Q3 2023 Microchip Technology Inc Earnings Call

February 2, 2023

[music].

Yeah.

Yes.

Good day, everyone and welcome to Microsoft's third quarter fiscal 2020 financial results Conference call.

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

At this time I would like to turn the call the call over to Mr. Eric <unk>. Our CFO . Please go ahead.

Just to caution you that such statements are predictions and that actual events or results may differ materially we refer.

For you to our press release was up today as well as our recent filings with the SEC that identify important risk factors that may impact <unk> business and results of operations.

And the tenants with me today are going to ask Marty Microchips, President and CEO , Steve Saggy, Microchips executive chair and sides of Dowdy Microchips head of Investor Relations.

I will comment on our third quarter financial performance and will then provide commentary on our results and discuss the current business environment as well as our guidance and Steve will provide an update on our cash return strategy.

He 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 have also posted a summary of our outstanding debt and our leverage metrics on our website.

I will now go through some of our operating results, including net sales gross margin operating expenses.

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

Net sales in the December quarter were $2 106, 9 billion, which was up four 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 68, 1% operating expenses were 26% and operating income was a record 47, 5%.

non-GAAP net income was a record $863 7 million non-GAAP earnings per diluted share was a record $1 56 and at the high end of our guidance range.

On a GAAP basis in the December quarter gross margins were a record at 67, 8% total operating expenses were $659 2 million and included acquisition intangible amortization of $167 4 million special charges of $6 5 million and <unk> 3 million of acquisition related and other cost.

<unk> and share based compensation of $37 1 million.

GAAP net income was a record $583 million, resulting in a record $1 four in earnings per diluted share.

As compared to a year ago quarter, our December 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.

Yeah.

Our non-GAAP cash tax rate was 11, 9% in the December quarter, we now expect our non-GAAP cash tax rate for fiscal 'twenty three to be about 11% exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

A reminder of what we communicated over the past couple of quarters or 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.

<unk>.

We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. If this were to happen. We would anticipate about a 300 basis points favorable adjustment to microchips non-GAAP tax rate in future periods.

Our inventory balance at December 31, 2022 was $1 165 billion. We had 152 days of inventory at the end of the December quarter, which was up 13 days from the prior quarter's level.

We have increased our raw materials inventory to help protect our internal manufacturing supply lines. We are carrying higher work in progress to help maximize the utilization of constrained equipment as well as to position ourselves to take advantage of new equipment installations, which should 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 take actions to help ensure that our supply lines can feed growth beyond what we expect in the March 2023, and June 2023 quarters, and our reported days of inventory is a backward looking indicator as.

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.

Inventory at our distributors in the December quarter was at 22 days, which was up three days from the prior quarter's level.

Our cash flow from operating activities was a record 1.2 dollars 78 billion in the December quarter included in our cash flow from operating activities was $385 million of long term supply assurance receipts.

We're going to adjust these items out of our free cash flow to determine the adjusted free cash flow that we will return to shareholders. As these payments will be refundable overtime as purchase commitments are fulfilled.

Our adjusted free cash flow was $751 6 million and 34, 6% of net sales in the December quarter.

As of December 31, our consolidated cash and total investment position was $288 9 million, we paid down $719 1 million of total debt in the December quarter, and our net debt was reduced by $701 2 million.

Over the last 18 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down almost $6 $2 billion of the debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt.

Our adjusted EBITDA in the December quarter was a record at 1.1 dollars 6 billion and 51% of net sales.

Our trailing 12 month adjusted EBITDA was also a record at $4 or five 1 billion.

Our net debt to adjusted EBITDA was 156 at December 31, 2022 down from $1 84 at September 32022, and down from $2 $5 eight at December 31 2021.

Capital expenditures were $141 3 million in the December quarter, our expectation for capital expenditures for fiscal year 2023 is between 525 and $545 million as we continue to take actions to support the growth of our business and ramp.

Our manufacturing operations accordingly.

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 improvements to our business and give us increased control over our production during periods of industry wide constraints.

Depreciation expense in the December quarter was $55 3 million.

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

Thank you Eric and good afternoon, everyone.

December quarter results were well above the midpoint of our revenue guidance marked by our disciplined execution as well as our resilient end markets.

Net sales grew four 6% sequentially and 23, 4% on a year over year basis to achieve another all time record of $2 $1 7 billion.

The December quarter also marks our ninth consecutive quarter of growth.

non-GAAP gross margins came in above the high end of our guidance at a record 68, 1% up 38 basis points from the September quarter, and up 202 basis points from the year ago quarter.

non-GAAP operating margin also came in above the high end of our guidance at a record 47, 5%.

Up 62 basis points from the September quarter, and up 283 basis points from the year ago quarter.

Due to a rapid increase in net sales over the last two years operating expenses at 26, 5% of our 185 basis points below the low end of our long term model range of 22, 5% to 23, 5%.

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

Our consolidated non-GAAP diluted earnings per share was at the high end of our guidance at a record $1 56 per share.

30% from the year ago quarter.

Adjusted EBITDA at 51% of net sales and adjusted free cash flow at 34, 6% of net sales for both very strong in the December quarter.

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

As Eric mentioned, we have excluded $385 million of long term supply assurance payments made by customers from our adjusted free cash flow calculation. Since these payments are refundable when customers fulfill their purchase commitments.

Net debt declined by $701 2 million driving our net leverage ratio down to 156 X exiting the December quarter.

During the December quarter, we returned $409 $8 million to shareholders in dividends and share repurchases, representing 60% of the prior quarter as free cash flow.

We expect to get below one <unk> net leverage by the end of the March quarter and.

And as Steve will share with you later for Microchip Board has decided to increase the rate at <unk> capital will be returned to shareholders starting in the June quarter.

My heartfelt gratitude to all our stakeholders, who enabled us to achieve these outstanding results and especially to the worldwide Microchip team, whose tireless efforts and strong sense of ownership are what enable us to navigate effectively in the midst of turbulent times.

Taking a look at our net sales from a product line perspective, our microcontroller net sales were sequentially up three 5% in the December quarter and set another all time record.

On a year over year basis, our December quarter microcontroller net sales were up 25, 6%.

Mitra controllers represented 56, 3% of our net sales in the December quarter.

Our analog net sales were sequentially up five 9% in the December quarter, and also set an all time record.

On a year over year basis, our December quarter analog net sales were up 21, 2%.

Analog represented 28% of our net sales in the December quarter.

In the December quarter, our FPGA net sales also achieved a new record.

While our overall business remains strong in the December quarter.

The consumer appliance end market was weak as was our overall business in China.

Our China business was initially impacted by Covid Lockdowns and then subsequently impacted by the rapid transmission of Covid when Lockdowns are lifted.

Both actions adversely impacted our customers' operations during the December quarter, resulting in inventory at many customers and distributors being higher than normal.

In response to the weaker business environment in China.

And a small but increasing number of other customers, who have inventory and requested push outs.

We took action in the December quarter to delay or redirect some shipments.

And plan to do more of the same in the March quarter.

This is designed to reduce customer and channel inventory overbuild.

But will also increase the inventory on our balance sheet in the near term.

In the medium term, we expect this will give us a better chance to achieve a soft landing and.

And position us well to respond to a stronger demand growth as the macro environment improves.

As a result of the uncertain macro environment and.

And the multiple quarters worth of backlog on our books, most of which is noncancelable.

Our bookings have slowed down as we expected.

Given the circumstances, we view the bookings slowdown is a positive which will serve to preserve the quality of new backlog that gets placed.

Or unsupported backlog, which represents backlog customers want it shipped to them in the December quarter, but which we could not deliver in the December quarter remained well in excess of the actual net sales we achieved.

Unsupported backlog did decline slightly for the first time in nine quarters.

And we are continuing to work hard to further reduce our unsupported backlog as well as our lead times to more manageable levels.

While we have seen an increase in request to push out or cancel backlog. These requests remain a small fraction of the very large backlog we have over multiple quarters.

And hence they have not had a material effect on our business.

Despite supply gradually improving.

We expect to have supply constraints through much of 2023.

However in order to achieve a more healthy and sustainable business environment. We are driving to bring average lead times down to 26 weeks or less by the time, we get to the second half of 2023.

And we will be publishing a customer letter to this effect shortly.

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

First on the demand side, the industrial automotive aerospace and defense data Center and communications infrastructure end markets.

Each make up approximately 86% of our net sales remained solid.

Consumer end market, which is about 14% of our net sales is experiencing some weakness but.

But it is dominated by home appliances, which are comparatively more resilient.

There are some signs that the data center end market could see some headwinds in 2023.

Although our business remains strong based on the market share gains we have had.

Hence our overall demand remains quite durable because of the end market mix, we have consciously gravitated towards over the years.

Second on the supply side, the 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 less opportunity to overshot to consumption.

And last but not least.

Laser focus on organic growth.

Total system solutions and higher growth Megatrends for multiple years is giving us increased design win momentum further share gains and the result in a revenue tailwind.

If you review Microsoft's peak to trough performance through the business cycles over the last 15 plus years.

You will observe a robust and consistent cash generation gross margin and operating margin results the.

The investor presentation posted on our IR website as details of our performance through the business cycle.

We remain cautiously optimistic about navigating to a soft landing for our business and expect our cash generation gross margin and operating margin to once again demonstrate consistency and resiliency through the cycle.

Last quarter, we mentioned that microchip was in the early stages of considering building a 300 millimeter U S based fab for specialized trailing edge technologies.

After a detailed analysis, we have concluded not to move forward with this project.

And our business.

Objectives would likely be better achieved through our relationships with our foundry suppliers with lower execution risk and a better return on invested capital.

<unk> is already making a positive impact on our business through the investment tax credit which started on January one.

And with impending capacity expansion grants that we will be seeking for several of our U S semiconductor factories.

We believe the chipset is good for the semiconductor industry and for America as it enables critical investments, which will help even the global playing field, while being strategically important for American economic and National security.

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

Backlog for the March quarter is strong.

And we have more capacity improvements coming into effect. However.

However, we are also taking active steps to help customers with inventory positions to selectively push out some of their backlog.

Taking all the factors we have discussed on the call today into consideration.

We expect our net sales for the March quarter to be up between 1% and 4% sequentially.

Further we expect sequential net sales growth again in the June quarter.

At the midpoint of our net sales guidance our year over year growth for the March quarter would be a strong 26%.

We expect our non-GAAP gross margin to be between 68, 1% and 68, 3% of sales.

We expect non-GAAP operating expenses to be between 26% and 28% of sales.

We expect non-GAAP operating profit to be between 47, 3% and 47, 7% of sales.

And we expect our non-GAAP diluted earnings per share to be between $1 61 per share $1 63 per share.

At the midpoint of our earnings per share guidance, our year over year growth for the March quarter would be a strong 20%.

Despite a much higher tax rate than the year ago quarter.

Finally, as you can see from our December quarter results, and our March quarter guidance or Microsoft three <unk> strategy, which we launched 15 months ago is firing on all cylinders as 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.

Our board of directors and leadership team operate just as long term owners of the business would thoughtfully, making the key investments in people technology capacity culture, and sustainability required to thrive in the long term.

While being prudent pragmatic a nimble about whatever short term adjustments may be required we.

We are confident we will effectively navigate through whatever macro business challenges.

In 2023.

Let me now pass the baton to Steve to talk 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 continue to be very proud of all employees of microchip that have delivered another exceptional quarter.

While making new records in many respects.

Emily with record net sales.

As I could non-GAAP gross margin percentage.

Record non-GAAP operating margin percentage record non-GAAP EPS.

And record adjusted EBITDA and all of that in a continuing challenging supply environment.

The board of Directors announced an increase in the dividend of nine 1% from last quarter to $35 eight per share.

This is an increase of 41, 5% from the year ago quarter.

During the last quarter, we purchased $229 $5 million of our stock.

Stock in the open market.

We also paid out $183 million in dividends.

The total cash return was $409 8 million.

This amount was 60% of our actual free cash flow of $682 $9 million.

During the September 2022 quarter.

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

Drove down our net leverage at the end of December 2022 quarter.

2156 from 180 <unk> at the end of September .

Ever since we achieved an investment grade rating for our debt in November 2021.

And pivoted to increasing capital returned to shareholders. We have returned $1 eight to $6 7 billion.

To shareholders through December 31, 2022 by a combination of dividends and share buybacks.

In the current March quarter, we will use the word adjusted free cash flow from the December quarter to target the amount of cash returned to shareholders.

The adjusted free cash flow excludes <unk>.

385.

Millions of dollars that we collected from our customers for long term supply assurance payments.

These payments are refundable when customer fulfill their purchase commitments.

Adjusted free cash flow for the December quarter.

It was $751 6 million.

We plan to return 62, 5%.

$469 $8 million of that amount to our shareholders.

Dividend expected to be approximately $196 million.

And the stock buyback expected to be approximately $273.8 million.

We also want to provide guidance for our planned cash returned to shareholders.

This quarter.

We expect our net debt leverage at the end of March quarter to be less than one five.

Therefore.

Our board of directors decided that beginning with the June quarter, we will accelerate the cash returned to shareholders.

We laid out a strategy for our cash return to shareholders.

At an analyst and Investor day in November 2021.

We begin with returning 50% of the free cash flow of the prior quarter and increasing it by two five percentage points every quarter.

With these increases will be returning 62, 5% of last quarter's adjusted free cash flow to investors this quarter.

Beginning in June quarter, we expect to double the rate at which we are increasing the percentage of free cash flow return to shareholders.

In other words.

In June quarter, we expect to return 67, 5% sort of adjusted free cash flow.

From March quarter.

Then in September quarter, we expect to return 72, 5%.

Adjusted free cash flow from the June quarter.

And so on.

Five percentage point increase every quarter.

At this rate, we would approach 100% return preferred adjusted free cash flow in about eight quarters.

We realize that we are still getting a debt burden of $6 $62 billion.

In a rising interest rate environment as.

As some of our debt matures, we will likely be renewing it.

Higher interest rate.

Then we are currently paying on such debt.

Our strategy of accelerating our cash return to shareholders over several quarters will help us pay down some additional debt and lower debt service costs.

With that operator will you please poll for questions.

Yes.

Thank you.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate that Youre line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

All participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. We also advised that due to the interest of time.

May limit yourself to one question and then re poll for any follow up questions. One moment. Please while we poll for questions.

Our first question comes from the line of Toshi Hari with Goldman Sachs. Please proceed.

Hi, good afternoon, and thank you so much for taking the question.

I had a question on the pricing environment in <unk>.

Calendar 'twenty two you grew your business about 25%.

What percentage of that was pricing versus volume and as you look ahead to calendar 'twenty three.

Considering the demand backdrop, considering potential price hikes from some of your foundry partners. How do you think about pricing and how do you see pricing play out and any implications for your margin profile in calendar 'twenty three thank you.

So the price increases in 2022.

Were at various stages.

And different based on customer what contractual agreements, we had with them our philosophy as the price increases are there to cover the cost increases that we saw in 2022 and.

So we don't have a nice easy breakout of what was cost driven price to have an increase versus.

Product shipment increases.

That is a component of both obviously.

The intensity of cost increases, we're seeing in 2023 or less than what they award in 2022, and we have not really made any judgment yet on price increases for this calendar year, our intent would be that at some point, we'll look at it and again have the same philosophy that we want to make sure that the cost increases are covered in <unk>.

Any price increases we make pricing for us is a strategic exercise. It is intended to make sure that customers get comfort in being able to design proprietary designs that they are going to run with us for a long time. It is not a tactical exercise to be able to maximize either the price or the revenue of the profits that come from it.

Thank you.

Our next question comes from the line of Vivek Arya with Bank of America. Please proceed.

Thanks for taking my question.

I'm curious do you think.

The share gains that youre seeing.

Compare your sequential or year on year growth in calendar Q1 versus your peers.

Is that a cyclical thing is is that a structural thing because many of your peers also have lower consumer exposure they have high industrial automotive.

Exposure and many of them have guided sales down yet you're guiding it up in March and suggesting that they could grow again in June . So I'm curious how much of this is just a cyclical issue where you just had a difference in when supply was available what does it really below you are gaining share or there is something more structural and you can maintain this kind of.

Market share gain advantage over time, thank you.

Yes, as I mentioned in the three categories of what we believe is differentiating our results. The part of it which is structural is what we have done for multiple years on how do we grow organically. How does the total system solutions approach, which is a huge amount of work across the company come in and then it takes time for it to pay off that's been had.

Turning from multiple years, how do we focus on higher growth.

Opportunities from a market megatrend standpoint, those are all we believe unique.

Unique growth drivers for Microchip and are in fact structural growth that is being built into what our long term growth will be.

Thank you.

Thanks Vivek.

Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Please proceed.

Hey, guys. Thanks for taking my question I realize you got out of the ditch.

Providing some estimation as to how many quarters in a row, you may be able to grow sequentially the future, but since you did comment on the June quarter I was hoping maybe you can share with us the baggage.

<unk> increase you might see in June and perhaps.

This sequential growth continue beyond the June quarter.

Firstly, we're not trying to guide anything beyond the June quarter and for June .

Likely data in prior quarters, So, we're giving you a directional expectation.

Expectations that we have but not an absolute expectation that we have and we will get to that and when we get to them.

Conference call.

For now we feel confident we can grow in the June quarter on top of the guidance, we're providing in the March quarter.

Thank you. Thank you Dinesh thanks, Gary.

Our next question comes from the line of Joshua Buchalter with Cowen and company. Please proceed.

Hey, guys. Thanks for taking my question. This is Josh buchalter on behalf of Matt Ramsey I.

I wanted to ask about the capital return program I think some expected and more binary event. When you hit the leverage target that you are taking a more gradual approach you called out the rate environment can you walk us through sort of why the decision to more gradually take it out.

And then also is there I guess, an intermediate target leverage where you would stop doing debt repayments altogether and just do a 100%.

Repurchases and dividends. Thank you.

So.

Board has decided is that given 662 billion still owing on the debt.

Some of that debt I think at least $2 billion of debt that have an interest rate of.

Below 100 Bips.

And when that comes up for maturity.

We will be renewing it if we were renewing at today it will be over 5%.

So in that kind of the current environment and interest rates are still rising.

The board decided to not go to 100% cash return right away today.

They decided to do that over eight quarters with double the rate at which we are increasing the cash return we would increasingly like 60 going to 62 and a half going to 65.

And what we have said is now we will go up 500 bps every quarter. So current quarter 62, 5% next quarter was 67, 5% then 70 to 577 five.

That rate I think in seven quarters, or so it will be 97, and a half and then go to 100.

I think thats it.

More reasonable approach.

<unk>.

Pay down some more debt along in the next headquarters.

Hey, Joshua if I would add to it I think.

Circumstances have changed from 2021 when interest rates were very low money.

Freely available to where we are and we have to adjust as the circumstances change.

And Thats, what the board and its deliberation had to think about and decided in terms of how we're going to go forward and we're absolutely committed to what we said.

But we're going at a glide slope that is different today.

Given what we know is the circumstances today.

Thanks for the color and congrats on the results.

Okay.

Our next question comes from the line of Rajiv Gill with Needham <unk> Company. Please proceed.

Yes, thank you and congrats as well.

I wanted to get a view.

On.

It's trailing edge capacity.

Do you see investments in trailing edge capacity.

Going forward.

Future projects on 300 millimeter.

Chatter that other major companies are.

Increasing capex significantly so I just wanted to get a sense.

The view of the industry.

<unk> edge capacity, that's obviously, because the issue with supply constraints and how do you think industry, suggesting.

To that dynamic.

From our perspective.

We did that analysis.

And in the process of doing the analysis, we have to validate which assumptions we were making that were reasonable assumptions, which assumptions perhaps are changing over the next three to five years of time.

And we don't know about industry investments necessarily but we do know that our partners and us in the.

Communication that we have had have a high confidence pop to being able to satisfy the 300 millimeter trailing edge capacity requirement is that our business requires and.

With our partners and US we have concluded that our business is best met with the best overall results in partnership with them.

Thank you good morning.

With respect to lead times as the lead times come.

Come in.

You'd mentioned that Youre, starting to see some order push outs. Your goal is the time you get to 26 weeks.

By the second half of the calendar year.

Just wondering if you could elaborate a little bit further on on <unk>.

Customers in their backlog.

As they start to reduce long lead time orders as more supply comes online do you anticipate more on own volatility or how do you manage that.

Long lead times are never a good thing for either the customer or for us.

More uncertainty the farther out in time, Hugo so providing shorter lead times and working towards getting it is in the best interest of our customer and what they need to plan for and for us and what we need to plan for.

And we expect that.

Bookings and backlog.

We'll reflect that change in lead time out in time, and we're not there today, we're expecting to get there in the second half of the year and it will still take time through much of this year that we have to get through the constraints.

It also has an unknown, which is what happens in the back half of this year on the demand side of the equation.

And if you remember over the last two years the lead times have been driven not because we didnt increase supply.

Because demand increased faster than we could bring out supply every single quarter for about eight quarters.

And so we're working hard to be able to get that.

Supply line improvement to bring lead times into a more manageable situation to bring backlog into a more manageable timeframe.

And then the demand side of the equation may or may not.

In fact, it further as we go into the second half of the year.

Thank you.

Youre welcome.

Our next question comes from the line of Tories Svanberg with Stifel. Please proceed.

Yes. Thank you I had a question on both internal and channel inventory. So it sounds like near term you want to be a little bit more internally.

Kind of manage it.

<unk> managed the channel.

I was just hoping you could give us some some numbers.

Where you intend to target.

What your targets are for channel inventory, but.

For the next couple of quarters, how do you.

How do you view, the internal inventories inventory days going verse.

And in the channel.

So we would expect that our internal inventory is likely to go up from where it is.

It will get to a point, where it will reverse course I don't have a precise time point it will.

The channel inventory is really in the hands of the channel for them to decide at what level of inventory do they want to run consistent with their working capital their customer support requirements and all of that and Eric If you want to add more on that yes. So we specifically guided in our release today for inventory days ending March to be between 105.

700, and 164 days beyond that we really haven't given any color, but we will continue to manage our manufacturing operations and our purchases from our suppliers to be in the right spot to support our customers. Another way to think about the inventory of this as inventory of product.

Very long lifetimes, there is no <unk> risk on them.

It is positioned well to <unk>.

<unk> to customers and their requirements.

If there is a strong up cycle in the second half of the year. It gets us on a running start to be able to go do that so we don't see the inventory levels that we are seeing today in predicting for this quarter has anywhere close to being an issue for us.

Great color. Thank you. Thank.

Thank you.

Our next question comes again from the line of Toshi Hari with Goldman Sachs. Please proceed.

Thank you for the follow up.

And maybe one for Steve just on kind of the philosophy or the approach toward the PSP.

I personally was under the impression that you were pretty adamant about customers taking product.

At least.

That was tied to PSP. It sounds like you are being a lot more flexible with that I guess, what's changed over the past.

A couple of months I completely agree with you. It's a win win if you if you.

I guess for a soft landing, but curious whats changed internally around the philosophy there. Thank you.

Let me have <unk>.

As shown for them.

So the philosophy of PSP backlog being high quality backlog, something we would like to get and have on our books Hasnt really changed.

The non cancel ability of PSP backlog hasnt really changed.

What we have always said is that the noncancelable part of it is not where we are willing to negotiate it's on the non reschedule ability or the ability to push it out that we are and we are working to make sure that where we see customers who have inventory and other customers, who don't have product being able to take and read.

Deploy from one to the other and Thats, a common sense way a set of helping to customers with one action that we would go to.

On the other hand, where we see potential customers who need.

Some help in terms of pushing inventory out quarter boundaries as the case might be and we'll work with them. These are long term customer relationships that we want to have but what we've always wanted was responsibility from a customer, placing PSP backlog honest to be able to honor the non cancel ability because we make commitments based on that responsive.

<unk> to our supply chain and I think you got to have some reliability in the people in that chain, who make and meet commitments on the non cancel ability.

Makes sense. Thank you.

Thank you.

Our next question comes from the line of William Stein with <unk> Securities. Please proceed.

Great. Thanks for taking my question you noted that Opex is tracking below your long term target right now and I'm, hoping you can help us understand where.

Or maybe.

Give us some.

Expectations as to where that should trend through the year and then longer term should we expect.

Should we expect this percentage to increase.

Yes, so we would expect that over time that percentage will increase to be within our long term model range, which we shared with the Street last November November .

November 2021 at our analyst day, and so we're well below that today.

We've had a couple of fantastic growth years, and it's been difficult to keep up.

With the spend and particularly hiring people and were seeing some of that free up today. So we are still continuing to hire and add people to our teams to make sure. We are supporting the long term growth of the business with having the people and processes and systems in place to drive that so yes, you should expect over time that it will grow.

<unk> inch its way up but it's not something that happens overnight you have been seeing that we've been investing significantly in increased operating expense dollars over many quarters now and just it hasnt been able to keep up with the rate of revenue growth and actually in the current quarter. The midpoint of our guidance is actually just slightly higher in percentage terms in what.

We achieved last quarter I think it's 27% this quarter versus the 26 five again, it's a it's a net but we are continuing to invest and are making progress on the hiring front.

We'll leave the way I think about it philosophically also is that.

The Opex investments, we make are also critical investments that drive future gross margin improvements future innovation for delivering to our customers.

<unk> growth and profitability of the company. He is dependent on making good operating investment operating expense investments.

And so that's why it's important to keep the investments consistent with where growth is.

For long term growth and profitability.

Great. Thank you.

Thanks will.

Our next question comes from the lineup and Bruce Srivastava.

<unk> capital markets. Please proceed.

Alright, Thank you very much.

I'll speak for myself to Nash and Steve you guys have proved me wrong.

How can it be.

We have never seen this kind of.

Soft landing so two quarters in a row.

You have shelf and you've given guidance beyond the quarter.

So kudos to you for that.

I just wanted to drill in a little bit into a point you made Ganesh you said that.

The lead times coming down to 26 weeks and you made some comments on the PSP as well, it's sort of make sure I understood. So what are your assumptions.

For the second half demand.

Matt.

Is kind of baked into your comments that you can get lead times down from 2006 weeks in the back half.

We're not getting into.

Specific guidance on second half growth and where it's going to be I think we're judging based on what are we doing to be able to continue to improve the supply lines, both our own as well as what we're doing with our partners.

We're judging where we expect demand to be out in time, but we don't have any certainty around it and those are it's a multi variable equation that if you project out under certain circumstances.

Certain assumptions that you make that in the second half of the year begin to get closer to that 26 week lead time, we could be wrong.

The demand could come back roaring in the second half debt.

Not.

Thinking about as it did in 'twenty, one 2020 in 2021, but under a reasonable set of.

The expectations that we are internally modeling, but were not externally communicating we think thats, where we can get to and we think thats, where we need to get to that.

Run this business.

And on a consistent basis and have it as a store.

<unk> way in which our customers and us together can plan for business.

Got it.

Yes.

Sure.

As you have seen many of our competitors and others in the semiconductor industry.

Actually go down sequentially for the last couple of quarters and most of them are guiding down for the March quarter, we have been growing every quarter.

And Ganesh mentioned that earlier it has to do with our end market mix focus on Mega trends focus on total system solution and we've been gaining share.

So not having gone down all of this time and.

<unk> guiding growth in March as well as June quarter.

And when you get to the second half.

It's quite possible that others are seeing second half demand will pick up again that we get the wind on the back in the second half while never had gone down in the last two quarters in the forward looking a couple of quarters.

So.

That's the thesis of soft lending.

We just.

Didn't go down so far and we pick up wind again in the second half.

So looking at the cash that way of how we are differentiating ourselves and by the way.

You can go back in 2020 and look at the four quarter performance in 2020, and you will see that we had a.

Barely a ripple in the first half and strong growth in the second half.

Okay, great. Thank you guys appreciate it.

Our next question comes from the line of Harlan sur with Jpmorgan. Please proceed.

Good afternoon. Thanks for taking my question on the commentary on higher inventory levels driven by some of the supply.

Then dislocations in China due to the easing of the zero equivalent policy looks like you guys are.

Proactively helping customers here by pushing out shipments may be decreasing your sell in into the channels in that region.

Does this imply that within your March quarter guidance that China region revenues will be down sequentially and just given that China is to the first waves of Covid here. This quarter are you starting to see some signs of demand improvement.

So while we don't break out.

The guidance by end market.

In the March quarter, China, Greater China has always had a decline there are.

Seven to 10 days of holidays for Chinese new year, and we don't expect this year is any different.

What we are cautiously optimistic is that with the worst of COVID-19 behind in the December and January timeframe.

That post Chinese new year, which is right about now.

China will come back and have a more constructive approach to <unk>.

Where their economy.

And therefore, our business will go as well I can't give you that is an absolute it's going to happen and so we are modeling for a normal China quarter this quarter.

And something more could happen depending on how business comes back post Chinese new year.

Thanks, and good afternoon in vast number of cases, the majority of the cases when we.

Help the customer in China.

Our distributor to not get the product because they had inventory we had so much other demand for that product in U S. Europe and other customers because we still getting huge amount of unsupported backlog. So in most cases, where we accommodated a customer we ship that product to somebody else.

Thanks, Steve Thanks.

Thanks Harlan.

Okay.

Our next question comes from the lineup Christopher Roland with Susquehanna.

Please proceed.

Hey, guys. This is Matt Meyers on for Chris.

Just wanted to circle back on your PSP for a second.

Curious because you guys have said in the past that your PSP is well over 50% of your backlog I was just curious where that is now and what the differences are between PSP versus non PSP backlog.

It remains well over 50%.

This day.

Got it that's helpful. And then do you have any updates on utilizations and how they've changed in the quarter and kind of what your expectations are going ahead.

So we're really really no change the manufacturing facilities are running hard so we've been bringing in a lot of equipment and bringing that online. So no no real change to report there.

Alright, thank you.

From utilization is essentially 100%.

Yes.

We can move and every unit, we can move to the factory removing it.

Great. Thank you.

Our next question comes from the line of Vijay Rakesh with Mizuho Securities. Please proceed.

Yes, hi, guys good quarter and guide here just a quick question on the <unk>.

On inventory levels I'm, just wondering if you could give some color on what inventory levels look like at the customer site.

If you look at the different segments.

<unk>.

But we don't we don't really have that information to share. We just have anecdotal information from individual customer conversations Vijay. So I mean, we don't get any sort of reporting on inventory being held by any of the end customers. We get that through distribution. We shared that in my prepared remarks of distribution inventory was up three days in the quarter outside.

That I don't have anything else to say I don't know if I can ask Steve without I mean, the only thing I would say is that we don't have a customer that is so large that their business or their inventory, we could change our business materially you can take any of the customers and if they are public companies you can do an analysis of what inventory they carry and we do that.

But we don't know what the inventory is and in many cases, where we are shipping product that is from constrained corridors.

On legacy technologies that don't have as much excess capacity.

We don't believe our inventories are what the accounting, but honestly, we don't know and they don't report like this.

Same way as our distribution channel partners.

<unk> to us.

Got it and then on the on the lead times, obviously good thing they are coming in.

Is that a function of broad industry supply improving or is it more a reflection of demand and how would you parse it I guess.

Especially we look at the different markets that every market, we're very disciplined so.

Well you need both sides of that equation right. So our supply lines are improving the fact that our parts of the industry.

<unk> have slowed down has opened up capacity incrementally to us our lead times are still long and it's really there's a tremendous amount of work we have to do over the next six 912 months to one by one by one and get it back into a range and we're still expecting that the 26 weeks, it's kind of an average lead time, we're going to have some that are longer some that are.

And where we go but directionally, it's where do we want to go it's what makes it constructive for our customers to plan better and for us to serve them better.

Got it thank you.

Our next question comes from the line of Chris Danley with Citi. Please proceed.

Hey, Thanks, guys I guess, one clarification and a question you seem to indicate that there was some weakness in China, but I think dinesh or Steve you just mentioned that Youre planning for a normal quarter.

In China in Q1, so any delineation there and then.

So the question you mentioned that some quote unquote other customers.

Have too much inventory is there any rhyme or reason there any commonality between end markets or geographies or is it just sort of spread out all over the place. Thanks, Let me take them one by one so what I said was that China had weakness in the December quarter, and they were from two different COVID-19 events.

First the lockdowns than the reopening and the spread of Covid that took place.

<unk> got cost have kept that many many of our customers and where was that.

We're expecting that those are behind us.

In this quarter and Thats what.

The information we have and the early signs we have are.

And so a good chunk of this quarter is still ahead of us.

We've just gone through January almost 10 days of that were used for the Chinese new year and so we have all of February and all of March and so in that context.

We think China will be normal in.

In this quarter, there is no incremental weakness compared to last quarter and in fact.

The COVID-19 issues are largely behind where they were last quarter.

In terms of customers, who have inventory provision this is not something new.

We've mentioned in prior quarters as well is that if someone self identified as having product.

They would like to get later.

We will take that information and find other customers to the extent, we can who can use that product and our short today. So that we match, where there is a supply demand imbalance, but it's in the customer's location to be able to do it.

And there's no particular.

And market, where that is giving us.

Grievance etcetera clearly.

The home appliance market is one relative to some of the others were.

There is more weakness in that but there is always going to be customers, who can be in any.

End market.

Who asked for relief to be able to help other customers and we work to the extent we can.

Got it thanks guys.

Welcome.

Our next question comes from the line of Chris Caso with Credit Suisse. Please proceed.

Yes. Thank you good afternoon I have a question about the manufacturing plan.

Given your decision not to go forward with the 300 millimeter investment.

I guess for one.

Just.

What's driving that decision.

And does that.

Remove any possibility of internal capacity expansion going forward and then following that what do you think that means for microchip competitively.

Are you confident in your ability to get certain third party wafers at competitive prices to support your growth going forward.

Yes, So let me parse your question. So number one we are continuing to expand the existing facilities we have.

Those are the three fabs in the U S. Our assembly and test facilities in the in the far east et cetera. So.

There is no.

Backing off from capacity, where we believe we can bring on cost effective capacity that will go forward. Our 300 millimeter was a fairly large step for us we don't have that infrastructure.

We had a lot of thinking to do on how would we load a fab because you.

You can build a fab and you can get the help to get the government funding whatever else to do that but still at the end of the day. There are several things that are important to have in the most important one is do you have enough wafers to loaded and have the cost per wafer.

And the absorption cost effective or not.

I was going to be a challenge we knew at all times and second we need to be able to license the technologies because unlike in 200 millimeter, where we own the vast majority of our technology and 300 millimeters, we would need to license that technology from our partners.

That all said as we looked at on balance how could we achieve our business objectives.

In the conversations we were able to have at the highest levels of our partners.

We came away with.

Plans and commitments for what was needed to support our business and we felt very confident that being able to work in the model we have today with our partners.

It was completely.

<unk> of our business and substantially de risked the execution of our Greenfield 300 millimeter fab.

Got it.

Thank you as a follow up.

Obviously been a lot of discussion about the PSP program and I wanted to ask on it in the context of.

As you achieve your goals of getting the lead times down.

What do you expect your customers' reaction to be.

Obviously, the PSP program in bookings. So far ahead was something we had typically seen in the industry for microchip generally.

Do you expect that customers would naturally wean themselves off with PSP or at least put a smaller part of the backlog in PSP, if the lead times come down.

And clearly it sounds like that's not happening right now.

The jewelry seller, but let me tell you right in the middle of all this we continue to have customers approaching us for long term supply agreements.

Long term supply agreements that are predominantly in a five year window of time. So many many of our customers build substantially valuable and equipment I mean, if you think of.

Aerospace defense commercial aviation medical automotive many of the large industrial equipment et cetera.

They are trying to have assurance of supply as the most critical element of what they are planning for and how they want to do it with us.

Whether it is standard backlog PSP backlog long term supply agreements is really a business decision that they need to make on the risk rewards of where they want to go but.

But I can tell you that for the customers that we're dealing with for many many many of them.

Value of the supply assurance is extremely high on their agenda and is the reason why they are continuing to be a participant in the PSP program and signing up to be.

An increasing number of long term supply agreements that they're signing up for <unk>.

We said in our prepared remarks that we collected $385 million.

Just last quarter from customers.

Who signed up for a long term supply agreement.

So our customers do not see.

The environment that has lots of excess capacity and people are shutting down factories and laying off people.

The capacity of the.

Note that we use is still largely constrained in.

And customers are still concerned about getting long term capacity.

And they're giving us money.

In signing up long term supply agreement for us to put that capacity in place ourself.

To sign up with our foundry partners.

Yeah, Chris a lot of conversations are taking place at the CEO CPO levels for these and I think customers are much more thoughtful about a long term view they don't they're not looking at a one or two quarter the cycle may be slower than what we thought there as much worried about what happens in 2024, and what happens in 2025 and how did.

<unk> build.

A supply chain that is reliable resilient and enables their growth on these very very high valued and equipment.

Got it thank you.

Thanks, Chris.

Our next question comes from the line of Joe Moore with Morgan Stanley . Please proceed.

Great. Thank you.

I guess I, just I wonder how you see the progression of bookings here you've got this elevated backlog you have lead times coming in it seems like the book to Bill should go pretty far below one, but then we'd probably mathematically its just math at that point its not really that there is an air pocket at the end, but I guess historically a lot of times Theres been air.

Pockets at the end so as I know you guys have seen a lot of these these types of environments. Just how are you thinking about it and how will you know if that lead time reduction means you need to take more action to kind of the actions you've already discussed to protect your earnings power.

So Julien book to Bill and our business has never been a meaningful indicator.

Making.

Proprietary products that the customer doesn't buy from anybody else. It has always been an indicator of.

What is the customer sentiment about where the business is going.

And what kind of lead times are they going to have to prepare for so clearly in a environment and which lead times will start to come in.

Customers will pull back on some of the bookings and I actually as I said that in my prepared remarks as well it doesn't mean that there needs a change it doesn't mean that their usage patterns are going to change right is just how they want to work with us now.

Customers also have been burned pretty badly over the last couple of years on trying to kind of optimize the last 5% of where they are going to hold an inventory et cetera, and so they do have.

And approach that is not.

Tactical Theyre trying to be more strategic in how they think about things and.

Where the bookings are low our bookings are high.

We know that theyre going to come and if I go back four quarters bookings were out of this book.

We were seeing levels of bookings that were incredible but that didn't mean, we expected business is going to double next quarter over quarter. After that that were being placed out in time and so we feel good about where our backlog still is we still have multiple quarters of backlog with still getting bookings that are coming in at a lower rate, but we still think there are high quality bookings.

Because we're not.

Expecting that they have to place backlog.

Beyond a point, where theyre comfortable with so I think it's a good environment at this point and bookings are low but that's okay.

Great. Thank you.

Yeah.

Our next question comes from the line of.

ARIA with Bank of America. Please proceed.

Thanks for the follow up actually just comment and the question comment if I just.

Annualized your March quarter guidance. It suggests annual sales growth somewhere in the 10% to 11%.

For this year and I just wanted to make sure that that is kind of the message.

<unk>.

My question is on gross margin usually venue growth as you have been able to grow gross margin, but I know I'm nitpicking, but I think for March you are guiding gross margins to go down somewhat.

And you're.

Also kind of at the higher end of your gross margin outlook. So.

Whats happening to gross margins why are they going down at $68 five.

Kind of not the final destination or is there more leverage in the model.

Okay. So I'll take both the questions and Steve can add onto it. So you are asking.

Our guidance for the next year.

10, or 11% makes sense, we've made no comment beyond what we're going to grow in the March quarter. Other than we will grow again in the June quarter. So I can't really provide any color on what youre, saying there on gross margin. We are actually guiding gross margins to be up modestly in the quarter, while last quarter, we were at 68, 1% non-GAAP .

Gross margin and if you look at the guidance table in our release the midpoint of guidance of $68 two theres, a GAAP and a non-GAAP column in there and maybe you are just looking at the wrong, one but non-GAAP .

And GAAP margins should both be up in the quarter.

And any leverage beyond the 68 I think.

So we arent, we arent at 68 and a half yet we're guiding to 68, 2%. Our long term model is a range of 67, 5% to 68, 5%.

We've done extremely well and got to where we are very quickly.

Announce those targets at our analyst day in November of 2021.

And we are always looking to continuously improve so I would say that over time as the topline growth. We think we will be efficient we will be introducing.

Highly value added products that can drive higher gross margins, but we have not changed that target at this point.

And with <unk>, we're always balancing growth and gross margin rates, we want both and so we've got to be careful that we don't take one up so high that it affects the other so we will improve but we also want growth.

To continue at the rate that we want.

Understood. Thank you. Thank you.

Our next question comes again from the line of Harlan sur.

J P. Morgan. Please proceed.

Yes. Thank you for the follow up so with fiscal 'twenty three almost behind US wondering if you have an update for us on your total system solution strategy I went to two of your major distributors websites.

The listed over 4000 reference designs for Microchip and that's up substantially from a few years ago. How effective are these reference designs and helping to drive TSS and do you have any metrics you can share with us on increasing dollar content per customer engagement.

So clearly the reference designs, both ourselves and our partners and how we go are a key element of how we go and provide total system solutions, but really we've taken it from just reference designs and products of the design stage to how are we conceiving our solutions, how our businesses working together.

Gather to create products in parallel that together create the hardware software and services that are needed for our customers to be able to adopt a large portion of their design with our products and so it's a complex set of processes that we are working on youre seeing some of the benefits in terms of.

The differential results that you've seen with us.

There is not a an easy equation I can plug into that tells you. Kate this is the rate at which it's growing but you can see it in the total results for the company and it does come from years of honing in all aspects of the total system solutions from development to go to market to sales to how do we.

Ensure that those design stay and stay sticky with the Microchip solutions.

Thank you.

Thanks Ali.

Our next question comes again from the lineup and Bruce.

<unk> <unk> with BMO capital markets. Please proceed.

Your line is now.

Good luck.

Oh, sorry about that thank you and thank you for that accommodating me and a follow up I had a question on 300 millimeter, Steve I thought when you started to talk about as you made a very compelling argument.

Why there hasnt been enough capacity.

And then.

As a very compelling argument of why doing it I just wanted to make sure I understand the comment you made with your partners you.

You seem comfortable that they would be investing and we won't be back to that again.

Yes, I don't know how many quarters from now that we again sitting here and saying Hey look there isn't enough capacity. So you feel confident enough to not go forward.

Cogs up to commitments from your partners is that the right takeaway.

Yes, so we've had extensive discussions about.

Options by which we could move forward.

Options that our partners were exercise to be able to support what we need and we've had those at the highest levels of our partners.

Management, and we are confident that what we need.

In partnership with <unk>.

Our supply chain are key supply chain partners that can be met and as I said it does it at a far lower risk.

And far better ROIC.

Okay got it thank you.

Thank you.

There are no further questions at this time.

Alright.

I'll call back to you for closing remarks.

Great. Thank you and thank you to everyone, who joined US on the call today and we'll be seeing many of you on some of the events that are coming up.

This quarter have a good evening bye bye.

This concludes today's conference you may now disconnect your lines.

Hey, Joe Thank you very much physical online and we'll see in a quarter.

[music].

Good day, everyone and welcome to Microchips third quarter fiscal 2023 financial results Conference call.

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

At this time I would like to turn the call the call over to Mr. Eric <unk>. Our CFO . Please go ahead.

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

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

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

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

That included reconciliation information in our press release, which we believe you will find useful when comparing our GAAP and non-GAAP results.

We have also posted a summary of our outstanding debt and our leverage metrics on our website.

I will now go through some of our operating results, including net sales gross margin operating expenses.

Net sales in the December quarter were $2 169 billion, which was up four 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 68, 1% operating expenses were 26% and operating income was a record 47, 5%.

non-GAAP net income was a record $863 7 million non-GAAP earnings per diluted share was a record $1 56 and at the high end of our guidance range.

Costs and share based compensation of $37 1 million.

GAAP net income was a record $583 million, resulting in a record $1 four in earnings per diluted share as.

Purposes.

Our inventory balance at December 31, 2022 was $1 165 billion. We had 152 days of inventory at the end of the December quarter, which was up 13 days from the prior quarter's level.

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.

<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 at our distributors in the December quarter was at 22 days, which was up three days from the prior quarter's level.

Our cash flow from operating activities was a record $1 78 billion in the December quarter included in our cash flow from operating activities was $385 million of long term supply assurance receipts.

We are going to adjust these items out of our free cash flow to determine the adjusted free cash flow that we will return to shareholders. As these payments will be refundable overtime as purchase commitments are fulfilled.

Our adjusted free cash flow was $751 6 million and 34, 6% of net sales in the December quarter.

Our adjusted EBITDA in the December quarter was a record at $1 $106 billion and 51% of net sales.

Our trailing 12 month adjusted EBITDA was also a record at $4 or $5 1 billion.

Our net debt to adjusted EBITDA was 156 at December 31, 2022 down from $1 84 at September 32022, and down from $2 $5 eight at December 31 2021.

Our manufacturing operations accordingly.

Depreciation expense in the December quarter was $55 3 million.

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

Thank you Eric and good afternoon, everyone.

Our December quarter results were well above the midpoint of our revenue guidance marked by our disciplined execution as well as our resilient end markets.

Net sales grew four 6% sequentially and 23, 4% on a year over year basis to achieve another all time record of $2 $1 7 billion.

The December quarter also marked our ninth consecutive quarter of growth.

non-GAAP gross margins came in above the high end of our guidance at a record 68, 1%.

38 basis points from the September quarter, and up 202 basis points from the year ago quarter.

non-GAAP operating margin also came in above the high end of our guidance at a record 47, 5%.

Up 62 basis points from the September quarter, and up 283 basis points from the year ago quarter.

Due to a rapid increase in net sales over the last two years operating expenses at 26, 5% of our 185 basis points below the low end of our long term model range of 22, 5% to 23, 5%.

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

Our consolidated non-GAAP diluted earnings per share was at the high end of our guidance at a record $1 56 per share.

Up 30% from the year ago quarter.

Adjusted EBITDA at 51% of net sales and adjusted free cash flow at 34, 6% of net sales for both very strong in the December quarter.

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

As Eric mentioned, we have excluded $385 million of long term supply assurance payments made by customers from our adjusted free cash flow calculation.

Since these payments are refundable when customers fulfill their purchase commitments.

Net debt declined by $701 2 million driving our net leverage ratio down to 156 X exiting the December quarter.

During the December quarter, we returned $409 $8 million to shareholders in dividends and share repurchases.

Representing 60% of the prior quarter as free cash flow.

We expect to get below one <unk> net leverage by the end of the March quarter.

And as Steve will share with you later for Microchip Board has decided to increase the rate at <unk> capital will be returned to shareholders starting in the June quarter.

Taking a look at our net sales from a product line perspective, our microcontroller net sales were sequentially up three 5% in the December quarter and set another all time record.

On a year over year basis, our December quarter microcontroller net sales were up 25, 6%.

Mitro controllers represented 56, 3% of our net sales in the December quarter.