies as well as product mix changes.
non-GAAP operating margin was also a record at 45, 6% up 90 basis points from the March quarter, and up 390 basis points from the year ago quarter, achieving the high end of our guidance.
Due to a rapid increase in revenue operating expenses at 21, 5% 100 basis points below the low end of our long term model range of 22, 5% to 23, 5%.
Our long term operating expense model will continue to guide our investment actions to drive the long term growth and profitability of our business.
Our consolidated non-GAAP diluted EPS was a record <unk> 37 per share up 38, 4% from the year ago quarter, and just above the high end of our guidance.
Adjusted EBITDA at 52% of revenue and free cash flow at 36, 6% of revenue were both very strong in the June quarter.
Continuing to demonstrate the robust cash generation capabilities of our business.
Net debt declined by $293 3 million driving a net leverage ratio down to 2.5 exiting the June quarter as we continue to aggressively drive down our net leverage.
Recalling that our net leverage was almost five X at the end of the 2018 June quarter right. After the Microsemi acquisition.
It is satisfying to see how far we've come in the four years since to bring down our net leverage so significantly.
During the June quarter, we returned $348 2 million to shareholders in dividends and share repurchases, representing 55% of the prior quarter's free cash flow.
I would like to take this opportunity to profusely. Thank all of our stakeholders, who enabled us to achieve these outstanding results and especially thank the worldwide microchip team with a concerted effort and never give up attitude to deliver results for our customers. Despite our 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 one 6% as compared to the March quarter and set another all time record.
On a year over year basis, our June quarter microcontroller revenue was up 17, 8%.
Microcontrollers represented 54, 1% of our revenue in the June quarter.
Our analog revenue sequentially increased 12, 5% in the June quarter.
Setting another record in the process.
On a year over year basis, our June quarter analog revenue was up a strong 34, 2% and analog represented 29, 5% of our revenue in the June quarter.
The difference in growth rate in the June quarter between Microcontrollers and analog is in part based on quarter to quarter differences as we have seen in the past and in part because we are comparatively less constrained on analog products, which are predominantly produced through internal factories.
Although we no longer break them out it was notable that in the June quarter, our FPGA revenue as well as our technology licensing royalty revenue were both up strongly and achieved new records.
Taking a look at our revenue from a geographic and end market perspective.
<unk> was up 33% over the prior year quarter Europe was up 28, 4% over the prior year quarter Asia was up 27% over the prior year quarter.
Our major end markets remained strong and were supply constrained.
Business conditions continue to be strong as viewed through our internal indicators.
We expect to remain supply constrained through the rest of 2022 and into 2023.
Demand continues to be insatiable. Despite the capacity increases we have implemented so far.
As a result, our unsupported backlog, which represents backlog customers want it shipped to them in the June quarter, but it was we could not deliver in the June quarter climbed again.
We exited the June quarter, with our highest unsupported backlog ever with unsupported backlog coming in well above the actual revenue we achieved.
We are cognizant of the weakening macro conditions, resulting from rising inflation and the actions being taken by central banks in response.
We're also aware that there is some inventory build at our customers as can be seen in their balance sheets.
Some of which we believe is due to a strategic buffer inventory builds and some of which is due to incomplete kits or the infamous golden screw effect.
While we have seen sporadic request to push out backlog.
These requests on a small fraction of the very large unsupported backlog, we have over multiple quarters, and hence have not had a material impact on our business.
At the same time, the level of Expedites and customer Escalations, we're experiencing has not abated.
Indicating that demand and supply remain imbalanced for many customer situations.
In order to best utilize the available supply and reduced customer inventory builds we continue to thoughtfully reallocate future supply from customers, who self identify inventory positions to customers in distress that eminent lifestyles situations.
Given the cross currency strong internal business indicators and some uncertainty in the macro environment, we have modeled a range of potential scenarios and I'm monitoring all leading indicators, which should enable us to take deliberate actions swiftly and early when appropriate or.
Goal is to deliver a soft landing for a business if or when the softer macro environment catches up with it.
So here's how we're thinking about it.
We continue to have strong PSP backlog, which is noncancelable for at least 12 months, which comprises well over 50% of our total backlog.
In addition over the last six months, we have entered into multi year long term supply agreements with a number of large customers.
In effect, giving them reserve capacity in exchange for guaranteed purchases typically over five years.
We have a significant demand cushing with unsupported backlog that is much greater than 100% of supported backlog and which can readily absorbed any push outs and cancellations.
In the distribution inventory at 19 days is low when compared to what the channel has historically required to serve customers effectively.
Any business weakness will give us the opportunity to replenish depleted channel inventory and position our channel partners to respond to business growth as well as better serve customers.
Our internal die Bank and finished goods inventory has been substantially depleted as demand outstrip supply for the last seven quarters.
Any businessman weakness will enable us to replenish this inventory to better position us to support our customers.
We continue we expect continued above average secular growth trends, resulting from our focus on total system solutions in Megatrends.
In addition, our end market exposure is concentrated in the industrial aerospace and defense automotive data Center and communications infrastructure markets, all of which have demonstrated much higher durability in prior cycles.
Yes.
With any business weakness, we expect our capital intensity will shift to the lower end or even below the low end of our capex guidance of 3% to 6% of revenue that's liberating free cash flow.
And finally as you've seen in prior cycles, we expect our variable compensation programs to buffer our operating expenses and protect our operating model.
If you study Microsoft's peak to trough performance through the business cycles over the last 15 years, you will observe our robust and consistent cash generation gross margin and operating margin results.
The investor presentation posted on our IR website today provides details about our performance through the business cycles.
If or when there is a macro slowdown that impacts our business, we expect our cash generation gross margin and operating margin to once again demonstrate consistency and resiliency.
This will help us to continue to execute our long term, Microsoft three point growth strategy and insulated from whatever short term market challenges they may be.
We continue to expect constraints in our internal and external factories and the related manufacturing supply chain.
We are ramping our internal factories and working closely with our supply chain partners to secure additional capacity wherever possible.
We expect our capital spending in fiscal year 'twenty three to be modestly above the 3% to 6% of revenue range. We have shared with you as.
As we respond to growth opportunities in our business.
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 margin and give us more control over our destiny, especially for specialized trailing edge technologies.
We're also pleased to see the chips and Science fact approved by Congress with bipartisan support and expect the president signed it into law imminently.
This bill is good for the semiconductor industry and for America as it enables critical investments, which will even the global playing field for U S companies.
While being strategically important for economic and National security.
We expect to be eligible to benefit from the grants under this legislation.
As well as the investment tax credit provisions after bill as we do our part to invest in ensuring U S economic and National security.
Now, let's get into the guidance for the September quarter.
Backlog for the September quarter is strong and we have more capacity improvements coming into effect.
Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the September quarter to be up between 3% and 7% sequentially.
And we expect sequential revenue growth again in the December quarter.
At the midpoint of our revenue guidance, our year over year growth for the September quarter would be a strong 25%.
For the September quarter, we expect our non-GAAP gross margin to be between $67, three and 67, 7% of sales.
We expect our non-GAAP operating expenses to be between $21, three and 21, 7% of sales we.
We expect non-GAAP operating profit to be between 45, 6% and 46, 4% of sales.
And we expect our non-GAAP diluted earnings per share to be between $1 42 per share and $1 46 per share.
At the midpoint of our EPS guidance, our year over year growth for the September quarter would be a strong 34, 6%.
Finally, as you can see from our June quarter results in September quarter guidance every.
Every element of our Microsoft three point of this strategy is firing on all cylinders as.
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 point, though they are.
Organic growth organic revenue growth rate of 10% to 15%.
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 as net leverage drops such that 100% of free cash flow was returned to shareholders. After net leverage drops to $1 five X.
Capex investment of 3% to 6% of revenue and inventory investment of 130 to 150 days over business cycles.
And a strong company foundation that is built on culture and sustainability.
Now, let me pass the baton to Steve to talk more about our cash return to shareholders.
Thank you Ganesh and good afternoon, everyone I would like to reflect on our financial results announced today and provide you further updates on our cash return strategy.
Reflecting on our financial growth I continue to be very proud of all employees of microchip.
They have delivered another exceptional quarter, while making new records in many respects.
Namely record net sales record net.
Record non-GAAP gross margin percentage record non-GAAP operating margin percentage.
Record non-GAAP EPS and record adjusted EBITDA.
And all of that and it really challenging supply environment.
The board of Directors announced an increase in the dividend of nine 1% from last quarter to 31 per share.
This is an increase of 37, 8% from the year ago quarter.
During the last quarter, we purchased $195 $2 million, our first stock in the open market.
Also paid out $153 million in dividends.
Thus the total cash return was $348 2 million.
This amount was 55% actual free cash flow of $633 $1 million during the March 2022, a quarter.
Our pay down of debt as realized record adjusted EBITDA.
Drove down our net leverage at the end of June 2022.
Or 2.05 from $2 three two at the end of March quarter.
Ever since we achieved investment grade rating cutover that in November of 2021, and pivoted to increasing capital returned to shareholders. We have returned a one point all $4 billion to shareholders through June 32022 by a combination of.
Dividends and share buybacks.
In the September quarter, we will use the June quarter's actual free cash flow of $718 $5 million.
And plan to return 57, 5% or $413 $1 million of that amount to our shareholders.
Out of this $413 1 million the dividend is expected to be approximately $166 $5 million and the stock buyback is expected to be approximately $246 $6 million.
With that operator will you please poll for questions.
Yeah.
Thank you Sir please note that due to time constraints. Please limit your questions to only one question. If you would like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again star one to ask a question.
We will take the first question from Gary Mobley from Wells Fargo. Your line is open. Please go ahead.
Hi, guys. Thanks for taking my question and congrats on some solid results lets just start out with the.
The inevitability of the chips Act.
Past I know you guys have a relatively high U S oriented manufacturing footprint employee base in that dimension.
Got it.
A U S centric military business and so I'm wondering if maybe you could give us a little more color in how the chips that may benefit you from the <unk>.
Capex subsidization perspective or from an AR.
R&D tax credit perspective, anything you can add there.
So there are various components of the chips Act and the rules of engagement of how they will be.
You know hand, it out are going to be different so the most obvious one is the investment tax credit and for any capital expenses in factories that are built et cetera.
The first thing that we think will take effect and it's probably the end of the year or the beginning of next year before that comes into effect and Thats a 25% investment tax credits that are then grants that are for both manufacturing and for R&D.
And we have opportunities in both of those are with the expansion plans that we have and some of the R&D programs that we are pursuing but honestly, it's too early because those are not quite clear yet in terms of how.
The requirements will be and then we have of course been engaged with both department of Commerce and Department of defense for many months with to give them an understanding of what the aligned interests are between what we are planning to do are interested in doing and what the government sees as a national security imperative and so we expect that as that rolls out will have.
More to share, but not at this point in time.
Thank you Dinesh I appreciate it.
Okay.
We will take the next question from Rodrigo Needham and company.
Your line is open. Please go ahead.
Yes, Thank you and congrats again on managing.
Through its very.
It's a very volatile period of time with Great result, just a question on <unk>.
Your unsupported backlog you mentioned it climbed again, it's well above the actual revenue that you achieved.
And you mentioned as part of your kind of scenario analysis that you can absorb any potential order push outs or order cancellations wondering if you could maybe elaborate further.
And maybe help us understand if there is a.
Significant decline in demand in some of these end markets. How much do you think you'll be able to cut it absorbed.
And you mentioned there is some indications of order volatility wondering if you could maybe describe that as well and you know where are you seeing it. Thank you.
So the last question the order volatility we see is sporadic it's very small.
It is well well below the unsupported orders that we have in there easily substitutable with other orders, we have and we have indicated that the unsupported is in excess of what we are shipping. So you can see the backlog would have to be cut by more than half just to get to where we're at.
That's a far far cry from where today's activity is taking place.
Yeah.
Thank you.
Thank you.
We will take the next question from Matt Ramsay from Cowen. Your line is open. Please go ahead.
Hey, guys. This is Josh buchalter on behalf of Matt. Thanks for taking my question and congrats on the solid results.
The revenue and gross margins speak for themselves, but I was wondering are there any metrics you can provide to help us understand how much of the upside was driven by pricing versus units as we try to square away how much your capacity investments on the Capex line are flowing through to the model already and what's still on the come thanks guys.
So it's not a easy way for us to break out pricing versus.
The increased number of units obviously, we have a component of both that go into it on the units we have a component which is what are we doing from our own factories and then we have components of what are we trying to do and get from our partners and what is coming from our factories. We at least have plans and things that we can measure what comes from our partners.
Can have.
Outside sometimes that are unexpected that help us. So it is very clear we're shipping more parts and there is a component of price that is included the price increases we have made are to offset.
Cost increases that we have experienced and so the primary driver for us is to grow by growing units not by growing price.
Okay, we should move to the next question is from.
The next question from William Stein from TUI Securities. Your line is open. Please go ahead.
Great. Thanks for taking my question with regard to the strength of the backlog and the.
Increase in capacity that you're expecting.
It sounds like you're expecting that to continue over the next few quarters.
Would you be willing to provide us a.
Perhaps not guidance, but some way to think about revenue growth in subsequent quarters could we think about at least for example into the December quarter.
Having relative.
Having let's say a relatively strong feelings that will be an up quarter.
So we don't provide guidance, obviously for subsequent quarters, but I did in my prepared prepared remarks say, we will grow in the December quarter and.
And if you look at historically December is a declining quarter.
From any measure of historical seasonality and so we're quite confident we will grow into the December quarter.
Does that answer your question again.
He's not underlying that.
Alright go ahead Dennis.
Again do you participants.
I wanted to ask a question.
Again press Star one to ask a question.
Then we will take the next question from Chris Danley from Citi. Your line is open. Please go ahead.
I guess, just a question on capacity and the shortages so are.
Are you seeing any improvement in the shortage of capacity situations you could talk about trying to squeeze a little bit more both internally and externally has your.
Projected capacity gone up a little bit over the last few months as you've been able to maybe hunter around and finding a few more parts out there maybe just give us little more color on that supply demand balance situations.
Yes, so for our internal factories, we have been investing in capex for many quarters, we made progress in our back end factories first because it was a shorter cycle time and easier to bring on we have been making progress on our front end factories and still have many quarters of capacity that we.
Think we can bring on.
As we are able to get equipment and some of the equipment that we have needed has been delayed.
We're able to hire people and it has been high hardware in some prior quarters, but we're getting better in terms of being able to fill our positions in the factories et cetera. So clearly internal capacity is growing and helping us support some of the backlog that we're unable to support at this point in time.
We have had incrementally more constructive.
Capacity improvements from our external partners. Although it is still very small in the Grand scheme of what we need in terms of that and we are hopeful that.
You know some of perhaps the weaknesses that may be out there in other segments will in fact help free up some of the capacity we need although there's not an exact mix between where things are getting freed up and where things are that we require but I think incrementally it will be constructive and positive for us.
Got it okay. Thanks, guys.
Thank you.
Your next question from Harlan sur from Jpmorgan. Your line is open. Please go ahead.
Yeah.
Yes, good afternoon, and congratulations on the strong execution.
Yeah near to midterm business continued strong right you've talked many times about the unsupported backlog being strong, but I think the market concern continues to be for a broader slowdown next year not so much logistics or just given the mix of your business, maybe as a reflection of your customers' view on next few year.
Sure maybe it's worthwhile to look at your PSP customers, because theyre, giving you 12 months order visibility, but they have to continue to keep that 12 months PSP funnel going right. So they are continuing to add orders to the back end of their PSP funnel every single month, so given that theyre booking well into next year combined with the concern.
On a macro slowdown have you guys seen a deceleration of decline in the PSP sort of order true ups on a sequential basis as sort of a reflection on customer demand concerns of next year.
Nothing perceptibly changing if you look at PSP as a percentage of our total backlog, it's pretty rock steady within about one percentage point.
Through you know pretty much the last 13 14 weeks of time so.
It's certainly a good indicator, we pay attention to and we are watching where that is going.
I think the strength of our business also is driven by the end markets, we're exposed to and what is out there today, where you see many of the.
Concerns and.
People, who are seeing weakness, it's predominantly in consumer driven segments and so whether that is consumer Pcs.
Consumer mobile phone, yes, within electronics et cetera, and we have no consumer PC exposure, we do have enterprise PC exposure, it's very strong.
We have almost no phone exposure our consumer appliances.
You know are we don't have consumer electronics, so to speak we do have home appliances, and there could be a part of it but it's such a small piece of our overall things. So our end market exposure, we're very fortunate to have very durable markets and.
And I think Eric wants to add a comment to it as well yeah. I mean, so so on PSP specifically the dollars amount ESP backlog that we had leaving June was higher than it was in March. So the program is still quite effective customers participating and adding orders out in time.
Well, thank you for the insights.
We'll take the next question from tore Svanberg from Stifel. Your line is open. Please go ahead.
Yes.
Congratulations on the rest of the quarter.
You talked about.
Enabled to manage a bit of a soft landing.
In case market continues to deteriorate, obviously, you got the PSP program could you talk about some of the other levers that you have and then.
Put them into perspective of your financial, especially gross margin and operating margin because I do know you have a very very strong valuable cost structure. So yeah any more color you could add there would be great.
So I had outlined multiple points that help us with a soft landing. So you mentioned PSP, which is clearly one part of the demand cycle.
We have in the last six months also been adding to that with some long term supply agreements, which bolster the the demand side of the equation, even further than just what PSP did.
We've talked about how large unsupported is and how that continues to provide a buffer against any ups and downs that may be there in the shorter term.
You know, we will with any slowing down that we might see use that as an opportunity to rebuild what is a supply chain running on fumes right. We have our internal.
<unk> and finished goods inventories that have been substantially depleted while you see some of our days of inventory, perhaps moving a little bit up a lot of that has come from the change in gross margin and really raw materials and end of life product that we're buying on an ongoing basis to be healthy we need to be able to run more <unk>.
Inventory, both with our channel partners and our internal factories all of that will continue to provide absorption and gross margin protection and whatever happens in the cycle.
And then we've talked about our capital intensity.
You know coming down coming below the range again from a cash preservation standpoint cash generation standpoint that will help and then finally on the Opex side, we have always had a large variable compensation element.
That gives us a large buffer.
For how we can have expenses come in or out during the different cycles and I think those are all the elements that give us the comfort on a.
A soft landing, which is to ensure that you.
What we're able to do in terms of gross margin or operating margin and our cash generation all remained strong through whatever that.
Soft landing requirement is.
Oh, great perspective, thank you.
Yeah.
The next question is from Chris Rolland from Susquehanna. Your line is open. Please go ahead.
Hi, guys. Thanks for the question.
You guys are either ganache or Steve you guys have talked about.
Analog capacity additions for the industry coming in 'twenty, three and beyond you know, we're now starting to hear about potentially equipment push outs and stuff like that and.
Maybe a little pumping of the brakes I I don't know if that's the opinion that you guys may have as well.
But would love to see kind of longer term, how you view capacity for the analog industry overall and would it have any sort of effect on your business. Thanks.
But let me take a quick shot at and maybe Steve can answer to it. So I don't want to speak for what the overall industry is doing because different people have different plans and thoughts and.
What they're doing I think what we can see is that those technology nodes that are very specialized and animal tends to be that that tend to be from the trailing edge.
The technology nodes that are out there are underinvested.
And yet our.
Critically important in being able to drive the growth or even the leading edge technology. So that you have more complete solutions.
So in that sense, we believe that that whole end of the market that requires analog solutions mixed signal solutions et cetera.
Is getting insufficient capital attention and we are taking some actions for it I don't know what everybody else is doing but we think it is going to be constrained for quite a while to come Steve do you want to add more.
Certainly you know.
Much more of our analog business comes from internal production.
And then the Microcontrollers do.
And we earlier described inorganic described in his prepared comments about the growth of the microcontroller business versus the growth of the analog business.
We are doing much better in capacity increase inside then we are doing it outside of the apartments.
And with Microcontrollers, having larger component of production outside and analog having large production inside we have been able to make more capacity available for analog hence stronger near term growth that we have seen.
Yeah.
Inside capacity on trailing edge technologies with analog runs.
So also is a bit easier to add.
Then to really good capacity outside you talked about equipment push outs I mean, some of the equipment push outs happened in the last 12 to 18 months.
And a lot of the equipment is here now.
After push out some things that were supposed to come in.
You know September arrived in January and February but it is in production now and it's contributing to the growth.
And we believe we will continue to.
Contribute to the growth in the December quarter that was going to as you mentioned before.
We're not hearing of brand new new kind of pushout.
Push out has been a continuous phenomena.
Suppliers are dealing with their own COVID-19, shutdowns based on where they produce ability to hire and all that we have substantial equipment coming in line.
This quarter. Some came on line last quarter and some will come online in December quarter, which we think will continue to add to internal capacity to grow to grow our business and we are clearly not instructing our capital equipment suppliers to push anything out we still need this equipment coming in as soon as we can get it if anything as I've mentioned in.
Other calls you know we are preferentially, helping all of our capital equipment suppliers by providing them you know semiconductor solutions to the extent they are constrained so that it helps not just us but healthy industry.
Complete the equipment that they are building so the other point I wanted to reemphasize and I. Thank goodness that would you know to the extent of our foundry in assembly and test partners.
We're seeing some slowdown in their business coming from consumer Pcs and cell phones. We are taking advantage of it because we have been able to increase the output by taking that slack both at the foundries and.
Assembly test all set guys. In addition to our incremental capacity and hopefully we will continue to take advantage of that and capitalize on the upside that's where we're able to say you know the growth in the business again this quarter that we guided to 5% midpoint and we're talking about growth again next quarter.
That's great. Thanks, guys as always insightful.
Alright, thank you.
It appears that there is no further question at this time, just because I'd like to turn the conference back to you for any additional or closing remarks.
We thank you all for attending and taking time from your day to be in this call and we look forward to speaking to many of you are as well as seeing some of you got to some of the conferences, we'll be at so thank you and good afternoon everyone.
This concludes today's conference you may now disconnect.
Alright.
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