Q2 2023 Microchip Technology Inc Earnings Call

November 3, 2022

To call over to Eric could be on holds please go ahead.

Thank you and good afternoon, everybody. Thank you for bearing with US we had some conference call dial and challenges that we've worked through now so appreciate your patience with that during.

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.

Wish to caution you that such statements are predictions 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.

And the tenants with me today are going to ask more than microchips, President and CEO , Steve Tsang Microchips executive Chair and Sajid Dowdy Microchips head of Investor Relations.

I will comment on our second quarter financial performance <unk> 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 on this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip Dot com.

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

[music].

Net sales in the September quarter were 2.0, $7 3 billion, which was up five 6% 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, 7% operating expenses were at 29% and operating income was a record 46, 9%.

non-GAAP net income was a record $814 4 million non-GAAP earnings per diluted share was a record dollars 46 and at the high end of our guidance range.

On a GAAP basis in the September quarter gross margins were a record 67, 4%.

Operating expenses were $642 8 million.

And included acquisition intangible amortization of $167 5 million special charges of $4 3 million.

$3 2 million of acquisition related and other costs and share based compensation of $34 8 million.

GAAP net income was a record $546 2 million, resulting in a record 98 in earnings per diluted share and was adversely impacted by a $2 $1 million loss on debt settlement associated with our convertible debt refinancing activities.

Our September quarter, GAAP tax expense was impacted by a variety of factors, notably the tax expense recorded as a result of the capitalization of R&D expenses for tax purposes.

Our non-GAAP cash tax rate was 11, 2% in the September quarter, we now expect our non-GAAP cash tax rate for fiscal 'twenty three to be between nine 8% and 10, 8% exclusive of the transition tax any potential tax associated with restructuring the microsemi operations into the micro.

Our global structure and any tax audit settlements related to taxes accrued in prior fiscal years.

This was modestly higher than our previous forecast as we have refined our tax calculations for the year.

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.

There appears to be some momentum for the tax rules requiring companies to capitalize R&D expenses to be pushed out or repealed. If this were to happen. We would anticipate about a 300 basis points favorable adjustment to microchips tax rate in fiscal year 2023.

Our.

Rory balance at September 32022 was $1 3 billion, we had 139 days of inventory at the end of the September quarter, which was up 12 days from the prior quarter's level.

We have increased our raw materials inventory to protect our internal manufacturing supply lines were.

We are carrying higher work in progress to maximize the utilization of constrained equipment as well as to position ourselves to take advantage of new equipment installations, which week, which will relieve bottlenecks.

We are investing in building inventory for long lived high margin products, whose manufacturing capacity is being end of life by our supply chain partners.

We need to ensure that our supply lines can feed growth beyond what we expect in the December 2022, and March 2023 quarters, and our reported days of inventory is a backward looking indicator.

<unk> gross margins rise the effective days of inventory for the same physical inventory rises and with every 100 basis points of gross margin growth. It creates approximately three incremental days of inventory.

Inventory days at our distributors in the September quarter was at 19 days, which was flat to the prior quarter's level.

With the distribution inventories still being low we will be carrying higher inventory at microchip to ensure our customers can be served.

In the September quarter, we repurchased $36 9 million of principal value of our 2025 and 2027 convertible subordinated notes for cash and we also paid cash for the value of these bonds above the principal amount, which was an additional $60 million.

We used cash generation during the quarter to fund the amount of the 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 September 30 was $766 6 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 $116 15.

[music].

At the beginning of calendar year, 2020, Microchip had $4 $4 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 $793 2 million in the September quarter, our free cash flow was $682 9 million and 32, 9% of net sales.

As of September 30, our consolidated cash and total investment position was $306 8 million.

We paid down $264 9 million of total debt in the September quarter, and our net debt was reduced by $192 6 million.

Over the last 17 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down almost $5 $5 billion of debt and continue to allocate substantially all our excess cash beyond dividends and stock buyback to bring down this debt.

Our adjusted EBITDA in the September quarter was a record at one point <unk> $5 6 billion and 59% of net sales.

Our trailing 12 month adjusted EBITDA was also a record at 381 4 billion.

Our net debt to adjusted EBITDA was 184 at September 32022 down from 2.5 at June 32022, and down from three <unk> at September 32021.

Capital expenditures were $110 3 million in the September quarter, our expectation for capital expenditures for fiscal year 2023 is between 500 $550 million as we continue to take actions to support the growth of our business and.

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 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 September quarter was $63 $6 million.

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

<unk>.

Thank you Eric and good afternoon, everyone.

Our September quarter results continued to be strong driven by our disciplined execution and our resilient end markets.

Net sales grew five 6% sequentially and 25, 7% on a year over year basis.

To achieve another all time record at $2 7 billion.

While we don't normally provide information on a distribution sell through basis, which we referred to as end market demand. We are providing information this quarter to give investors some insight into consumption.

September quarter end market demand grew sequentially at about the same rate as our GAAP net sales, which is based on sell in recognition.

The September quarter was our eighth consecutive quarter, where we achieved a net sales record in the first time, we've ever crossed the $8 billion annualized net sales mark.

non-GAAP gross margin came in at the high end of our guidance at a record 67, 7% up 64 basis points from the June quarter, and up 244 basis points from the year ago quarter.

non-GAAP operating margin came in well above the high end of our guidance at a record of 46, 9% up a 127 basis points from the June quarter, and up 438 basis points from the year ago quarter.

Due to a rapid increase in net sales over the last two years operating expenses at 29% were about 160 basis points below the low end of our long term model range of 22, 5% to 23, 5%.

Our long term operating expense model, we will continue to guide our investment actions to drive the long term growth profitability and durability of our business.

Our consolidated non-GAAP diluted EPS was a record $1 46 per share up 36, 4% from the year ago quarter and at the high end of our guidance.

Adjusted EBITDA at 59% of net sales and free cash flow of 32, 9% of net sales were both very strong in the September quarter.

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

Net debt declined by $192 6 million driving a net leverage ratio down to one eight forex exiting the September quarter.

During the September quarter, we returned $413 3 million to shareholders in dividends and share repurchases, representing 57, 5% of the prior quarter as free cash flow.

I would like to take this opportunity to thank all of our stakeholders, who enabled us to achieve these outstanding results and especially thank the worldwide Microchip team for their continued effort during challenging times to deliver results for our customers. Despite a large and persistent imbalance between supply and demand.

Taking a look at our net sales from a product line perspective, our microcontroller net sales were sequentially up 11% as compared to the June quarter and set another all time record.

On a year over year basis, our September quarter microcontroller net sales were up 31, 9% and Microcontrollers represented 56, 9% of our net sales in the September quarter.

Our analog net sales sequentially decreased one 3% in the September quarter.

On a year over year basis, our September quarter analog net sales were up 16, 6% and analog represented 27, 6% of our net sales in the September quarter.

As we mentioned last quarter, there are quarter to quarter differences in supply constraints, which can cause differences and net sales growth by product line.

If you compare the trailing four quarter net sales growth performance versus the prior four quarters for our analog and microcontroller product lines. The growth rates are almost exactly the same.

In the September quarter, a technology licensing net sales achieved a new record.

Business conditions continue to be strong as viewed through our internal indicators.

<unk> continued to be strong despite the capacity increases we have been implementing for some time now.

As a result are unsupported backlog, which represents backlog customers want it shipped to them in the September quarter, but which we could not deliver in the September quarter climbed again, and we exited the September quarter with our highest unsupported backlog ever.

With unsupported backlog well above the actual net sales we achieved.

We are working hard to reduce our unsupported backlog to more manageable levels and expect to do so in the coming quarters.

But also expect to remain supply constrained through the rest of 2022 and well into 2023.

We're of course cognizant of the weakening macro conditions, resulting from rising inflation and interest rates and are monitoring conditions closely.

We're also aware that there is some inventory build at our customers as can be seen in their balance sheets.

Some of this we believe is due to strategic buffer inventory builds are rising from the learnings over the last two years and some of this is due to incomplete kit so the infamous golden screw effect.

While we have seen an increase in request to push out or cancel backlog.

These requests remain a very small fraction of the very large backlog, we have over multiple quarters and hence they have not had a material impact on our business.

We believe there are three reasons why microdose business is demonstrating more resilience in the midst of the weakness seen by some of the other semiconductor companies.

First on the demand side, the industrial automotive aerospace and defense data Center and communications infrastructure end markets, which make up 86% of our net sales remained strong.

The consumer end market, which is about 14% of our net sales. He has experienced some weakness but is dominated by home appliances.

In home appliances are more resilient than other consumer markets is a high percentage of demand comes from replacement put appliances, which have broken down and must be replaced hence.

Hence our demand is quite durable because of the end market mix, we are consciously gravitated towards over the years.

Second on the supply side.

Vast majority of our products are built on specialized technologies, requiring trailing edge capacity.

This is the capacity that has been most constrained over the last two years, which still remains constrained and where there was a least opportunity to over ship to consumption.

And last but not least our laser focus on organic growth through a total system solutions and higher growth Megatrends for multiple years is giving us increased design win momentum and the resultant revenue tailwind.

Given the cross current of strong internal business indicators and some uncertainty in the macro environment. We have modeled a range of potential scenarios and are closely monitoring various indicators, which should enable us to take deliberate action when we feel it's appropriate.

Our goal is to deliver a soft landing for our business.

When there is a softer macro the softer macro environment catches up with it.

The playbook, we shared with you last quarter for how we will deal with the macro slowdown remains unchanged.

If you study Microsoft's peak to trough performance.

Through the business cycles over the last 15 years, you will observe a robust and consistent cash generation gross margin and operating margin results.

The investor presentation posted on our IR website provides details about our performance through the business cycles.

If or when there is a macro slowdown and 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 continue to execute our long term, Microsoft three point of the strategy and help insulate it from whatever short term market challenges they may be.

While we are seeing some loosening of constraints in our supply chain. We continue to have several internal and external capacity corridors that remain very constrained.

We are continuing with a carefully calibrated capacity increases.

Seeking to serve what we believe is a long term consumption growth.

We believe our calibrated increase in capital spending will enable us to capitalize on growth opportunities.

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.

As you May have seen Microsoft has expressed its view at the recently approved chips Act is good for the semiconductor industry and put America as it enables critical investments, which will even the global playing field for U S company wide.

While being strategically important for our economic and National security.

For a very long time and important component of our business strategy has been to own and operate a substantial portion of our manufacturing resources, including wafer fabrication facilities in the U S.

This strategy enables us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry.

In light of the strategy and potential grant funding from the chipset.

The investment tax credit provision as well as state and local grants and subsidies.

<unk> is in the early stages of considering a 300 millimeter U S based fab for specialized trailing edge technologies.

This fab project, if we decide to pursue it would be intended to provide competitive growth capacity as well as geographic and geopolitical diversification.

The availability of grants subsidies and other incentives will all be important considerations in our analysis and will also help determine the location and timing for the fab.

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

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

Taking all the factors we've discussed on the call today into consideration, we expect our net sales for the December quarter to be up between three and 5% sequentially.

We also expect our net sales based on end market demand to grow at about the same growth as GAAP net sales.

[music].

And further we expect sequential net sales growth again in the March quarter.

At the midpoint of our net sales guidance our year over year growth for the December quarter would be a strong 22, 7%.

We expect our non-GAAP gross margin to be between 67, 8% and 68% of sales.

We expect non-GAAP operating expenses to be between 27 and 29% of sales.

We expect non-GAAP operating profit to be between 46, 9% and 47, 3% of sales.

And we expect our non-GAAP diluted earnings per share to between to be between $1 54 per share and $1 56 per share.

At the midpoint of our EPS guidance, our year over year growth for the December quarter will be a strong 29, 2%.

Finally, as you can see from our September quarter results and our December quarter guidance, our Microsoft three <unk> strategy, which we launched a year ago is firing on all cylinders.

We continue to build and improve what we believe is one of the most diversified.

Fencible high growth high margin high cash generating businesses and the semiconductor industry.

Let me now pass the baton to Steve <unk>.

More about our cash return to shareholders Steve.

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 results.

I continue to be very proud of all employees of microchip there to have delivered another exceptional quarter.

While making new records in many respects.

Namely record net sales record.

non-GAAP gross margin percentage.

Record non-GAAP operating margin percentage.

With record non record 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 9% from last quarter to 32 eight per share.

This is an increase of 41, 4% from the year ago quarter.

During the last quarter, we purchased 247 2 million our first stock in the open market.

We also paid out $166 1 million in dividend.

Thus the total cash return was $413 3 million.

This amount was 57, 5% of actual free cash flow of $718 5 million.

During the June 2022 quarter.

Our pay down of debt as well as a record adjusted EBITDA.

Drove down our net leverage at the end of September 2022 quarter to 184.

<unk> 2.5 at the end of June .

Ever since we achieved.

Investment grade rating.

For our debt in November of 2021.

<unk> pivoted to increasing our capital return to shareholders.

We have returned 145 $7 billion to shareholders through September 32022.

By a combination of dividends and share buybacks.

In the December quarter, we will use the September quarter's actual free cash flow of $682 9 million.

And plan to return 60%.

Our $409 7 million of the demand.

To our shareholders.

Of this $409 $7 million.

The dividend is expected to be approximately $181 million and the stock buyback is expected to be approximately $228 $7 million with that operator will you. Please poll for questions.

Sure if you'd like to ask a question simply press the star key followed by the digit one on your telephone keypad.

Also if you are using a speaker phone. Please thanks for your mute function is turned off to allow your signal to reach our equipment.

Once again press star one at this time, we will pause for a brief moment.

And Bruce <unk> Srivastava of BMO has that first question.

Alright, Thank you very much Steve and Eric.

Yes.

You said that you put the investor slide deck, where you talked about the <unk>.

Bookend scenarios and you've talked about the playbook.

Hi.

Just kind of help us this question because weaknesses.

Many of you are diversified peers have talked about weakness just kind of help us understand.

The big concern I have is.

Is the longer the lead times stretched out.

[music].

The higher the possibility of a harder landing so just kind of help us understand.

How are you managing the.

The quote unquote soft landing that you have addressed a few things, but I just wanted to re address that issue. If you could please thank you.

Sure. So it starts with having high quality backlog.

And.

<unk> being a high percentage of our backlog well over 50%.

Is the highest quality backlog. It is noncancelable, it's customers, who have put time into making a commitment to be noncancelable and that is always going to have far more thought that goes into it.

It starts also with the supply side, where we're making calibrated investments every quarter, we're not trying to go satisfy all the demand that's out there.

And our lead times are long, but they are also in specific areas started to improve.

That helps with customers who have visibility out in time.

And then the end market exposure, we have is another huge benefit to us most of these customers. In these end markets are not in volatile markets, where things can go up and down in short order and looking at the long term and looking at demand that is far more durable.

When you put all that together and we feel we have a model that is outperforming.

And for those reasons from a market standpoint supply standpoint, and what we have done for ourselves in terms of total system solutions in the Mega trends were focusing on in the design in activity that we are pursuing.

Okay, just a quick follow up.

Lead times now and then.

The product line is very diverse but the way you characterize it what percent of lead times.

Have come in versus staying at 52 plus weeks.

The lead times are all over the place we have some lead times, which are as low as four to eight weeks, we have a lot of them, which are at 26% to 52 weeks, it's corridor by corridor product by product, where the constraints are right. We go to work every day trying to improve it and as long as <unk>.

Supply improves.

We were able to do that demand remains still strong. So there's not a single number I can give you on a single percentage that I can say hey, this is what the lead times are.

But most importantly, it's not just the lead times Thats also how strong the demand is and you can see with some of the end market data that we provide you with.

Information on the growth.

The end market growth is keeping pace with what we're shipping into on a GAAP basis.

Got it thank you Manish.

Thank you.

Next we'll hear from Vivek Arya of Bank of America Securities.

Alright, Thanks for taking my question for the first one.

Interesting you are considering a 300 millimeter fab.

I was wondering what is driving that decision.

Kind of Capex related to acquire.

Will it have any impact on your dividend or buyback philosophy and does it mean, you will bring back some of what youre, giving to external foundries.

Inside the company just any more color on the 300 millimeter fab.

Appreciate it as properties stood at early stages of discussion.

Yes.

You should look at it is it's a very strategic.

Thought process and decision for us.

Something we think about over a 20 year plus.

Timeframe of what it will do for us not unlike how when we bought our Gresham fab just about 20 years ago right. It was a long term investment that we made we have many processes that are at 300 millimeter that are candidates that we have some specific ones. We would look at is the early ones, we bring in but I wouldn't look at it as necessarily just bringing all the stuff inside as much as.

As we grow we would have additional.

Places, where it can grow.

This investment will happen over multiple years it.

It will be largely within the range of the Capex that we have provided and we do not expect it to have either an impact on our dividend or share buyback or anything else.

With where we're at.

Alright.

A follow up.

Denise you mentioned that.

One reason that you might be seeing the strength as some customers that are building some.

Buffett inventory.

I'm curious how far along do you think that in that process and does it just pull forward their demand from from outer quarters, because I think what everyone is trying to get a sense of what is that in most of our prior downturns Microchip was always the first one to signal when the macro conditions weakened this time conditions RV kidney.

Every one of your competitors they think that yet.

So what has changed.

Did your analog industrial peers I can understand the consumer part with what's different versus your peers are also exposed to the same automotive industrial type markets. Thank you.

Number 2022, and March 2023 quarters, and our reported days of inventory is a backward looking indicator.

As gross margins rise the effective days of inventory for the same physical inventory rises and with every 100 basis points of gross margin growth. It creates approximately three incremental days of inventory.

Hello, how are you guys still there.

Inventory days at our distributors in the September quarter was at 19 days, which was flat to the prior quarter's level.

With the distribution inventory still being low we will be carrying higher inventory at microchip to ensure our customers can be served.

Please remain on the line, while we reconnect our presenters.

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

<unk>.

Yes.

[music].

The principal amount of convertible debt on our balance sheet at September 30 was $766 6 million.

You May proceed.

Hi, we're back Vivek if.

If youre still on we didn't get the entirety of your question would you repeat your question. Please.

Yes, so basically what I asked finish was that you mentioned customers that building buffer inventory.

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

Just wondering how far along in that process and in general If you contrast, microchip today versus in prior downturns.

Our cash flow from operating activities was $793 2 million in the September quarter, our free cash flow was $682 9 million and 32, 9% of net sales.

<unk> had a somewhat similar mix of products. The company was always the first to see the downturn, but youre not seeing it now so I was curious what is the difference between the old micro chip versus the new microchip.

Sure. So let me ask the answer the second one first if you look at the old Microchip, we had more exposure to markets that perhaps a more volatile like they didn't have the same aerospace and defense data center infrastructure, we weren't as high in industrial and automotive and those are far more durable and we had a much higher consumer exposure. If you go back.

As of September 30, our consolidated cash and total investment position was $306 8 million.

We paid down $264 9 million of total debt in the September quarter, and our net debt was reduced by $192 6 million.

Over the last 17 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down almost $5 5 billion of debt and continue to allocate substantially all our excess cash beyond dividends and stock buyback to bring down this debt.

10 years of the financial crisis in that timeframe. So that has changed to where we can see the customer and their end market.

<unk> has been far more durable today than it was in history.

On your first question about what about the.

Our adjusted EBITDA in the September quarter was a record at one point <unk> $5 6 billion and 59% of net sales.

Buffer I think the amount that's being built is small because we're not able to ship right. I mean, we're constrained in our ability to service.

Our trailing 12 month adjusted EBITDA was also a record at 381 4 billion.

All of this backlog that is unsupported, but anecdotally are there going to be some customers who are building and yes for sure. There is some of that but we still think it's small and mostly it is in the markets, where there's a very large multiplier for the Oems and product as compared to the value of the semiconductors that they carry.

Our net debt to adjusted EBITDA was 184 at September 32022 down from 2.5 at June 32022, and down from three <unk> at September 32021.

Thank you.

Youre welcome.

Okay.

Operator would you continue to pull for questions. Please Christopher Rolland Susquehanna.

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 the expected long term growth of our business.

Yes.

Hey, guys. Thanks for the question.

I guess my first one is.

For for either Steve or Ganesh.

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.

So.

You had confidence confidence enough to.

Provide growth into March which is pretty incredible in this environment.

Is this do you think you have this confidence and this visibility because of your kind of tough stance on your end CNR policy.

Depreciation expense in the September quarter was $63 6 million.

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

Is it.

Perhaps youre looking at channel inventories and keeping those tight is there some other difference here operationally.

Thank you Eric and good afternoon, everyone.

Our September quarter results continued to be strong driven by our disciplined execution and our resilient end markets net.

Or.

That kind of affect your confidence versus others out there or is there something youre doing different.

Net sales grew five 6% sequentially and 25, 7% on a year over year basis to achieve another all time record at $2 7 billion.

So firstly we.

We have confidence both on the demand side as well as the improving supply that we're making but let.

Let me put it in perspective, even if we accepted 100% of all of the cancellations and pushout requests of noncancelable backlog.

September quarter end market demand grew sequentially at about the same rate as our GAAP net sales, which is based on sell in recognition.

This factor alone would not have changed our September quarter results our December quarter guidance.

And we will remain poised to grow sequentially again in March.

The September quarter was our eighth consecutive quarter, where we achieved a net sales record.

So don't assume that it's the non cancel ability that is somehow propping is up.

And the first time, we've ever crossed the $8 billion annualized net sales mark.

Great. Thank you.

non-GAAP gross margin came in at the high end of our guidance at a record 67, 7% up 64 basis points from the June quarter, and up 244 basis points from the year ago quarter.

Steve you've talked before about industry capacity.

Being tight.

Four and us not having enough as an industry moving forward.

non-GAAP operating margin came in well above the high end of our guidance at a record of 46, 9% up 127 basis points from the June quarter, and up 438 basis points from the year ago quarter.

I think there's probably been some cancellations in terms of equipment and stuff like that but would love an update here.

Hugh.

How you feel about that are you even more strong in that belief in.

Due to a rapid increase in net sales over the last two years operating expenses at 29% were about 160 basis points below the low end of our long term model range of 22, 5% to 23, 5%.

And is that what underpins the 300 millimeter thought process as well.

Mhm.

Right.

So.

It began.

Year, and a half ago.

Our long term operating expense model will continue to guide our investment actions to drive the long term growth profitability and durability of our business.

Capacity being constrained at all the nodes trailing edge, leading edge in the middle of the way.

What has happened in the last few quarters.

Our consolidated non-GAAP diluted EPS was a record $1 46 per share up 36, 4% from the year ago quarter and at the high end of our guidance.

As with the.

Personal computers and cell phones.

Which are.

Adjusted EBITDA at 59% of net sales and free cash flow of 32, 9% of net sales were both very strong in the September quarter.

<unk> consumers of semiconductor and mostly semiconductors on the bleeding edge of technology.

Processors and very high end chips.

<unk> to demonstrate the robust cash generation capabilities of our business.

In the cellular phone.

With the production in that market.

Net debt declined by $192 6 million driving a net leverage ratio down to $1 eight forex exiting the September quarter.

The leading bleeding edge of capacity now is really no longer constrained.

Have seen dramatic or downside guidance by a lot of the very leading edge people. So today if you wanted.

During the September quarter, we returned $413 3 million to shareholders in dividends and share repurchases, representing 57, 5% of the prior quarter as free cash flow.

No.

Seven nanometer 10 nanometer or 14 nanometer capacity you can have everything you need.

I'd like to take this opportunity to thank all of our stakeholders, who enabled us to achieve these outstanding results and especially thank the worldwide Microchip team for their continued effort during challenging times to deliver results for our customers. Despite a large and persistent imbalance between supply and demand.

But the trailing edge capacity continues to be extremely constrained.

On trailing edge, we built some inside and we also bought some from the foundries and we are constrained on both.

Inside we haven't been able to get all the equipment we wanted.

Taking a look at our net sales from a product line perspective, our microcontroller net sales were sequentially up 11% as compared to the June quarter and set another all time record.

Most equipment that was even schedule to be delivered got pushed out by many months sometime many quarters.

Because the equipment supplier wasn't able to get semiconductors for their cars.

On a year over year basis, our September quarter microcontroller net sales were up 31, 9% and Microcontrollers represented 56, 9% of our net sales in the September quarter.

Inside products that we've done inside.

Land constrained on many different quarter doors.

And the capacity, we buy outside is really very similar.

Our analog net sales sequentially decreased one 3% in the September quarter.

The trailing edge capacity remains constrained and we currently believe.

On a year over year basis, our September quarter analog net sales were up 16, 6% and analog represented 27, 6% of our net sales in the September quarter.

We will remain constrained or well into 2023.

I would add one more thing right I think on 300 millimeter.

Where if we started on our fab tomorrow, it's four plus years away before that fab is starting to ramp. So these are not decisions we make in a single cycle Louie we think through these across cycles on a long term secular growth basis, and what our position is and what we want our capabilities to be out in <unk>.

As we mentioned last quarter, there are quarter to quarter differences in supply constraints, which can cause differences and net sales growth by product line.

If you compare the trailing four quarter net sales growth performance versus the prior four quarters for our analog and microcontroller product lines. The growth rates are almost exactly the same.

Hi.

In the September quarter, a technology licensing net sales achieved a new record.

No on the prior question, we were talking about backlog and while we are still resilient.

Business conditions continue to be strong as viewed through our internal indicators.

And in the price cycle that we used to be the first one to see this and we're not seeing it today I think I wanted to add a comment a couple of comments one the agonist mentioned.

<unk> continued to be strong despite the capacity increases we have been implementing for some time now.

Which is a dramatically different end market mix, we have today than when you used to Carla for Canadian coal mine.

And secondly, I think.

We want to keep emphasizing that PSP backlog is a very high quality backlog.

With unsupported backlog well above the actual net sales we achieved.

We are working hard to reduce our unsupported backlog to more manageable levels and expect to do so in the coming quarters.

When a customer has to commit.

<unk> months and in some cases 18 months and longer noncancelable non reschedule level backlog.

But also expect to remain supply constrained through the rest of 2022 and well into 2023.

There is a lot more parts that goes into it and it's not the junior purchasing manager who places the backlog it goes up for approval.

We're of course cognizant of the weakening macro conditions, resulting from rising inflation and interest rates and are monitoring such conditions closely.

So it's a much much higher quality backlog.

We're also aware that there is some inventory build at our customers as can be seen in their balance sheet.

And people don't just double already thinking that they would cancel it.

Because its noncancelable their own double order thinking that.

Some of this we believe is due to strategic buffer inventory builds are rising from the learnings of the last two years and some of this is due to the incomplete kits of the infamous Golden screw effect.

Microchip will love them change the rules and we will let them cancel it so that backlog is very high quality, we have gotten very small number of scheduled request here and there.

While we have seen an increase in request to push out or cancel backlog.

These requests remain a very small fraction of the very large backlog, we have over multiple quarters and hence they have not had a material impact on our business.

And as <unk> mentioned, if we were to take all of them for cancellation it wouldn't change anything.

It would not change our September December or March it's just a miniscule presented it really means nothing enrollment.

We believe there are three reasons why Microsoft's business is demonstrating more resilience in the midst of the weakness seen by some of the other semiconductor companies.

So take that into account.

From lot of.

First on the demand side, the industrial automotive aerospace and defense data Center and communications infrastructure end markets, which make up 86% of our net sales remained strong.

Investors and analysts that thinking on PSP.

Some sort of exited to happen because people are building inventory and we're not letting them cancer late in the fall would be even harder.

The consumer end market, which is about 14% of our net sales. He has experienced some weakness but is dominated by home appliances.

I think that thinking is not correct.

Yes.

Thank you guys appreciate it.

In home appliances are more resilient than other consumer markets is a high percentage of demand comes from replacement for appliances, which have broken down and must be replaced hence.

Great. Thank you.

Yes.

Next we'll hear from Timothy Arcuri of UBS.

Hence our demand is quite durable because of the end market mix, we are consciously gravitated towards over the years.

Thanks, a lot.

You mentioned <unk> is more than half of backlog, but can you talk about how much of the September revenue was moving inside of PSTN and maybe Steve I know that you just made some comments about some requests for.

Second on the supply side.

Vast majority of our products are built on specialized technologies, requiring trailing edge capacity.

Before changes within PSP. It sounds like there is still pretty small, but I guess can you also just double click on the comment you just made because PSP doesn't really change demand I mean to a certain degree you just put product to customers that might not need it because they committed to it six months to 12 months ago. So can you just kind of talk through that and then maybe answer the question about how.

This is the capacity that has been most constrained over the last two years, which still remains constrained and where there was a least opportunity to over ship to consumption.

Much revenues moving PSP. Thanks.

So firstly.

In a given quarter by the time, we get to that quarter PSB is an overwhelming percentage of what we ship in that quarter, that's what customers who placed backlog back in time received priority for ex.

And that's why we give them and so.

Our goal is to deliver a soft landing for our business.

Further out in time there is.

When there is a softer macro the softer macro environment catches up with it.

More space.

New backlog and come in and fill it up but near term like what just happened in September and what is going to happen in December is a very very high percentage of it that is PSP backlog that is being fulfilled.

The playbook, we shared with you last quarter for how we will deal with the macro slowdown remains unchanged.

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.

Let me reiterate the points, Steve made in which I'm a little bit earlier on.

<unk> backlog is the highest quality backlog, that's there we make noncancelable commitments to our suppliers and we don't make them lightly because there is a financial commitment that is required to have enough scrutiny.

The investor presentation posted on our IR website provides details about our performance through the business cycles.

Therefore, when there is a macro slowdown and that impacts our business, we expect our cash generation gross margin and operating margin to once again demonstrated consistency and resiliency.

Similarly, our customers have significant scrutiny when theyre trying to make commitments they don't try to get excess capacity ordered from us.

This will help us continue to execute our long term, Microsoft three point of our strategy and help insulate it from whatever short term market challenges they may be.

They in fact will try to undershoot, so that they can actually hit it.

So I want you to take from this that PSP backlog is the highest quality backlog, we have far more cancellations.

While we are seeing some loosening of constraints in our supply chain. We continue to have several internal and external capacity corridors that remain very constrained.

And requests on non PSP.

But <unk> backlog is very high quality.

And even outside PSP I want to note that our standard cancellation window is 90 days. So when we win when we enter a quarter really everything that's on books for the quarter is noncancelable, whether it's PSP or not.

We are continuing with a carefully calibrated capacity increases.

Seeking to serve what we believe is a long term consumption growth.

We believe our calibrated increase in capital spending will enable us to capitalize on growth opportunities 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.

You should also think that.

When we took the PSP backlog and for the last year year and a half.

In the middle of extreme constrains.

We made a choice to ship to the PSP customers and not shipped to the non PSP customers.

As you May have seen microchip has expressed its view at the recently approved chips Act is good for the semiconductor industry and for America as.

All of the non PSP customers are not low quality customers some of them are.

Has it enables critical investments, which will even the global playing field for U S companies.

Very good customers, but their business is such that they cannot make it one year commitment for there were non PSP customers. They got very little product. So we made a choice to <unk>.

While being strategically important for our economic and National security.

While it is giving it to PSP customers and look the other customers grow not get product gets somewhere else. So sure. Our PSP customers have benefited from the best product pension in the last year and a half.

This strategy enables us to maintain a high level of manufacturing control, resulting in us being one of the lowest cost producers in the embedded control industry.

In light of this strategy and potential grant funding from the chips Act the investment tax credit provision as well as state and local grants and subsidies.

And now.

They can have the best of then and.

Then be flexible and not really meet their part of the bargain. We have added capacity for them, we prioritize them. We lost the other customers when we did not give any product.

Microchip is in the early stages of considering a 300 millimeter U S based fab for specialized trailing edge technologies.

So I think this.

This fab project.

I would say don't be fixated on it. This is our best demand is our best customers.

We decided to pursue it would be intended to provide competitive growth capacity as well as geographic and geopolitical diversification.

Yes.

Got it got it got it. Thank you. Thank you and then just as my.

The availability of grants subsidies and other incentives will all be important considerations in our analysis and will also help determine the location and timing for the fab.

Follow up.

Gabe so on.

Some view on consumption and you call. The end market demand does that include the inventory is building at your customers.

When you talk about end market demand is that net of the inventory build at your customers or is that inclusive of the inventory build that your customers. Thanks.

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

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

So when we speak of end market demand. It is everything that we shipped to our direct customers, which is no different than GAAP revenue and then the other difference is the roughly 50% of our business that goes through distribution. It represents the distributor sell through to <unk> customers rather than what we are selling in to.

Taking all the factors we've discussed on the call today into consideration, we expect our net sales for the December quarter to be up between three and 5% sequentially.

We also expect our net sales based on end market demand to grow at about the same growth as our GAAP net sales.

And further we expect sequential net sales growth again in the March quarter.

The distribution channel, we do not have a any kind of view in terms of exactly what our customers are doing with inventory reserve was 125000 customers and Thats just not data that we have or as possible for us to track, yes, when we talk about potential.

At the midpoint of our net sales guidance our year over year growth for the December quarter would be a strong 22, 7%.

We expect our non-GAAP gross margin to be between 67, 8% and 68% of sales we.

We expect non-GAAP operating expenses to be between 27 and 29% of sales.

Inventory at customers all we can see as what do they publicly report, but I can tell you that the level of Expedites and customer Escalations, we're experiencing remain high indicating that demand supply imbalance for many customer situations.

We expect non-GAAP operating profit to be between 46, 9% and 47, 3% of sales.

We expect our non-GAAP diluted earnings per share to between to be between $1 54 per share and $1 56 per share.

Thank you. Thank you very much appreciate it.

At the midpoint of our EPS guidance, our year over year growth for the December quarter would be a strong 29, 2%.

Our next question comes from William Stein of Choice Securities.

Great. Thanks for taking my questions first a little bit of an off the run question and then I'll have a follow up.

Finally, as you can see from our September quarter results and our December quarter guidance, our Microsoft three point of our strategy, which we launched a year ago is firing on all cylinders as we.

Opex I think you highlighted that it's below your target range as revenue continues to grow youre not spending as much.

We continue to build and improve what we believe is one of the most diversified defensible high growth high margin high cash generating businesses and the semiconductor industry.

Sort of you would normally target over what timeframe should we anticipate.

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

Your opex approaching your target percent of revenue.

Thank you Ganesh and good afternoon, everyone.

It'll be over many quarters.

You can see in our guidance, which is not happening in the December quarter.

I would like to reflect on our financial results announced today.

Hiring environment has been difficult.

And provide you further updates on our cash return strategy.

Perhaps we will do better as we go into 2023.

Reflecting on our financial results.

So it'll be slow.

I continue to be very proud of all employees of microchip that have delivered another exceptional quarter.

Eric do you want to Fannie.

It somewhat depends on what the revenue curve looks like out in time, obviously, we're guiding for nice growth again in December <unk> made comments about March being a growth quarter for us. So it's going to take us some time to catch up well.

While making new record in many respects.

Namely record net sales record non-GAAP gross margin percentage record non-GAAP operating margin percentage.

Okay.

Thank you for that and then I'd want to linger on the same topic that so many other people have hit on but I wanted to ask you to sort of a different way.

Record non record non-GAAP EPS.

And record adjusted EBITDA and.

Understand the PSP is very high quality backlog youre not seeing many cancellation requests even if you took all the cancels you still have this good guidance and the comments on March.

And all of that in a very challenging supply environment.

The board of Directors announced an increase in the dividend of 9% from last quarter to 32 eight per share.

What it doesn't so much addresses what might happen in a couple of quarters, if more customers either doing PSP or otherwise come in and request a cancel or push out.

This is an increase of 41, 4% from the year ago quarter.

During the last quarter, we purchased 247 2 million are for stock in the open market.

The question really is is that this is one thing that has changed.

We also paid out $166 1 million in dividend.

Maybe not the model, but in the way the company operates Steve in fact, you just talked a lot about how you'd never.

Thus the total cash return was $413 3 million.

Use distribution as sort of the mechanism to let's say stuff, let's call stuffing the channel for a moment.

This amount was 57, 5% of actual free cash flow of $718 5 million during the June 2022 quarter.

When you have to make a decision as to whether you force a customer to live up to and in CNR that is remarkably similar to stuff. The channel in terms of at least the economic impact on your business and Im wondering how youre going to take that decision. If you wind up in a position where more customers come to you to cancel whether its PST irregular backup.

Our pay down of debt as well as the record adjusted EBITDA.

Drove down our net leverage at the end of September 2022 quarter to 184 from two points or five at the end of June .

Lord how you make the decision on the one hand, I want to make them live up to their commitments.

Ever since we achieved.

Investment grade rating.

Highlighted all of those reasons on the other hand, if you do that you know you're damaging future demand.

For our debt in November of 2021.

<unk> pivoted to increasing our capital return to shareholders.

And pushing out.

Painful situation, how do you plan on managing that.

Return.

145 7 billion.

And those two dynamics. Thank you well. This is not the first time, we've had to deal with noncancelable backlog. It has been a part of our business.

Two shareholders through September 32022.

By a combination of dividends and share buybacks.

Basically ever right.

That the percentage of that has grown.

In the December quarter, we will use the September quarters.

We work with customers on what their requirements are but you can't have an asymmetric.

Actual free cash flow of $682 9 million.

Agreement, where.

And plan to return 60%.

They win entails we lose Mike you got to make sure that there are commitments. This is why if you make sure that there is an understanding that there is a responsibility with placing that backlog table.

Our $409 7 million of the demand to our shareholders.

Of this $409 7 million.

The dividend is expected to be approximately $181 million and the stock buyback is expected to be approximately $228 7 million.

Moderate the backlog they place on us.

If they have no responsibility then there is no reason why they wouldn't just give us much much higher backlog and where they are at so we think again going back to the quality of the backlog. It comes because it has responsibility that goes with it.

With that operator will you please poll for questions.

Sure if you'd like to ask a question simply press the star key followed by the digit one on your telephone keypad.

Outside of that situation of our situation with the customer.

We're in this to be in business, but we're not in this to say, it's all risk free are all the risk is on our side and what we go with it and by the way by and large that's how customers have expected anything as well they are not pushing on us to say.

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

Once again press star one at this time, we will pause for a brief moment.

Hey, I Didnt mean that it should be.

And Bruce <unk> Srivastava of BMO has our first question.

PSB and I don't want something else different from what.

What we had agreed to so I don't see that as big of an issue and by the way if we didn't have PSP.

Alright, Thank you very much Steve and Eric.

They appreciated that you put the investor slide deck, where you talked about the playbook and the scenarios that you've talked about the playbook.

The situation that we have is far far higher backlog and far bigger of a fall from that high backlog, we have yes.

But.

I just can't help asked this question because weakness.

Yes, I think one other thing I'd like to point out well because youre talking several quarters out in time beyond March right a customer that's on PSP and has 12 months of backlog with US every week or every month that goes by they make a decision in terms of what the next backlog that theyre going to put on us out in time, they could put zero backlog record with 50% they can put a 120%.

Many of your diversified peers have talked about weakness.

Kind of help us understand that.

The big concern I have is the longer the lead times stretched out.

The higher the possibility of a harder landing so just kind of help us understand.

<unk> of what it was the month before and so.

How are you managing the.

The quote unquote soft landing that you've addressed a few times, but I just wanted to re.

These fears of rising interest rates and recession. This is not new when we woke up today and this has been happening now for several months and I think customers gradually adjust that over time, but as <unk> said in PSP is still a large percentage of our backlog, we still have tons of unsupported and it's been a program that I believe has worked very well not only for.

The address that issue if you could please thank you.

Sure. So it starts with having high quality backlog.

<unk>.

<unk> being a high percentage of our backlog well over 50%.

Is the highest quality backlog. It is noncancelable, it's customers, who are put time into making a commitment to be noncancelable and that is always going to have far more thought that goes into it.

The customer but for microchip.

The gist of your question is that.

Lots and lots of PSP customers wanted to cancel and we're just kind of letting them do it and that is not the case.

It starts with also with the supply side, where we're making calibrated investments every quarter, we're not trying to go satisfy all the demand that's out there.

There is.

<unk> amount of demand at any point in time, you have customers that want to move small things around.

The PSP backlog.

And our lead times are long, but they are also in specific areas started to improve.

He is not going to see that behavior that youre talking about were not inundated with PSP customers wanting to cancel the debt load and we're not canceling it and thats not happening next quarter thats not happening quarter thereafter.

That helps with customers, who have our visibility out in time.

And then the end market exposure, we have is another huge benefit to US right. Most of these customers. In these end markets are not in volatile markets, where things can go up and down in short order Theyre looking at the long term and looking at demand that is far more durable.

I think that that's the issue that's your assumption that it would happen. We don't think we will fit because the PSP backlog is very high quality and customer can easily start toward adjusted.

When you put all that together and we feel we have a model that is outperforming.

By taking the foot off the gas pedal.

Every month when they place the order 12 months out.

And for those reasons from a market standpoint supply standpoint, and what we have done for ourselves in terms of total system solutions in the Mega trends, we're focused on in the design in activity that we are pursuing.

Let me give me one more piece of data.

We are making a big deal of cancellations. If you aggregate all of the cancellation requests we have.

It's four 5% of our total backlog.

Okay, just a quick follow up.

Lead times now on the <unk> and then the other product lines made versus the way you characterize what percent of lead times.

And that includes PSB non PSP and it will be dominated by non PSP.

It has a negligible part of the business guys.

Have come in versus staying at 52 plus weeks.

Thank you.

Welcome.

Okay.

Next we'll hear from Chris Danley Citigroup.

Hey, Thanks, guys.

So I think someone asked you earlier about.

Lead times have they gone up or gone down or how much you said you really couldn't couldn't define that.

So you said you still have some I guess quite a bit of business. That's.

Supply improves.

We were able to do that demand remains still strong. So there's not a single number I can give you on a single percentage that I can say hey, this is what the lead times are.

Rained or products that are constrained is there any like I guess metrics you could give us that would talk about your percentage of products or percentage of business that is constrained or any shortage now versus three months ago and what you expect to be three months from now just so we could I guess.

But most importantly, it's not just the lead times Thats also how strong the demand is and you can see with some of the end market data that we provide you with the information.

<unk> on the growth.

We track the progress of that.

The end market growth is keeping pace with what we're shipping into on a GAAP basis.

The best metric probably asked what is the unsupported backlog exiting quarters and I am going to tell you it's high.

Got it thank you.

Thank you.

It's probably not healthy to be there.

Next we'll hear from Vivek Arya of Bank of America Securities.

And we will work to improve that and it is to improve the customer service and the customer experience with it but we have still.

Alright, Thanks for taking my question for the first one.

Interesting youre, considering a 300 millimeter fab.

Substantial constraints that we're working through and it will take us many many quarters to work through them.

I was wondering what is driving that decision.

Capex will it require.

I don't know if <unk> said that earlier, but our unsupported backlog with leaving September quarter was another all time high.

Will it have any impact on your dividend or buyback philosophy and does it mean, you will bring back some of what you are giving to external foundries.

So during the quarter cusp.

Inside the company just any more color on the 300 millimeter fab.

Customer wanted more parts to.

Appreciate it its properties stood at early stages of discussion.

To be shipped in the September quarter that we couldnt ship and the unsupported grew over the June quarter to another record.

Yes.

You should look at it is it's a very strategic.

Thought process and decision for us.

So that doesn't mean in any way that.

Something we think about over a 20 year plus.

Customers are feeling that the lead times are coming in.

And we are broadly constrained almost everywhere.

I mean, we've got daily escalation calls from multiple customers every day.

So yes, that's what I was.

Our candidates that we have some specific ones. We would look at is the early ones, we bring in but I wouldn't look at it as necessarily just bringing all the stuff inside as much is as we grow we would have additional.

<unk> reached the peak the unsupported Hasnt really reached the peak and started dropping it is still growing.

Yes, that's what I was getting at is that that's what it felt like and then for my follow up.

Places, where it can grow.

So Steve you've been through even more cycles than I have.

This investment will happen over multiple years it.

This continues where the.

It will be largely within the range of the Capex that we have provided and we do not expect.

The competitors.

Keep taking numbers down in the precession gets worse and worse and your business gets better and better.

Expect it to have either an impact on our dividend or share buyback or anything else.

With where we're at.

You'll get through it.

Alright.

A follow up.

Do you think it's possible for you guys to make it through.

Dennis you mentioned that.

One reason that you might be seeing the strength in some customers that are building some bus.

Global recession, and a downturn unscathed theyre relatively unscathed.

Did you see anything during this quarter other than.

Buffered inventory.

I'm curious how far along do you think that in that process and does it.

Reported backlog that made you feel any better or any worse about microchips ability to do that.

Pull forward their demand from from outer quarters, because I think what everyone is trying to get a sense of what does that did most spot. Prior downturns microchip was always the first one to signal when the macro conditions weakened this time conditions RV Canning every one of your competitors is saying bad yet.

For year to define what unskilled demand.

Ganesh talked about it in his remarks that.

We're not seeing anything today.

But we see the macro weakening and read all the other companies are seeing.

And what we're seeing is if macro ever catches up to us.

Seeing it so what has changed.

What did your analog industrial peers I can understand the consumer part with what's different versus your peers are also exposed to the same automotive industrial type markets. Thank you.

Then we have stepped in steps in place to create a soft landing.

When you say unscathed, we're not saying we're going to keep growing.

22% per year forever right.

Ben.

But we will soft land plan because of all the attributes of <unk>.

Yes. Thanks.

Okay.

And then next we'll hear from Scott.

Toshi Hari of Goldman Sachs.

Thank you.

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

I was hoping you can talk a little bit about what youre seeing from a pricing perspective.

Hello are you guys still there.

<unk>, our microcontroller and analog businesses.

Your September quarter revenue was up 25% plus year over year.

How much of that was pricing.

Please remain on the line, while we reconnect our presenters.

And then Steve when you were at our conference a month and a half ago, you had hinted that pricing should be a tailwind in the early part of 'twenty three as well given some of the conversations that you're having with your foundry suppliers I'm curious if anything has changed since then I have a quick follow up.

Okay.

Yes.

Okay.

Yes.

[music].

So pricing is stable there are no price adjustments that are.

In may there are affecting where the.

Quarterly results are we did make an adjustment at the beginning of this year or the early part of this year.

Yes.

[music].

And that's where it's at.

I don't think we have any price adjustment plans into 2023.

You May proceed.

That are in the offing in so.

Hi, we're back.

<unk> is really not a factor today.

Correct.

If youre still on we didn't get the entirety of your question could you repeat your question. Please.

In terms of what we're executing where we're going in terms of our new designs and where we are in touch with our banks.

Yes, so basically what I asked finish was that you mentioned customers are building buffer inventory I was just wondering how far along in that process and in general. If you contrast, microchip today versus in prior downturns right. When you had a somewhat similar mix of product. The company was always the first to see the downturn, but.

Got it.

And then as my follow up.

I guess this is a hypothetical but given the visibility you have and given everything that you've said so far on the call.

If you're a business in calendar 'twenty three is.

Up 5% or flat or somewhere in that range and most of your peers are down 10% what would it be fair to say that in a recovery phase in 2020 for you under grow your peers are you, perhaps don't participate in that recovery or.

We're not seeing it now so I was curious what is the difference between the old microchip versus the new microchip.

Sure. So let me ask the answer the second one first if you look at the old Microchip, we had more exposure to markets that perhaps a more volatile like we didn't have the same aerospace and defense data center infrastructure, we weren't as high in industrial and automotive.

Are you guys gaining permanent structural share.

Cross the analog and MCU businesses.

And those are far more durable and we had a much higher consumer exposure. If you go back 10 years of the financial crisis in that timeframe. So that has changed to where we can see the customer and their end market demand as being far more durable today than it was in history.

It's a hypothetical we don't know what 24 hours, but we believe we are gaining share we are executing the total system solution strategy. We have we are focused on the fastest growing markets and we are seeing substantial wins that are creating the tailwind for us.

Thank you.

On your first question about what about the.

Buffer I think the amount that's being built is small because we're not able to ship right. I mean, we're constrained in our ability to service.

Our next question comes from Harlan sur of Jpmorgan.

All of this backlog that is unsupported, but anecdotally are there going to be some customers who are building and yes for sure. There is some of that but we still think it's small and mostly it is in the markets, where there's a very large multiplier for the Oems to end product as compared to the value of the semiconductors that they carry.

Good afternoon. Thanks for taking my question on channel or just the inventories still 40% below pre pandemic levels.

Inventories are kind of at the low end of your target range. So obviously.

Demand remains strong given given your capacity expansion plans looking at your demand profile in backlog do you guys anticipate increasing inventories with your <unk> customers and moving towards the midpoint of your range on your own inventories over the next call. It two to three quarters.

Thank you.

Youre welcome.

Okay.

Operator would you continue to poll for questions. Please Christopher Rolland Susquehanna.

So we actually grew quite a bit of inventory on our balance sheet in the September quarter, and Youll see just below our guidance table on our press release, we're expecting that to grow again this quarter and in my prepared remarks, I kind of went through some of the reasons why that is happening is positioning the company for future growth in <unk>.

Yes.

Hey, guys. Thanks for the question.

I guess my first one is.

For for either Steve or Ganesh.

So.

You had confidence confidence enough to.

A distribution distribution inventory stayed flat quarter on quarter at 19 days and we think at some point in time, there will be some level of restocking in the distribution channel.

Provide growth into March which is pretty incredible in this environment.

Is this do you think you have this confidence and this visibility because of your kind of tough stance on your end CNR our policy.

You know that's going to vary by distributor.

And what how they manage the business, but in the meantime, with their inventory being relatively low we feel that we need to have more inventory on our balance sheet to support the end customer needs and so that's that's what we're doing but really we are now within our target range of inventory days that we provided to the street.

Is it.

Perhaps you're look in the channel inventories in keeping those tight is there some other difference here operationally.

Oren.

That kind of affect your confidence versus others out there or is there something that youre doing different.

Back in our November analyst day, So we're managing it appropriately in a challenged supply environment I would call it.

So firstly.

We have confidence both on the demand side as well as the improving supply that we're making but let.

Yes, thanks for that and I know, it's always somewhat complex. This is to end market demand trends, because you've got such a broad portfolio of products you're selling in many different end markets. However, there is one segment where products are easily track because they are very specific to that end market that sir Rad hard kind of higher oil products that you.

Let me put it in perspective, even if we accepted 100% of all of the cancellations and pushout requests of noncancelable backlog.

This factor alone would not have changed our September quarter results our December quarter guidance.

And we will remain poised to grow sequentially again in March.

That's your aerospace and defense business I believe is about 13% to 14% of your revenues much higher mix versus your peers. It seems like activity around commercial space programs.

So don't assume that it's the non cancel ability that is somehow propping is up.

Great. Thank you.

Steve you've talked before about industry capacity.

Satellite constellations defense spending all look strong for not just next year, but the next several years you guys are number one in space strong turn defense like help us understand the visibility and A&D growth trends and sustainability of this segment into a potentially weaker macro economic backdrop next year.

Being tight.

Four and us not having enough as an industry moving forward.

I think there's probably been some cancellations in terms of equipment and stuff like that but would love an update here.

Sure So aerospace and defense I think it's about 9% to 10% of our revenue.

Hugh.

How you feel about that are you even more strong in that belief in.

It is performing extremely well for many reasons.

And is that what underpins the the 300 millimeter thought processes work.

<unk> commercial aviation commercial aviation is going through a strong resurgence and so all three elements space.

Mhm.

Right.

And commercial aviation are all growing strongly in the current environment and they are generally less influenced by shorter term macroeconomic conditions.

So.

No it begin.

Year, and a half ago.

Capacity being constrained at all the nodes trailing edge, leading edge in the middle of the way.

Thank you.

What has happened in the last few quarters.

Thank you.

Next we'll hear from Matt Ramsay of Cowen.

As with the.

Personal computers and cell phones.

Thank you very much good afternoon guys.

Which we.

Thanks, Toshi I took my earlier question on an AFB assumption, so I'll just ask one.

Significant consumers of semiconductor and mostly semiconductors on the bleeding edge of technology.

It's around the.

Iteration of investing in the 300 millimeter fab.

Processors and very high end chips.

In the cellular phone.

There's two parts of the question Ganesh as you consider that what would be.

With the production in that market.

The leading bleeding edge of capacity now is really no longer constrained.

I don't know ballpark off the top of your head focus of which process nodes mix in a facility like that if you consider it and then second is this.

Have seen dramatic or downside guidance by lot of the very leading edge people. So today if you wanted.

Something that you guys felt you needed to do but.

No.

It didn't really feel like you could fund all of it until the chips that got past that now it's a reaction to potential funding from governments or was this a decision that you were probably going to need to make anyway. Thank you.

Seven nanometer 10 nanometer or 14 nanometer capacity you can have everything you need.

But the trailing edge capacity continues to be extremely constrained.

On trailing edge, we built some inside and we also bought some from the foundries and we are constrained on board.

So firstly on in our process technologies those are still being worked but largely we use our 300 millimeter.

Foundries today on process technologies on our 90 nanometer and smaller in size and the workhorse technologies for trailing edge tend to be at 40, 65 90 in that general neighborhood.

Inside we haven't been able to get all the equipment we wanted.

Most equipment that was even scheduled to be delivered got pushed out by many months sometime many quarters.

Because the equipment supplier was unable to get semiconductors for their cars.

We wouldn't limit ourselves just to that is again I want you to think of this as this is a 2025 year look at what we would do with the 300 millimeter fab.

So the inside products that we've done inside remain constrained on many different quarter doors.

The reasoning for it is.

And the capacity, we buy outside is really very similar.

We have as our business has grown.

The trailing edge capacity remains constrained and we currently believe.

<unk> of our business that we do with 300 millimeter has also grown.

And the investment in the trailing edge part of 300 millimeter technologies has not been there with many of our foundries at a level that we have wanted.

We will remain constrained to run into 2023.

I would add one more thing right I think on 300 millimeter.

Where if we started on our fab tomorrow, it's four plus years away before that fab is starting to ramp. So these are not decisions. We make in a single cycle. We think through these across cycles on a long term secular growth basis, and what our position is and what we want our capabilities to be out in <unk>.

And.

But.

It takes a certain scale to get there.

And.

If you had a full boat.

Fab that you needed to build.

The way in which the breakeven points in the absorption points come about or different from when there is a.

Hi.

Fabric can be built with government funding and the investment tax credit from whatever local banks combined so clearly that has changed the equation as to when does it make sense financially.

No on the prior question, we were talking about backlog and why we are so resilient.

And in the price cycle that we used to be the first one to see this and why we're not seeing it today I think I wanted to add a comment a couple of comments one that Ganesh mentioned.

But that's not the only reason why we think trailing edge 300 millimeter technology is going to have.

Constraints for a long time to come and a portion of that being within microchip would allow us to better serve those markets.

Which is a dramatically different end market mix, we have today than when you used to Carla for Canadian coal mine.

And secondly, I think.

Thanks.

We want to keep emphasizing that.

Thank you.

PSP backlog is a very high quality backlog.

Our next question comes from Joe Moore of Morgan Stanley .

When a customer has to commit 12 months and in some cases 18 months and longer noncancelable non reschedule liberal backlog.

Great. Thank you.

If you look at your operating margins now, you're obviously much higher than you've been in prior.

Prior cycles.

There is a lot more talk that goes into it and it's not the junior purchasing manager who places the backlog it goes up for approval.

It seems like a lot of that is is secular but like do you. When you when you contemplate the soft landing scenario do you expect your margins to sort of see.

So it's a much much higher quality backlog in.

And people don't just double already thinking that they would cancel it.

The type of declining you've seen historically could we go back to prior troughs.

Because its noncancelable their own double order thinking that.

I know some of your competitors have talked about.

Target margin on.

Microchip will love them change the rules and we will let them cancel it.

A trough revenue level like how should we think about.

Primarily gross margin leverage in it sort of weaker environment.

So that backlog is very high quality, we've got in <unk>.

Very small number of scheduled request here and there.

Well I'll give you a quick answer and then Eric Microrna elaborate more on it again, the best way to look at it is how have we performed over the last 15 years through the cycles.

And as <unk> mentioned, if we were to take all of them for cancellation you wouldn't change anything.

And you will see that on those metrics of growth in operating margin from.

It would not change our September December or March.

From peak to trough across the cycle.

It's just a miniscule percentage it really means nothing relevant.

200 basis points of the decline in that range, plus or minus 200 300 basis points.

So take that into account we have heard from lot of.

And that's the way in which we manage the business.

Investors and analysts that thinking on PSP.

Built into our DNA is built into our systems and processes is built into the soft landing that I described.

Some sort of exit into happen because people are building inventory and we're not letting them cancer late in the fall would be even harder.

<unk> ago, Eric do you want to add more to it.

Yes, I mean, obviously we've continued to.

I think that thinking is not correct.

Integrate acquisitions, we've got a different product mix than we've had historically.

Yes.

You guys I appreciate it.

We feel really comfortable with the margin targets that we've set out for the street, which we are above today as you mentioned on the operating margin side.

Great. Thank you.

Yeah.

Yes.

Next we'll hear from Timothy Arcuri of UBS.

Because the business has grown so while we've got quite a bit of cushion I would call. It on our opex today with the level of bonuses that were planning variable comp that will allow us to adjust if need be.

Thanks, a lot.

You mentioned PSP as more than half of backlog, but can you talk about how much of the September revenue was moving inside of P. S. P. A and maybe Steve I know that you just made some comments about some requests for.

The macro catches up with us at some point in time so.

And we want to build inventory on our own factories, we think distributors will rebuild inventory and so we.

Before changes within PST. It sounds like there is still pretty small, but I guess can you also just double click on the comment you just made because PSP doesn't really change demand I mean to a certain degree you just put product to customers that might not need it because they committed to it six to 12 months ago. So can you just kind of talk through that and then maybe answer the question about how.

We don't want to give a specific number but again the range that we provided on a long term basis, we think that we can operate within that and obviously, we are operating above it today and the mix of the business. We have has and markets that are far more durable and tons of how they perform and what gross margin these products and solutions we bring.

Revenues moving inside of PSP.

So firstly.

Are able to command.

And it's not just silicon and silicon and software systems and services. These are very very sticky.

Applications and markets.

And that's why we give them and so.

That are not prone to perhaps what a pure consumer or mobile phone type of market.

Further out in time, there is more space and new backlog and come in and fill it out but near term like what just happened in September or what is going to happen in December is a very very high percentage of it that is PSP backlog that is being fulfilled.

You may have.

Great. Thank you very much.

Okay.

Sorry swanberg of Stifel.

Yes, Thank you and congrats on all the metrics.

Let me reiterate the points, Steve made in which I mentioned a bit earlier on.

<unk> backlog is the highest quality backlog, that's there we make noncancelable commitments to our suppliers.

I have a sort of a different angle on the pricing question.

It's kind of more related to Asps. So if you look at the 25, 7% growth year over year that you're reporting this quarter.

We don't make them lightly because there is a financial commitment that is required to have enough scrutiny.

Much of that is coming from higher asps, meaning selling more value in the form of your total system type solutions.

Similarly, our customers have significant scrutiny when theyre trying to make commitments they don't try to get excess capacity ordered from us.

There is not an easy way to break that up.

Clearly.

In fact, we will try to undershoot, so that they can actually hit it.

With constrained capacity, we will direct them and have been directing it to the highest value products that we're producing.

So I want you to take from this that PSP backlog is the highest quality backlog, we have far more cancellations.

We're shipping more units. So there's a lot of the growth that's coming from capacity. In addition that we have made.

And requests on non PSP.

At CFT backlog is very high quality.

But I certainly don't have a good way to parse out.

And even outside PSP I want to know that our standard cancellation window is 90 days. So when we win when we enter a quarter really everything that's on books for the quarter is noncancelable, whether it's PSP or not.

What comes from mix and pricing versus what comes from units.

That's fair and then I had a question on the inventory, whether it's internal or channel. So obviously the channel it sounds like youre going to sort of keep that a little bit constrained going forward.

You should also obtained that.

When we took the PSP backlog and for the last year year and a half.

But is there may be a secular trend here, where basically may be the right number is actually around 20 days of channel inventory and then your own inventories could maybe even exceed the high end of the range, which is $1 50.

In the middle of extreme constrained.

We've made a choice to ship to the PSP customers and not shipped to the non PSP customers.

No we don't dictate what channel inventory needs to be the channel decides what inventory do they need in some cases, we may be constrained and shipping it to them and they may not be able to get what they want to but channel has history of what does it take to support the mix of product the customer expectations.

All of the non PSP customers are not low quality customers some of them are.

Very good customers, but their business is such that they cannot make it one year commitments, where there were non PSP customers dig out very little product. So we made a choice.

To prioritize giving it to PSP customers and let the other customers grow not get product get somewhere else.

That are there and we are at the low end of what they have historically done and whether they are going to be at $19 or 20 or 25 or 30.

So sure our PSP customers have benefited from the best product pension in the last year and a half.

Really a decision they're going to make we don't tell them what to do in terms of inventory.

<unk> they need to stock the level of inventory appropriate to support their customers and you know that.

And now.

They can have the best of them and then be flexible and not really meet their part of the bargain. We have added capacity for them, we prioritize them. We lost the other customers, whom we did not give any product.

They'll need to find the right level of that as the supply becomes less constrained than it is today. We have we have a lot of unsupported backlog to our distributors today that we need to catch up on.

The last thank you.

So so I think this.

Sure.

It doesn't really matter, where distributor one and we just don't have the product to start them.

I would say Dolby fixated on it yes. This is our best demand, it's our best customers.

So that has not been a choice and we don't think there is a choice for well into 2023, but someday when we have parts available to stock distribution.

Got it got it got it. Thank you. Thank you and then just as my follow up.

<unk> gave.

Some view on consumption and you call. The end market demand does that include the inventory is building at your customers.

At that point in time, it will matter what they want to do right now it doesn't matter.

When you talk about end market demand is that net of the inventory build at your customers or is that inclusive of the inventory build at your customers. Thanks.

Yes, I guess my point was more maybe you have a better read on defaulted that baby.

Thank you.

So when we speak of end market demand it is.

Next we'll hear from Rajiv Gill of Needham <unk> company.

Anything that we shipped to our direct customers, which is no different than GAAP revenue and then the other difference is the roughly 50% of our business that goes through distribution. It represents the distributors sell through to <unk> customers rather than what we are selling in to the distribution channel we do not have.

Yes, Thank you and congratulations on good results in this very uncertain environment.

One question on gross margins.

We continue to be at kind.

Kind of record levels.

I'm wondering kind of what are the had been the drivers of the margin so far and how do we think about those.

Any kind of view in terms of exactly what our customers are doing with inventory reserve was 125000 customers and that's just not data that we have or as possible for us to track.

Those drivers going through into next year. Thank you.

Yes, I think the biggest drivers are going to be factory utilization right. I mean, we have more backlog than we know what to do with at this point in time and so the factories are running harder than they've ever been before and we're using every piece of equipment that we have to produce as much product as we can and so with that.

Yes, when we talk about potential.

Our planning operations team are able to schedule things and batch runs and try to produce as much product as they can so that's a big thing and then I think the other thing that we talked about it's a response to some of the earlier questions was just our product mix and how that's changed over time has continued to enhance the gross margin.

Thank you. Thank you very much appreciate it.

Our next question comes from William Stein of tourists Securities.

Great. Thanks for taking my questions first a little bit of an off the run question and then I will have a follow up.

Alright, Thank you rajeev.

Opex I think you highlighted that it's below your target range as revenue continues to grow and you are not spending as much.

Next we'll hear from Vijay Rakesh of Mizuho.

Thanks Joelle.

Yeah, Hi, guys just a quick question here.

You would normally target over what timeframe should we anticipate.

Look at.

You talked about your own inventory in the channel inventory I was just wondering if you could give some color on what the OEM inventories look like because I think you're starting to see some of the Oems next Bill Anderson and BMW. This morning talked about.

Your opex approaching your target percentage of revenue.

It'll be over many quarters.

You can see in our guidance, which is not happening in the December quarter.

What are you somewhat cautious about the slowing down of sale.

Deals with macro in place et cetera, and then at a follow up.

<unk> environment has been difficult.

Perhaps we will do better as we go into 2023.

Okay.

So Oems don't tell us what inventory they carry right now what we can gauge how are they <unk>.

So it'll be slow.

Eric do you want to say it.

It somewhat depends on what the revenue curve looks like out in time, obviously, we're guiding for nice growth again in December connections made comments about March being a growth quarter for us. So it's going to take us some time to catch up well.

<unk> with us on how they see business.

How they're how many escalation issues are we still working.

We don't see.

An abatement in terms of what they are trying to do and.

Okay.

Thank you for that and then I would want to linger on the same topic that so many other people have hit on but I wanted to ask you sort of a different way.

Oems also have not only.

No requirement to sell to their demand.

Understand the PSP is very high quality backlog youre not seeing many cancellation requests even if you took all the cancels you would still have this good guidance and the comments on March.

We're also trying to replenish there.

Their dealers and what the dealers inventory needs to be Theyre trying to replenish what the rental car inventory needs to be out there. So demand is still running strong.

Yes.

What it doesn't so much addresses what might happen in a couple of quarters, if more customers either doing PSP or otherwise come in and request a cancel or push out.

We don't see for our products and inventory issue that they are bringing to us to go solve if anything we're working more shortages and constraints sport with them.

The question really is is that this is one thing that has changed.

Got it.

Maybe not the model, but in the way the company operates Steve in fact, you just talk a lot about how you'd never.

Last quick question on the pricing side, I know you talked about and many different products, but obviously a lot of the microcontroller for a pretty long life products.

Use distribution as a mechanism to let's say stuff, let's call stuffing the channel for a moment.

Wondering if you take a step back and looked at 2021 'twenty two.

For some of the long life.

When you have to make a decision as to whether you force a customer to move up to date.

Product that you guys have how has pricing changed tended over the last two years.

So pricing over the history of Microchip is a strategic exercise.

A sole sourced.

A product that is proprietary from us.

The only time when we have made a pricing adjustment that's been broad based is over the last year to year and a half when we had cost increases.

With a view towards covering the cost increases.

That we were subject to in the way we passed on margin up.

For that so outside of that pricing is not something we try to take advantage of when there are constraints nor is pricing something that we give up on when there is extra supply got.

Got it thank you.

Youre welcome.

And it appears there are no further questions at this time I'll turn the call back over to our presenters for any additional or closing comments.

Agreement, where hedge they win entails we lose Mike you got to make sure that there are commitments. This is why if you make sure that there is an understanding.

Great I want to thank everybody for hanging in there and despite some of the technical challenges. We appreciate the questions and we look forward to seeing many of you in talking to many of you.

That there is a responsibility with placing that backlog stable.

And the phone calls and conferences, we have coming up so thank you.

Moderate the backlog they place on us.

If they have no responsibility.

That does conclude today's call. Thank you all for your participation you may now disconnect.

And there is no reason why they wouldn't just give us much much higher backlog and where they are at so we think again going back to the quality of the backlog. It comes because it has responsibility that goes with it.

Outside of that situation, our situation with a customer.

And I don't want something else different from what.

What we had agreed to so I don't see that as big of an issue and by the way if we didn't have PSP.

The situation that we'd have is far far higher backlog and far bigger of a fall from that high backlog, we have yes.

Yes, I think one other thing I'd like to point out well because you're talking several quarters out in time beyond March ranked a customer that's on PSP and has 12 months of backlog with US every week or every month that goes by they make a decision in terms of what the next backlog that theyre going to put us out in time, they could put zero backlog record with 50%. They can put a 120.

<unk> of what it was the month before and so.

These fears of rising interest rates in recession, you know this is not new when we woke up today and this has been happening now for several months and I think customers gradually adjust that over time, but as <unk> said you know PSP is still a large percentage of our backlog, we still have tons of unsupported and it's been a program that I believe has worked very well not only for the <unk>.

Customer but for microchip.

I think the the gist of your question is that.

Lots and lots of PSP customers wanted to cancel and we're just not letting them do it and that is not the case.

There is.

Negligible amount them in at any point in time.

Have customers.

Move small things around.

The PSP backlog.

Is not going to see that behavior that you are talking about were not inundated with PSP customers wanting to cancel the backlog and we're not canceling it and thats not happening next quarter, its not happening quarter thereafter.

I think that that's the issue that's your assumption that it would happen.

Don't think we will fit that because the PSP backlog is very high quality and customer can easily start toward adjusted.

By taking the foot off the gas pedal.

You know every month when they place the order 12 months out.

Let me give me one more piece of data.

We are making a big deal of cancellations. If you aggregate all the cancellation request we have it.

<unk>.

Four 5% of our total backlog.

And that includes PSB non PSP and it will be dominated by non PSP.

It has a negligible part of the business guys.

Thank you.

Welcome.

Next we'll hear from Chris Danley of Citigroup.

Thanks, guys.

So I think someone asked you earlier about.

Lead times have they gone up or gone down or how much can you said you really could could define that you also said you still have some I guess quite a bit of business, that's constrained or products that are constrained is there any like I guess metrics you could give us that would talk about your percentage of products or percentage of business that is concern.

Rain or any shortage now versus three months ago, and what you expect to be three months from now just so we can track the progress of that.

Not the best metric probably is what is the unsupportive backlog exiting quarters and I'm going to tell you it's high.

It's probably not healthy to be there and we will work to improve that and it is to improve the customer service and the customer experience with it but we have still some.

Potential constraints that we're working through and it will take us many many quarters to work through them.

<unk> said that earlier, but our unsupported backlog, leaving September quarter was another all time high.

So during the quarter.

Customer wanted more parts.

To be shipped in the September quarter that we couldnt ship and the unsupported grew over the June quarter to another record.

So that doesn't mean in any way that.

Customers are feeling that lead times are coming in.

We are broadly constrained almost everywhere.

I mean, we've got daily escalation calls from multiple customers every day.

Yes, that's what I was.

<unk> reached the peak the unsupported hasnt, even reach the Pekin started dropping it is still growing.

Yes, that's what I was getting at is that that's what it felt like and then for my follow up.

So Steve you've been through even more cycles than I have.

This continues where.

The competitors.

Keep taking numbers down in the precession gets worse and worse and your business gets better and better or.

It gets through it.

Do you think it's possible for you guys to make it through.

A global recession, and a downturn unscathed, they're relatively unscathed.

Did you see anything during this quarter other than.

So that supported backlog that made you feel any better or any worse about microchips ability to do that.

Well you have to define what unskilled demand.

As Ganesh talked about it in his remarks that.

We're not seeing anything today.

But we see the macro weakening and with all the other companies are saying.

And what we're seeing is if macro ever catches up to us.

Then we have stepped in steps in place to create a soft landing.

And when you say Unscarred you know, we're not saying, we're going to keep growing 22% per year forever like like we have been.

But we will soft land the plane because of all the attributes management over.

Yep. Thanks.

Yes.

Okay.

And then next we'll hear from.

Toshi Hari of Goldman Sachs.

Okay.

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

I was hoping you can talk a little bit about what youre seeing from a pricing perspective.

Cross, our microcontroller and analog businesses.

Your September quarter revenue was up 25% plus year over year.

How much of that was pricing.

And then Steve when you were at your at our conference a month and a half ago, you had hinted that pricing should be a tailwind in the early part of 'twenty three as well given some of the conversations that you're having with your foundry suppliers I'm curious if anything has changed since then and I have a quick follow up.

So pricing is stable there are no price adjustments that are.

He may there are affecting where the.

Quarterly results are we did make an adjustment at the beginning of this year or the early part of this year.

And that's where I shop.

I don't think we have any price adjustment plans into 2023.

That are in the offing in so.

<unk> is really not a factor today.

In terms of what we're executing where we're going in terms of our new designs and where we are in terms of market.

Got it.

Then as my follow up.

I guess this is a hypothetical but given the visibility you have and given everything that you've said so far on the call.

If you're a business in calendar 'twenty three is.

Hey.

5% or flat or somewhere in that range and most of your peers are down 10% what would it be fair to say that in a recovery phase in 2020 for you under grow your peers are you, perhaps don't participate in that recovery or.

Where are you guys gaining permanent structural share.

Across the analog and MCU businesses.

Thank you.

Our next question comes from Harlan sur of Jpmorgan.

Okay.

Good afternoon. Thanks for taking my question on channel or just the inventories still 40% below pre pandemic levels.

Your own inventories are kind of at the low end of your target range. So obviously clear signs that demand remains strong given given your capacity expansion plan is looking at your demand profile in backlog do you guys anticipate increasing inventories with your <unk> customers and moving towards the midpoint of your range on your own inventories.

Over the next call it two to three quarters.

A distribution you know distribution inventory stayed flat quarter on quarter at 19 days and we think at some point in time, there will be some level of restocking in the distribution channel.

That's going to vary by distributor.

Really we are now within our target range of inventory days that we provided to the street back.

Back in our November analyst day, So we're managing it appropriately in a challenged supply environment I would call it.

Yes, thanks for that and I know, it's always somewhat complex. This is to end market demand trends because you've got such a broad portfolio of products, you're serving many different end markets. However, there is one segment where products are more easily track because they are very specific to that one market. That's you're right. It's hard kind of higher oil products that you.

That's your aerospace and defense business I believe it's about 13% 14% of your revenues much higher mix versus your peers. It seems like activity around commercial space programs, New satellite constellations defense spending all look strong for not just next year, but the next several years you guys.

Our number one in space strong turn defense like help us understand the visibility and A&D grilled trends and sustainability of this segment into a potentially weaker macro economic backdrop next year.

Sure So aerospace and defense I think it's about 9% to 10% of our revenue.

It is performing extremely well for many reasons and you Miss in commercial aviation commercial aviation is going through a strong resurgence and so all three elements space.

Defense and commercial aviation are all doing strongly in the current environment and they are generally less influenced by shorter term macroeconomic conditions.

Thank you.

Next we'll hear from Matt Ramsay of Cowen.

Thank you very much good afternoon guys.

Thanks, Toshi I took my earlier question on AFB assumption, So I'll just ask one.

It's around the <unk>.

Consideration of investing in the 300 millimeter fab.

There's two parts of the question.

Ganesh as you consider that what would be.

I don't know ballpark off the top of your head focus of which process nodes.

Mix in a facility like that as you consider it.

And then second is this.

Something that you guys felt you needed to do but.

It didn't really feel like you could fund all of it until the chips that got past that now that's a reaction to potential funding from governments or was this a decision that you were probably going to need to make anyway. Thank you.

So firstly on in our process technologies those are still being worked but largely we use our 300 millimeter.

Foundries today on process technologies on our 90 nanometer and smaller in size and the workhorse technologies for trailing edge tend to be at 40, 65, 90 in that channel neighborhood, and but those that we wouldn't limit ourselves just to that again I don't want you to think of this is because of the 2025 year look.

And what we would do with the 300 millimeter fab.

The reasoning for it is.

We have as our business has grown.

A portion of our business that we do with 300 millimeter has also grown.

And the investment in the trailing edge part of putting on a millimeter technologies has not been there with many of our foundries at a level that we have wanted.

And but I doubt it.

It takes a certain scale to get there.

And.

If you had a full boat.

Fab that you needed to build.

The way in which the breakeven point and the absorption point has come about or different from when there is a.

Fabric can be built with government funding and the investment tax credits from whatever local thanks, commensal clearly that has changed the equation as to when does it make sense financially.

But that's not the only reason why we think trailing edge 300 millimeter technology is going to have.

Strange for a long time to come and a portion of that being within microchip would allow us to better serve those markets.

Thanks Ganesh.

Thank you.

Our next question comes from Joe Moore of Morgan Stanley .

Great. Thank you.

If you look at your operating margins now, you're obviously much higher than you've been in prior cycles.

It seems like a lot of that is is secular but like do you. When you when you contemplate the soft landing scenario do you expect your margins to sort of see.

The type of declining has seen historically could we go back to prior trough just.

I know some of your competitors have talked about.

Target margin on kind of a trough revenue level like how should we think about.

Primarily gross margin leverage in it.

A weaker environment.

Well I'll give you a quick answer and then Eric might want to elaborate more on it again the best way to look at it is how have we performed over the last 15 years through the cycles.

And you will see that on those metrics of growth in operating margin from.

From peak to trough across the cycle.

200 basis points of the decline in that range, plus or minus 200 300 basis points.

And that's the way in which we manage the business that's built into our DNA is built into our systems and processes is built into the soft landing that I described a quarter ago, Eric do you want to add more to it.

Yes, I mean, obviously we've continued to.

Integrate acquisitions, we've got a different product mix than we've had historically.

We feel really comfortable with the margin targets that we've set out for the street, which we are above today as you mentioned on the operating margin side.

The macro catches up with us at some point in time so.

And we want to build inventory on our own factories, we think distributors will rebuild inventory and so we.

We don't want to give a specific number but again the range that we provided on a long term basis, we think that we can operate within that and obviously, we're operating above it today and the mix of the business. We have has and markets that are far more durable in terms of how they perform and what gross margin these products and solutions we bring.

Or are able to command.

And it's not just silicon and silicon and software systems and services. These are very very sticky.

Implications in markets.

That are not prone to perhaps what a pure consumer or mobile phone type of market.

You may have.

Great. Thank you very much.

Okay.

Floris van <unk> of Stifel.

Yes, Thank you and congrats on all the record metrics.

I have a sort of a different angle on the pricing question.

It's kind of more related to Asps. So if you look at the 25, 7% growth year over year that you're reporting this quarter.

How much of that is coming from higher asps, meaning selling more value in the form of your total system type solutions.

There's not an easy way to break that up.

Clearly.

With constrained capacity, we will direct them and have been directing it to the highest value products that we're producing we're.

We're shipping more units. So there's a there's a lot of the growth that's coming from capacity. In addition that we have made.

But I certainly don't have a good way to parse out.

What comes from mix and pricing versus what comes from units.

Don.

That's fair and then I had a question on the inventory, whether it's internal or channel. So obviously the channel it sounds like you're going to sort of keep that a little bit constrained going forward.

Is there maybe a secular trend here, where basically you know may be the right number is actually around 20 days of channel inventory and then your own inventories could maybe even exceed the high end of the range, which is 150.

No we don't dictate what channel inventory needs to be the channel decides what inventory do they need in some cases, we may be constrained and shipping it to them and they may not be able to get what they want to but channel have history of what does it take to support the mix of product the customer.

<unk> that are there and we are at the low end of what they have historically done and whether they are going to be at 19, or 20 or 25 or 30 is really a decision they're going to make we don't tell them what to do in terms of inventory now ultimately they need to stock the level of inventory in appropriate to support their customers and you know that.

They'll need to find the right level of that as the supply becomes less constrained than it is today. You know we have we have a lot of unsupported backlog to our distributors today that we need to catch up on.

The last okay. Thank you.

<unk>.

It doesn't really matter, where distributor one and we just don't have the product to start them.

So so that has not been a choice and we don't think there is a choice for you know well into 2023, but someday when we have parts available to start distribution at that point in time, it will matter what they want to do right now it doesn't matter.

Yes, I guess my point was more maybe you have a better read on the fall through that they do but that's all that's fair. Thank you.

Next we'll hear from Rajiv Gill of Needham <unk> company.

Yes, Thank you and congratulations on good results in this very uncertain environment.

One question on gross margins.

We continue to be kind of record levels.

I'm wondering kind of what are the had been the drivers of the margin so far and how do we think about those.

Those drivers going through into next year. Thank you.

Yes, I think the biggest drivers are going to be factory utilization right. I mean, we we have more backlog than we know what to do with at this point in time and so the factories are running harder than they've ever been before we're using every piece of equipment that we have to produce as much product as we can and so with that.

Our planning operations team are able to schedule things and batch runs and try to produce as much product as they can so that's a big thing and then I think the other thing that we talked about on the response to some of the earlier questions is just our product mix and how that's changed over time has continued to enhance the gross margin.

Great. Thank you Roger.

Next we'll hear from Vijay Rakesh of Mizuho.

Mizuho.

Yeah, Hi, guys. Just a quick question here as you look at you've.

Talk about your own inventory in the channel inventories just wondering if you'd give us some color on what the OEM inventories look like because I think you're starting to see sound Oem's next Bill Anderson and BMW. This morning talk about.

What are you somewhat caution about a slowing down of sales with macro and rates et cetera, and vanilla falloff.

So OEM is don't tell us what inventory they carry right now what we can gauge how are they.

Interacting with us on how they see business how they're how.

Many escalation issue is are we still working.

We don't see.

An abatement in terms of what they're trying to do and.

Oems also have not only.

In requirement to sell to their demand.

They're also trying to replenish there.

Their dealers and what the dealer inventory needs to be Theyre trying to replenish what the rental car inventory needs to be out there. So demand is still running strong.

And we don't see for our products and inventory issue that they're bringing to us not to go solve if anything we're working more shortages and constraints for lithium.

Got it.

One last quick question on the pricing side, I know you talked about and many different products, but obviously a lot of the microcontrollers are pretty long life product step. So just wondering if you take a step back and looked at 2021 or 'twenty two.

For some of the long life products that you guys have how has the pricing changed tended over the last two years.

So pricing over the history of Microchip.

Our strategic exercise.

For a sole sourced.

A product that is proprietary from us.

The only time when we have made a pricing adjustment that's been broad based is over the last year to year and a half when we had cost increases.

With a view towards covering the cost increases.

That we were subject to in the way we passed on margin up.

For that so outside of that pricing is not something we've tried to take advantage of when there are constraints nor is pricing something that we give up on when there is extra supply.

Got it thank you.

Youre welcome.

And it appears there are no further questions at this time I will turn the call back over to our presenters for any additional or closing comments.

Great I want to thank everybody for hanging in there and despite some of the technical challenges we appreciate it.

The questions and we look forward to seeing many of you in talking to many of you.

And the phone calls and conferences, we have coming up so thank you.

That does conclude today's call. Thank you all for your participation you may now disconnect.

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Yes.

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Q2 2023 Microchip Technology Inc Earnings Call

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