Q4 2023 Microchip Technology Inc Earnings Call

May 4, 2023

[music].

Okay.

Greetings and welcome to the Microchip technology, Q3, and FY2023 financial results Conference call.

At this time all parts.

I'm sorry.

And the only mode.

Brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press Star and then zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host.

Beyond Holt senior Vice President and CFO . Thank you and you May proceed sir.

We wish to caution you that such statements are predictions and that actual actual events or results may differ materially.

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

In attendance with me today are Ganesh Moorthy microchips, President and CEO .

<unk> sang microchips executive chair and Sajid, Audi Microchips head of Investor Relations I will comment on our fourth quarter and full fiscal year 2023 financial performance.

We will then provide commentary on our results and discuss the current business environment as well as our guidance and Steve will provide an update on our cash return strategy.

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

We are including information in our press release and this conference call on various GAAP and non-GAAP measures.

We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip Dot Com and include a reconciliation information in our earnings press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We've also identified.

<unk> 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 that 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 earnings press release and in the reconciliation on our website.

Net sales in the March quarter were two to three 3 billion, which was up two 9% sequentially.

We have posted a summary of our 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, 3% operating expenses were at 27% and operating income was a record 47, 65%.

non-GAAP net income was a record $907 8 million non-GAAP earnings per diluted share was a record $1 64, and a penny above the high end of our guidance range.

On a GAAP basis in the March quarter gross margins were a record 68% total operating expenses were $671 3 million and included acquisition intangible amortization of $167 4 million.

Special charges of $2 1 million $2 3 million of acquisition related and other costs and share based compensation of $37 8 million.

GAAP net income was a record $604 million, resulting in a record $1 nine in earnings per diluted share.

As compared to a year ago quarter, our March quarter, GAAP tax expense was adversely impacted by a variety of factors, notably the tax expense recorded as a result of the capitalization of R&D expenses for tax purposes.

For fiscal year 2023, net sales were a record 843 9 billion and were up 23, 7% from net sales in fiscal year 2022.

On a non-GAAP basis gross margins were a record 67, 8% operating expenses were 29% of sales and operating income was a record 46, 9% of sales.

non-GAAP net income was a record $335 3 billion and EPS was a record at $6 <unk> per diluted share.

On a GAAP basis gross margins were also a record of 67, 5%.

Operating expenses were 36% of sales and operating income was 36, 9% of sales.

Net income was $2 238 billion and EPS was $4 <unk> per diluted share.

Our non-GAAP cash tax rate was 10, 8% in the March quarter, and 10, 9% for fiscal year 2023.

Our non-GAAP tax rate for fiscal year 2024 is expected to be about 14%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Our fiscal 2004 cash tax rate is expected to be higher than our fiscal 'twenty three tax rate for a variety of factors, including lower availability of tax attributes such as net operating losses and tax credits lower tax depreciation with our expectation for lower capital expenditures in the U S in fiscal 2024 as well as the <unk>.

Pact of current tax rules, requiring the capitalization of R&D expenses for tax purposes.

We are still hopeful that the tax rules requiring companies to capitalize R&D expenses, we pushed out a repeal if thats sort of happen. We would anticipate about a 200 basis point favorable adjustment to microchips non-GAAP tax rate in future periods.

Our inventory balance at March 31, 2023 was 132 5 billion.

We had 169 days of inventory at the end of the March quarter, which was up 17 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 constraint equipment.

As well as to position ourselves to take advantage of new equipment installations, which should relieve bottleneck.

In certain circumstances, we have allowed customers to push out delivery schedules for products that were very far through the manufacturing process.

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 and these last time buys represented about seven days of inventory at the end of March.

We feel that we need to take actions to help ensure that our supply lines can feed our growth beyond what we expect in the June 2023 quarter.

We are targeting actions to reduce our inventory down between five and 10 days in the June quarter.

Inventory at our distributors in the March quarter was at 24 days, which was up two days from the prior quarter's level.

Our cash flow from operating activities was $709 $5 million in the March quarter included in our cash flow from operating activities was a net $79 5 million of long term supply assurance receipts from customers and suppliers.

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 through dividends and share repurchases as these payments will be refundable overtime as purchase commitments are fulfilled.

Our adjusted free cash flow was $517 $3 million in the March quarter and was adversely impacted by our working capital investments this quarter, including $158 4 million increase in inventory and $130 3 million increase in accounts receivables, which we do not expect to repeat in the June quarter.

As of March 31, our consolidated cash and total investment position was $234 million, we paid down $153 million of total debt in the March quarter, and our net debt was reduced by $98 1 million.

Over the last 19 full quarters since we closed the microsemi acquisition and interpret incurred over $8 billion of debt to do so we have now paid down $635 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 March quarter was a record at $1 $39 billion and 51% of net sales our trailing 12 month. Adjusted EBITDA was also a record at four to eight 8 billion.

Our net debt to adjusted EBITDA was 145% at March 31, 2023 down from 156 at December 31 2022.

And down from $2 32 at March 31, 2022.

Getting our net leverage below one five a significant milestone for microchip on its capital returns earnings, which Steve will talk about shortly.

Capital expenditures were $112 $7 million in the March quarter, and $486 2 million for fiscal year 2023.

Our expectation for capital expenditures expenditures for fiscal year 2024 is between 300 400 million.

As we still have a lot of equipment that was ordered with long lead times that will be received over the next year.

We expect better capital investments will continue to provide us with increased control over our production during periods of industry wide constraints.

Depreciation expense in the March quarter was $54 1 million.

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

Thank you Eric and good afternoon, everyone.

Our March quarter results were strong in the context of a slowing macro environment.

Marked by our continued disciplined execution as well as our resilient end market.

Net sales grew two 9% sequentially and 21, 1% on a year over year basis to achieve another all time record of $2 3 billion.

March quarter represented our 10th consecutive quarter of sequential growth.

non-GAAP gross margin came in at the high end of our guidance at a record 68, 3% up 171 basis points from the year ago quarter.

non-GAAP operating margin also came in closer to the high end of our guidance at a record $47 six 5%.

292 basis points from the year ago quarter.

We continued to make investments that we expect to drive the long term revenue growth profitability and durability of our business.

Consolidated non-GAAP diluted earnings per share was above the high end of our guidance at a record $1 64 per share up 21, 5% from the year ago quarter.

Adjusted EBITDA was 51% of net sales and adjusted free cash flow was 23, 2% of net sales in the March quarter continue.

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

We returned $469 9 million to shareholders in dividend and share repurchases in the March quarter.

Representing 62, 5% of our December quarter, adjusted free cash flow.

Our net leverage exiting March dropped to 145.

And as we mentioned a quarter ago, our capital returns this quarter increased to 67, 5% of our.

March quarter adjusted free cash flow.

As we continue on our plan to return 100% of adjusted free cash flow by the March quarter of calendar year 2025.

Reflecting on our fiscal year 'twenty period results. It was another one for the record books.

Revenue grew 23, 7% to finish at a record $8 4 billion.

non-GAAP gross margin non-GAAP operating margin non-GAAP, EPS, EBITDA and adjusted free cash flow.

All set new records.

We significantly increase the capital return to shareholders in fiscal year 'twenty three to 164 billion, representing a 76, 6% growth as compared to fiscal year 'twenty to <unk>.

Through a combination of increasing dividends and a formulaic share buyback program.

My heartfelt gratitude to all of us take holders who enabled us to achieve these outstanding results and.

And especially to the worldwide Microchip team, whose tireless efforts have enabled us to navigate effectively through the business cycle.

Taking a look at our March quarter net sales from a product line perspective.

Our mixed signal microcontroller net sales set another all time record.

Coming in sequentially up five 8% in the March quarter, and up 23, 5% on a year over year basis.

Our 32 bit mixed signal Microcontrollers grew at the fastest rate among our Mexican microcontroller product line.

And represented over 48% of our fiscal year 'twenty three Mexican microcontroller revenue.

As you May have noticed we are clarifying the nomenclature for our microcontrollers going forward to be mixed signal microcontrollers.

They have substantial analog and mixed signal content integrated on chip.

As a result exhibit business characteristics that are more like analog and mixed signal products.

Staying with Mexico microcontroller for a moment Gartner just published their rankings for calendar year 'twenty two.

Using our publicly reported mixed signal microcontroller revenue for calendar year 'twenty two.

Gartner unexpectedly underreported from Microsoft.

We ranked number three and are just one 4% away from number one.

To put this in perspective, just three years ago in calendar year 2019 by.

By our estimate combined with the Gartner data, we were 16, 5% away from number one.

We are fast closing on the number one spot.

Moving next to our analog business our analog net sales also set another all time record coming it's sequentially up one 9% in the March quarter.

And up 19, 9% on a year over year basis.

Fiscal year 'twenty three analog sales were $2 4 billion.

And broke through the $2 billion Mark for the first time ever.

We are gaining share in our analog business without.

With our total system solutions approach continuing to provide a tailwind for this product line.

While we don't normally breakout our FPGA product line was up.

It is noteworthy to report.

<unk> set a march quarter and fiscal year 'twenty three revenue for FPGA for both records in.

In fact, our fiscal year 'twenty, three FPGA revenue exceeded $550 million grew more than 31% as compared to fiscal year 'twenty, two and delivered operating margins of our north of corporate average.

Our design win momentum is strong and we offer market leading mid range FPGA solutions.

Best in class low power reliability and security.

At our Investor Day in November 2021, we emphasize the importance of six market Mega trends for our long term growth and shared that we expected our revenue growth from customers and applications.

And then the mega trends to be approximately <unk> of Microsoft's growth rate.

We just completed our revenue by Megatron analysis for fiscal year 'twenty three.

As compared to fiscal year, 'twenty, one which is the last time, we conducted the same analysis.

Overall revenue grew 55, 2%.

While revenue from our Mega trends grew 108, 5%.

Right in line with our expectation of roughly two X growth from the Mega trends.

Revenue from the fixed Mega trends represented approximately 45% of our fiscal year 'twenty three revenue.

Impaired to approximately 34% of our <unk>.

Fiscal year 'twenty one revenue.

We also just completed our revenue by end market analysis for fiscal 'twenty three.

As compared to fiscal 'twenty, two our industrial business grew from 40% to 41% of our revenue.

Our data center and computing business grew from 18% 19% of our revenue.

And our consumer appliance business decline from 14% to 12% of our revenue.

Automotive and communications infrastructure remained unchanged at 17% and 11% of our revenue respectively.

As you can see from the data slowly, but surely we continue to curate an increasing proportion of our business towards less volatile and more resilient end markets.

Now for some color on the March quarter.

While our overall business remains strong in the March quarter, many of our customers felt the effect of slowing economic activity and increased business uncertainty.

Requests to push out our canceled backlog increase.

We were able to push out significant amounts of backlog. The later quarters to help customers with inventory positions.

This resulted in our days of inventory growing.

We are comfortable with this inventory growth given the very long lifecycle and durable end markets for our products.

By taking action to reduce customer inventory overbuild.

And carrying that inventory on our balance sheet we.

We expect to increase our odds of achieving a soft landing.

And also expect to be better positioned to respond to demand growth and the macro environment strengthen.

Consistent with the slowing macro environment and the growth in our inventory we have paused most of our internal factory expansion plans.

Reduce our capital investment plan for fiscal year 'twenty four.

And taken steps to lower our inventory in the coming quarters.

As a result of the uncertain macro environment and multiple quarters worth of backlog on our books.

Our bookings have slowed down as expected over the last two quarters.

In order to provide customers with more flexibility in an uncertain demand environment.

As well as to achieve a more healthy and sustainable long term supply demand balance.

We are striving to bring average lead times down to under 26 weeks over the course of the second half of 2023.

We believe there are three reasons why microchips business continues to demonstrate more resilience in the midst of the weakness seen by some of our semiconductor some other semiconductor companies.

Firstly on the demand side, the end markets and we have the most exposure to.

Industrial which includes aerospace and defense automotive and data center.

The applications within these end markets, where we are strong are less volatile and comparatively more resilient.

Second on the supply side, the vast majority of our products are built on specialized technologies, requiring trailing edge capacity.

Basically the capacity that has been most constrained over the last two plus years.

There was less opportunity to over ship to consumption and.

Third our laser focus on organic growth for multiple years by concentrating on total system solutions.

And higher growth Megatrends, which we just discussed a few minutes ago.

Has translated into increased design wins.

Further share gains and the result in revenue tailwind.

A quick update regarding the chips back.

We have been getting the benefit of the investment tax credit since the beginning of this year.

And we are in the process of submitting our applications for grants to support expansion in several of our domestic factories.

The timeline for when grants may be approved is not yet determinable.

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

Although our backlog for the June quarter is strong we expect to continue to take active steps to help customers with inventory positions to push out their backlog.

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

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

At the midpoint of our net sales guidance a year over year growth in the June quarter would be a strong 16, 5%.

We expect our non-GAAP gross margin to be between 68, 3% and 68, 5% of sales.

We expect non-GAAP operating expenses to be between 21% and 25% of sales.

And we expect non-GAAP operating profit to be between 47, 8% and 48, 4% of sales.

We expect our non-GAAP diluted earnings per share to be between $1 63, and $1 65.

At the midpoint of our non-GAAP EPS guidance, our year over year growth for the June quarter would be a strong 19, 7%.

Despite a much higher tax rate a year ago quarter.

Finally, as you can see from our March quarter results and our June quarter guidance.

Microsoft three <unk> strategy, which we launched 18 months ago is firing in all cylinders.

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

However, we also recognize that we operate in a cyclical industry and that we are not immune to business cycles.

But if you review microchips peak to trough performance through the business cycles over the last 15 plus years.

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

Although we don't foresee any significant decline in our business.

If we werent experienced the semiconductor inventory correction like the industry has seen in the past we are highly confident that our non-GAAP operating margins will remain well above 40%.

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

With that let me pass the baton to Steve to talk about our cash returned to shareholders by the way, Steve just published a new book called up into the right, which chronicles building microchip into a technology a juggernaut.

Investors and analysts can get additional insights from the book, it's about the foundational elements behind microchips long term business success Steve.

Thank you condition and thanks for the color on the book.

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.

<unk> delivered another exceptional quarter, while making new records in many respects.

Namely record net sales record.

non-GAAP gross margin percentage.

non-GAAP operating margin percentage.

Record non-GAAP EPS and record adjusted EBITDA and all of that in a continuing challenging environment.

The board of directors announced an increase in the dividend.

Eight 8% from the year ago quarter.

$238 three per share.

During the last quarter, we purchased $273 $9 million of our stock in the open market.

We also paid out $195 9 million in dividend.

Thus the total cash return was $469 8 million.

This amount was 62, 5% actual adjusted free cash flow.

$751 6 million during the December 2022 quarter.

Our pay down of debt as well as the victory or adjusted EBITDA.

Drove down our net leverage at the end of March 2023 quarter.

Two 145 times.

From 156 times at the end of December 2022.

Yeah.

This also marks a pivotal point of our net leverage going below one five times.

At which we further accelerated our cash return to the shareholders, which I will describe further.

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 $2 three $3 $6 billion.

To shareholders through March 31, 2023.

By a combination of dividends and share buybacks.

In the current June quarter, we will use the word adjusted free cash flow from the March quarter.

We target the amount of cash returned to shareholders.

We are just your free cash flow excludes a net $79 5 million.

That we collected from our customers and pay to our suppliers for long term supply assurance payment.

These payments are refundable purchase commitments were fulfilled.

Adjusted free cash flow for the <unk>.

First quarter was $517 2 million.

We plan to return <unk>.

67, 5%.

$349 $2 million of debt.

It amounts.

To our shareholders with the dividend expected to be approximately $209 million in.

And the stock buyback is expected to be approximately $142 million.

The above numbers are reflected in our <unk>.

One area.

We are increasing the total return to shareholders in 500 basis points increments for the quarter.

And set up the 250 basis points, we were increasing until now.

Going forward, we plan to continue to increase free cash flow returned to shareholders.

By 500 basis points every quarter until really to 100%.

Our adjusted free cash flow return to shareholders.

That will take several more quarters.

And dividends over time, we.

We expect will represent approximately 50% of cash return.

With that operator will you please poll for questions.

Thank you very much and we will now be conducting a question and answer session.

To ask a question Keith.

And then one on your telecom pad.

Felicia tone will indicate your line no question Q.

Can you meet your question to one question Brian .

Question.

You May proceed.

Thank you if you would like to remove your question from the queue.

All participants using speaker equipment, it may be Dave for you to pick up Johan.

The stock.

One moment, please pull for questions.

The first question comes from Toshi Hari from Goldman Sachs. Please proceed with your question.

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

I was hoping you could give.

Give a little bit more color and context in terms of the demand environment.

Goodness you've talked about.

Experiencing push outs from your customers.

Up tick in cancellations, but are these sort of events broad based across geographies and end markets and device types or is it a little bit more concentrated and then I have a follow up.

Generally speaking I would say that are a cross section of those requests from many geographies. Many customers. Many end market. We also continue to have.

Constrained products on which there are shortages that were trying to accelerate product for so.

It is not only one directional and which the demand requests are coming in.

Got it and then as my follow up.

Just your thoughts on trough gross margins you provided good context.

Terms of operating margins.

Thank you said well above 40%.

And a kind of a recessionary or contractionary environment, how should we think about gross margins off of these.

These record levels as you as you work down inventory and presumably reduce utilization rates. Thank you.

They're going to be darn. Good if you look at our history, you can get a pretty good idea of what the gross margin.

Trough to peak peak the trough look like.

We are sitting at 48% operating margin given your eight percentage points as a bottom and hopefully this is going to be an operating margin I think you can draw the conclusion relatively easily.

Got it thank you.

We have some charts on our website to look at the last 15 years of history and you can do you can draw some conclusions from that.

Thank you.

Thank you. The next question comes from Steven Johnson from BMO Capital markets. Please proceed with your question.

Alright. Thank you very much that charter is very helpful.

I had my first question for the last few quarters, you have been guiding for the quarter out.

And so I just wanted to make sure that.

You are not able to guide for September .

Vis vis the if you just look at how the business has changed and I'm just reading your comments it sounds like that confidence is not there this quarter.

So we have not adopted a consistent practice of providing more than one quarter guidance.

At certain points of time, we have elected to provide more than one quarter guidance or directional guidance sometimes.

And this is when we believe it will help investors and analysts better frame our current quarter guidance.

Having provided the extra quarter of directional guidance for three quarters in a row.

It did not appear to add much value to analysts or investors, who were more worried about the overall semiconductor industry cycle and in fact as seen to elicit more skepticism and our ability to provide guidance and confidence in our understanding of the business.

And therefore, we have decided to end the temporary practice we started.

And alert to just sort.

To just providing one quarter's guidance.

Makes sense excepted proved.

Proved how wrong. It was every quarter instead of question on the.

The push thank goodness.

How do they come back to the overall PSP I'm assuming that this is not in the <unk> because of those you have said in the past you had not willing to.

Negotiate on or less willing to negotiate and he said the right way to think about it. The DSP has both <unk> and non <unk> and push out some more related to the non <unk>.

So maybe let me clarify all PSP backlog is noncancelable non reschedule.

What I have said before is that we.

We are not flexible under noncancelable portion.

We are flexible on the non reschedule as well and that's where we're pushing up so we are pushing out backlog.

<unk> are not.

Into further quarters.

And.

That's the way in which we lead.

Support customers, who whose business environment has changed and who have concern about that inventory level and in the process hopefully create.

Less of an overhang that we will run into and more of a soft landing for our own business.

But we are flexible on the reschedule ability just not in the non cancel ability.

Got it thank you for that clarification. Thanks Youre.

You're welcome.

Thank you. The next question comes from Disney.

Please proceed with your question.

Alright, Thank you for taking my question.

To revisit again this question of end market.

So there is a perception that the aerospace defense medical.

Lots of data center these markets are holding up better.

So can you give us a sense that in the last three months.

Specifically, which end market customers and which end markets have asked you or you have asked them and they have agreed to pushing.

Pushing off some of that demand because.

I just wanted to make sure that RV.

When you say.

Soft landing.

Are we talking about revenues kind of floating at plus minus the levels you are giving.

There's some bigger drop off and having that end market view I think we'll be better prepared to analyze with how we should be thinking about September and December .

In an absolute sense Theres no end market that I can say.

The only one that has a problem or one that has no problem at all it's all on a relative basis and so the strength comes from those end markets were.

Far better resilience far better end market characteristic those are the ones. We've described the industrial including aerospace and defense.

Automotive.

For the data center that we have exposure to.

And even if you look at industrial I know different people about different comments on it but.

Our exposure in industrial is dominated by aerospace and defense, our renewable energy energy efficiency factory automation medical infrastructure. These are all the parts of industrial that dominate is now within that is there going to be somebody asking for a push out or a reschedule or a.

A swap of certain products sure there'll be some of that but in the aggregate that end market is doing extremely well compared to the rest of the end markets that perhaps are in consumer and phones and others, which we don't have much exposure to.

Got it and for my follow up I had just two quick clarification.

But absolutely I think just what is the right way to look at the other expense line.

And any indication of kind of the rising rates on your debt servicing and then opex.

That's kind of our Opex intensity is lower than your long term model. So how are you planning to manage expenses as the business goes through this.

Kind of.

Slowdown in the near term.

Okay. So let me take the other expense piece first which is obviously dominated by interest expense. So yes, yes, we are being impacted by the rising rate environment. We don't have much variable rate debt left on the balance sheet. Today is it's our line of credit which is about $100 million, but we do have <unk>.

<unk> coming due in both June and September of this calendar year that the current intention is to refinance those or retire those using our line of credit and the interest rate currently on the variable line of credit is higher than where those bonds are at so we are going to be facing a higher interest expense each quarter.

<unk> as we go through this fiscal year.

It's not like a stair step jump, but definitely the interest expense will be rising by several million dollars per quarter I think that that schedule. That's on our website can help you model that because it shows the maturity dates on the interest rates on those various pieces of debt and our current borrowing rate on our line of credit is about six.

Three 5%, so I think with that information you can probably model that out appropriately.

On the Opex side, yes, we are below our long term model and obviously microchip has grown very fast over the last couple of years and we've had a hard time, keeping up with expenses and.

Expenses as a percentage of net sales, it's dropping again this quarter at the midpoint of guidance Opex is rising in dollars again, but the percentage is coming down and.

The large factor in there in terms of just our hiring activities is that variable compensation that we're paying to our employees and as the environment changes from one of very high growth to one of more moderate growth.

We will moderate Bose.

Bonuses that are being paid to help us manage appropriately within our long term model I don't know if I can ask wants to add anything more I think you stated exactly so as we've always said the operating expenses on an investment in our long term growth profitability resilience of our results and so those investments need to be made.

And to have years and years of return on those investments.

And we are below our target.

But as things settle out over time that will creep up but not in <unk>.

<unk> right.

Thank you.

Thank you. The next question comes from Joshua <unk> from Cowen and company. Please proceed with your question Joshua.

Again, thank you so much for taking my question.

I wanted to ask you about the pricing environment. So when you were discussing the PSP you mentioned that backlog is noncancelable.

But it sounds like its flexible on the timeline.

Can you talk about how the pricing discussions go both within your PSP program and then outside it and if there's been any change in that.

That as you're going to you're starting to lower inventories a bit. Thank you.

So pricing is not any different between PSP or non PSP. So I'll give you a more general answer for just.

Overall methodology pricing for us is a strategic exercise.

We provide products that are sole source products have proprietary products and customers place their trust in us.

Years before they go to production and then they are with us for many many years to come.

Traditionally over the years, we have not had annual price reductions necessarily is a consistent part of what we do in.

In the last two years, we've had inflation at a much higher rate than what we could absorb with our improvements and we did pass along price increases that would absorb the cost increases keeping it margin neutral.

And that has not changed and that we don't expect to change as we go forward.

So pricing is stable and strategic and I think our thought.

Thought process.

Got it. Thank you and I was hoping you could maybe help us understand the utilization rates a little bit better can you walk us through where things are at in your front end and whether I guess argue lower inventory more of it is coming out of your internal.

Facilities versus your foundry partners. Thank you.

Yes, so your utilization in the factories has been very high throughout the last year and that continues today. So we arent facing underutilization charges or anything like that we're still trying to get caught up on our backlog. So the factories are still running at a pretty high rate.

And we don't expect the reduction of.

Inventory days to affect what we're going to do in our factories in terms of the under loading them. So the internal factories are running lower inventory and they will run constant through this cycle.

So that does know under absorption issue.

To be concerned about.

Thank you.

Thank you. The next question comes from Rajiv Gill from Needham <unk> Company. Please proceed with your question.

Yes, Thank you for taking my questions and.

Congratulations on solid results in a tough environment.

Just in terms of the backlog.

The past you mentioned that.

The backlogs.

Come down through the year as lead times start to normalize.

Youll start to see that Youll see more volatility and I think you indicated that.

But in the past you mentioned that the delta between the backlog and the actual sales is still quite wide.

That.

And that backlog to sales delta could offset.

That potential order volatility.

Wanted to get a sense of.

What are your thoughts on the backlog to sales a delta as we stand today.

So we still have significant backlog in excess of our sales.

And we have backlog over multiple quarters, and we continue to get new bookings and backlog that layers in.

Over time.

The backlog is a function of also where customers view lead times are going to be headed not so much what theyre going to be consuming.

And so as lead time slowly pull in we.

We do expect that customers will.

Slowdown some of what they want to do in terms of placing backlog now.

Any kind of inventory adjustment is not a permanent change in this industry.

A year ago, we were we had a completely different view of where things were in a year from now we may have a completely different view of where things are likely to be.

I think many customers are strategic in their thinking.

I have very high value end product and what they are doing.

And so they are more strategic in how they're thinking about their inventory over time, and what backlog that they'll place but.

But we don't see any concern with the amount of backlog, we need to be able to achieve.

The guidance that we've provided in the soft landing that we're trying to drive towards.

Obviously, it's still require bookings to come in and that is all driven by how consumption continues.

Thank you for joining us for that and just my follow up what is your latest pulse on China regarding customer order patterns and channel inventory. Thank you.

So I would say China is.

Stable.

I don't.

I don't see a major uptick from China post Chinese new year.

And.

We will see how the rest of the year goes I think there is opportunity for China to strengthen and contribute some tailwind as we go through the rest of the year, but I can't say that we can see that today and what we see what the order pattern.

Thank you.

Thank you ladies and gentlemen.

Reminder, excuse me I have to ask a question Keith.

And then Glenn if you want to ask a question Keith could start and then the next question comes from Chris Danley from Citi. Please proceed with your question.

Hey, Thanks, guys.

Can you give us a sense of how much of the backlog right now, let's just say for the next.

12 months is PSP versus.

I guess, the quote unquote can be cancelled or can be pushed out anything kind of percentage there.

So the percentage of backlog that is PSP has amazingly Ben.

Consistent for the last I would say nine to 12 months. So even if the overall backlog has been slowly ticking down by PSP as a percent of total backlog, it's well over 50% have stayed at that level. So it is resilient backlog it is higher quality backlog.

Then that and then what we see.

Great and have you had any customers try and renegotiate any of the PSP agreements either supply or price.

Not on price I think there have been customers asking for help on PSC backlog that they wanted to have pushed out in time and as I mentioned earlier in my prepared remark that is something that we have been actively doing.

To enable them.

To have that.

It's a strange environment, where I think in the shorter term there are more people looking to push out because they're uncertain about their business, but were also seen cases, where people who wanted to push out several months ago coming back in and wanting to pull it back in as well. So I think sometimes that is an overcorrection on both sides.

I would not be surprised as we go through the second half of this year that some of the push outs that are happening today.

If the environment strengthened could just as well come right back out at.

At that point in time, but in today's environment, it's very market.

Yes, Thanks, a lot guys.

Thanks.

Thank you. The next question comes from Joe Moore from Morgan Stanley . Please proceed with your question Joe.

Great. Thank you.

Thanks for all the color on the actions you guys are taking.

To match up customer inventories can you talk about what you think the state of those inventories are and I know some of your competitors just talked about we're trying to pruning some of the backlog, we're proactively making sure that our shipments are going into demand and not into inventory can you just talk about where you think you are relative to others.

How careful or are you trying to be in terms of.

Preserving customer inventory balances being ready to <unk>.

So our visibility into customer inventory is not there because they don't share that with us we can infer their inventory by their request for a push outs or cancellations as the case might be where that is cancelled or backlog or cancel basically anytime there is kind of our.

Total backlog they can do that.

It is non reschedule in noncancelable and they asked for help then we get involved in it.

But it's hard for us to know where customer is in their inventory.

Correction, so that we can see that in distribution.

And there we get a weekly report that tells us by distributor of different parts of the world Outwear stack.

As Eric mentioned distribution days of inventory went up by two days.

From 22 to 24 days.

Still well in control below where it used to be historically in ways that.

So thats about as much color as we can give you on kind of customer inventory and customer inventory.

Okay.

That makes sense.

Yes.

<unk> described the PSP over the last couple of quarters.

We're now kind of taking a little bit more of an approach.

Helping the customers, where they want to reduce it as.

Is that because there's just more people asking now and so we're trying to match it up or were they asking two quarters ago, but it wasn't brought enough Im just theres a perception I guess that that because of PSP you may have more inventory at customers than peers and I'm just trying to see if youre behaviors.

That much different than anyone else's.

Let me clarify I don't know where that perception with SaaS, maybe what we said in the past we have been pushing out orders from customers PSC customers for multiple quarters.

I mean, we're in this to be responsive to the market.

But we also want to make sure that as noncancelable orders get placed there is domestic responsibility from us and from our customers and Thats what creates some resistance to placing.

Orders that they shouldnt be placing ore that are speculative and where they're at and so we've done this multiple quarters theres. Another first quarter, we're doing it and it is in response to where markets and customers in specific situations are at.

And and we will continue to do it as needed including in this quarter.

Very helpful. Thank you for the clarification.

Just wanted to add one point this is Steve.

I think investors and analysts.

Failed to appreciate it.

That when a customer is placing a year worth of orders.

Which by contract noncancelable and non reschedule Liberals.

It goes through it.

I will now review the customer.

At much higher levels than just only the purchasing person.

And the resulting backlog that is placed on microchip has a much higher quality.

So therefore.

Even though we have taken some adjustments and rescheduling some of the PSD backlog.

The fundamental fact is that the backlog is a very high quality.

Relative to a similar backlog at any of the competitors.

Great. Thank you.

Youre welcome.

Thank you. The next question comes from Harlan sur from Jpmorgan. Please proceed with your question Harlan.

Hi, Thanks, good afternoon.

The uncompleted backlog to actual revenue shifts still above one in the March quarter, and where do you anticipate that we should be this quarter.

I believe the unsupported backlog was greater than the amount that we shipped in the quarter. It was.

I think it's becoming a less relevant indicator at this point right. We are unsupported means that down our backlog is noncancelable, but we are helping and non reschedule them, but we are actively allowing customers to reschedule it out in time and so we don't pay as much attention to it today as we did a year ago.

Today, it's really making sure that we are shipping to customers, who need the product for helping customers who are asking for help.

Working towards setting this thing up to not have an overhang to the best extent that we can.

Okay perfect. Thanks for that and then Jonathan our products are quite application specific life, a bit easier to track right storage controllers enterprise SSD controllers, Ethernet phy and so on right.

The demand dynamics in cloud in Morristown Enterprise data center have clearly weekend I know you guys have had.

Some products are strong some product is still weak but.

Is the aggregate data center franchise, holding up on a quarter over quarter and year over year basis.

Absolutely.

And I would say.

We are getting a tailwind from the AI servers.

And we are represented in those many of our pcie switches are an integral part of that.

The storage in general is stable.

But it has experienced substantial growth over the last year.

So data center is holding up.

Obviously, not as strong today as it was from a year ago growth.

Still stable.

Thank you Ganesh.

Thank you. Your next question comes from Toys Steinberg from Stifel. Please proceed with your question.

Yes. Thank you.

To follow up on the scheduling of our backlog I mean, the semi industry has obviously been struggling for a while now.

So would you say that this more recent phenomenon is due to some of the financial stress that's going on and the reason I'm asking that is because I'm. Just wondering if people are pushing out because they feel a little bit uncomfortable with the current <unk>.

Financial environment, and you know as soon as there is some stabilization, perhaps those push outs will turn into Poland. So I'm, just hoping you could give us your view there.

Yes, I'm sure. There's a portion of that that falls into that but you've also got to think about the environment is more stress both for our customers today with where inflation is at where interest rate is that what the economy in general is doing.

The relative growth rate from a year ago and so.

They placed orders with the best intention with the best information that they had back in time.

And as the environment has changed.

And in some cases seeing.

Seeing their demand picture different and therefore, asking for our supply picture to adapt to where they're at.

I don't believe this is a permanent change I think these things go in cycles and.

I do think as the economy at some point reversing and gathers more strength as the macro gathers more strength.

Any of these will come right back up and I do expect if.

History has to be repeated we will at some point and go back into.

People asking for Expedites on things that maybe three months ago six months ago, they were asking for push outs.

Nature of the Beast and the people have the best visibility at any point in time.

But as that visibility of the pushes out there need a pull them their need.

It will signal to us what we have to do to help them.

Very good and that was my follow up is.

One for Steve Steve Congratulations on your on your book.

What was the reason behind the increase.

The returns from $2 50 to 500 bps a quarter I guess my question is more on the timing of it I mean, you just feel.

I'm more confident about the profitability of the company during the soft lending period. If you could just elaborate on hardening that'd be great.

So the reason and growing from 250 bps increase per quarter to 500 was clearly.

Hitting a target.

Our total leverage going below one to one five X.

So this is what we had said for long time.

By paying down the debt every quarter, we're going to bring the leverage below 1.5 X and when that happens then we will further accelerate.

Return to the shareholders so that happened last quarter.

Where the leverage was 145, so therefore, we are accelerating.

The total cash return to shareholders.

From 62, 5% last quarter to 67, 5% this quarter. The difference of 500 bps in the following quarter will be 72, 5%, then 77, 5% and so on we take about seven quarters to get to 100.

Great. Thank you again.

And over the last seven quarters, we will continue to use the excess cash to pay down debts and bring leverage down further.

Alright. Thank you all that we think is appropriate in a.

<unk> interest rate environment.

Thank you. The next question comes from James Mckenzie from Mizuho. Please proceed with your question.

Jay You May proceed with your question if your line is muted.

Im sorry, you can pose your question.

Thank you.

Just wondering.

Hello.

Yes, I was just wondering if you could give us some.

Give us some color on what the ASP trends look like.

Exiting two and Howard add looking this year.

And then a follow up.

Yes.

The earlier question ASP trends.

Tend to be reasonably stable, we have passed along.

Nice increases.

A lesser extent than what we have and always absorbed from a cost standpoint trying to be margin neutral to make sure that between the improvements, we're making in our own business and the pricing from a market standpoint being reasonable to the customer so.

Asp's today, if you were to compare them over a year ago or slightly higher but they are stable trends on the EAC and some of those trends is not necessarily price increase driven.

Introducing new proprietary more complex products that bring more value to our customers.

Got it and then.

Addressing the comment you had in your deck.

Just wondering what percentage of your customers, you're seeing kind of redeploy look to redeploy backlog a pushout Ken so.

What are you seeing that.

I would guess some.

Quite a good segment that youre seeing it.

That's it thanks.

It's next to impossible to give you a number because we serve about 125000 customers.

About 115 of them are indirect through our distributor channel. So we don't really hear a customer by customer where it's at.

I would say that.

It's not the majority of the business that we're doing at.

Specific customers and specific markets in any given day, that's there so there's not a wholesale.

I want to push everything out that's out there.

Got it thank you.

Okay.

Tom.

Do we have any more questions.

Let me off the line operator are you there.

Okay.

Ladies and.

We apologize for the technical difficulty we'll move onto our next question, which is coming from the line of Chris Danley with Citi. Please proceed with your question.

Okay. Thanks, guys I just have two quick ease and then I guess I'll, let everybody.

Go back to work on the notes.

Is there any way you could tell like how much of this changes in backlog is too much inventory versus weaker demand is it 50, 50 or little more on the demand side, a little more on the inventory side any any color any clarity there.

So those two are interconnected right it's not.

It's only one or the other so weaker demand results in more inventory, which a lot of long or a stronger demand results and meeting to expedite that as well so it's hard to parse those out.

The sum of both.

Then there.

And in many of these.

Our customers who are also facing uncertainty, perhaps so it may not just the demand alone, but the environment that they're in.

They are trying to decide how they navigate that environment.

So what we see in the end is the aggregate feedback on our request.

They provide us.

And.

And with all of that we're able to show.

Continuing growth into this quarter into the June quarter.

As it stands right now we believe it is highly unlikely that the September quarter is going to have a sequential down quarter.

That's the basis of all of our integrated information from customers on.

What they are seeing on internal data that we see in all of our indicators bookings backlog.

Expedited class pushout requests all the external data that we track GDP PMI consumer confidence inflation et cetera.

So that's what gives us the confidence in our business.

Perfect. Thanks, Kash. Thanks, So let me ask another question.

Youre welcome.

Thank you.

No further questions at this time I would like to turn the call back to Dennis Murphy for closing remarks. Thank you.

I want to thank everybody for your time and questions. This afternoon, we will be seeing many of you on the road as we come out to different conferences et cetera and.

Thank you again.

Yeah.

Thank you very much ladies and gentlemen that does conclude today's teleconference. Thank you very much for joining US you may now disconnect your lines.

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Sure.

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Yes.

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Greetings and welcome to the Microchip technology, Q3, and FY2023 financial results Conference call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press Star and then zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mr. Eric Beyond Holt Senior Vice President and CFO . Thank you and you May proceed sir.

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

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

In attendance with me today are Ganesh Moorthy, Microchips, President and CEO , Steve, saying Microchips executive Chair and Sajid, Audi Microchips head of Investor Relations I.

I will comment on our fourth quarter and full fiscal year 2023 financial performance the.

Dennis 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.