Q2 2024 Microchip Technology Inc Earnings Call

November 2, 2023

Irritation.

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

As a reminder, this conference is being recorded I would now like to turn the conference over to your host Eric <unk> Chief Financial Officer.

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

For 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.

Greetings and welcome to the Microchip technology Q2 fiscal years 2024 financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

In attendance with me today are going to ask him worthy microchips President and CEO.

Steve Sanger, Microchip executive chair and Sajid Dowdy Microchips head of Investor Relations.

I won't comment on our second quarter fiscal year 2024 financial performance <unk> will then provide commentary on our results and discuss the current business environment as well as our guidance and Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions.

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

As a reminder, this conference is being recorded I would now like to turn the conference over to your host Eric Bjorn Holt Chief Financial Officer.

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 you to our press releases of today as well as our recent.

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.

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

Fillings with the SEC that identify important risk factors that may impact microchips business and results of operations.

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

In attendance with me today are going to ask Marty Microchips, President and CEO, Steve Zhang Microchip Executive Chair and Sajid Dowdy Microchips head of Investor Relations.

I will now go through some of the operating results, including net sales gross margin and operating expenses other than net sales I will be referring to these results on a non-GAAP basis.

I will comment on our second quarter fiscal year 2024 financial performance.

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 reconciliations on our website.

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.

Net sales in the September quarter were 225, 4 billion, which were down one 5% sequentially we.

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 68, 1%.

Operating expenses were at 20%.

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

And operating income was a record 48, 1%.

non-GAAP net income was $889 3 million and non-GAAP earnings per diluted share was $1 62.

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

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

On a GAAP basis in the September quarter gross margins were 67, 8% total operating expenses were $642 4 million and included acquisition intangible amortization of $151 4 million.

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 the reconciliation on our website.

Special charges of $1 8 million share based compensation of $38 million and $1 1 million of other expenses.

GAAP net income was a record $666 6 million, resulting in a record $1 21 in earnings per diluted share.

Net sales in the September quarter were 225, 4 billion, which were down one 5% sequentially.

We have posted a summary of our net sales by product line and geography on our website for your reference.

Our non-GAAP cash tax rate was 14, 2% in the September quarter.

On a non-GAAP basis gross margins were 68, 1%.

Our non-GAAP tax rate for fiscal year 2024 is expected to be about 14, 2%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Operating expenses were at 20%.

Operating income was a record 48, 1%.

non-GAAP net income was $889 3 million and non-GAAP earnings per diluted share was $1 62.

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.

On a GAAP basis in the September quarter gross margins were 67, 8% total operating expenses were $642 4 million and included acquisition intangible amortization of $151 4 million.

Lower depreciation with our expectation for lower capital expenditures in the U S. In fiscal 'twenty four as well as the impact of current tax rules, requiring the capitalization of R&D expenses for tax purposes.

Special charges of $1 8 million share based compensation of $38 million and $1 1 million of other expenses.

We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed.

GAAP net income was a record $666 6 million, resulting in a record $1 21 in earnings per diluted share.

If this were to happen, we would anticipate about a 200 basis point favorable adjustment to microchips non-GAAP tax rate in future periods.

Our non-GAAP cash tax rate was 14, 2% in the September quarter.

Our inventory balance at September 32023 was 133 1 billion. We had 167 days of inventory at the end of the September quarter, which was flat to the prior quarter's level.

Our non-GAAP tax rate for fiscal year 2024 is expected to be about 14, 2%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Although we reduced inventory dollars in the quarter, we were not able to make as much progress as we would have liked as we continued to accommodate requests by customers to push out delivery schedules for products that were very far through the manufacturing process.

Depreciation with our expectation for lower capital expenditures in the U S in fiscal 'twenty four as well as the impact of current tax rules, requiring the capitalization of R&D expenses for tax purposes.

We also continue to invest 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 10 days of inventory at the end of September.

We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out for repeal.

We expect dollars of inventory on our balance sheet to reduce in the December quarter inventory.

If this were to happen, we would anticipate about a 200 basis point favorable adjustment to microchips non-GAAP tax rate in future periods.

Inventory at our distributors in the September quarter was at 35 days, which was up six days from the prior quarter's level.

Our inventory balance at September 32023 was 133 1 billion. We had 167 days of inventory at the end of the September quarter, which was flat to the prior quarter's level.

Our cash flow from operating activities was $616 2 million in the September quarter included in our cash flow from operating activities was $87 5 million of long term supply assurance receipts from customers.

We have adjusted these items out of our free cash flow to determine the adjusted free cash flow that we will return to shareholders through dividend and share repurchases as the supply assurance payments will be refundable overtime as purchase commitments are fulfilled.

Our adjusted free cash flow was $454 3 million in the September quarter.

As of September 30, our consolidated cash and total investment position was $256 6 million.

Our total debt increased by $45 6 million in the September quarter, and our net debt was up by $62 million.

We expect dollars of inventory on our balance sheet to reduce in the December quarter.

Inventory at our distributors in the September quarter was at 35 days, which was up six days from the prior quarter's level.

Over the last 21 full quarter since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we have paid down $6 $72 billion of debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring bound to bring down this debt.

Our cash flow from operating activities was $616 2 million in the September quarter.

Our cash flow from operating activities was $87 5 million of long term supply assurance receipts from customers.

In the September quarter, we issued a $750 million term loan a and retired $1 billion in bonds that matured on September one 2023, with the term loan a and proceeds from our line of credit.

We also issued $1 billion of commercial paper during the September quarter, taking advantage of about a 90 basis point lower interest rate on the commercial paper compared to our line of credit rate.

Our adjusted free cash flow was $454 3 million in the September quarter.

As of September 30th our consolidated cash and total investment position was $256 6 million.

Our line of credit had $39 million of borrowings against it at September 32023.

Our total debt increased by $45 6 million in the September quarter, and our net debt was up by $62 million.

During the September quarter. We also retired $18 2 million of total principal amount of our 2027 convertible bonds for a total cash payment of $42 7 million.

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

In the September quarter, we issued a $750 million term loan a and retired $1 billion in bonds that matured on September one 2023, with the term loan a and proceeds from our line of credit.

The $24 5 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.

<unk> and an additional reduction in the dilutive share count outstanding.

We also issued $1 billion of commercial paper during the September quarter, taking advantage of about a 90 basis point lower interest rate on the commercial paper compared to our line of credit rate.

Our adjusted EBITDA in the September quarter was 115, 2 billion and 51, 1% of net sales.

Our trailing 12 month adjusted EBITDA was a record at $4 five.

Our line of credit had $39 million of borrowings against it at September 32023.

<unk> 7 billion.

Our net debt to adjusted EBITDA was $1 two eight at September 32023 down from 184 at September 32022.

During the September quarter. We also retired $18 2 million of total principal amount of our 2027 convertible bonds for a total cash payment of $42 7 million.

Capital expenditures were $74 4 million in the September quarter, our expectation for capital expenditures for fiscal year 2024 is between 300 and $325 million, which is down from the $300 million to $350 million, we shared with investors last quarter as we are delaying certain capital given the more challenging.

The $24 5 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.

Gnomic backdrop.

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

<unk> and an additional reduction in the dilutive share count outstanding.

Depreciation expense in the September quarter was $47 million.

Our adjusted EBITDA in the September quarter was 115, 2 billion and 51, 1% of net sales.

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

Our trailing 12 month adjusted EBITDA was a record at 4.5.

Thank you Eric and good afternoon, everyone.

<unk> 7 billion.

Our net debt to adjusted EBITDA was $1 two eight at September 32023 down from 184 at September 32022.

Our September quarter results were about as we expected with net sales coming in just under the midpoint of our guidance and well within our guidance range.

Net sales were down one 5% sequentially and up eight 7% on a year over year basis.

Capital expenditures were $74 4 million in the September quarter, our expectation for capital expenditures for fiscal year 2024 is between 300 $325 million, which is down from the $300 million to $350 million, we shared with investors last quarter as we are delaying certain capital given the more challenging.

non-GAAP gross and operating margins remained strong at 68, 1% and 48, 1% respectively.

Our consolidated non-GAAP diluted EPS was at the midpoint of our guidance at <unk> 62 per share up 11% from the year ago quarter.

<unk> backdrop.

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

Adjusted EBITDA was 51, 1% of net sales and adjusted free cash flow was 22% of net sales in the September quarter.

Depreciation expense in the September quarter was $47 million.

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

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

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

We had higher cash flow outflows in the September quarter compared to the June quarter due to the timing of tax payments and because of record capital returned to shareholders in dividend and share repurchases totaling $562 6 million.

Thank you Eric and good afternoon, everyone.

Our September quarter results were about as we expected with net sales coming in just under the midpoint of our guidance and well within our guidance range.

Net sales were down one 5% sequentially and up eight 7% on a year over year basis.

This is 61% higher than the capital returned to shareholders in the June quarter.

Our capital returned to shareholders in the December quarter will increase to 77, 5%.

non-GAAP gross and operating margins remained strong at 68, 1% and 48, 1% respectively.

September quarter adjusted free cash flow.

Our consolidated non-GAAP diluted EPS was at the midpoint of our guidance at <unk> 62 per share up 11% from the year ago quarter.

As we continue on our path put it around a 100% of our adjusted free cash flow to shareholders by the March quarter calendar year 2025.

Adjusted EBITDA was 51, 1% of net sales and adjusted free cash flow was 22% of net sales in the September quarter.

My thanks to all our stakeholders, who enabled us to achieve these results despite the increasingly challenging macro environment, and especially to the worldwide microchip team with effort and engagement enables us to navigate effectively through the business cycle.

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

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

Taking a look at our September quarter net sales from our product line and geographic perspective.

Our mixed signal microcontroller net sales were down one 7% sequentially and up eight 5% on a year over year basis.

Our analog product line net sales were down one 7% sequentially and up eight 8% on a year over year basis.

This is 61% higher than the capital returned to shareholders in the June quarter.

On a sequential revenue basis Asia was down Europe was about flat in the Americas was slightly up.

Our capital returned to shareholders in the December quarter will increase to 77, 5%.

Our September quarter, adjusted free cash flow.

Now for some color on the September quarter.

We continue on our path put it around 100% of our adjusted free cash flow to shareholders by the March quarter calendar year 2025.

Our business slowed down as expected.

As our customers continue to respond to the effects of increasing business uncertainty slowing economic activity and a resultant increase in inventory.

Well. Thanks, so all of our stakeholders, who enabled us to achieve these results despite the increasingly challenging macro environment and especially to the worldwide Microchip team.

The combined effects of persistent inflation and high interest rates, we believe are contributing to the weak macro environment.

And engagement enables us to navigate effectively through the business cycle.

All regions of the World and most end markets experienced varying degrees of weakness.

Taking a look at our September quarter net sales from our product line and geographic perspective.

We continue to receive request to push out or cancel backlog as customers sought to rebalance their inventory in light of the weaker business conditions and increased uncertainty tailored experiencing and we weren't able to push out meaningful amounts of backlog to later quarters to help many customers with inventory positions.

Our mixed signal microcontroller net sales were down one 7% sequentially.

And up eight 5% on a year over year basis.

Our analog product line.

Net sales were down one 7% sequentially and up eight 8% on a year over year basis.

On a sequential revenue basis Asia was down Europe was about flat in the Americas was slightly up.

We are seeing customers continue to adjust the demand expectations.

As they derisk that inventory position whenever possible.

Now for some color on the September quarter.

Our experience in prior cycles is that at this stage of the cycle customers tend to Overcorrected net inventory.

Our business slowed down as expected.

As our customers continue to respond to the effects of increasing business uncertainty.

And backlog due to their business uncertainty.

Slowing economic activity and the resultant increase in inventory.

And bind with the availability of product with very short lead times.

This is in effect the flip side of what we saw during 2021 and 2022 when demand with historically strong and seemingly insatiable.

The combined effects of persistent inflation and high interest rates, we believe are contributing to the weak macro environment.

All regions of the World and most end markets experienced varying degrees of weakness.

Reflecting the slow macro environment, our channel inventory grew to 35 days.

We continue to receive request to pushed out or canceled backlog.

We are working with our channel partners to find the right balance of inventory required to serve customers as well as to be positioned for the eventual strengthening of business conditions.

As customers start to rebalance their inventory in light of the weaker business conditions and increased uncertainty they were experiencing.

Most of our internal capacity expansion actions remain paused and we expect this will result in lower capital investments.

And we weren't able to push out meaningful amounts of backlog to later quarters to help many customers with inventory positions.

Fiscal year, 'twenty, four and fiscal year 'twenty five.

We are seeing customers continue to adjust the demand expectations.

Even as we prepare for the expected robust long term growth of our business.

De risked inventory position whenever possible.

In the Meanwhile, we have been driving our lead times down and have reduced average lead times from approximately 52 weeks at the start of 2023 to approximately 26 weeks at the end of June.

Our experience in prior cycles is that at this stage of the cycle customers tend to Overcorrected inventory and.

And backlog due to their business uncertainty.

And bind with the availability of product with very short lead times.

And exited the September quarter at approximately 13 weeks.

This is in effect the flip side of what we saw during 2021 and 2022 when demand was historically strong and seemingly insatiable.

We expect to continue to drive average lead times down further to less than eight weeks by the end of 2023.

Reflecting the slow macro environment, our channel inventory grew to 35 days.

During a period of macro weakness and business uncertainty, we believe short lead time, so the best way to help customers navigate the environment successfully and improve the quality of backlog placed on us as.

We are working with our channel partners to find the right balance of inventory required to serve customers as well as to be positioned for the eventual strengthening of business conditions.

Is it enables our customers and microchip to engage an uncertain environment with more agility and effectiveness.

Most of our internal capacity expansion actions remain paused and we expect this will result in lower capital investments in fiscal year, 'twenty, four and fiscal year 'twenty five.

However, the significant reduction in lead times is also resulting in lower bookings and reduced near term visibility.

Even as we prepare for the expected robust long term growth of our business.

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

In the Meanwhile, we have been driving our lead times down and have reduced average lead times from approximately 52 weeks at the start of 2023 to approximately 26 weeks at the end of June.

As our customers take further actions to adjust to a weakening macro environment and uncertain business conditions.

We are continuing to support customers and channel partners with inventory positions to push out their backlog.

And exited the September quarter at approximately 13 weeks.

Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the December quarter to be between down, 15% and down 20% sequentially.

We expect to continue to drive average lead times down further to less than eight weeks by the end of 2023.

At the midpoint of our net sales guidance for the December quarter, our year over year decline for the quarter would be 14, 3%.

We expect our non-GAAP gross margin to be between 64% 65% of sales.

Is it enables our customers and.

Microchip to engage an uncertain environment with more agility and effectiveness.

We expect non-GAAP operating expenses to be between 22, 7% and 23, 3% of sales.

However, the significant reduction in lead times is also resulting in lower bookings and reduced near term visibility.

We expect non-GAAP operating profit to be between 47% and 42, 3% of sales and.

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

And we expect our non-GAAP diluted earnings per share to be between $1 nine and $1 17 per share.

As our customers take further actions to adjust to a weakening macro environment and uncertain business conditions.

Given the current macro weakness and resultant business uncertainty combined.

We are continuing to support customers and channel partners with inventory positions to push out their backlog.

Combined with our lower bookings and reduced near term visibility.

Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the December quarter to be between down, 15% and down 20% sequentially.

We anticipate that our March quarter revenue is likely to decline again sequentially, although to a lesser extent in the December quarter decline.

Notwithstanding any near term macro weakness, we are confident that semiconductors remain the engine of innovation for the applications in markets we serve.

At the midpoint of our net sales guidance for the December quarter, our year over year decline for the quarter would be 14, 3%.

Our focus on total system solutions and key market Mega trends is fueling strong design win momentum that we expect will drive above market long term growth.

We expect our non-GAAP gross margin to be between 64% and 65% of sales.

We expect non-GAAP operating expenses to be between 22, 7% and 23, 3% of sales.

If you review Microsoft's peak to trough performance on a trailing 12 month basis through the business cycles over the last 15 plus years.

We expect non-GAAP operating profit to be between 47% and 42, 3% of sales and.

Which is included in the Investor presentation posted on our website.

And we expect our non-GAAP diluted earnings per share to be between $1 nine and $1 17 per share.

You will observe are consistent and resilient cash generation gross margin and operating margin results.

Given the current macro weakness and resultant business uncertainty.

We remain confident that our non-GAAP operating margins on a trailing 12 month basis should remain above 40% through the business cycles.

Combined with our lower bookings and reduced near term visibility.

We anticipate that our March quarter revenue is likely to decline again sequentially, although to a lesser extent in the December quarter decline.

With that let me pass the baton to Steve to talk about more about a cash return to shareholders.

Thank you Dinesh and good afternoon, everyone.

Notwithstanding any near term macro weakness, we are confident that semiconductors remain the engine of innovation for the applications in markets we serve.

I would like to provide you with a further update on our cash you're tuned strategy.

Our focus on total system solutions and key market Mega trends is fueling strong design win momentum that we expect will drive above market long term growth.

The board of directors announced an increase in the dividend.

32, 8% from the year ago quarter.

243.9 cents per share.

If you review Microsofts peak to trough performance on a trailing 12 month basis through the business cycles over the last 15 plus years.

During the last quarter we.

We purchased 339 $8 million.

Which is included in the Investor presentation posted on our website you will observe are consistent and resilient cash generation gross margin and operating margin results. We remain confident that our non-GAAP operating margins on a trailing 12 month basis should remain above 40% through the business cycles.

Our stock in the open market.

We also paid out.

$222 8 million in dividends.

That's the total cash to the tune.

A record 562 6 million.

This amount was 72, 5%.

With that let me pass the baton to Steve to talk about more about a cash return to shareholders.

Actual adjusted free cash flow.

$776 million during the June 2023 quarter, our net leverage at the end of September 2023 quarter was $1 two eight times.

Thank you Dinesh and good afternoon, everyone.

I would like to provide you with a sort of an update on <unk>.

Cash you tuned strategy.

The board of directors announced an increase in the dividend.

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 three point to four a $2 billion.

32, 8% from the year ago quarter to 43.9 cents per share.

During the last quarter.

We purchased <unk>.

There are 39 $8 million.

Holders to September 32023 by a combination of dividends and buybacks.

If our stock in the open market.

We also paid out.

$122 8 million in dividends.

In the current December quarter, we will use the adjusted free cash flow from the September quarter.

That's the total cash to the tune.

A record 562 6 million.

The amount of cash returned to shareholders.

This amount was 72, 5%.

Free cash flow.

Actual adjusted free cash flow of $776 million.

Excludes a net 87 $5 million.

That we collected from our customers for long term supply assurance pins.

During the June 2023 quarter.

Net leverage at the end of September 2023 quarter was $1 two eight times.

These payments are refundable when purchase commitments up from June <unk>.

Ever since we achieved an investment grade ratings from all of our debt in November 2021.

Adjusted free cash flow for the September quarter was $454 2 million.

And pivoted to increasing capital returned to shareholders. We have returned three point to $482 billion to shareholders through September 32023 by a combination of dividends and buybacks.

We plan to tune.

Seven 5%.

Over $352 $1 million of that amount to our shareholders with the dividend expected to be approximately 237 5 million.

And the stock buyback expected to be approximately $114.6 million.

In the current December quarter, we will use the adjusted free cash flow from the September quarter.

Going forward, we plan to continue to increase free cash flow return to shareholders by 500 basis points every quarter until we reach 100%.

We target the amount of cash returned to shareholders.

They are existing.

Free cash flow.

Excludes it net.

87 $5 million debt.

That we collected from our customers for long term supply assurance payments.

Free cash flow.

Shareholders Devry take five more quarters.

These statements are refundable when purchase commitments up from June <unk>.

And dividends over time, we expect will represent approximately 50% of our cash returned.

Adjusted free cash flow for the September quarter was $454 2 million.

With that operator will you please poll for questions.

We plan to tune 77, 5%.

Thank you.

And gentlemen, if you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. We also would like to suggest that you limit your.

Or $352 $1 billion of debt.

<unk> to our shareholders with the dividend expected to be approximately 237 $5 million and the stock buyback I expect it to be.

<unk> $114.6 million.

<unk> to one question and one follow up one moment, please while we poll for questions.

Going forward, we plan to continue to increase free cash flow return to shareholders by 500 basis points every quarter until we reach 100%.

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

Hi, Thank you so much.

Adjusted free cash flow.

I guess my first question is on the December quarter outlook.

Shareholders, Debbie take five more quarters and dividends over time, we expect will represent approximately 50% of our cash returned.

I think you gave a little bit of color by by Geo, but I was hoping you could provide a little bit of context by end market.

Any of the end markets standout either to the downside of the upside and is this mostly volume that's driving the sequential decline in revenue or are you starting to see price pricing erode a little bit as well. Thank you.

With that operator will you please poll for questions.

Thank you.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys. We also would like to suggest that you limit your.

Sure. So firstly there is no pricing that is driving the changes it's all volume.

The weakness is very broad based.

Across the different geographies across the different end markets.

Perhaps the one end market, which continues to have reasonable resilience is aerospace and defense as you might expect.

<unk> to one question and one follow up.

Please while we poll for questions.

But it is extremely broad based at this point.

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

Got it and then as my follow up maybe one for Eric on gross margin.

Hi, Thank you so much.

Utilization rates as well.

I guess my first question is on the December quarter outlook.

How how are your factories running today, both wafer processing and packaging and test and as you continue to adjust to sort of evolving demand environment, how should we see that impacting gross margins beyond the December quarter, how should we think about the trough. Thank you.

I think you gave a little bit of color by by Geo, but I was hoping you could provide a little bit of context by end market.

If any of the end markets stand out even to the downside of the upside and just mostly volume that's driving the sequential decline in revenue or are you starting to see price pricing erode a little bit as well. Thank you.

Okay. So on utilization we have lapped the.

Sure. So firstly there is no pricing that is driving the changes it's all volume.

The wafer fabs.

Kind of reduced from where they were at the peak when they were running just pull out and that that has dropped modestly we're still not in a situation, where we are taking underutilization charges in that that's not anticipated in the gross margin guidance that we've provided.

The weakness is very broad based.

Across the different geographies across the different end markets.

Perhaps the one end market, which continues to have reasonable resilience is aerospace and defense as you might expect.

But they are running at lower levels and not as efficiently on the assembly and test side, we definitely have reduced the activities in the assembly and test, we'd rather build the product through die bank through the wafer Fabs and then have it ready when orders come in to be able to turn it quite quickly with short lead times for the assembly and test process. So the assembly and test.

But it is extremely broad based at this point.

Got it and then as my follow up maybe one for Eric on gross margin.

Yes utilization rates as well.

It is more kind of in line with where consumption is we actually reduced finished goods last quarter and that will continue to be very focused on that.

Okay. So on utilization, we have lapped the wafer fabs.

And our next question comes from the line of Bruce Srivastava with BMO. Please proceed.

Kind of reduced from where they were at the peak when they were running full out and that that has dropped modestly you know we're still not in a situation, where we are taking underutilization charges in that that's not anticipated in the gross margin guidance that we provided.

Alright, Thank you very much for taking my questions and issue.

You mentioned cancellations in your prepared remarks, and then I just wanted to get.

It could provide us with a little bit more.

Details around that in the first and you mentioned that.

But they are running at lower levels and not as efficiently on the assembly and test side, we definitely have reduced the activities in assembly and test, we'd rather build the product through die bank through the wafer Fabs and then have it ready when orders come in to be able to turn it quite quickly with short lead times for the assembly and test process. So the assembly and test.

What to what.

<unk> is the industrial orders.

And then lift it for you is just starting the year over year decline, which is kind of related second part question.

Is.

A typical cycle that in the 5% to seven quarters.

Decline, what's your sense of how long does the year over year decline loss given.

It is more kind of in line with where consumption is we actually reduced finished goods last quarter and will continue to be very focused on that.

The programs you have in place.

Now if you look back and clearly you are over shipping over the last few quarters. So color on both would be great.

Helpful. Thank you.

So first of all.

And our next question comes from the line of Bruce Srivastava with BMO. Please proceed.

Inside of 90 days any orders that a customer had canceled without digest our standard terms.

Alright, Thank you very much for taking my questions and thank you.

And then there are the longer term noncancelable orders that we have worked and we don't really work on cancellations there as much as rescheduling and pushing out where that backlog would be.

You mentioned cancellations in your prepared remarks, and then I just wanted to get.

It could provide us with a little bit more.

Details around that in the first and you had mentioned that.

A lot of the backlog that has been placed over the last many quarters, where based on very long lead times.

So what to what.

<unk> is the industrial orders.

And then with it for you is just starting the year over year decline, which is kind of related second part question.

The conditions for the market for many of our customers have changed over that time and so what they believe their businesses are going to do.

Is.

A typical cycle that in the 5% to seven quarters.

Decline, what's your sense of how long does the year over year decline skin.

And with the businesses are doing today are a little bit different from when they place those orders and thats, where theyre, making adjustments to what they require.

The programs you have in place.

Now if you look back and clearly you are over shipping over the last few quarters. So color on both would be great.

And if the run rates come down.

And whatever units there have an inventory or they have placed on us on at a higher run rate than they really need.

Helpful. Thank you.

So first of all.

And Thats what reflects some of the correction you seem.

Inside of 90 days any orders that a customer has canceled them. So that's our just our standard terms.

To bring our shipments and our customers.

Inventory more into line.

And then there are the longer term noncancelable orders that we have worked and we don't really work on cancellations there as much as we scheduling and pushing out where that backlog would be.

And then the PV.

Year over year to clients on a.

If you just compare to the last few cycles.

So I know every cycle is different.

A lot of the backlog that has been placed over the last many quarters, where based on very long lead times.

No about the year over year decline necessarily but when you look at historically how cycles have played out.

Typically there is a two three quarter.

The conditions for the market for many of our customers have changed over that time and so what they believe their businesses are going to do.

Period of time over which the digestion of that inventory takes place and upon that being completed the consumption, which is normally ahead of shipments.

And what the businesses are doing today are a little bit different from when they place those orders and thats, where theyre, making adjustments to what they require.

Shipments catches back up and that's how the cycle gets reborn.

And if their run rates come down.

And what we have seen.

Okay. Thank you.

And whatever units there have an inventory or they have placed on us on at a higher run rate than they really need.

Youre welcome.

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

And Thats what reflects some of the correction you seem.

To bring our shipments and our customers.

Hey, guys. Thanks for taking my question.

Inventory more in July.

You commented in your prepared remarks that you expect further sequential decrease in the March quarter.

And then the PV.

Again to clients on it.

If you just compare to the last few cycles.

I would assume that that would come with perhaps some lower gross margin attached to it.

So I know every cycle is different.

Don't know about the year over year decline necessarily but when you look at historically how cycles have played out.

And that puts you pretty close to that 40% op margin threshold.

Without any opex adjustments. So maybe you can just speak to.

Typically there is a two to three quarter.

Period of time over which the digestion of that inventory takes place and upon that being completed the consumption, which is normally ahead of shipments.

Whether or not that lower revenue comes with lower gross margin and as well what sort of measures you would be willing to take to make opex adjustments.

So I think in any given quarter as revenue declines.

Shipments catches back up and that's how the cycle gets reborn.

And what we have seen.

Operating margin at a fairly large change in revenue.

Okay. Thank you.

It's not you can't draw a line in therapy. It will never fall below this line, we look at our operating margins on a trailing 12 month basis. That's why we've always had in terms of the data we presented at trough number that they put out there and.

Youre welcome.

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

Hey, guys. Thanks for taking my question.

You commented in your prepared remarks that you expect further sequential decrease in the March quarter.

And we don't know exactly what the magnitude of what might take place in March but we're confident that if you look at a four quarter rolling our trailing 12 months, we will still be at that 40% trough that is where we see it going.

And I would assume that that would come with perhaps some lower gross margin attached to it and.

And that puts you pretty close to that 40% op margin thresholds.

I guess I would add to that is what <unk>.

Investors and analysts as seen from microchip over time, when we face. These cycles is we're pretty nimble and we adjust our business appropriately to the environment, whether that's on the expense side or if we need to do something with utilization and right now we're continuing to run the factories at a pretty high level, but lower than they were.

Any opex adjustments. So maybe you can just speak to.

Whether or not that lower revenue comes with lower gross margin and as well what sort of measures you would be willing to take to make opex adjustments.

So I think in any given quarter.

As revenue declines.

Before and Opex, we have some levers that we can pull depending on what business environment, we're going to be facing in March and beyond.

The operating margin at a fairly large change in revenue.

You can't draw a line and say Okay. You can never falls below the line, we look at our operating margins on a trailing 12 month basis. That's why we've always had in terms of the data we presented at trough number that they put out there.

Okay, and the follow up I wanted to ask about distribution inventory.

Which was up sequentially.

And we don't know exactly what the magnitude of what might take place in March.

I know you don't really have.

Thanks.

How quickly they think is draining with channels training, but maybe if you can just give us a sense of when you could.

<unk> that if you look at a four quarter rolling our trailing 12 months, we will still be at that 40% prospect is where we see it going.

See that worked down a bit.

I guess I would add to that is what it.

So in terms of timing some of that is going to be based on what the distributors want to take in terms of inventory and then obviously what the end market consumption is going to be so it's hard to forecast.

Our distributors are tasked with having the right level of inventory in place to support their customers and we will work with them to achieve that level and just just like customers. Some distributors need inventory in summit's. Some distributors are over inventoried or going to work through that and it takes some time. So don't have a specific way to answer your question.

Before and Opex, we have some levers that we can pull depending on what business environment, we're going to be facing in March and beyond.

Okay, and the follow up I wanted to ask about distribution inventory.

But I imagine over the next couple of quarters that distribution inventory will get more right sized to whatever the distributors think is the best place for them to be.

Which was up sequentially.

I know you don't really have.

Thanks.

How quickly the zinc is draining with channels training, but maybe if you can just give us a sense of when you could.

Thank you guys.

And the next question comes from the line of Timothy Arcuri with UBS. Please proceed.

See that worked down a bit.

So in terms of timing some of thats going to be based on what the distributors want to take in terms of inventory and then obviously what the end market consumption is going to be so it's hard to forecast.

Thanks, a lot.

You will get your peers during the upturn was PS.

<unk> in Europe and <unk>.

And the idea was that you don't just let customers pushed out and pushed out and pushed that out but it does sound like that's actually what's.

Happening. So are you are you sort of being a little more proactive about maybe cleaning that out and forcing them to come back and place new orders and I'm just kind of wondering about the discussions that youre, having with these customers that had been underneath.

<unk>.

So this is not the first quarter in which we have been doing that we have mentioned that in prior calls as well.

But I imagine over the next couple of quarters that distribution inventory will get more right sized to whatever the distributors think is the best place for them to be.

<unk>.

When customers are trying to place orders farther out in time to do the best they can and as conditions change.

Thank you guys.

We will have discussions with them to see what we can do to help and what they can do to help us in terms of what future businesses in any business relationship has given take and.

And the next question comes from the line of Timothy Arcuri with UBS. Please proceed.

Thanks, a lot.

Of course, we have done.

You will get some of your peers during the upturn was PS.

<unk> amount of push outs.

<unk>.

PSP and your <unk>.

And the idea was that you don't just let customers pushed out and pushed that out and pushed that out but it does sound like that's actually what's.

Okay, and then Eric can.

Can you give us some idea of inside of December how much of.

The guidance depends on churn.

Okay.

We do not break that out, but it's a small number.

Okay. Thank you.

I would say that we still have <unk>.

More backlog on our books in total than what would be typical for us.

And C&I.

So this is not the first quarter in which we have been doing that we have mentioned that in prior calls as well.

But lead times.

<unk>.

When customers are trying to place orders farther out in time to do the best they can and as conditions change.

And our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed.

We will have discussions with them to see what we can do to help and what they can do to help us in terms of what future businesses in any business relationship has given take and.

Thanks for taking my question I had one on <unk> then one on gross margins.

On the same side I think and as you mentioned that March quarter could decline again and I'm wondering if there is a <unk>.

Of course, we have done.

<unk> amount of push outs.

<unk>.

<unk> decided to let's say if you assume that June and September if kind of being the peak of the cycle.

Okay, and then Eric can.

Can you give us some idea of inside of December how much of.

You should be thinking I don't know, 25% peak to trough that kind of put March sales down mid single digits is that a reasonable way to think about it just just bigger picture you think 25% peak to trough is that a reasonable expectation of decline in this cycle.

The guidance depends on churn.

Okay.

We do not break that out, but it's a small number.

Okay. Thank you.

I would say that we still have <unk>.

More backlog on our books in total than what would be typical for us.

As Jay kind of.

Tell us.

In fact, the the history is all over the place.

But lead times.

And so it's unclear for us to be able to give you and especially when we have.

Low visibility into the March quarter, and we have a fair amount of turns to take in the March quarter itself. The business Hasnt gone away the customers haven't gone away the designs Havent gone away. So we know that all there. It's now a matter of whereas the macro telling our customers with their bills should be.

And our next question comes from the line of Vivek Arya with Bank of America Securities. Please proceed.

Thanks for taking my question I had one on <unk> then one on gross margins.

On the same side I think and as you mentioned that March quarter could decline again and I'm wondering if there is a <unk>.

Or is there inventory at and where they.

Separately, we decided that let's say if you assume that June and September if kind of being the peak of the cycle.

It will be building two as they go into the March and June quarters paying for themselves.

At 17, 5% in the December quarter I think this is probably one of the larger declines historically microchip then.

First quarter of the global financial crisis. So you can see there's a pretty big chunk that is taking place here in the December quarter.

The expectation of decline in this cycle, but what does history kind of.

Okay.

Tell us.

On the gross margin side I'm trying to get a sense of both kind of the downside.

In fact, the the history is all over the place.

And so it's unclear for us to be able to give you and especially when we have.

Risk from here and then.

Whenever you get to be.

These revenue levels in the next cycle with gross margins get back to prior levels. So on the downside I think youre guiding gross margin down about 350 basis point. That's also below what <unk> seen in prior down cycles is there a way to think about what is.

That's kind of a crawfish.

Or is there inventory at and where.

Pension level I think Eric you mentioned Youre still keeping utilization high if I if I recall so.

It will be building two as they go into the March and June quarters paying for themselves.

Whats happened if you have to start cutting them. So what's the downside risk and then.

At 17, 5% in the December quarter I think this is probably one of the larger declines historic with Microchip then.

<unk> of that is let's say they come back to these revenue levels, sometimes right over the next several quarters.

First quarter of the global financial crisis. So you can see there's a pretty big chunk that is taking place here in the December quarter.

Gross margins get back to 68 or will it be different because the 68% right plus minus was achieved during a period of very strong industry pricing and shortages.

Okay.

On the gross margin side I'm trying to get a sense of both kind of the downside.

Yes. So there is a lot in that question I wish I had a crystal ball to answer it specifically, but.

Risk from here and then.

Whenever we get to.

Yes, the bottom line is as we as I said in my response before we will adjust our operations based on the environment that we're faced with and with with needing quite a bit of turns in the March quarter. At this point in time with short lead times, which again is not unusual but not something that we faced over the last couple of years.

These revenue levels in the next cycle with gross margins get back to prior levels. So on the downside I think youre guiding gross margins down about 350 basis points. That's also below what <unk> seen in prior down cycles is there a way to think about what is.

The kind of the crawfish.

There is some uncertainty, but we have confidence in our business longer term and the products that we build in our factories sell for years and years and years. So sometimes the offset between utilization taking utilization down and then building the product and taking an inventory reserve charge for.

Pension level I think Eric you mentioned Youre still keeping utilization high if I if I recall so.

What has happened if you have to start cutting them. So what's the downside risk and then.

Part of that is let's say they come back to these revenue levels, sometimes right over the next several quarters.

Gross margins get back to 68 or will it be different because the 68% right plus or minus was achieved during a period of very strong industry pricing and shortages.

For a period of time, those things can somewhat offset each other.

So well evaluate that based on what we are facing when we get into March and beyond and adjust accordingly, but we fully expect our gross margins to stay strong guests. They are taking a drop this quarter, but still exceptionally high gross margins and I wouldn't expect it.

Yes, so there's a lot in that question I wish I had a crystal ball to answer it specifically, but.

The bottom line is as we as I said in my response before we will adjust our operations based on the environment that we're faced with and with with needing quite a bit of turns in the March quarter. At this point in time with short lead times, which again is not unusual but not something that we face over the last couple of years.

A huge drop from where they're at but again that kind of depends on if the environment requires us to do something different if theres something we arent seeing at the moment, we would evaluate that and share that with the analysts and investors at that time.

That's what you want to add anything at all I would say if the revenue is back at the levels that we've done and I see no reason why our gross margin won't be back to the levels that we're at.

Sure.

Thank you.

And our next question comes from the line of Torrey Svanberg with Stifel. Please proceed.

For a period of time, those things can somewhat offset each other.

Yes. Thank you I know this is a tricky one.

Though we talk about over shipping and on the shipping do you have a sense for what the true consumption is of your business at this point on a quarterly or annual basis.

The hard question to come up with it because.

Our customers demand has also shifted over the last.

Six months or so.

They are trying to figure out, whereas the macro going and what are their real demand.

And so I don't know if there is a clear number we could give you that says this is what is consumption.

What do you want to add anything at all that I would say if the revenue is back at the levels that we've been at I see no reason why our gross margin wouldn't be back to the levels that we're at.

But as we go through this correction, we believe we will be shipping under consumption, but to what extent I can't tell you.

Thank you.

That's fair.

Then moving onto the operating margin and not to sort of focus on the math here, but when you when you position as a trailing 12 month I mean.

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

Yes. Thank you I know this is a tricky one.

One quarter could be as low as 25%. So I'm just trying to understand just conceptually would your opex how much variability do you have if we continue to see.

Though we talk about over shipping and on the shipping do you have a sense for what the true consumption is of your business at this point on a quarterly or annual basis.

Sequential declines in revenues.

The hard question to come up with because.

So we have more flexibility in our opex compared to what we've guided the current quarter four.

Our customers demand has also shifted over the last.

Six months or so.

We are we are not ready to size that for the street at this point in time, but.

They are trying to figure out, whereas the macro going and what are their real demand.

As I said before you guys have seen us work through cycles before and if the cycle gives us something thats extreme to work with we will take more measures in our business that is not what we're hoping that we need to do.

And so I don't know if there is a clear number we can give you that says this is what is consumption.

But as we go through this correction, we believe we will be shipping under consumption, but to what extent I can't tell you.

But we do have levers that we can pull that we pulled historically that if we're faced with a more difficult environment than we anticipate opex can come down from from what Youre seeing here in our guidance for the current quarter.

That's fair.

Then moving onto the operating margin and not to sort of focus on the math here, but when you when you position as a trailing 12 month I mean.

Very helpful. Thank you Ed.

One quarter could be as low as 25% right. So I'm just trying to understand just conceptually would your opex how much variability do you have if we continue to see.

Welcome.

Our next question comes from the line of Joshua <unk> with TD Cowen. Please proceed.

Sequential declines in revenues.

Hey, guys. Thanks for taking my question.

So we have more flexibility in our opex compared to what we guided the current quarter four.

I wanted to follow up on the utilization comments you mentioned.

Matching utilization to the business environment, but clearly youre seeing weakness that you are adding customers I guess what are the signals that would do.

We are not ready to size that for the street at this point in time, but.

Drive.

<unk> utilization is like what are the what would you need to see and then can you maybe expand a little bit more on the rationale behind keeping utilization high as you're trying to work through inventory both on books setting the channel. Thank you.

So I'll start and goodness <unk>, Steve can kind of add to this about again our products have a very very long life cycles.

But we do have levers that we can pull that we pull historically that if we're faced with a more difficult environment than we anticipate opex can come down from from what Youre seeing here in our guidance for the current quarter.

If we were to cut utilization in the factories significantly.

Very helpful. Thank you Ed.

There is a large portion of the cost that you can't take out because of the very heavy fixed cost environment and so the balance does it makes sense to build the inventory.

Welcome.

Our next question comes from the line of Joshua <unk> with TD Cowen. Please proceed.

Have that higher inventory have it available to support your customers when the business environment turns positive, which it will.

Hey, guys. Thanks for taking my question.

I wanted to follow up on the utilization comments you mentioned.

And that's kind of how we're managing it right now now you can obviously get to a point where that inventory is too high and it doesn't make sense and you know we don't think that we're in that position today, but we have let fab utilization fall from where it was and will continue to monitor it on a really a weekly monthly basis and make decisions as we go.

Matching utilization to the business environment, but clearly youre seeing weakness that you are adding customers I guess what are the signals that would do.

Drive.

<unk> utilization is like what does it what would you need to see and then can you maybe expand a little bit more on the rationale behind keeping utilization high as you're trying to work through inventory both on books setting the channel. Thank you.

What I would add to it.

So I'll start and goodness <unk>, Steve can kind of add to this about again our products have a very very long life cycles.

Ramping a fab.

After you take it down drastically it takes time to get people hired trained.

If we were to cut utilization in the factories significantly.

Get the equipment and the remaining process work to be done takes time, so as we saw in 2021 and 2022.

There is a large portion of the cost that you can't take out because of the very heavy fixed cost environment and so the balance does it make sense to build the inventory.

We put the foot on the accelerator, but it took time to get the ramps going so I think you want to be careful as you make some of those changes and we are making small changes to get them to where we want to be but because we have the good fortune of products with extremely long lifecycle at all of those inventories in good shape and in fact, all of that inventory allows us to do.

Have that higher inventory have it available to support your customers when the business environment turns positive, which it will.

And that's kind of how we're managing it right now now you can obviously get to a point where that inventory is too high and it doesn't make sense and we don't think that we're in that position today, but we have what fab utilization fall from where it was and we will continue to monitor it on a really a weekly monthly basis and make decisions as we go.

Two great things one respond quickly when the business changes and we know when it changes it will change faster than we expect on the upside and second push the capital that is required to be to be deployed in order to generate those products further out in time. So I think it is a good asset utilization in terms of being able to be <unk>.

What I would add to it.

Ramping a fab.

After you take it down drastically takes time to get people hired trained.

<unk>, how we take capacity down.

I appreciate all the color there. Thank you.

Get the equipment and the remaining process.

And for my follow up I wanted to ask about pricing I guess, it's encouraging to hear pricing still hanging in there.

Work to be done takes time, so as we saw in 2021 and 2022.

Theres, a big Investor concern that it will rollover.

We put the foot on the accelerator, but it took time to get the ramps going so I think you want to be careful as you make some of those changes we are making small changes to get them to where we want to be but because we have the good fortune of products with extremely long life cycles, and all of the inventories in good shape and in fact, all of that inventory allows us to do.

Can you provide some anecdotes or like what do you think is allowing firmer pricing than in past cycles, because that's what's allowing margins to hang in I think better than feared given the top line.

But also a major concern for investors. Thank you.

The pricing on our product line, which are long design cycle, a very sticky product lines in past cycles has never been something that rolled over.

Nor are we prone to trying to use price as a way to leverage any short term demand changed because it doesn't help and where we're going.

So our cycle of experience with how we handle other cycles for pricing plus where we are and how we are navigating. This cycle. We don't feel price is the is a place where change is expected to happen.

Our forward, how we take capacity down.

I appreciate all the color there. Thank you.

So my follow up I wanted to ask about pricing I guess, it's encouraging to hear pricing still hanging in there.

Thank you.

Theres, a big Investor concern that it will rollover.

Youre welcome.

Our next question comes from the line of William Stein with true Securities. Please proceed.

Thank you for taking my question guys.

I know, you're only guiding a quarter, but you made this comment on March I think about a sequential decline by my math I think typical seasonality is down at least a couple percentage points in just to help us sensitize. Our models would you anticipate another as you called it last time I think amplified or.

The pricing on our product line, which are long design cycle, a very sticky product lines in past cycles has never been something that rolled over.

Nor are we prone to trying to use price as a way to leverage any short term demand changed because it doesn't help and where we're going.

Magnified seasonality in Q1 or do you think it's possible that were more like a normal seasonal.

So our cycle of experience with how we handle other cycles for pricing plus where we are and how we are navigating this cycle, we don't feel price is.

Result.

Well, there's so little.

No visibility that we can apply to any kind of intelligent answer at this point in time.

As a place where change is expected to happen.

We need to get farther.

Further down the time to see how next quarter take shape and we're guiding to just one quarter. The December quarter at this point in time, we're giving you some directionally, where our census for the March quarter, but in terms of the magnitude. There's nothing that we can provide at this point that would be helpful.

Thank you.

Youre welcome.

Our next question comes from the line of William Stein with True Securities. Please proceed great.

Great. Thanks for taking my question.

Yes.

I know, you're only guiding a quarter, but you made this comment on March I think about a sequential decline.

Understood I have a follow up if I can I'm, hoping you can.

Size for us the amount of.

<unk> My math I think typical seasonality is down at least a couple percentage points in just to help us sensitize. Our models would you anticipate another as you called it last time, I think amplified or magnified seasonality in Q1 or do you think it's possible.

Sales in Q in the December quarter.

You anticipate will be filled as part of the PSP program and similarly, how much PSP backlog you have after December still on the books. It just seems to me with lead times at 13 weeks going to I think you said eight.

More like a normal seasonal.

Result.

Well there is so little.

Visibility that we can apply to any kind of intelligent answer at this point in time.

It's hard to imagine customers are.

Winding up for that still thank you.

We need to get farther.

So youre right.

PSP.

Had a time when it was far more important for customers to be enrolled and to be taking advantage of that priority our cycle times come down.

There are fewer people.

PSP orders that are needed for many customers. It's not that has gone away it's still there.

Understood I have a follow up if I can I'm, hoping you can.

A reasonable amount, but its typically the customers who are very long cycles in their design and very high valued in their end products.

Size for us the amount of.

Sales in Q in the December quarter.

Honestly there are many parts of the market that are concerned about what happens.

On the flip side of this cycle whenever that is in.

In the second half of 'twenty, four et cetera. So it's.

It's a customer choice no customer has to use PSP unless they believe it provides them a tool.

It's hard to imagine customers are.

And we've made adjustments to the program to give them more flexibility have shorter window of time et cetera and.

Signing up for that still thank you.

So you are right.

And we will continue to evolve the program and if there is useful that customers will take advantage of it and if they want if there isn't then they won't.

PSP.

A time when it was far more important for customers to be enrolled actively taking advantage of that priority our cycle times come down.

Thank you.

Welcome.

And there are fewer people.

PSP orders that are needed for many customers, it's not that it has gone away it's still there.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.

A reasonable amount, but its typically the customers who are very long cycles in their design and very high valued in their end products.

And our next question comes from the line of Christine Worley with Citi. Please proceed.

Hey, Thanks, guys.

<unk> on the on the Geos I guess, so in terms of all of these cancellations and push outs in the forecast have any geographies fared any better or worse as we're going through this correction.

Honestly there are many parts of the market that are concerned about what happens.

On the flip side of this cycle whenever that is.

In the second half of 'twenty, four et cetera. So it's.

It's a customer choice no customer has to use PSP unless they believe it provides them a tool.

No because a lot of our customers can be in multiple geographies can be headquartered in the U S, but manufacturing in a different geography and so.

And we've made adjustments to the program to give them more flexibility have shorter amount a window of time et cetera.

And we will continue to evolve the program and if there is useful that customers will take advantage of it and if they want if there isn't then they won't.

The.

The intensity or the.

Our requirements for a pushout in health is has no geographic signals that would be different.

Thank you.

Okay. Yeah, I know you said North America was flattish in the previous quarter I was wondering if anything was still holding up or worse.

Welcome.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.

As my follow up.

So we've seen some of these internal.

And our next question comes from the line of Christine Worley with Citi. Please proceed.

China Oems.

Finally start to do their own analog and mixed signal chips.

Hey, Thanks, guys.

BYD doing their own Dms solution is one of them and it seems like they.

On the on the Geos I guess, so in terms of all of these cancellations and push outs in the forecast have any geographies fared any better or worse as we're going through this correction.

They don't really care about.

Quality or cost or what have you.

Can you give us a sense if you know of roughly how much of your business goes to domestic China and do you see any risk that the.

No because a lot of our customers can be in multiple geographies can be headquartered in the U S, but manufacturing in a different geography and so.

Non China MCU business could.

Kind of issues with this.

The.

So.

The intensity or the.

The proportion of what goes into.

The requirements for a pushout in health is has no geographic signals that would be different.

China for China.

<unk> based product line I would say is probably under five ish percent or in that range I don't have an exact numbers. So don't hold me to that.

Okay. Yeah, I know you said North America was flattish in the previous quarter I was wondering if anything was still holding up or worse.

As my follow up.

The difference is that this is not new that we have competition in China.

So we've seen some of these internal.

China Oems.

The business is extremely fragmented.

Finally start to do their own analog and mixed signal chips.

101000 customers and applications that are there and so even previously we would have had some designs where somebody didn't care about quality or didn't care about something else. Since then I'm just going to use this and thats not unusual and where it happens.

BYD doing their own BMS solution is one of them and it seems like they.

They don't really care about.

Quality or cost or what have you.

Can you give us a sense if you know of roughly how much of your business goes to domestic China and do you see any risk that the.

So it is something we are paying attention to but not something which is creating a dramatic change in the business itself.

Non China MCU business good.

Got it thanks guys.

Youre welcome.

Kind of issues with this.

So.

And our next question comes from the line of Christopher Rolland with.

The proportion of what goes into.

Please proceed.

China for China.

Hi, guys. Thanks for the question.

<unk> based product line I would say is probably under five ish percent or in that range.

Can you guys talk about or give us a rough idea of what percent of bookings coming into any of these quarters.

I don't have an exact numbers so don't hold me to that.

The difference is that this is not new that we have competition in China.

Are being pushed out each quarter and is that representative basically of the December sequential drop that we're we're getting here.

The business is extremely fragmented.

101000 customers and applications that are there and so even previously we would have had some designs for somebody who didn't care about quality I didn't care about something else. Since then I'm just going to use it and that's not unusual and where it happens.

As you guys mentioned like that he really didn't have any turns business into the quarter and I think December is traditionally been somewhat flat.

And are these levels of push outs are they increasing progressively as.

So it is something we are paying attention to but not something which is creating a dramatic change in the business itself.

As we move along here.

So let me start and then Eric might want to.

Got it thanks guys.

Chime in here as well so firstly.

Youre welcome.

New bookings are not the place where people are trying to push things out because if they're new bookings within the last three to six months of time.

And our next question comes from the line of Christopher Rolland with.

Please proceed.

Those are with much more informed.

Hi, guys. Thanks for the question.

For demand supply market et cetera.

Can you guys talk about or give us a rough idea of what percent of bookings coming into any of these quarters are being pushed out each quarter and is that representative basically of the December sequential drop that we're getting here.

Lot of the pushout requests for backlog that was placed.

912 are longer months, where as time has gone on the need as they proceed deck when they place the orders and the need as they see it today when they are facing the reality of what the markets have changed two are different.

As you guys mentioned like that he really didn't have any turns business into the quarter and I think December is traditionally been somewhat flat.

So new bookings actually are in far better shape, just because they are much more informed about current market conditions.

And are these levels of push outs are they increasing progressively as.

Right, what I guess, what I would add to that is that those new bookings have been.

As we move along here.

Pretty modest rather than coming in right, so but bookings bookings have been lower we don't break out a book to bill, but bookings have been low.

So let me start and then Eric might want to.

Chime in here as well so firstly.

And the bottom line is I think it's very difficult for customers to to know what they need you know, particularly with those orders that can actually saying they replace nine to 12 months ago, but we have had certain instances where customers have actually apps for a push out and then the next month or coming back to us and asking for us to pull it in so I think it's just a very.

New bookings are not the place where people are trying to push things out because if there are new bookings within the last three to six months of time.

Those out with much more informed.

For demand supply market et cetera.

Lot of the pushout requests for backlog that was placed.

912 are longer months, where as time has gone on the need as they proceed deck when they place the orders and the need as I see it today when they are facing the reality of what the markets have changed two are different.

Uncertain environment at the customer level, and obviously that causes some churn on our backlog and the requests that we get for pushout activity.

They have a benefit today of knowing that supply is readily available that lead times are short and they are taking advantage of that which are which would make sense.

So new bookings actually are in far better shape, just because they are much more informed about current market conditions.

Yeah, I think that's a great tie in maybe the my next question.

Right, what I guess, what I would add to that is that those new bookings have been.

I guess with hindsight, how do you guys evaluate instituting that that 12 month PSP was that a good thing a bad thing would you do it again.

Pretty modest rather than coming in right, so but bookings bookings have been lower we don't break out a book to bill, but bookings have been low.

And the bottom line is I think it's very difficult for customers to to know what they need, particularly with those orders that can actually saying they replace nine to 12 months ago, but we have had certain instances where customers are actually apps for a push out and then the next month or coming back to us and asking for us to pull it and say I think it's just a very.

And if so were there any changes you would make.

It's a question we ask ourselves all the time, but I think you also have to look at not 12 months as a standalone piece of information right. It is what were the lead time. So even if when lead times are 52 weeks, you really can't offer somebody something inside of that because there isn't that all of the capacity within that window has already consumed.

Uncertain environment at the customer level, and obviously that causes some churn on our backlog and the requests that we get for pushout activity.

Like all programs they have to be designed with a sense of the information at a given point in time and they have to evolve as that information changes and so even on PSP right. It used to be 12 months today six months we.

They have a benefit today of knowing that supply is readily available that lead times are short and they are taking advantage of that which are which would make sense.

We made that change several months ago.

Yeah, I think that's a great tie in maybe the my next question.

The flexibility et cetera around it have changed.

Each program is designed to create a customer solution and that solution has to be sensitive to what problem. We're trying to solve at a given point in time.

I guess with hindsight, how do you guys evaluate instituting that that 12 months PSP was that a good thing a bad thing would you do it again.

<unk> was a fantastic program for 'twenty, one and 'twenty, two and parts of 'twenty three when there was very long lead times and the customers who participated got the most benefit from kind of from that.

And if so were there any changes you would make.

It's a question we ask ourselves all the time, but I think you also have to look at not 12 months as a standalone piece of information right. It is what were the lead time, so even if when lead times are 52 weeks.

It has less value when the cycle time of our lead times come down dramatically and other than a small set of customers. It is not as important to provide that much visibility.

And I've said this to.

Really can't offer somebody something inside of that because there isn't that kept all of the capacity within that window has already consumed so like all programs. They have to be designed with a sense of the information at a given point in time and they have to evolve as that information changes and so even on PSP right. It used to be 12 months today six months.

Investors time and time again that if we had not had PSP I am confident that our backlog would have been higher but we wouldn't have known what was good backlog in what was bad backlog than we would have made the wrong decisions in terms of.

Foundry orders that we made capital equipment that we're putting in place and so the PSP program was designed in a way where we were trying to service customers in a very long lead time environment, where we were capacity constrained.

We made that change several months ago.

The flexibility et cetera around it have changed in each program is designed to create a customer solution.

And give the customer.

That solution has to be sensitive to what problem, we're trying to solve at a given point in time.

An option to do that but then have skin in the game also we're just not all that restore microsemi. So theres a lot of good things that came with PSP, obviously, when the cycle changes customers can feel differently about the backlog that they place than they did when they place the order, but there were a lot of happy customers that were serviced well because of the program.

<unk> was a fantastic program for 'twenty, one and 'twenty two and parts of 23, when there was very long lead times and the customers who participated got the most benefit from kind of from there today. It has less value when the cycle time of our lead times come down dramatically.

Other than a small set of customers. It is not as important to provide that much visibility.

Makes sense, thanks, Eric Thanks Ganesh.

Yes.

You're welcome.

I've said this to investors time and time again that if we had not had PSP I am confident that our backlog would have been higher but we wouldn't have known what was good backlog in what was bad backlog than we would've made the wrong decisions in terms of foundry orders that we made capital equipment that we're putting in place.

And our next question comes from the line of Chris Caso with Wolfe Research. Please proceed.

Yes, thank you a.

Question is on the cash return program.

The buybacks and understand that the program is really meant to be formulaic, but the question is is there any flexibility within that program to be more opportunistic.

The PSP program was designed in a way, where we were trying to service customers in a very long lead time environment, where we were capacity constrained and give the customer.

<unk> like these and obviously you guys are still generating a good amount of cash.

An option to do that but then have skin in the game also we're just not all that restore microchip. So theres a lot of good things that came with PSP, obviously, when the cycle changes customers can feel differently about the backlog that they place than they did when they place the order, but there were a lot of happy customers that were serviced well because of the program.

But.

Taken advantage when when the downturn in the stock is down.

Have you contemplated that.

Now, let me get it kicked off and then I think Steve might want to weigh in here as well.

So the program is something that the board looks at on a constant basis.

Makes sense, thanks, Eric Thanks Ganesh.

And there is nothing that would prevent us from doing something which is opportunistic for the right reasons.

Youre welcome.

If the board believes is the right action for US Steve do you want to add to that.

And our next question comes from the line of Chris Caso with Wolfe Research. Please proceed.

Yes.

So while the main body of the program is formulaic.

Yes. Thank you.

Question is on the cash return program.

We are increasing.

And the buybacks and understand that the program is really meant to be formulaic, but the question is is there any flexibility within that program to be more opportunistic.

Cash returned to shareholders by 500 basis points every quarter.

And increasing our dividend by about 7% or so every quarter.

Any amount becomes the stock buyback.

Times like these and obviously you guys are still generating a good amount of cash.

The program doesn't prohibit us.

Taking advantage of it.

But.

Taken advantage when when the downturn in the stock is down.

Environment, where stock gets into.

Severe downdrafts for any reason we can certainly.

Have you contemplated that.

Now, let me get it kicked off and then I think Steve might want to weigh in here as well.

Has the cash resources on our credit line and all that too.

So the program is something that the board looks at on a constant basis.

For where to buy the stock.

And there is nothing that would prevent us from doing something which is opportunistic for the right reasons.

Following quarter, and then buy less in the following quarter. So it doesn't stop us from doing that we have not done that so far.

If the board believes is the right action for US Steve do you want to add to that.

<unk>.

Yes.

<unk> has been kind of reasonably constant in that range of between 70 and $90.

So while the main body of the program is formulaic.

But if there was to be a substantial.

We will be increasing.

Cash returned to shareholders by 500 basis points every quarter.

Opportunity at a lower stock price, which was to emerge.

For any reason.

Increasing our dividend by about 7% or so every quarter.

Then microchip has the flexibility to do anything we wanted to do.

Any amount becomes the stock buyback.

And Chris we have the headroom and whats the approved buyback theres over $2 billion of headroom available there and we have the headroom in our line of credit.

The program doesn't prohibit us.

From taking advantage of.

Environment, where stock gets into.

Got it.

Severe downdrafts for any reason we can certainly.

That's helpful.

As a follow up I, just wanted to return to gross margin and.

Has the cash resources on our credit line and all of that to the <unk>.

The utilization and I guess, asking perhaps some of the questions have been answered in a different way is there a particular level of inventory.

For where to buy the stock.

Following quarter, and then buy less in the following quarter. So it doesn't stop us from doing that we have not done that so far.

That would make you uncomfortable that would cause you to reduce the utilization I guess part of this depends upon somewhat the duration of the downturn how long this.

<unk>.

Chuck just has been kind of reasonably constant in the range of between 70 and $90.

The downturn should last.

But if there was to be a substantial.

I think that's a key.

Opportunity at a lower stock price, which was to emerge.

Point to look at there because if youre looking at your inventory on a backward looking basis or current quarter tight basis, and what that drives but you have confidence that two quarters three quarters four quarters six quarters whenever out in time that the business is going to go back and exceed.

For any reason.

Then microchip.

Has the flexibility to do anything we wanted to do.

And Chris we have the headroom and whats the approved buyback theres over $2 billion of headroom available there and we have the headroom in our line of credit.

Prior highs youre going to take a different action and if you think the businesses and decline mode or in stagnant mode. So yes. Those are all the things that we need to evaluate when determining how we're going to run our factories and what's the right position for the inventory.

Got it.

That's helpful.

As a follow up I, just wanted to return to gross margin and.

The utilization and I guess, asking perhaps some of the questions have been answered in a different way is there a particular level of inventory.

We've got our position today and you know as I've said, we will continue to evaluate that based on the environment that we see in front of us.

That would make you uncomfortable that would cause you to reduce the utilization I guess part of this depends upon somewhat the duration of the downturn how long does.

Okay. Thank you.

Yes.

And our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed.

The downturn should last.

Yeah I was just wondering is there like a target inventory level that you want to maintain or on the flip side of that is.

I think that's a key.

At what point do you start to talk to the vacuum transition.

So our target levels that we set at our analyst and Investor Day back in November of 2021 was 130 to 150 days, we are obviously above those levels today and there's reasons for that.

Prior highs youre going to take a different action and if you think the businesses in decline mode or in stagnant mode. So yes. Those are all the things that we need to evaluate when determining how we're going to run our factories and what's the right position for the inventory.

Some of your some of your question I responded to in response to the prior question. So we're not uncomfortable with where the inventory is today.

We've got our position today and you know as I've said, we will continue to evaluate that based on the environment that we see in front of us.

We're going to watch it closely depending on the environment and then that's going to be what the outlook is in terms of are we comfortable continuing to run the fabs at the levels that they are running out today or if we need to do something different.

Okay. Thank you.

And our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed.

At that point today, where we're going to do something different yes inventory is above our target levels.

Yes, I was just wondering is that a good target inventory level that you are to maintain or on the flip side of that is.

I think we're managing it appropriately and we'll continue to do so.

I would add.

In steady state is where the 130 to 150 is where everyone would be if you look back at the last cycle. I think we were down like 180 to 109 days and that was when it was in the.

At what point do you start to talk to the vacuum transition Nevis.

So our target levels that we set at our analyst and Investor Day back in November of 2021 was 130 to 150 days, we are obviously above those levels today.

A place where demand was so high for completing our inventory today. We're at 167 10 days of data really last time buys so you take that out of around 157.

Reasons for that.

Some of your some of your question I responded to in response to the prior question. So we're not uncomfortable with where the inventory is today.

So we're not.

Dramatically outside of the steady state range that we would need to be.

Got it.

And I ask this because that I mean, you have to take a step down.

We're going to watch it closely depending on the environment and then it's going to be what the outlook is in terms of are we comfortable continuing to run the fabs at the levels that they're running out today or if we need to do something different.

Mike Spike.

Got it.

And then as you look at the market conditions.

Can you talk to.

At that point today, where we're going to do something different yes inventory is above our target levels.

Inventory levels are trending and does that prompt.

Are you seeing any pushback on pricing.

Think we're managing it appropriately and we'll continue to do so.

The supply chain.

And as supply comes on all of that demand conditions soften a bit.

I would add instead.

In steady state is where the 130 to 150 is where everyone would be if you look back at the last cycle. I think we were down like 180, 109 days and that was when it what I'm, saying.

If you can give some color on that.

So firstly, we don't.

At our distributors, we have a view into the inventory they have at our customers. We use their request for a push out push outs and all that as a proxy for understanding in fact cut.

Place, where demand was so high for completing our inventory today. We're at 167 10 days of that are really last time buys. So you take that out of around 157.

Customers have many business units, many product lines and they could be and on certain product lines wanting to push out another one that they want to pull in so.

No we're not.

<unk> dramatically outside of the steady state range that we would need to be.

It's all over the place.

The second part of your question stepped up pricing.

Got it no division and I ask this because when you just take a step down.

Quite sure if that was a customer pricing or a supplier pricing.

I might spike.

Is it supply chain pricing or our customer pricing, which you're asking about.

Got it.

And then as you look at the market conditions.

Customer pricing is down so as the market conditions change as the supply growth as inventory levels go up.

Can you talk to.

Inventory levels are trending and does that prompt.

<unk> now becoming part of the discussion.

Are you seeing any pushback on pricing.

Yeah.

All good purchasing managers and I'm going to ask for lower prices.

Supply chain.

The supply comes on all of that demand conditions soften a bit.

In an environment that is software, but these are products, where the price elasticity isn't there were somehow.

If you can give some color on that.

Firstly, we don't.

The lower price, we get more shipments this quarter or next quarter et cetera. These are long design cycles prices et cetera.

Distributors, we have a view into the inventory they have at our customers we use there.

Quest for a push out push outs and all that as a proxy for understanding our customer.

2018, 24 36 months ago.

Pricing is at the point of design and we will be competitive at the point, where they redo the designing.

Customers have many business units, many product lines and they could be on <unk>.

Product lines wanting to push out and other ones they want to pull in so.

Business itself in the short term is not affected by the pricing.

It's all over the place.

Alright, thank you.

And there was a second part of your question about pricing.

Okay.

Yeah.

Yes, quite sure if that was a customer pricing or a supplier pricing.

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

Supply chain pricing or our customer pricing that you're asking about.

Yes. Good afternoon. Thanks for taking my questions maybe another one on just the inventory as you know last quarter, you talked about the lower than expected sell through in China, which was largely responsible for the rise in channel inventories and John I think days increased.

Yes customer pricing is down so as the market conditions change as the supply improves as inventory levels go up is that.

<unk> now becoming part of the discussion.

Yes.

All good purchasing managers and I'm going to ask for lower price.

I think it was five days back in June days increased another six six days here in the September quarter.

In an environment that is softer, but these are products, where the price elasticity isn't there were somehow.

Primarily continued <unk> weakness in China or is the pickup more pronounced in other geographies.

The lower price, we'd get more shipments this quarter or next quarter et cetera. These are long design cycles prices et cetera.

2018, 24 36 months ago.

I would say that just the sell through was.

Pricing is at the point of design.

And we will be competitive at the point, where they redo the designer.

Not strong in any geography so.

Business itself in the short term is not affected by the pricing.

We did not see any significant improvement in distribution sell through so.

Alright, thank you.

And China has continued to be weak.

Yes.

We have not seen that.

Yeah.

The level of improvement, we expected out of China, and there's plenty of.

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

News information about what's happening from an economy standpoint there.

Thank goodness, you talked about the relative strength in aerospace and defense.

No.

The data center and continued client size I think probably now it's about 20% of your business mix. The management is here as well, but you guys are exposed to some of the stronger areas like accelerated continue.

I think it was five days back in June days increased another six six days here in the September quarter.

This primarily continued just you're still seeing weakness in China or is the pickup more pronounced in other geographies.

This end market funding for the team.

So I think on data center.

I think the last breakout rate of about 17% or so in that range.

I'd say that the sell through was.

But there are many sub segments that go into it.

Not strong in any geography so.

Clearly have a.

We did not see any significant improvement in distribution sell through so.

Tailwind on anything and everything that goes into the artificial intelligence.

And China has continued to be weak.

The generative AI space et cetera.

We have not seen that.

But in terms of the volume that that drive on the dollars that are drive.

The level of improvement, we expected out of China, and there's plenty of.

While it is meaningful it's not big enough to offset some of the other weakness we have in other parts of the data.

News information about what's happening from an economy standpoint there.

Thank goodness, you talked about the relative strength in aerospace and defense.

Thank you.

Welcome.

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

The data center and continued client size I think probably now about 20% of your business mix management is here as well, but you guys are exposed to some of the stronger areas like accelerated compute.

Great. Thank you.

She talked about every cycle being different.

And this cycle any upturn it seemed like the shortages were more severe.

This end market funding for the team.

So I think on data center.

You did see prices go up more on a like for like basis.

I think the last breakout for everybody, a 17% or so in that range.

And your margins got higher than we've seen before.

So I guess as you think about the downturn.

But there are many sub segments that go into it.

Is that going to reverse or do you have a situation where there is more awareness of the supply chain people want to hold more inventory because of the intensity of the shortages can you just tell us like how the strength in the last couple of years might portend for the next couple of quarters.

Clearly have a.

Tailwind on anything and everything that goes into the artificial intelligence and degenerative AI space et cetera.

But in terms of the volume that that drive in the dollars that are drive.

I think different customers have.

While it is meaningful it's not big enough to offset some of the other weakness we have in other parts of the data.

Different.

The levels of strategic versus tactical thinking.

Thank you.

Last night I had dinner with the CTO of one of our largest customers.

Welcome.

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

Extremely thoughtful about not just the next one quarter, but about the next three four years of time and how they want to plan for it.

Great. Thank you.

She talked about every cycle being different.

I have also had similar discussions with people who.

<unk>.

And this cycle any upturn it seemed like the shortages were more severe.

Were for two or three years suffering with lack of product and all of a sudden a forgotten about all the things that they need to be able to do so it's all over the place and it really depends on what are the impressive Thunder.

You did see prices go up more on a like for like basis.

And your margins got higher than we've seen before.

But for the most part what we see is our.

So I guess as you think about the downturn is that going to reverse or do you have a situation where there is more awareness of the supply chain people want to hold more inventory because of the intensity of those shortages can you just tell us like how the strength in the last couple of years might portend for the next couple of quarters.

Customers on our customer's customer in many cases, who are people who build.

Any of the high value systems are much more thoughtful about how a small piece of the bill of materials is not where they need to be able to make a savings while they have substantial value and they are trying to create at the at the overall system. So there is no single answer because we serve 100000 customers.

I think different customers have.

Different.

Level of strategic versus tactical thinking.

Last night, I had dinner with the CPO or quantify our largest customers in the <unk>.

All over the place, but without a doubt short lead times are giving them more flexibility in terms of what are they trying to.

STREAMWAY thoughtful about not just the next one quarter, but about the next three or four years of time and how they want to plan for it.

Place on us and how much how much time that they need to give us in many cases.

<unk> also had similar discussions with people who.

That's helpful. Thank you.

Hey, Joe.

And our next question will come again from the line of N Bruce Bruce Srivastava with BMO. Please proceed.

Hi, Thanks for squeezing me in with a follow up I had a quick quick one for you Eric what's the target.

Our customers on our customer's customer in many cases, who are people who build many of the high value systems.

Days of inventory for distributors.

We are much more thoughtful about how a small piece of the bill of materials is not where they need to be able to make a saving while they have substantial value that they are trying to create at the at the overall system. So there is no single answer because we serve 100000 customers. It's all over the place but without a doubt.

So we don't really have a target it's been all over the place historically its been as low as 17 days and it's been as high as I think is 47% in our history and probably as high as 41 over the last maybe 10 12 years. So it is a broad range on ultimately its the distributors decision on the product that <unk>.

Short lead times are giving them more flexibility in terms of what are they trying to.

Purchase and how they support their customers and you're obviously they need a certain amount of inventory to effectively serve their customer base and if they don't hold that inventory.

Place on us and how much how much time do they need to give us in many cases.

And customer will find another another channel to buy that product through so we don't we don't drive it to a certain number of days.

That's helpful. Thank you.

Hey, Joe.

And our next question will come again from the line of N Bruce Bruce Srivastava with BMO. Please proceed.

I would not be surprised in the current environment that distributors with interest rates, where they are if they try to take their inventory down to some degree, but you know where that goes to it's very hard for us to predict.

Hi, Thanks for squeezing me in with a follow up I had a quick quick one for you Eric what's the target.

Alright.

Days of inventory for distributors.

If I can add to us and our distributors business over time has also changed Dave too.

So we don't really have a target it's been all over the place historically its been as low as 17 days and it's been as high as I think as <unk> 47 in our history and probably as high as 41 over the last maybe 10 12 years. So it's a broad range on ultimately its the distributors decision on the product.

The warehousing services for many Oems, where they actually carry in pipeline inventory for them. So they have programs that are not the traditional distribution, where they are carrying the product and the <unk>.

Right as it is not the same when they are pipelining for very large Oems. So inventory is as Eric said something that each distributor.

They purchase and how they support their customers and you're obviously they need a certain amount of inventory to effectively serve their customer base and if they don't hold that inventory.

Has a model for what they're trying to accomplish and what they want and what they need is where they end up at.

And customer will find another another channel to buy that product through so we don't we don't drive it to a certain number of days.

Okay and your business has changed a lot also over the years.

Visit defense that you didn't have.

Several years ago.

So that's why I was asking and I think you gave a helpful answer that tidbit on the on the target of inventory days the niche that the 10.

Is it also you're carrying at the end of life. So so youre not that far out of the range.

And then if.

If I can add to us and our distributors business over time has also changed Dave to the.

On where you are versus your target shared at the analyst day.

Yes.

Great. Thank you.

Okay.

Ladies and gentlemen, there are no further questions at this time I would like to hand, the call back to management for closing remarks.

The turns rate is not the same when they are pipelining for very large Oems. So inventory is as Eric said something that each distributor.

Okay I want to thank everybody for participating the call today and we do have many events that we will be out that during the course of this quarter and we look forward to talking to you more at those events. Thank you.

Has a model for what they are trying to accomplish and what they want and what they need is where they end up at.

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

And your business has changed a lot also over the years.

Aerospace and defense that you Didnt tap.

Several years ago. So.

So that's why I was asking and I think you gave a helpful answer that tidbit on the on the target of inventory days the niche that the turn is also you're carrying at the end of life. So so youre not that far out of the range on where you are versus your targets at the analyst day.

Thank you.

Great. Thank you.

Okay.

Ladies and gentlemen, there are no further questions at this time I would like to hand, the call back to management for closing remarks.

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

Okay.

[music].

Yeah.

[music].

Greetings and welcome to the Microchip technology Q2 fiscal year 2024 financial results Conference call.

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

A question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded I would now like to turn the conference over to your host Eric Bjorn Hall, Chief Financial Officer.

Filings with the SEC that identify important risk factors that may impact microchips business and results of operations.

In attendance with me today are going to ask Marty Microchips, President and CEO.

Steve <unk> Microchip executive Chair and started dowdy microchips head of Investor Relations.

I will comment on our second quarter fiscal year 2024 financial performance <unk> will then provide commentary on our results and discuss the current business environment as well as our guidance and Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions.

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

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

I will now go through some of the operating results, including net sales gross margin and operating expenses other than net sales I will be referring to these results on a non-GAAP basis.

Net sales in the September quarter were 225, 4 billion, which were down one 5% sequentially we.

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 68, 1%.

Operating expenses were at 20% and.

Operating income was a record 48, 1%.

non-GAAP net income was $889 3 million and non-GAAP earnings per diluted share was $1 62.

On a GAAP basis in the September quarter gross margins were 67, 8% total operating expenses were $642 4 million and included acquisition intangible amortization of $151 4 million.

Special charges of $1 8 million share.

Share based compensation of $38 million and $1 1 million of other expenses.

GAAP net income was a record $666 6 million, resulting in a record $1 21 in earnings per diluted share.

Our non-GAAP cash tax rate was 14, 2% in the September quarter.

Our non-GAAP tax rate for fiscal year 2024 is expected to be about 14, 2%, 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.

<unk> lower availability of tax attributes such as net operating losses and tax credits lower depreciation with our expectation for lower capital expenditures in the U S. In fiscal 'twenty four as well as the impact of current tax rules, requiring the capitalization of R&D expenses for tax purposes.