Q1 2024 Microchip Technology Inc Earnings Call

August 3, 2023

[music].

Welcome to the first quarter fiscal 2020 for a conference call I will now turn the call over to todays host Erik young.

Chief Financial Officer of Microchip, you may begin.

Good afternoon, everybody 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.

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

And it turns with me today, Oregon, that's more microchips, President and CEO , Steve Saggy, Microchip executive chair and sides of Dowdy Microchips head of Investor Relations I won't comment on our first quarter fiscal year 2024 financial performance and will then provide commentary on our results and discuss the current business environment.

As well as our guidance and Steve will provide an update on our cash return strategy.

We will then be available to respond to specific investor and analyst questions. We are including information in our press release and 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 that Paul and.

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

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

Other than that sales I'll be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities.

<unk> based compensation and certain other adjustments as described in our earnings press release and in the reconciliation on our website.

Net sales in the June quarter were 2.289 billion, which was up two 5% 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, 4%.

Operating expenses were at 23% on operating income was a record 48, 1%.

non-GAAP net income was $905 3 million and non-GAAP earnings per share.

On a diluted basis was a record $1 64.

On a GAAP basis in the June quarter gross margins were a record at 68, 1% total operating expenses were $655 3 million and included acquisition intangible amortization of $151 5 million.

Charges of $1 7 million share based compensation of $37 7 million and a benefit of <unk> 4 million for other matters.

Net income was a record $666 4 million, resulting in a record $1 21 per diluted share.

Our non-GAAP cash tax rate was 14, 2% in the June quarter, our non-GAAP tax rate for fiscal year 'twenty 'twenty four 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 'twenty forecast 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 not operating losses tax credits lower tax depreciation on our expectation for lower capital expenditures in the U S in fiscal 'twenty four.

As well as the impact of the current tax rules, requiring the capitalization of R&D expenses for tax purposes.

We're still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repeal if that were to happen. We would anticipate about a 200 basis points favorable adjustment to microchips non-GAAP tax rate in future periods.

Our inventory balance at June 30 of 2023 was 133 6 billion we.

We had 167 days of inventory at the end of the June quarter, which was down two days from the prior quarter's level.

Although we reduced inventory days, where we were not able to make as much progress as we would've liked to as we accommodated requests by customers to push out delivery schedules for products that were very far through the manufacturing process.

We also continue to invest in building inventory for products with long life and high margins Who's manufacturing capacity is being end of life by our supply chain partners and these last time buys represented eight days of inventory at the end of June .

We expect dollars and days of inventory on our balance sheet to reduce in the September quarter.

Inventory at our distributors in the March quarter.

Excuse me in the June quarter was at 29 days, which was up five days from the prior quarter's level compared to our other regions inventory at our Asia distributors grew the most in the quarter as sell through activity was down significantly on a sequential basis in this region heavily driven by unfavorable business conditions in China.

Our cash flow from operation operating activities was $993 2 million in the June quarter included in our cash flow from operating activities was $106. One of long term supply assurance receipts from customers. We have adjusted these items out of our free cash flow to the German the adjusted free cash flow that we will return to shareholders.

Through dividends and share repurchases.

These supply assurance payments will be refundable overtime, that's purchase commitments were fulfilled.

Our adjusted free cash flow was $776 million in the June quarter.

As of June 30, our consolidated cash and total investment position was $271 2 million.

We paid down $413 million of total debt in the June quarter, and our net debt was reduced by $450 2 million.

Over the last 24 quarters since we closed the microsemi acquisition and incurred over $8 billion in depth to do so we have paid down $6 76 billion of debt and continue to allocate substantially all of our excess cash beyond dividends and stock buybacks to bring down the stack.

In the June quarter, we retired $1 billion in bonds that matured using our line of credit to do so our line of credit had $725 million of borrowings against that at June 32023.

After paying off the $1 billion in bonds.

During the June quarter. We also retired $38 million of total principal amount of our 2025 2027, and 2037 convertible bonds for a total cash payments of $90 1 million.

The amount paid above the principal amount essentially works like a synthetic stock buyback, reducing any current and future share count dilution that would result, if these convertible bonds wherever converted into shares.

The over $50 million, we paid above the par value for the convertible bonds was in addition to our normal share buyback activity that we executed during the quarter, resulting in an additional reduction in the dilutive shares outstanding.

Our adjusted EBITDA in the June quarter was a record at $1 $1 72 billion and 51, 2% of net sales.

Our trailing 12 month adjusted EBITDA was also a record at 4.4 dollars 73 billion.

Our net debt to adjusted EBITDA was 1.29 at June 30th 2023 down from 1.45 at March 31, 2023, and down from 2.05 at June 30 of 2022.

Capital expenditures were $111 1 million in the June quarter, our expectation for capital expenditures for fiscal year 2024 is between 300 and $400 million as we still have a lot of equipment that was ordered with long lead times that we will be receiving over the next year.

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

Depreciation expense in the June quarter was $50 5 million.

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

Thank you Eric and good afternoon, everyone. Our June quarter results were strong in the context of a slowing macro environment marked by our continued disciplined execution.

Well as a resilient end markets and diversified customer base net sales grew two 5% sequentially and 16, 6% on a year over year basis to achieve another all time record of $2 9 billion.

The June quarter represented our 11th consecutive quarter of sequential revenue growth.

non-GAAP gross and operating margins were both record at 68, 4% and 48, 1% respectively.

Our consolidated non-GAAP diluted earnings per share was $1 64 per share.

Another record by a whisker and up 19, 7% from the year ago quarter.

Adjusted EBITDA was a record 51, 2% of net sales and adjusted free cash flow was 33, 9% of net sales in the June quarter continue.

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

Our net leverage exiting June dropped to one <unk>.

We returned $349 2 million to shareholders in dividends and share repurchases in the June quarter, representing 67, 5% of our March quarter adjusted free cash flow.

Our capital returned to shareholders in the September quarter will increase to 72, 5% of our June quarter adjusted free cash flow as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025.

My profuse, thanks to all our stakeholders, who enabled us to achieve these outstanding results. Despite the increasingly challenging macro environment.

And especially to the worldwide microchip team, whose tireless efforts and agility to adapt are what enable us to navigate effectively through the business cycles.

Taking a look at our June quarter net sales from a product line perspective, our mixed signal microcontroller net sales set another all time record coming and sequentially up <unk>, 8% in the June quarter, and up 22, 5% on a year over year basis.

Our analog net sales also set another all time record coming and sequentially up two 5% in the June quarter, and up nine 2% on a year over year basis.

Our FPGA net sales, which we comment on from time to time had another record quarter with annualized revenue growth continuing to be in the double digits.

Now for some color on the June quarter.

While our overall business remained steady our customers continued to feel the effects of slowing economic activity and increasing business uncertainty.

Starting in early June we saw business conditions deteriorated in three areas first our China business was much weaker than our expectations and has not recovered from the shutdowns of last year and.

And the lunar new year holidays in the March quarter.

This manifested in week sell through activity and the building of inventory in the distribution channel in China.

Second we started to see initial signs of weakness and uncertainty in the automotive and industrial segments, reflecting.

Reflecting the impact of high inflation and high interest rates driving more cautious spending.

And third we are seeing early signs of an impending slowdown in Europe .

<unk> by some of our European customers being dependent on exports to countries like China, whereas we noted the business environment is much weaker than expected.

As a result, we continue to receive request to push out or cancel backlog as customers start to rebalance their inventory in light of the weaker business conditions and increase uncertainty they were experiencing.

We were able to push out meaningful amounts of non reschedule backlog to later quarters to help many customers with inventory positions.

While the rate of cancellations and pushout requests appears to be stabilizing.

We expect to request to push out or cancel backlog will likely be with us through the rest of calendar 2023.

Customers adjust to the new demand environment.

Tempt to derisk their inventory position commensurately.

We're also seeing an increasing direct and indirect impact from the cumulative effect of U S export control actions, especially in China.

These actions were less of an issue over the last few quarters when demand was significantly higher than supply.

Are more of an issue now as demand and supply come more into balance.

Despite all the factors mentioned so far in the June quarter, we weren't able to reverse the growth in days of inventory on our balance sheet with inventory dropping by two days to 167 days.

Of which eight days of inventory were from an investment in last time buys of high margin long life products, whose manufacturing capacity was being end of life by our supply chain.

Reflecting the slowing macro environment, especially in China.

Our channel inventory grew by five days to 29 days.

We continue to take actions to further reduce the days of inventory on our balance sheet, while maintaining absorption in our internal wafer fabrication factories.

We're also working with our channel partners to find the right balance of inventory required to serve customers.

And to be positioned for an eventual strengthening of business conditions.

Finally, while our overall inventory is still a bit higher than our target. We made excellent progress to position our inventory at the best locations and manufacturing to be able to rapidly respond to demand growth when the macro environment strengthens.

Consistent with the slowing macro environment.

And the higher than target level of inventory on our balance sheet as well as with some of our customers and channel partners.

Most of our internal factory expansion actions remain paused.

This we expect will result in lower capital investments in fiscal year, 'twenty, four and fiscal year 'twenty five.

During a period of macro weakness and business uncertainty. We believe shorter lead times are the best way to help customers navigate the environment successfully and improve the quality of backlog placed on us.

We have been able to reduce average lead time from roughly 52 weeks at the start of 2023 to roughly 26 weeks by the end of the June quarter.

And we expect to continue to drive lead times down further in the coming months.

We have heard concerns from some of the investment community about falling lead times, because it results in lower backlog.

This is often true we believe the level of backlog does not equate to true end market consumption and.

And the final analysis shorter lead times enable our customers and microchip to navigate an uncertain environment with agility and more effectively.

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

Although our backlog for the September quarter was strong.

We are continuing to take active steps to help customers with inventory positions to push out their backlog.

Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the September quarter to be between up 1% and down 3% sequentially.

At the midpoint of our net sales guidance for the September quarter, our year over year growth for the quarter would be nine 3%.

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

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

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

And we expect our non-GAAP diluted earnings per share to be between $1 60, and $1 64 at.

At the midpoint of our non-GAAP earnings per share guidance, our year over year growth for the September quarter would be 11%. Despite a much higher tax rate down a year ago quarter.

As supply and demand come into balance, we expect normal seasonality to return to our business.

Historically, the December quarter has been our seasonally weakest quarter.

This year, we expect that our normal seasonality in the December quarter will likely be amplified by the macro weakness and business uncertainty that our customers are experiencing.

As a result, we anticipate further business headwinds in the December quarter.

However, notwithstanding any near term macro weakness we are confident at semiconductors remain the engine of innovation for the markets and applications we serve.

Our focus on total system solutions and key market Megatrends continues to fuel strong design win momentum, which we expect will drive above market long term growth.

Finally, as you can see from our June quarter results and our September quarter guidance, our Microsoft three point of our strategy, which we launched 21 months ago continues to be the foundation of our results.

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

However, we recognize that we operate in a cyclical industry and we're not immune to the business cycle.

If you review, Microsoft peak to trough performance.

Through the business cycles over the last 15 plus years.

Which is included in the Investor presentation posted on our website, you will observe a robust and consistent cash generation gross margin and operating margin results.

Although we don't know what exactly the future holds.

We were to experience a semiconductor inventory correction like what the industry has seen in the past.

We are highly confident that our non-GAAP operating margins will remain well above 40% and.

And we expect our cash generation non-GAAP gross margin non-GAAP operating margin to once again demonstrate consistency and resiliency through the cycle.

And with that let me pass the baton to Steve to talk more about our cash return to shareholders.

Thank you Ganesh and good afternoon, everyone I would like to reflect on our financial results announced today.

And provide you further updates on our cash strategies.

Collecting on our financial results.

Continue to be very proud of all employees of microchip.

They would have delivered another exceptional quarter, while making new record in many respects.

Namely record net sales record 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 environment.

The board of Directors announced an increase in the dividend of 36, 2% from the year ago quarter to 41 per share.

During the last quarter, we purchased $143 million of FERC.

Stock in the open market.

We also paid out $208 9 million in dividends.

The total cash return was $349 2 million <unk>.

This amount was 67, 5% of our.

Actual or adjusted free cash flow of $517 3 million during the March 2023 quarter.

Our paydown of debt.

As well as record adjusted EBITDA drove down our net leverage at the end of June 2023 quarter 2129 times from 2.05 times at the end of June 2022.

Ever since we achieved an investment grade rating on our debt in November 2021, and pivoted to increasing our capital return to shareholders. We have returned to $6 $86 billion through shareholders through June 32023.

A combination of dividends and stock buybacks.

In the current September quarter, we will use the word adjusted free cash flow from the June quarter to target the of cash returned to shareholders via adjusted free cash flow.

Excludes a net $106 1 million.

That we collected from our customers for long term supply assurance payments. These payments are refundable when purchase commitment to flow through the year.

Adjusted free cash flow for the June quarter was 700.

$76 million, we plan to return.

72, 5%.

For $562 $6 million.

That amount to our shareholders with the dividend expected to be approximately $223 million and the stock buyback expected to be approximately $339 6 million.

Going forward, we plan to continue to increase free cash flow return to shareholders by 500 basis points every quarter.

<unk> to 100%.

Adjusted free cash flow returned to shareholders.

It will take six more quarters and dividends over time, we expect will represent approximately 50% of our cash return.

With that operator will you please poll for questions.

If you'd like to ask a question. Please press star one on your telephone keypad again to ask a question press star.

Why.

And.

For the sake of time lead to ask that you limit yourself to one question if possible.

My first question is going to come from tore Svanberg said.

Your line is open.

Yes. Thank you.

Was hoping you could talk a little bit more about your orders.

Backlog in the backlog that will make sense, but.

I was just wondering if you could update us on the orders, especially by region.

And are you seeing any sort of signs of life at all from China, because obviously they are trying to stimulate the economy and just wondering if you've seen any data points here at all.

I think going through the month of July we have not yet seen China recover there are.

Discussions I understand about things they may do in the rest of this quarter.

Yet to be seen.

So I don't have anything more to add with respect to China.

Our bookings have been.

Weak.

We do expect in time that those will begin to strengthen there is still a lot of backlog that we are accounting and we are pushing out backlog. So there's not an immediate requirement for bookings to spring back to where they used to be.

Perfect. Thank you.

Maybe I can just add to that Neil bookings are a reflection of where lead times are and with lead times coming down.

The customers just aren't viewing that they need to put the backlog in place because our lead times are falling pretty rapidly.

Makes sense. Thank you Eric.

Our next question is going to come from Vijay Rakesh with Mizuho. Your line is open.

Yeah, Hi, this is Mike.

Question I was wondering when you look at.

Our supply chain, where you have you seen any what are you seeing on the pricing side.

If you if you were to look at.

China.

Yes globally.

Our supply chains are stable in most places where we buy wafers from wherever you buy some of our assembly and test services from clearly on some of the materials. There may have been some movement in certain cases.

We track it at the level that perhaps you.

May be interested in but I would say supply chain is a stable lead times have come down we were able to get renewed.

Got it and if you look at.

Trends as you look out.

On the on the pricing side any any thoughts here.

Sure I mean, what has been trends and what you see in the last two or three years and how you see it going forward I guess, that's it thanks a lot.

In our business for the embedded solutions business.

Pricing tends to be a lot more stable pricing as something you establish at the point of doing a new design in activity not at the point at which a fulfilling demand thats coming in.

And outside of the last two years, where there was significant inflation that we faced and that we passed onto our customers pricing is usually relatively stable over time, we're not looking to reduce pricing to increase pricing.

As we go forward I don't expect that is going to change in the way that our business runs.

Alright, thank you.

Hmm.

Our next question is going to come from Vivek Arya of bed.

Bank of America Securities. Your line is open.

Thanks for taking my question sort of a multipart, but related when I look at the September quarter, I would look at it as kind of flattish, even though youre describing the situation is getting somewhat tougher and then as I look out to the December quarter. I think you mentioned it could be worse than seasonal but even with the headwinds do you.

You see a scenario where microchip could continue to grow.

On the other where you think we should be thinking about the first quarter of year on year declines.

Declines in if they were to.

Right declined year on year, what would be the effect on gross margins.

We haven't modeled what the December quarter, nor are we guiding towards the December quarter is going to be at a range of scenarios that showed that we are working with.

And.

I don't really have any more color to offer on it.

With respect to the gross margins as we have said many times.

We have a pretty strong resilience to the way the gross margin works. If you look at our inside outside mix.

We still have a 60% outside mix, we are continuing to run our fac.

For absorption purposes.

We are building the products that we need to build in building some inventory so really I'm not trying to provide any guidance for December <unk>.

That you might have but youre absolutely right. We are expecting that the December quarter is going to be weaker than normal seasonality.

Thank you.

Our next question is going to come from ambit.

Goodbye.

BMO capital markets. Your line is open.

Alright, Thank you very much.

I wanted to ask about.

Automotive and industrial industrial has weakened for some lots of competitors for quite a few quarters.

And <unk> continues to be strong.

More or less although the growth rate seems to be selling what's your take on it having been through several cycles. You just following on here and lead times on our contracting so.

How many quarters do you think the weakness in autos and for that matter in industry and for your business, we should expect loss.

It's very difficult for me to answer that question is that question off.

Which part of this is just inventory digestion, that's taking place and how much of it is consumption changes and how consumption changes might change.

So just using China as an example, China consumption was weak OE.

A weaker than anyone expected in the June quarter now how does that come back in the September December quarters, as anybody's cast and where it's at so I don't have a clear view.

How long does automotive or industrial stay weak there we've gone through many cycles. They don't last forever.

This land.

There are some typical cycles, you can look back on and see how they perform.

So I just had a quick follow up I'm struggling with the R part of the <unk>.

What's the learning here has it allowed you.

To reduce the volatility that usually used to occur when we were going into a downturn.

Because you keep.

Police scheduling these I shouldn't say keep from a couple of quarters you reschedule these and you're expecting one the lease schedule next quarter.

What's the right way investors should think about that because we have seen and <unk> by <unk>.

Many companies into and so so I don't know what's the learning from this.

Well the purpose of fee and CNR was to get our mutual commitment of investment we were going to make and benefit of customer was going to get it's based on a set of assumptions about where business is going to go.

And I think as lead times go farther and farther out.

Everybody's visibility gets to be less clear.

And the.

The vast majority of the customers, who pro who were part of the NPA and our programs have been extremely happy with what they were able to get in an extremely department in 2021 and 2022.

No program is perfect I believe that our programs have had substantially more benefit than issues with them. We are at a point of the cycle, where the demand curve has changed and as that demand curve changes, we have to adjust and by the way at the same demand curve will change again.

As we go into 2024.

So I think we have to look beyond the short term view of where this all ends up and look at how do these programs provide mutual benefit in the medium to long term.

Makes sense. Thank you.

Youre welcome.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad. Our next question is going to come from Joe Moore with Morgan Stanley . Your line is open.

Great. Thank you guys.

I guess youre, describing an environment in which youre seeing weakness in multiple regions weakness in multiple end markets.

Victor rising that is kind of.

Early signs of that and yet you're only guiding down 1% quarter on quarter. So I guess, it's like.

The level of demand Thats, it's lower than that assuming you have a lot of backlog right. Now what happens is that backlog runs out can you just give us a sense for what type of drawdown, we might be looking at over the course of the next few quarters just anything qualitative you can help us so that would be great.

We're calling it as we see it.

We've given you a guidance for September quarter, or the brackets between plus one and minus three and that reflects what we see today in our backlog and what we see in the tone of the business.

We're giving you a sense that the December quarter is going to be seasonally weaker than normal.

And again it has a number of puts and takes that could go into it.

I don't know what more I can say, Joe it's the best.

That we are able to peer into the future.

And provide some insight as to where we think business is going.

I can appreciate that thank you and then in terms of the.

40% operating margin can you give us a sense for.

Yeah.

What.

Parameters are of that like how much.

Is that kind of a normal revenue weakness that you might have seen two or three years ago could you still do at north of 40%. If it's worse than that can you just give us a sense for your confidence in the durability of that number.

Our confidence is pretty high.

<unk> looked at a number of scenarios, we've looked at how other cycles have gone.

And I think we'll be well above 40% and the way that we have modeled it in the different scenarios that we have.

Eric do you want to add more of it.

Yeah, I think you've summed it up well going as you know, we we've done scenario planning and do not see a scenario, where our operating margins on a non-GAAP basis could fall below 40%. So we're very comfortable in making that statement maybe the other piece that I would add to Dan essence first response is.

I think it's a little bit tricky for investors to understand what is normal seasonality for microchip because of the supply constraints. We've been under for the last couple of seasonality did play a part in that and then we've done a lot of acquisitions historically right, but we would say that probably a normal December seasonal might be.

Down three or 4%, so hopefully that that provide some contacts and were saying that.

Based on the conditions that we're seeing it.

We could be.

Yeah.

What's the word goodness.

Tied to the maturation of that amplified.

Great. Thanks, so much Greg Hendrick much appreciate it.

Our next question is going to come from Joshua <unk>.

P D Cohen.

Your line is open.

Hey, guys. Thank you for taking my question in the past you've talked you've sort of given us rough levels of where you expected inventory to come in in the quarter.

I guess given regarding to this digestion period can you give us any level that you would feel comfortable with what sort of targets are you thinking about for all bulk sitting in the channel when you would feel.

More comfortable that Youre shipping closer to end demand. Thank you.

I think the channel inventory is driven by in part with the channel wants to carry what we can supply and what their demand intensity is so we don't try to guide where is the channel inventory going to go it goes where it goes.

Just on those factors.

We do take a lot of effort on the internal inventory inside microchip.

And we haven't added factor at this point, which is we are.

Customers, who have inventory positions and are looking for pushout health and.

And that has caused us to go slower than we would normally have liked but it's the right long term answer for us and for our customers and we do expect as Eric said to have both a reduction in absolute and days of inventory on our balance sheet in the September quarter.

I appreciate the color there and as my follow up I mean, given that dynamic. Your gross margin suggests that there is no real material cut at least on your internal utilization rates can you talk about how youre thinking about running your factory through this period of digestion and I guess the same question for.

Your foundry partners as well thank you.

Sure. So our internal fabs are continuing to run relatively.

Unchanged.

These products are very long lived products in many cases had been depleted in the inventory points that we typically need.

To be able to be able to serve at a high level of.

Certainty as well as the lead times with one so our internal factories and the internal Fabs in particular are continuing to run.

And our foundry partners, depending on where the inventory levels were.

In some cases, we will be adjusting and have adjusted.

The purchasing to bring that inventory into line with where we want to be long term.

Thank you.

Youre welcome.

Our next question is going to come from Chris Caso with Wolfe Research. Your line is open.

Yes. Good evening. Thank you first question is about.

I guess, something we haven't spoken about in a while and potential for.

For the requirement for turns and can you speak about that.

Given the.

A reduction in lead times. The fact that customers are booking closer and are we in a situation.

Chris We may have lost you can you can.

It looks like kisses line had dropped so until he comes back we'll just move on to the next.

Chris Thank you and that's going to be Harlan sur with Jpmorgan.

Line is open.

Hi, Good afternoon. Thanks for taking my question you know the team out a target to get average lead times down to 26 weeks in the second half I mean is there now given the rescheduling and activity in the near term demand weakness improving foundry capacity right I think normal average.

Historical lead times for you guys have been in that eight to 12 week range.

Is this kind of a range that you expect as you move through the second half of the year now and and just a quick follow up do you guys expect to see a channel distribution inventories continue to rise from the 29 day level.

In this weak environment.

So first to take the lead times, we are continuing to drive lead times down as I mentioned in my prepared remarks, we believe that short lead times is what makes us all effective and agile.

And in an unpredictable business environment that we're in and we're on average at just under 26 weeks right. Now I think we will end the year at well under 13 weeks it could be under 10 weeks out by that time, but we will know how we progressed in that time four to eight weeks is where our.

Lead times are 490% or so of our line items.

Our historical benchmark for wherever you are.

With respect to distribution inventory as I mentioned, a little earlier on it has many functions. It's a function of what kind of sell through are they seeing what kind of inventory do they want to carry what are we able to supply that maybe we've been they've been asking for some time to be able to do it. So I don't have any color on what.

Distribution inventory is likely to be doing.

Outside of what we've provided so far for Jim.

Okay. Thanks, Scott.

Welcome. Thanks Harlan.

First of all you're back.

Yes, Hi, Chris Keith Your line is open again.

Yeah, not sure what happened but.

So the question was on the turns environment and it's obviously you havent seen turns in several quarters given the weather.

Hi backlog is that something you contemplate your different September quarter, and December quarter, and can you tell us how you're thinking about that the turns business.

Under the context of shortening lead times.

Yes, we certainly expect that turns will be a requirement as we go into the December quarter, and I know, it's a normal part of the business that we have done well there.

And so most things are starting to normalize again with respect to lead times on what kind of backlog coverage will have in terms of just something else will have to manage as we normally do.

Starting from the December quarter onwards.

Okay, but it starts in December not in September .

There may have been small parks in the September quarter and were one third of the way into the September quarter.

Right right.

That's helpful. As a follow up I Wonder if you could expand on some of the comments about Europe and we've heard from from various others in the industry, obviously weakness throughout China, there's been a bit here and there about industrial and.

Auto, but really not any comments about Europe , that's something new and if you can expand upon what you're seeing there.

Yes, as I mentioned I think Europe is more.

I look forward.

There are more headwinds that European economies are facing.

I believe technically Germany is now in a recession has had two consecutive quarters of negative GDP.

And interest rates are still high inflation. This July those energy inflation, which was larger than in the U S.

And some of the large European economies rely on export China being one and to the extent China is weak we're going to see some of that weakness in China, but we'll also see some of the weakness in Europe . When their exports are not quite so that's the addition of all of what we see as we look into where are things going.

And the impact from Europe .

Got it helpful. Thank you and thank you for coming back to my question.

Youre welcome Thanks, Chris and welcome back.

Our next question is going to come from Timothy Arcuri with UBS. Your line is open.

Thanks, a lot I had a question on cancellations and in the past.

Or you have been working with customers.

Allowing push outs.

But in the past you've sort of you've been.

Offering customers to cancel for a fee. So if you want to bring down backlog or you're sort of increasingly forcing cancellation versus just.

Allowing customers to push out shipments.

Shipments I guess, if you want to bring down backlog, one quick way to do that forced them to cancel versus just allowing them to push things out.

We're not intentionally trying to bring backlog down.

We are trying to help customers, who have backlog placed on us, but we'd prefer to receive it in some cases later than what is presently scheduled for.

Backlog will over time has been coming down.

As the fever of what it was in 2022 and 2021, where people are placing huge amounts of backlog out in time started.

Starts to settle out, especially as this time starting to come in.

As the industry starts to normalize.

Backlog will get back to what it used to be normally.

Pre COVID-19 and so that's really what's happening with backlog.

We're not trying to force it down in any way.

Thanks, a lot and then just as a quick follow up in China do you think any of the weakness in China.

Are you seeing examples of locally sourced product.

That is being that you are being displaced by I know that you don't have very much exposure there.

If you net out the proprietary stuff, it's probably only 5% thats kind of subject to some sort of going local but are you are you seeing any of that thanks.

And in fact, it's a timely question, we just had a review with our China team here yesterday on exactly that topic.

There is.

Little to no loss to the local China.

Producers that we're able to see either in design or in things that are in production today. So.

No. It is actual consumption that is weak.

A lot of uncertainty in China with respect to.

What the amount of debt people are carrying or what kind of stimulus is going to take place and I think there is a ton of consumption that is waiting to happen and I hope it will open up at some point in time, but at the moment I think things are uncertain enough.

Consumption is being held down.

Thank you so much thanks welcome.

Welcome.

Our next question is going to come from William Stein with Jefferies. Your line is open.

Great. Thank you.

Wanted to address the.

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