Q3 2024 Microchip Technology Inc Earnings Call

February 1, 2024

Operator: www.microsoft.com Greetings and welcome to Microchip's third quarter fiscal year 2024 financial results conference call. At this time, all participants are in a listen-only mode.

Operator: A brief question and answer session will follow the formal presentation. 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. It is now my pleasure to introduce your host, CFO, Mr. Eric Bjornholt. Thank you. You may begin. Thank you, operator. Good afternoon, everyone.

Operator: During the course of this conference call, we will be making projections and other forward-looking statements regarding future events and 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 today, as well as our recent filings with the SEC, that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Ganesh Moorthy, Microchip's president and CEO. Steve Sanghi, Microchip's Executive Chairperson, and Sajid Daudi, Microchip's head of investment.

Eric Bjornholt: I will comment on our third quarter fiscal year 2024 financial performance. Ganesh will then provide commentary on our results and discuss the current business environment as well as our guidance. Steve will provide an update on our cash return strategy, and we will then be available to respond to specific investor and analyst questions. We are including information in our press release and on this conference call on various GAAP and non-GAAP financial measures. We have posted a full gap to non-gap reconciliation on the investor relations page of our website at www.microchip.com and included reconciliation information in our earnings press release, which we believe you will find useful when comparing GAAP and non-GAAP results.

Eric Bjornholt: We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of our operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, based on expenses prior to the effects of our acquisition activities, share-based compensation, and certain other adjustments as described in our earnings press release and in the reconciliations on our website. Net sales in the December quarter were $1.766 billion, down 21.7% sequentially. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were 63.8%, operating expenses were at 22.5%, and operating income was 41.9%.

Eric Bjornholt: Non-GAAP net income was $592.7 million, and non-GAAP earnings per diluted share was $1.80. On a GAAP basis, in the December quarter, gross margins were 63.4%. Total operating expenses were $590.6 million and included acquisition and tangible amortization of $151.3 million, special charges of $1.1 million, share base compensation of $38.8 million, and $1.5 million of other expenses. Gap net income was $419.2 million, resulting in $0.77 in earnings per diluted share. The GAAP tax rate was favorably impacted by an IRS notice that clarified the treatment of costs incurred by a research provider under a contract that we had been accruing for, and that accrual was released in court. Our non-GAAP cash tax rate was 13.2% in the December quarter; for Non-Gas Cash, the tax rate for fiscal year 2024 is expected to be just under 14 percent.

Eric Bjornholt: Transcription by CastingWords, Any Tax Audit Settlements Related to Taxes Accrued in Prior Years Our fiscal 24 cash tax rate is higher than our fiscal 23 tax rate was for a variety of factors, including lower availability of tax attributes, such as net operating losses and tax credits. Lower tax depreciation with our expectation of lower capital expenditures in the U.S. in Fiscal 24, as well as the impact of current tax rules requiring the capitalization of R&D expenses for tax purposes. We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. The House actually passed a tax bill last night that would achieve this, and we will see how this progresses through the Senate.

Eric Bjornholt: If this were to happen, we would anticipate about a 200 basis point favorable adjustment to Microchip's non-GAAP tax rate in future periods. Our inventory balance at December 31st, 2023 was $1.31 billion. We had 185 days of inventory at the end of the December quarter, which was up 18 days from the prior quarter's level. 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. At the midpoint of our March 2024 quarter guidance, we would expect inventory dollars to be modest and days of inventory to be in the range of 225 to 230 days.

Eric Bjornholt: Due to the significant reduction in revenue and cost of goods sold, we also continue to invest in building inventory for long-lived, high-margin products whose manufacturing capacity is being phased out by our supply chain partners, and these last-time buys represented 10 days of inventory at the end of December. In December, inventory that is distributors was at 37 days, which was up two days from the prior quarter's level. Our cash flow from operating activities was $853.3 million in the December quarter.

Eric Bjornholt: The total amount included in our cash flow from operating activities was $30.4 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 dividends and share repurchase. As these supply assurance payments will be refundable over time as purchase commitments are fulfilled, our adjusted pre-cash flow was $763.4 million in the December quarter.

Eric Bjornholt: As of December 31st, our consolidated cash and total investment position was $281 million. Our total debt decreased by $392 million in the December quarter, and our net debt decreased by $416.4 million. Over the last 22 full quarters since we closed the MicroSemity acquisition and incurred over $8 billion in debt to do so, we have paid down $7.1 billion of the debt. We will continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt. Our adjusted EBITDA in the December quarter was $796.2 million, and 45.1% of net sales are trailing 12-month-adjusted EBITDA $4.26 billion. Our net debt to Adjusted EBITDA was 1.27 times at December 31, 2023, down from 1.56 times at December 31st, 2020. Capital expenditures were $59.5 million in the December quarter.

Eric Bjornholt: Our expectation for capital expenditures for fiscal year 2024 is between $300 million and $310 million, which is down from the $300 million to $325 million we shared with investors last quarter as we are delaying certain capital given the more challenging economic backdrop. We expect that our capital investments will continue to provide us increased control over our production during periods of industry-wide constraints. The depreciation expense in the December quarter was $47.1 million.

Ganesh Moorthy: I will now turn it over to Ganesh to give his comments on the performance of the business in the December quarter, as well as our guidance for the March quarter. Thank you, Eric, and good afternoon, everyone. Our December quarter results were disappointing and below our expectations, with net sales down 21.7% sequentially and down 18.6% from the year ago. Non-gap gross and operating margins came in at 63.8% and 41.2%, respectively. From our recent strong performance, we're somewhat resilient despite the significant sequential decline in revenue. Our Consolidated Non-Gap Diluted EPS came in at $1.08 per share, down 30.8% from the year ago. Adjusted EBITDA was 45.1% of net sales in the December quarter, continuing to demonstrate some resilience. As a result, we had good debt reduction in the December quarter, and despite the lower adjustability that we generated, our net leverage ticked down to 1.27x.

Ganesh Moorthy: However, we expect our net leverage ratio to rise for a few quarters as trailing 12-month adjusted EBITDA drops when replacing stronger prior-year quarters with weaker ones. As a result, our capital return to shareholders in the March quarter will increase to 82.5% of our December quarter adjusted free cash flow. And as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2021. My thanks to our worldwide team for their support, hard work, and diligence as we navigated a difficult environment and focused on what we could control so that we are well positioned to thrive in the long run. Taking a look at our December quarter net sales from a product line perspective. Our mixed-signal microcontroller net sales were down 22.3% sequentially and down 18.5% on a year-over-year basis, and our analog net sales were down 30.9% sequentially and down 29% on a year-over-year basis. Now for some color on the December quarter and the general business environment. All regions of the world and most of our end markets were weak.

Ganesh Moorthy: Our business was weaker than we expected as our customers continued to respond to the effects of increasing business uncertainty, slowing economic activity, and a resulting increase in their inventory. In addition, many customers implemented extended shutdowns or closures at the end of the December quarter as they managed their operational activity.

Ganesh Moorthy: We continue to receive requests to push out or cancel backlogs as customers start to rebalance their inventory in light of the weaker business conditions and the increased uncertainty that we're experiencing, and we were able to push out a canceled backlog to help many customers with these inventory positions. With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe there is inventory destocking underway at multiple levels and among our direct customers and distributors who buy from us. Our indirect customers who buy through our distributors and, in some cases, our customers' customers. The very strong up-cycle of the last 2-3 years drove many of our customers to build inventory in order to be able to capitalize on strong business conditions in an uncertain supply environment, term just in case. Microsoft Office Word Microsoft Office Word Document MicrosoftWordDoc Word.

Ganesh Moorthy: Document.8, But as the macro environment slowed, many of our customers found their business expectations to be too optimistic and ended up with high levels of inventory, and as a result, they sought to cancel or reschedule back. An update on our PSP program. During the early stages of the upcycle, we launched our PSD program requiring non-cancellable backlog in exchange for supply priority in a hyper-constrained supply environment. The program was aimed to discourage speculative demand and achieve mutual commitments between our customers and us for future demand. The program worked extremely well for many customers who participated during all of 2021 and 2022, as well as the early part of 2023, supporting strong growth in their business. However, the business challenges which led to the creation of the PSP program are no longer relevant, and we have therefore decided to discontinue the program effective today.

Ganesh Moorthy: Given the severity of the down cycle, our factories around the world will be running at lower utilization rates and also taking up the two shutdown weeks in each of the March and June quarters in order to help control the growth of inventory. We expect our capital investments in fiscal year 24 and fiscal year 25 will be low, even as we prepare for the long-term growth of our business. To that end, we reached a preliminary memorandum of terms with the Department of Commerce for $162 million in grants targeted at existing projects for two of our U.S. funds.

Ganesh Moorthy: These grants are subject to diligence by the CHIPS office, as well as capacity investments by Microchip over multiple years. We have been driving our lead times down and have reduced average lead times from roughly 52 weeks at the start of 2023 to roughly eight weeks by the end of 2023 on average. During a period of macro weakness and business uncertainty, we believe short lead times are the best way to help customers navigate the environment successfully and improve the quality of backlog placed with us, as it enables our customers and Microchip to engage an uncertain environment with more agility and effectiveness. However, a significant reduction in lead times is also resulting in lower bookings and reduced near-term visibility for our business. We're also taking steps to reduce our expenses; in addition to the Variable Compensation Program, which provides automatic reductions during a downswipe, and Normal Containment of Discretionary Expenses, we will be implementing a broad-based pay-to-reduction. Our team members, who are not a part of the factory shutdowns, will take a 10% pay cut.

Ganesh Moorthy: And consistent with our normal practice, the executive team will take the largest reduction with a 20%. The shutdowns for manufacturing team members and pay cuts for non-manufacturing team members are consistent with our long-standing culture of Shared Sacrifices and Down Cycles, Shared Rewards and Ups. That's avoiding layoffs and, in the process, protecting manufacturing capability as well as high priority projects which are important for our customers and us to thrive We took similar actions in prior periods of business and circumstance and during the Global Financial crisis in 2008 and 2009. And we believe such actions were quite effective in navigating our business.

Ganesh Moorthy: Now let's get into our guidance for March. As our customers take further actions to adjust to a weakening macro environment and uncertain business, we are continuing to support customers and channel partners with inventory positions to push out or cancel their back-orders. We recognize that our short lead time.

Ganesh Moorthy: Increased flexibility with backlog will result in customers reducing inventory aggressively, and this could result in some degree of overcorrection. However, in response to these conditions, we are continuing to work with our customers to absorb as much of the inventory correction as we can at this time, taking all the factors we have discussed in the call today into consideration. We expect our net sales for the March quarter to be between $1.225 billion and $1.425 billion.

Ganesh Moorthy: The guidance range is larger than normal to reflect the macro uncertainty and the resultant low business visibility. We expect our non-GAAP gross margin to be between 59% and 61.6% of sales. We expect non-GAAP operating expenses to be between 26.9% and 30.7%. We expect non-GAAP operating profit to be between 28.3% and 34.7%, and we expect our non-GAAP diluted earnings per share to be between 46 cents and 68 cents. To keep things in perspective, while our business results have degraded significantly over the last two quarters as a larger-than-normal inventory correction has played out. Our full fiscal year 2024 revenue... At the midpoint of the March quarter, guidance is expected to be roughly 9.5%, comparing favorably with the weakness that other industry players have experienced. Our non-GAAP operating margin for full fiscal year 24 at the midpoint of our March quarter guidance is expected to be 43.6%, continuing to be among the best results across other companies in our industry. While we don't know how and when the inevitable upcycle will play out, we believe the fundamental characteristics of our business remain intact. Finally, notwithstanding any near-term macro weakness, we are confident that our solutions remain the engine of innovation for the applications and end markets we serve.

Steve Sanghi: Focus on Total System Solutions and Key Market Megatrends continue to fuel strong design momentum, which we expect will drive above-market long-term growth. With that, let me pass the baton to Steve to talk more about a cash return to shareholders. Thank you, Ganesh, and good afternoon, everyone.

Steve Sanghi: I would like to provide you with a further update on our cash return strategy. The Board of Directors announced an increase in the dividend of 25.7% from the year-ago, to Forty-five cents per share. During the last quarter, we purchased $114.6 million of our stock in the open market. We also paid out $237.4 million in dividends. That's the total cash return was $352 million. This amount was 77.5% of our actual adjusted free cash flow of $454.3 million during the September 2023 quarter. Our net leverage at the end of December 2023 quarter was 1.27 times. Ever since we achieved an investment-grade rating for our debt in November 2021 and pivoted to increasing our capital return to shareholders, we have returned $3.6 billion to shareholders through December 31, 2023 through a combination of dividends and share buybacks. During this time, we have bought back approximately 26 million shares of our common stock from the open market, representing approximately 4.5% of our shares outstanding. In the current March quarter, we will use the adjusted free cash flow from the December quarter to target the amount of cash returned to shareholders.

Steve Sanghi: The Adjusted Free Cash Flow. This includes a net $30.4 million that we collected from our customers for long-term supply assurance payments. These payments are refundable when purchase commitments are fulfilled. The adjusted free cash flow for the December quarter was $763.4 million.

Operator: We plan to return 82.5%, or $629.8 million, of that amount to our shareholders, with the dividend expected to be approximately $243 million and the stock buyback expected to be approximately $386.8 million, which will be a new quarterly record for the stock buyback since we initiated our Enhanced Capital Return Strategy. Going forward, we plan to continue to increase Adjusted Free Cash Flow return to shareholders by 500 basis points every quarter until we reach 100% of Adjusted Free Cash Flow return to shareholders. That will take four more quarters, and we expect that dividends, over time, will represent approximately 50% of our cash flow. With that, operators, will you please call with questions? Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

Operator: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we pull for questions. Thank you. And our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question. Hi, thanks a lot.

Timothy Michael Arcuri: I wanted to ask about how much of a headwind the, you know, inventory inside of distribution still is. Shipments into distribution are down about 30%. Well, actually more than that.

Ganesh Moorthy: And yet, some of your largest distributors are still saying that they're having a hard time working down inventory. So can you provide any guidance? Like, does the March guidance assume that shipments into distribution will be down a lot more than what the corporate, you know, you know, guidance is, again, just like it was in December? We are expecting that we will drain inventory in distribution and in the market. Okay, great. And then, Eric, can you talk about utilization rates and the potential for some write-downs? We sort of haven't been at a level yet where you would write things down, but can you talk about that?

Eric Bjornholt: Thanks. Sure. So, you know, we have been kind of working on an employee attrition basis in our three large fabs, and through the December quarter, that did not put us in a situation where we were taking underutilization charges from those three fabs. That will change this quarter, as we have, and as Ganesh kind of walked through we've got. We are going to break out a utilization rate. But, you know, underutilization is absolutely impacting our business, our gross margins in the current quarter, and on top of that with.

Operator: , www.microchip.com Hi. You know, we have been taking relatively large charges for emissory reserves based on our accounting policy. www.microchip.com. Thanks a lot. Thank you. Our next question comes from the line of Toshi Yahari with Goldman Sachs. Please proceed with your question. Hi, thank you.

Chris Danely: My first question is on cancellation rates and what you're seeing from a customer push-out perspective. Are you seeing any signs of stabilization, Ganesh, in terms of cancellation rates or, you know, pretty much the same so far in the quarter relative to December and September of last year? We don't have a numerical tracking process.

Ganesh Moorthy: We still have customers that have asked for help. We have done a lot of that and built it into what we have into our guidance. I don't know if you have a better view.

Eric Bjornholt: I would say, as we kind of talked about, that customers and distributors are feeling like they have excess inventory, and with that, if they have backlog in place for those products, they are either not placing backlog, but if they have backlog in place, they are looking to see if there's an ability for them to push that out. So we're having those ongoing discussions, and I'd say that they're still at a relatively high rate. I got it.

Ganesh Moorthy: Thank you. And as a follow-up, I was hoping to get your comments on pricing. The headwinds you're seeing today, is it mostly volume-driven, or are you starting to see price erode as well between your microcontroller business and analog business? It seems like at the industry level, you've got more supply coming online over the next couple of quarters, several quarters. So, I'm curious what you're seeing today and how you're thinking about pricing as we progress through calendar 24. Thank you.

Operator: Yeah, all the revenue declines are really volume declines and not pricing. Pricing is stable. It is not contributing to the revenue change that is in our guidance. Our business is one that is based on design-ins that are done, www.microsoft.com www.microsoft.com.

Chris Caso: Thank you. Thank you. And our next question comes from the line of Chris Caso with Wolf Research. Please proceed with your question. Yes, thank you. Good evening.

Ganesh Moorthy: My question is, and it's a difficult question about, you know, sort of where you think aggregate inventory levels are and how much progress with some of these lower revenue shipping rates will make in getting those inventories down over time. And I know that's difficult to answer for, you know, your end customers, your indirect customers, but perhaps you could address it from the distribution Channel, where you have a little more visibility and, you know, what the target inventory levels are and where you expect to get them over time. You know, as you said, inventory in some cases. We have to estimate based on where customers are placing orders, what kind of orders are being placed, and what kind of orders are being fulfilled.

Ganesh Moorthy: The feedback they're giving us, you know, we know we're going to be substantially under shipping to where consumption is going to be, but it's very hard to put a number on what that is and how much of the inventory has been taken. And as I said, in some cases, it is multiple layers of inventory, and especially as people are getting to that point where they are less willing to carry inventory, perhaps even take it to the low end of what they might historically do, because supply is plenty. www.microsoft.com. We don't have a good way to put a number on what you're asking. Okay, fair enough.

Ganesh Moorthy: One of the things you've also said in prior downturns is, you know, typically you've seen, you know, three down quarters before you achieve a bottom. You know, you're kind of at that now, although September quarter was obviously a much smaller magnitude than now, given where we are right now, uh, do you think that still holds, and perhaps you could characterize this downturn against some of the prior ones that you've been through? Well, there's nothing typical about this downturn, and you know I don't think that is a good comparison to history. You could say in magnitude that it is on the order of what we've seen in the global financial crisis. We were down 36% or so at that point in time. You know, we have very limited visibility in today's market. So it's difficult to say where exactly this is.

Operator: As I mentioned, we believe we are significantly under shipping to end demand, but we're unable to provide any kind of forecast or guidance beyond this. Fair enough. Thank you. Thank you. Our next question comes from the line of Christopher Rolland with SIG. Please proceed with your question. Hey guys, thanks for the question. So around cycle times and lead times, you know, we have found that some of your products, particularly through distribution, have lead times that are even below your cycle times. I'm assuming your cycle times are something like four weeks or six weeks, something like that.

Christopher Rolland: I guess my question is how long would you expect this dynamic to last? You know, if you do have big inventory corrections like we're going through, you see that phenomenon occasionally, but how long might this last? And when are you expecting lead times to maybe expand again? Obviously, we have some inventory dynamics we're going through here. But maybe talk about lead times versus cycle times and when you think that those might actually work. So Chris, let me just define two terms and then we'll walk through it. So cycle time is the time it takes from when you begin with raw materials and get to finished goods. That cycle time for semiconductors, depending on which product and what process, can be anywhere from three to five months, sometimes longer, depending on the specialty.

Ganesh Moorthy: So that's the typical production cycle. We have always been able to manage lead times, which we define as, from the moment a customer places an order with us, when can we ship the product to them? To be a lot shorter than that, historically, pre-pandemic, you know, that was four to eight weeks was not an unusual number for 80 90% of our lineup.

Ganesh Moorthy: Where we have come back to is that those lead times, on average, where a customer places an order, they can get it in less than eight weeks. And in some cases, if we have it in finished goods, they can get it much sooner than that as well. So I don't have a good view of when lead times will go back out. And I'm not sure that's a good thing.

Ganesh Moorthy: I think we have to, obviously, work to manage the supply and demand consistent with where demand is going. But for years, we ran in that four to eight weeks as a reasonably stable lead time, outside of any major increases or decreases in demand in the market. And right now, we think we're going to be at low lead times for quite some time.

Eric Bjornholt: You know, we have inventory that is high and will be growing into the March quarter. And we're going to position that inventory to be able to take advantage of orders that come in with short cycles because visibility is low. And we need to be able to position and take that as quickly as it comes in. So all of our systems are geared towards having shorter lead times and being able to take orders off the shelf that are placed with short lead times as quickly as we can. Maybe just one thing. I think, Chris, maybe what you were getting at is when we have a product that is staged in DIVANK, so it's through the WaferFab, and in many cases, we can turn that through assembly and test in the fourth. www.microchip.com. Yeah, thank you very much, guys. There was some good stuff there,

Eric Bjornholt: Eric, while I have you, gross margin, just for kind of simplicity's sake, my model's roughly like 300 basis points below for next quarter where I was previously. I don't know if you can kind of walk us through that, you know, what's mixed versus, you know, underutilization versus inventory write-down. Sounds like pricing is not an issue here, like for like, but I would love to know how those kinds of various things contribute. Yeah, so I would say the biggest change quarter to quarter is going to be in the factory utilization, and that's a combination of, www.microsoft.com Microsoft Office Word Microsoft Office Word Document MSWordDoc Word. Document.8, larger than life.

Operator: All those things impacted, I'd say. The Bulletproof Executive 2013, Part of it, but you know, we had relatively. Significantly more this quarter, and they'll probably be larger. Thanks, guys.

Gary Mobley: Thank you. Our next question comes from the line of Gary Mobley with Wells Fargo. Please proceed with your question. Hey guys, good afternoon.

Ganesh Moorthy: Thanks for taking my question. Looking at the March quarter guidance, basically, a peak to trough in revenue terms of more than 40% all within the same fiscal year. So clearly, the rate of the decay has been extreme.

Ganesh Moorthy: And I'm calling on your experience here, given that you've all been through a lot of cycles in the past, and you hinted in your prepared remarks, maybe some overcorrection on your customers' part in terms of inventory depletion. So, based on your experience, how would you say the slope of the recovery may look given your lead times? Is it a gradual one? Or, you know, are we going to see just a sharper rebound as we saw in terms of this correction? So I'll start, and Ganesh...

Ganesh Moorthy: I think it is unknown at this point in time, right? We have limited backlog visibility as we look out in time, you're asking about whether or not, www.microsoft.com is necessary for their business today. So, you know, until we start getting, www.microchip.com I think the recovery has many components to it, right? One is just, If you assume business is flat. And there is also, what does the macro do?

Gary Mobley: What Happens to Actual Consumption Over Time? And that depends on many things, you know, where's GDP at, what are interest rates doing, etc. And I think those are all variables which you can't, at least we're not, able to plug in and say this is how the next three, four quarters, the shape of the recovery. We don't have the visibility and backlog to give us any insight. I know I was asking for a lot there, but I appreciate the color.

Ganesh Moorthy: So, it sounds like your OPEX management is more so variable versus structural, and you've obviously done this in the past. In this recent round where you asked employees to take a 10% pay reduction, what was communicated to them in terms of when that might be recouped based on some sort of revenue or performance metric? You know, I have not been able to speak to the entire microchip community until..., and I will do that on Monday morning.

Ganesh Moorthy: I did write them all a message today after the market closed and before this call to let them know what we were doing. So those are details that I would prefer to first speak to our employees about and give them all of that. But you know, this is not new to us.

Ganesh Moorthy: We have done this multiple times. Our culture, you know, allows people to understand how shared sacrifice and shared rewards go hand in hand and how that creates excellent outcomes for the company and for the individuals in the process of doing that. And so I'm confident that our team, especially the team that has been through many cycles with us, will see it, help us with it, and pull everybody else along. Thank you, Ganesh.

Operator: Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question. Thanks for taking my question. Ganesh, I appreciate you're not going beyond a quarter, but I still wanted to, you know, get some help in getting some directional sense of whether June could be, you know, flat up or down because, you know, you do have some shutdowns in June, right? You're already planning for that.

Vivek Arya: So that's not a great data point, but then June tends to also be seasonally up for you historically. So just, you know, give us some more color.

Ganesh Moorthy: You know, what is true demand right now? And if you were sitting in our shoes, would you think about June being kind of up, down, flat, even if you don't have an absolute sense of where June might check out? You know, I think the shutdowns that we communicated based on the days of inventory that we closed in December and what we have indicated are going to be at the end of March are required steps we need to take. Those are not necessarily trying to provide an indication of where the June business is going to be. In fact, the real answer is, I don't know. And I think, you know, the world is not falling apart.

Ganesh Moorthy: So we know that consumption is taking place. We know that inventory needs to drain. We're trying to gauge the difference between, www.microsoft.com.

Ganesh Moorthy: And then my bigger question, Ganesh, is that, you know, how would you contrast your strategy of maintaining kind of a hybrid manufacturing model, right, where lead times can suddenly get extended, but your capex is low, and your profitability is high? To say your other US competitor who has high capex, you know, they can usually keep lead times very low, and they have managed to avoid, right, these kind of very, very large swings. How would you kind of contrast the two strategies, and do you think, you know, what you're going through, could make you change your strategy about maybe, you know, having higher capex in the future and always trying to maintain lower lead times? Again, there are many people that fit into what you described. I'll describe our strategy, which is, you know, we run inside of the microchip, the product that we know how to run cost effectively and consistently within That includes both our front end as well as our back.

Operator: We have grown that front end footprint over time, but also our foundry products have grown over time, and that balance has been roughly 40% plus or minus internal, 60% external. We don't try to guide where that percentage needs to go.

Tore Egil Svanberg: The market demand drives, is it higher or lower from there? But we know what products and technologies make sense within our footprint and what makes sense to drive with our partners. And that's the way we think about it.

Ganesh Moorthy: And in the aggregate, barring any near-term changes like we've had last quarter and this quarter, it's been a very successful strategy in terms of how gross margins over time have accreted and how, over many cycles, we've had higher highs and higher lows. So we're very happy with the strategy we have. And I leave others with their strategies to speak for themselves.

Ganesh Moorthy: Thank you. Thank you. Our next question comes from the line of Tore Svanberg with Stiefel.

Operator: Please proceed with your question. Yes, thank you. So my first question is on the PSP program. It was obviously put in place to try and avoid volatility, but it doesn't look like that has happened.

Chris Danely: You know, maybe it was just the nature of the pandemic cycle. I don't know. But why do you think the PSP program did not sort of buffer the volatility that we're actually seeing? I know it's a great question.

Ganesh Moorthy: You know, although the PSB program was aimed at discouraging speculative demand by making orders NCNR and then giving us confidence to make investment on it, I think there was a combination of very strong OEM market demand, our customers, and their customers, and what they were seeing. There were persistent shortages over a long period of time and very long lead times. And I think when you put all that together, you know, OEM customers ended up placing more backlog because they believed their business was a lot stronger than they thought. And they were trying to place orders for a lot longer than they normally would have done in that situation. So that's the way it, from our perspective, played out.

Ganesh Moorthy: How it did phenomenally for them in the 2021-2022 timeframe, where those that were in the program were able to keep their business going, take market share away, and drive things. But at the end of the day, the longer lead times get, the farther out someone is trying to predict where their business is going to be. And I think that's the, you know, the issue at some point in time is, you know, you don't know what your demand is with any kind of high confidence. http://www.microsoft.com.au Thank you very much. Well, that's very fair.

Ganesh Moorthy: And then as my follow-up, I recognize that, you know, all end markets are going to be weak in the March quarter. But any sort of relative comment on the end markets? Anything holding up a little bit relatively better than others?

Chris Danely: Yeah, I would say, you know, if you look at our aerospace and defense market, there are strengths in those. Commercial aviation remains strong, the defense remains strong, and space has always been very lumpy in where it's at. Our portion of the data center, which is around AI platforms, those are doing extremely well. It's not big enough to move the microchip needle overall, but it's certainly a pocket of strength that we see.

Ganesh Moorthy: And, Great, thank you very much, www.microsoft.com. Thank you. Our next question comes from a line from Chris Danely with Citi. Please proceed with your question. Hey, thanks guys. I guess just a little clarification. Any comments?

Chris Danely: Your Sense of End Demand. Maybe talk about the end market that has been the worst, and then also, you know, given your revenue decline. Notably, more than some of your peers, why do you think it's hitting? More at www.microsoft.com. Sorry, what was the last part of your question? Why do you think what?

Ganesh Moorthy: But why is your revenue declining much more than some of your competitors? So on your second question, as I said, if you look at it over a year's period of time, you're going to find that fiscal 24 at the midpoint of our guidance is about nine and a half percent down. I don't think that's outside of where the normal is. Within a two-quarter period of time, absolutely, we are correcting and correcting at a faster rate than where we were.

Ganesh Moorthy: But I think we have to look at the area under the curve for revenue rather than just peak-to-trough alone, in terms of what you... In terms of end markets, you know, we... Sorry, was there a question? No, I said, thanks.

Ganesh Moorthy: Okay, in terms of end markets, as I mentioned, it's weak across the board. We don't track at the quarterly level kind of how they're all moving, but we have enough anecdotal data. I think we were among the earliest people, as early as two or three quarters ago, saying automotive was starting to weaken and roll over, and industrial did, and data center had been. So we have seen this for some time, and at this point in time, I would say they're all weak.

Operator: You know, there might be individual customers who are stronger or weaker than what, on average, we see. But nothing to write home about other than the two exceptions I spoke about, which are aerospace and defense, which are still holding up, and our portion of the AI servers that we provide. Thanks, Ganesh. And then just a quick clarification on the utilization rates. Do you guys anticipate utilization rates declining again in the June quarter from March, or will they stay flattish? We don't know the answer yet.

Vijay Raghavan Rakesh: We will have to see, you know, how this kind of business evolves over the coming years. Okay, thanks, Eric. Thank you.

Eric Bjornholt: Our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed with your question. Yeah, hi.

Ganesh Moorthy: I had a quick question. I was wondering between the CAPEX and the funding that Microchip was getting, how much capacity you would be adding on the front end or the back end, as you look at calendar 24. So our capital expenditures for fiscal 24, we laid out for you, and that's $300 to $310 million. We have not given a number for next fiscal year. I expect it to be lower than that.

Ganesh Moorthy: We've actually taken in quite a bit of equipment this year that we have not essentially released in place for production purposes. So we've got capital that's paid for and at our facilities that we can deploy as the market returns to a more normalized level and we need that capacity, quite low. That's school. The Bulletproof Executive 2021. Here's how I would think about it from a, how are we positioned for growth from our capacity? You know, our initial response as this thing changes is going to be utilizing the inventory that we have built and being able to ship using the inventory we have. Our next response will be around getting our factories to full utilization. We are underutilizing them at this point in time.

Vijay Raghavan Rakesh: Our third response would be taking equipment that we have already ordered and received, which we will begin to place into production. And then finally, adding more equipment or bottleneck equipment, as the case might be. So we believe we have plenty of firepower for being able to respond to an upcycle through a combination of those four things.

Ganesh Moorthy: And if you were to combine all of that, you mentioned your channel disk inventory was at 37 days versus the optimal high 20s, I guess, that you mentioned before. And, you know, your in-house inventory UI probably goes up a little bit as you go into March. Any thoughts on when you actually see that starting to realign or start to stabilize or start to come down? Is that more of a second half?

Eric Bjornholt: And last question, on the margin trajectory for the March quarter, did you say that all of it was because of utilization? Should we expect that underutilization to continue into June, or how do you see that, or do you expect utilization to pick back up again? So, you know, we didn't we didn't say it was all of it.

Vijay Raghavan Rakesh: There's a large portion of the change that is utilization driven. There's always product mix and inventory reserves and other things that impact it. I think it will probably be difficult for capacity utilization, www.microchip.com, and then it just takes a while to ramp that back up, even if the market dynamics are better. And so, you know, that's something that we'll watch very closely and make sure that we're making the appropriate investments in people, but it tends, Like moving a battleship out in the ocean, it turns relative. I got it.

Operator: Thank you very much. Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question. Great, thank you. I guess I wonder if you could address a couple of the bear cases that I hear. One, you sort of talked about PSP and what it accomplished and what it didn't. Do you think that having more flexibility about customer cancellations when this started to slow down would have, you know, sort of made the issue less bad now? Is that the PSP, you know, part of the reason why the hole is a little bit deeper, maybe? You know, perhaps, and, um... I think, again, in retrospect, you know, as a Monday morning quarterback, I know exactly what I would have done.

Joe Moore: But you know, we were under for many, many, many quarters, and even as recently as last March and June quarters. There were CEO-level calls that were pushing and driving for getting more product than we had. If you remember, we would provide statistics about how much of what customers wanted that we couldn't ship was there. So in the throes of all of that, were there parts of it where perhaps we should have taken our foot off the accelerator? Perhaps, But it isn't something that was knowable as we went through it.

Ganesh Moorthy: But can you talk about, you know, how much of your business might see competition from that direction over the next few years? I think you've talked about that being single digits, but maybe if you could just update us on your thinking there. Sure, so mainland China today is about 28% of our revenue. About half of it, we estimate, is designed elsewhere and just happens to be manufactured in mainland China, and some of that is, frankly, moving out of China as people diversify. So it doesn't, the point of design is outside of China, and we're comfortable with that.

Ganesh Moorthy: So the other 10% of our business that's in China, that is designed in China, has another half of that, which... Very complex designs, and these are not the ones that are easy to dislodge and would require a significant amount of knowledge about systems, the software that goes with them, the hardware and software interaction and all that. So that means about 5% of our business, about one-fourth of the business in mainland China, that is our more broad-based microcontrollers and analog, and those types of products. And there, fragmentation is our friend. It is a very, very fragmented market. Any one opportunity is a small percentage of revenue, you know; it is not easy to go to the place, but theoretically, you could say if somebody had an identical kind of offering and, by the way, a lot of that business is not just about having silicon. It's about having silicon, having tools, having design guides, having software that we make available. There's a lot of help.

Joe Moore: Self-help that we provide for our customers as well. So, yes, you know, there is more going on in China. We're trailing at both technologies and capacity, and we will pay attention, and we will, through our product line and innovation, and cost reduction, be continuing to work to go head-to-head again, but if the portion of the business that you might think about is more broad-based, where they would come after that business is less than 5% and is very, very fragmented and difficult to get, does that help? Great, thank you. Yes, so much, thank you.

Operator: Thank you. Our next question comes from the line of Joshua Buchalter with TD Cowan. Please proceed with your question. Hey guys, thanks for taking my questions. I wanted to ask about utilization rates and sort of the strategic decisions you're making to shut down the FABs for two weeks in March and June and also keep utilization rates lower over those two quarters. I guess the reason is start and stop the FABs, but also why not just take the utilization rates much lower in the March quarter and then see where things play out, given you're trying to get inventory down, but expectations are that it'll still go up in Thank you.

Joshua Buchalter: You know, it's a balanced decision that we had to think through and make, but as inventories climbed, there is a point at which the pain gets high enough, and as we looked at that, we felt unbalanced, and you know, we don't know what other supply-demand, http://www.microsoft.com.au, And in the meanwhile, the inventory is high enough that we're comfortable that if the recovery would accelerate, we're in a good place and, you know, we are, if the recovery were something different, that we're ahead of us and we have options of what we can do in the June quarter. But right now, we need to prepare for where March and June, to the best of our ability to call it, is going to be, and that includes the running at a lower utilization and taking a two-week shutdown in our FABs, in each of the two quarters. Thanks Ganesh.

Ganesh Moorthy: And then as my follow-up, and I know you have a formulaic approach to your capital return program, but you've also in the past talked about potentially going above the rates that you've outlined. As we go through this period where you're going through the digestion and pre-cash flows depressed versus where they were in the last few quarters, any thought to either using the balance sheet or returning more than you would have returned under the formula that you've outlined? Thank you. So maybe I'll start.

Steve Sanghi: So you mean we actually have a very healthy cash return this quarter, right? We increased from 77 12% to 82 12%. The adjusted free cash flow in the December quarter was quite high, and even though the dividend is going up again, we are going to have a kind of record share buyback in the quarter based on that formula that you spoke to. So we think it's appropriate, and we're glad that we're going to be buying back a bunch of shares this quarter. Stephen Ganesh can give commentary if the board would think of doing anything different, but I think that program is kind of in place as it is.

Steve Sanghi: If the market changed and the stock price declined significantly, it would be a discussion with the board. I think it just came out naturally that our cash flow was extremely healthy last quarter, and with the return being 82.5% back to shareholders with dividend increasing, it still creates a record stock buyback in a quarter, a record that we have never done before, $386.8 million. This was a very, very healthy buyback.

Steve Sanghi: If there was not to be the case where the cash flow wasn't as healthy as last quarter, then the question would be valid. Should we do an extraordinary stock buyback this quarter if the stock were to become weak? But I think we just formulate by formula.

Steve Sanghi: There's a very, very healthy amount of cash reserved. Shock Biotech Discourse. And you know, for the last many quarters, we've been steady as she goes. I think having a program that doesn't try to have, you know, major variations from quarter to quarter has been a way in which to establish the consistency of the capital return program.

Steve Sanghi: I think Steve and myself and the rest of the board see that as a way that we should continue. Thank you. Thank you. Our next question comes from the line of Quinn Bolton with Needham.

Operator: Please proceed with my question. I guess the first one for Eric, you know, you talked about the lower utilization, you're shutting down the factories for two weeks in both March and June. I'm just kind of wondering if you could walk us through the accounting, how much of that hits you in the current period? How much of those lower utilization charges flow through inventory?

Quinn Bolton: And given how much inventory you have, could be, you know, something that hits gross margin for a longer period of time. Is that, you know, it flows through inventory and then the income statement? And then I got a quick follow-up.

Eric Bjornholt: So our three large wafer fabs will, even without the shutdowns, with the attrition that we've had, be running below what we would call normal utilization. And so these two-week shutdowns will be period costs in the quarter and not capitalized. Now, we are running at lower utilization rates than we were. So the costs that are being capitalized into inventory on a per-unit basis are higher than what they were when we were running at full board. But, yeah, I think that answers your question: shut down. www.microchip.com. That's very, very clear. Thank you. And then, I guess just for Ganesh, you mentioned you're ending the PSP program.

Ganesh Moorthy: And so I'm curious, does that just mean you're not signing anyone to new PSPs? Does that mean that existing PSPs have now been canceled, and folks, you know, have, you know, greater rights to cancel existing backlogs? Just what happens with the current PSP participants?

Ganesh Moorthy: You know, the backlog has been shrinking for some time, and really, what we're telling customers is that, you know, no more orders get accepted that are PSP or www.microsoft.com.au Got it. Thank you. Thank you. Our next question comes from the line of William Stein with Truist. Please proceed with your question. Great, thanks for squeezing me.

Operator: And I was also going to ask about PSP and the mechanics of how it rolls out of backlog, but I think you just answered that. But I do have a sort of financial question around it. I believe that for many of these orders, you are getting prepaid by customers, and you might have been likewise prepaying for capacity at Foundry. Can you walk through how they affect the financial activity of the company and when you expect them to be sort of in the rearview mirror? Is that done, you think, by the end of the March quarter? Okay, so with PSP, those were not typically, you know, customers paying cash in advance for any of that. We have certain long-term supply agreements, and those have a cash prepayment element to them. Those are still in place.

William Stein: Those aren't there's nothing that's happening with those programs related to the cancellation, So those programs are still in place, and those tend to be three to five year agreements, most of them five year agreements. And those will just kind of run out over time. In some cases where customers' demand is not as strong as originally anticipated, work with them to find a mutually workable answer on that. Maybe it's to extend the program longer, or they can add something else into the program for their volume commitments, but we're not looking to penalize them. www.microchip.com www.microsoft.com. Great, thank you. Thank you. And our next question will come from the line of Janet Ramkisson with Quadra Capital. Please proceed with your question. Yes, thanks for taking my question. Can you guys give us a sense of what's going on with the design activity? I know you've seen this real cutback, and you're saying that there's really not much of a shortfall in terms of actual demand. Do you have any visibility, less visibility, the same as before?

Eric Bjornholt: Could you give us some sense of what's going on to give us a better sense of the long-term outlook beyond the June quarter? Yeah, no, thank you.

Ganesh Moorthy: So design activity, as I said in my prepared remarks, is at a very high level. And I think it is because, for a number of reasons, customers were in triage for some time as they were dealing with shortages, and as all that went behind them, they went back to focusing on innovation. Our products and technologies are enabling innovation in many new fields. So by many measures, both what we measure internally, in terms of design lens and design funnel and all that, and what some of our partners who are more design-in focused, particularly the catalog distributors, a good example where much of the feeding activity that takes place, are also seeing very high levels of that. So I think the innovation machine is strong, and the inventory correction will pass and go, and ultimately, the long-term growth of the business, as you noted, will come from how this innovation plays out and the overall role and content that semiconductors will play in that innovation being delivered. Thanks, that's very helpful. And just one last one, if I could sneak it in.

Ganesh Moorthy: Is there any particular geography or particular segment that you saw sort of a faster rate of decline? I noticed that industrial as a percent of total went down just from the supplemental slides. Is there any color that you could give us in terms of geography or end markets where you saw most of the weakness? You know, I think they're all weak.

William Stein: I don't have a number to give you, but I can tell you that China, for example, has been weak for an extended period of time. So, you know, we're back, going back all the way to 2022 when... www.microchip.com. But I think we've seen weakness in all geographies, pretty much all end markets with the exception of, a bit of the data center that it all is. And I believe the end market data that was posted on our website still references the last full fiscal year, and that hasn't been updated. That's a process that we do once a year, so we'll take a look at the slide to make sure it's not confusing, but that's what I believe to be the case. Okay, thanks guys, I appreciate it. Thank you. Thank you.

Operator: There are no further questions at this time, and I would like to turn the floor back over to Ganesh Moorthy for closing comments. All right, I want to thank everyone for taking the time to be on this call and for all of your questions. We look forward to having further discussions at some of the conferences coming up this year. And on that note, we are closing this call. This concludes today's teleconference. You may disconnect your lines at this time.

Janet Ramkisson: Thank you for your participation. ?? www.microsoft.com.ca ?? ?? ?? ?? ?? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com www.microchip.com Greetings, and welcome to the Microchip's third quarter fiscal year 2024 financial results conference call. At this time, all participants are in a listen-only mode.

Ganesh Moorthy: A brief question and answer session will follow the formal presentation. 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. It is now my pleasure to introduce your host, CFO, Mr. Eric Bjornholt. Thank you. You may begin. Thank you, operator. Good afternoon, everyone.

Ganesh Moorthy: 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 you to our press releases today, as well as our recent filings with the FBI, that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Ganesh Moorthy, Microchip's president and CEO, Steve Sanghi, Microchip's Executive Chairperson, and Sajid Daudi, Microchip's head of investment.

Ganesh Moorthy: I will comment on our third quarter fiscal year 2024 financial performance. Ganesh will then provide commentary on our results and discuss the current business environment as well as our guidance. Steve will provide an update on our cash return strategy, and we will then be available to respond to specific investor and analyst questions. We are including information in our press release and on this conference call on various GAAP and non-GAAP financial measures. We have posted a full gap to non-gap reconciliation on the investor relations page of our website at www.microchip.com and included reconciliation information in our earnings press release, which we believe you will find useful when comparing GAAP and non-GAAP results.

Ganesh Moorthy: We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of our operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, based on expenses prior to the effects of our acquisition activities and share-based compensation. There are certain other adjustments, as described in our earnings press release and in the reconciliations on our website. Net sales in the December quarter were $1.766 billion, down 21.7% sequentially. We have posted a summary of our net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were 63.8%, operating expenses were 22.5%, and operating income was 41.9%. Non-GAAP net income was $592.7 million, and non-GAAP earnings per diluted share was $1.80. On a gap basis, in the December quarter, gross margins were 63.4%. Total operating expenses were $590.6 million and included acquisition and tangible amortization of $151.3 million, and special charges of $1.1 million.

Ganesh Moorthy: Share base compensation of $38.8 million and $1.5 million of other expenses. The diluted net income was $419.2 million, resulting in 77 cents in earnings per diluted share. The GAAP tax rate was favorably impacted by an IRS notice that clarified the treatment of costs incurred by a research provider under a contract that we had been accruing for, and that accrual was released in court. Our non-GAAP cash tax rate was 13.2% in the December quarter. Non-Gas Cash The tax rate for fiscal year 2024 is expected to be just under 14%.

Ganesh Moorthy: Transcription by CastingWords, Any Tax Audit Settlements Related to Taxes Accrued in Prior Our fiscal 24 cash tax rate is higher than our fiscal 23 tax rate was for a variety of factors, including lower availability of tax attributes such as net operating losses and tax credits, lower tax depreciation with our expectation of lower capital expenditures in the U.S. in Fiscal 24, as well as the impact of current tax rules requiring the capital We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed. The House actually passed a tax bill last night that would achieve this, and we will see how this progresses through the Senate.

Ganesh Moorthy: If this were to happen, we would anticipate about a 200-basis point favorable adjustment to Microchip's non-GAAP tax rate in future periods. Our inventory balance at December 31st, 2023 was $1.31 billion. We had 185 days of inventory at the end of the December quarter, which was up 18 days from the prior quarter's level. 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. At the midpoint of our March 2024 quarter guidance, we would expect inventory dollars to be modest and days of inventory to be in the range of 225 to 230 days.

Ganesh Moorthy: Due to the significant reduction in revenue and cost of goods sold, we also continue to invest in building inventory for long-lived, high-margin products whose manufacturing capacity is being end-of-lifed by our supply chain partners, and these last-time buys represented 10 days of inventory at the end of December. In December, inventory that is distributors was at 37 days, which was up two days from the prior quarter's level. Our cash flow from operating activities was $853.3 million in the December quarter.

Ganesh Moorthy: The total amount included in our cash flow from operating activities was $30.4 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 dividends and share repurchase. As these supply assurance payments will be refundable over time as purchase commitments are fulfilled, our adjusted pre-cash flow was $763.4 million in the December quarter.

Ganesh Moorthy: As of December 31st, our consolidated cash and total investment position was $281 million. Our total debt decreased by $392 million in the December quarter, and our net debt decreased by $416.4 million. Over the last 22 full quarters since we closed the microsending acquisition and incurred over $8 billion in debt to do so, we have paid down $7.1 billion of the debt. We will continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt. Our adjusted EBITDA in the December quarter was $796.2 million, and 45.1% of net sales are trailing 12-month adjusted EBITDA. $4.26 billion. Our net debt to Adjusted EBITDA was 1.27 times at December 31, 2023, down from 1.56 times at December 31st, 2020. Capital expenditures were $59.5 million in the December quarter.

Ganesh Moorthy: Our expectation for capital expenditures for fiscal year 2024 is between $300 million and $310 million, which is down from the $300 million to $325 million we shared with investors last quarter as we are delaying certain capital given the more challenging economic backdrop. We expect that our capital investments will continue to provide us increased control over our production during periods of industry-wide constraints. Appreciation Expense in the December quarter was $47.1 million.

Ganesh Moorthy: From our recent strong performance, we're somewhat resilient despite the significant sequential decline in revenue; our Consolidated Non-Gas Diluted EPS came in at $1.08 per share, down 30.8% from the year ago. Adjusted EBITDA was 45.1% of net sales in the December quarter. Continuing to demonstrate some resilience. As a result, we had good debt reduction in the December quarter, and despite the lower adjustability that we generated, our net leverage ticked down to 1.27x. However, we expect our net leverage ratio to rise for a few quarters as trailing 12-month adjusted EBITDA drops when replacing stronger prior-year quarters with weaker ones. As a result, our capital return to shareholders in the March quarter will increase to 82.5% of our December quarter adjusted free cash flow.

Ganesh Moorthy: And as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2020. My thanks to our worldwide team for their support, hard work, and diligence as we navigated a difficult environment and focused on what we could control so that we are well positioned to thrive in the long run. Taking a look at our December quarter net sales from a product line perspective. Our mixed-signal microcontroller net sales were down 22.3% sequentially and down 18.5% on a year-over-year basis, and our AnalogNet sales were down 30.9% sequentially and down 29% on a year-over-year basis. Now for some color on the December quarter and the general business environment. All regions of the world and most of our end markets are wheat.

Ganesh Moorthy: Our business was weaker than we expected as our customers continued to respond to the effects of increasing business uncertainty, slowing economic activity, and a resultant increase in their inventory. In addition, many customers implemented extended shutdowns or closures at the end of the December quarter as they managed their operational activities.

Ganesh Moorthy: We continue to receive requests to push out or cancel backlogs as customers seek to rebalance their inventory in light of the weaker business conditions and the increased uncertainty they were experiencing, and we were able to push out a canceled backlog to help many customers with these inventory positions. With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe there is inventory destocking underway at multiple levels and among our direct customers and distributors who buy from us. Our indirect customers who buy through our distributors and, in some cases, our customers' customers. The very strong up-cycle of the last 2-3 years drove many of our customers to build inventory in order to be able to capitalize on strong business conditions in an uncertain supply environment, term just in case. Microsoft Office Word Microsoft Office Word Document MicrosoftWordDoc Word.

Ganesh Moorthy: If business conditions warrant it, we may at some point in the future initiate a similar program, which will, of course, have to be adapted to whatever that situation requires. Reflecting the slowing macro environment, our distribution inventory grew to 37 days at the end of the December quarter, as compared to 35 days at the end of the September quarter. We are working with our distribution partners to find the right balance of inventory required to serve their customers, manage their cash flow requirements, and be positioned for the eventual strengthening of business conditions. However, our internal capacity expansion actions remain paused. Given the severity of the down cycle, our factories around the world will be running at lower utilization rates and also taking up the two shutdown weeks in each of the March and June quarters in order to help control the growth of inventory. We expect our capital investments in fiscal year 24 and fiscal year 25 will be low, even as we prepare for the long-term growth of our business. To that end, we reached a preliminary memorandum of terms with the Department of Commerce for $162 million in grants targeted at existing projects for two of our U.S. patents.

Ganesh Moorthy: These grants are subject to diligence by the CHIPS office, as well as capacity investments by Microchip over multiple years. We have been driving our lead times down and have reduced Ambrish lead times from roughly 52 weeks at the start of 2023 to roughly eight weeks by the end of 2023 on average. During a period of macro weakness and business uncertainty, we believe short lead times are the best way to help customers navigate the environment successfully and improve the quality of backlog placed with us, as it enables our customers and Microchip to engage an uncertain environment with more agility and effectiveness. However, a significant reduction in lead times is also resulting in lower bookings and reduced near-term visibility for availability. We're also taking steps to reduce our expenses; in addition to the Variable Compensation Program, which provides automatic reductions during a downswipe, and Normal Containment of Discretionary Expenses, we will be implementing a broad-based pay reduction. Our team members, who are not a part of the factory shutdowns, will take a 10% pay cut. Transcripts provided by Transcription Outsourcing, LLC.

Ganesh Moorthy: The shutdowns for manufacturing team members and pay cuts for non-manufacturing team members are consistent with our long-standing culture of shared sacrifices and down cycles and shared rewards and ups and downs. That's avoiding layoffs and, in the process, protecting manufacturing capability as well as high priority projects which are important for our customers and us to thrive in the long term. We took similar actions in prior periods of business uncertainty and the Global Financial Crisis in 2008 and 2009, and we believe such actions were quite effective in navigating our business.

Ganesh Moorthy: Now let's get into our guidance for March. As our customers take further actions to adjust to a weakening macro environment and uncertain business, we are continuing to support customers and channel partners with the inventory position to push out or cancel their orders. We recognize that our short lead time.

Ganesh Moorthy: Increased flexibility with backlog will result in customers reducing inventory aggressively, and this could result in some degree of overcorrection. However, in response to these conditions, we are continuing to work with our customers to absorb as much of the inventory correction as we can at this time, taking all the factors we have discussed from the call today into consideration. We expect our net sales for the March quarter to be between $1.225 billion and $1.425 billion.

Ganesh Moorthy: To keep things in perspective, while our business results have degraded significantly over the last two quarters, as a larger-than-normal inventory correction has played out, our full fiscal year 24 revenue... At the midpoint of the March quarter, guidance is expected to be roughly 9.5%, comparing favorably with the weakness that other industry players have experienced. Our non-GAAP operating margin for full fiscal year 24 at the midpoint of our March quarter guidance is expected to be 43.6%, continuing to be among the best results across other companies in our industry.

Ganesh Moorthy: While we don't know how and when the inevitable upcycle will play out, we believe the fundamental characteristics of our business remain intact. Finally, notwithstanding any near-term macro weakness, we are confident that our solutions remain the engine of innovation for the applications and end markets we serve. Focus on total system solutions and key market megatrends continue to fuel strong design momentum, which we expect will drive above-market long-term growth. With that, let me pass the baton to Steve to talk more about a cash return to shareholders. Thank you, Ganesh, and good afternoon, everyone.

Steve Sanghi: I would like to provide you with a further update on our cash return strategy. The Board of Directors announced an increase in the dividend of 25.7% from the year-ago quarter to $0.45 per share. During the last quarter, we purchased $114.6 million of our stock in the open market. We also paid out $237.4 million in dividends. That's the total cash return was $352 million. This amount was 77.5% of our actual adjusted free cash flow of $454.3 million during the September 2023 quarter. Our net leverage at the end of December 2023 quarter was 1.27 times. Ever since we achieved an investment-grade rating for our debt in November 2021 and pivoted to increasing our capital return to shareholders, we have returned $3.6 billion to shareholders through December 31, 2023 through a combination of dividends and share buybacks. During this time, we have bought back approximately 26 million shares of our common stock from the open market, representing approximately 4.5% of our shares outstanding. For the current March quarter, we will use the adjusted free cash flow from the December quarter.

Steve Sanghi: Target the amount of cash returned to shareholders. The Adjusted Free Cash Flow. This includes a net $30.4 million that we collected from our customers for long-term supply assurance payments. These payments are refundable when purchase commitments are fulfilled. The adjusted free cash flow for the December quarter was $763.4 million.

Steve Sanghi: We plan to return 82.5%, or $629.8 million, of that amount to our shareholders, with the dividend expected to be approximately $243 million and the stock buyback expected to be approximately $386.8 million, which will be a new quarterly record for the stock buyback since we initiated our Enhanced Capital Return Strategy. Going forward, we plan to continue to increase adjusted free cash flow return to shareholders by 500 basis points every quarter until we reach 100% of adjusted free cash flow return to shareholders. That will take four more quarters, and we expect that dividends, over time, will represent approximately 50% of our cash flow. With that, Operator, will you please call me with any questions? Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

Operator: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. And our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question. Hi, thanks a lot.

Timothy Michael Arcuri: I wanted to ask about how much of a headwind the, you know, inventory inside of distribution still is. Shipments into distribution were down about 30%. Well, actually more than that.

Ganesh Moorthy: And yet, some of your largest distributors are still saying that they're having a hard time working down inventory. So can you provide any guidance? Like, does the March guidance assume that shipments into distribution will be down a lot more than what the corporate, you know, you know, guidance is, again, just like it was in December? We are expecting that we will drain inventory and distribution in the market. Okay, great. And then, Eric, can you talk about utilization rates and the potential for some write-downs? We sort of haven't been at a level yet where you would write things down, but can you talk about that?

Eric Bjornholt: Thanks. Sure. So, you know, we have been kind of working on an employee attrition basis in our three large fabs, and through the December quarter, that did not put us in a situation where we were taking underutilization charges from those three fabs. That will change this quarter, as we have, and as Ganesh kind of walked through we've got, And we have a big shutdown schedule in all three of those large factories. So we are going to break out utilization. But, you know, underutilization is absolutely impacting our business, our gross margins in the current quarter, and on top of that with...

Ganesh Moorthy: We still have customers that have asked for help. We have done a lot of that and built it into what we have into our guidance. I don't know if you have a better view.

Operator: And as a follow-up, I was hoping to get your comments on pricing. The headwinds you're seeing today, is it mostly volume-driven, or are you starting to see price erode as well between your microcontroller business and your analog business? It seems like at the industry level, you've got more supply coming online over the next, you know, a couple of quarters, several quarters, so I'm curious how you're, what you're seeing today, and how you're thinking about pricing as we progress through calendar 24. Thank you. Yeah, all the revenue declines are really volume declines and not pricing, because pricing is stable. It is not contributing to the revenue change that is in our guidance. You know, our business is one that is based on design-ins that are done, www.microsoft.com.au www.microsoft.com.

Chris Caso: Thank you. Thank you. And our next question comes from the line of Chris Caso with Wolf Research. Please proceed with your question. Yes, thank you. Good evening.

Ganesh Moorthy: My question is, and it's a difficult question about, you know, sort of where do you think aggregate inventory levels are and how much progress we'll make with some of these lower revenue shipping rates in getting those inventories down over time. I know that's difficult to answer for, you know, your end customers, your indirect customers, but perhaps you could address it from the distribution channel, where you have a little more visibility and where the target inventory levels are and where you expect to get them over time. You know, as you said, inventory in some cases. It's a little obscure to us; we have to estimate based on where customers are placing orders, what kind of feedback they're giving us, you know, we know we're going to be substantially under-shipping to where consumption is going to be.

Operator: But it's very hard to put a number on, you know, what that is and how much of the inventory has been taken. And as I said, in some cases, it is multiple layers of inventory, especially as people are getting to that point where they are less willing to carry inventory, perhaps even taking it to the low end of what they might historically do, because supply is plenty, www.microsoft.com. We don't have a good way to put a number on what you're asking. Okay, fair enough.

Christopher Rolland: One of the things you've also said in prior downturns is, you know, typically, you've seen, you know, three down quarters before you achieve a bottom. You're kind of at that now, although the September quarter was obviously a much smaller magnitude than now. It, you know, given where we are right now, uh, you know, do you think that still holds, and perhaps you could characterize this downturn against some of the prior ones that you've been through? Well, there's nothing typical about this downturn, and you know I don't think that is a good comparison to history. You could say in magnitude that it is on the order of what we've seen in the global financial crisis. We were down 36% or so at that point in time. You know, we have very limited visibility in today's market. So it's difficult to say where exactly this is.

Ganesh Moorthy: As I mentioned, we believe we are significantly under shipping to end demand, but we're unable to provide any kind of forecast or guidance beyond this. Fair enough. Thank you. Thank you. Our next question comes from the line of Christopher Rolland with SIG. Please proceed with your question. Hey guys, thanks for the question. So around cycle times and lead times, you know, we have found that some of your products, particularly through distribution, have lead times that are even below your cycle times. I'm assuming your cycle times are something like four weeks or six weeks, something like that.

Ganesh Moorthy: I guess my question is how long would you expect this dynamic to last? You know, if you do have big inventory corrections like we're going through, you see that phenomenon occasionally, but how long might this last? And when are you expecting lead times to maybe expand again? Obviously, we have some inventory dynamics we're going through here. But maybe talk about lead times versus cycle times and when you think that those might actually be. So Chris, let me just define two terms and then we'll walk through it. So cycle time is the time it takes from when you begin with raw material and get to the finished good. That cycle time for semiconductors, depending on which product and what process, can be anywhere from three to five months, sometimes longer, depending on the specialty.

Ganesh Moorthy: Where we have come back to is that those lead times, on average, where a customer places an order, they can get it in less than eight weeks. And in some cases, if we have it in finished goods, they can get it much sooner than that as well. So I don't have a good view of, you know, when do lead times go back out. And I'm not sure that's a good thing.

Eric Bjornholt: I think we have to, obviously, work to manage the supply and demand consistent with where demand is going. But, you know, for years, we ran in that four to eight weeks as a reasonably stable lead time, outside of any major increases or decreases in demand in the market, and right now, we think we're going to be at low lead times for quite some time. You know, we have inventory that is high and will be growing into the March quarter, and we're going to position that inventory to be able to take advantage of orders that come in with short cycles because visibility is low, and we need to be able to position and take advantage of that as quickly as it comes in.

Eric Bjornholt: So all of our systems are geared towards having shorter lead times and being able to take orders off the shelf that are placed with short lead times as quickly as we can. Maybe just one thing. I think, Chris, maybe what you were getting at is when we have a product that is staged in DIVANK, so it's through the wafer fab, that in many cases we can turn that through assembly and test in the Fortis. www.microchip.com Yeah, thank you very much guys. There was some good stuff there.

Eric Bjornholt: Eric, while I have you, gross margin, just for kind of simplicity's sake, my model's roughly like 300 basis points below for next quarter where I was previously. I don't know if you can kind of walk us through that, you know, what's mixed versus... You know, underutilization versus inventory write-down. Sounds like pricing is not an issue here, like for like, but would love to know how those kinds of various things Yeah, so, you know, I would say the biggest change quarter to quarter is going to be in the factory utilization, and that's a combination of, www.microsoft.com www.microsoft.com larger than life. All those things impacted, I'd say, www.microsoft.com, part of it, but, you know, we had relatively high charges last quarter on that, and I wouldn't expect... Significantly more This quarter; they'll probably be larger.

Operator: Thanks, guys. Thank you. Our next question comes from the line of Gary Mobley with Wells Fargo. Please proceed with your question.

Gary Mobley: Thanks for taking my question. Looking at the March quarter guidance, basically, a peak to trough in revenue terms of more than 40% all within the same fiscal year. So clearly, the rate of the decay has been extreme.

Ganesh Moorthy: And I'm calling on your experience here, given that you've all been through a lot of cycles in the past, and you hinted in your prepared remarks, maybe some overcorrection on your customer's part in terms of inventory depletion. So, based on your experience, how would you say the slope of the recovery may look given your lead times? Is it a gradual one, or are we going to see just a sharper rebound as we saw in terms of this correction? So I'll start, and Ganesh...

Ganesh Moorthy: I think it is unknown at this point in time, right? Limited backlog visibility as we look out in time, www.microsoft.com, or www.microsoft.com is necessary for their business today. So, you know, until we start getting www.microchip.com Shipping below what the end consumption for our products is, and we think that's relatively material. But, you know, giving you any guidance in terms of what the slope of the recovery is, I think it's hard. I think the recovery has many components to it, right? One is just, If you assume business as flyers, www.microsoft.com. Microsoft Office Word Microsoft, Inc. Title Microsoft Office Word 97-2003 Document MSWordDoc Word. Document.8, and there is also a What Does the Macro Do?

Gary Mobley: What happens to actual consumption over time? And that depends on many things, you know, where GDP is, what interest rates are doing, etc. And I think those are all variables which you can't, at least we're not, able to plug in and say this is how the next three, four quarters, the shape of the recovery. We don't have the visibility and backlog to give us any insight. I know I was asking for a lot there, but I appreciate the color.

Ganesh Moorthy: So it sounds like your OPEX management is more so variable versus structural, and you've obviously done this in the past. In this recent round where you asked employees to take a 10% pay reduction, what was communicated to them in terms of when that might be recouped based on some sort of revenue or performance metrics? You know, I have not been able to speak to the entire microchip community until, and I will do that on Monday morning.

Operator: Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question. Thanks for taking my question. Ganesh, I appreciate you're not going beyond a quarter, but I still wanted to, you know, get some help in getting some directional sense of whether June could be, you know, flat up or down because, You know, you do have some shutdowns in June, right? You're already planning for that.

Vivek Arya: So that's not a great data point. But then June tends to also be seasonally favorable for you, historically. So just, you know, give us some more color, you know, what is true demand right now? And if you were sitting in our shoes, would you think about June being kind of up, down flat, even if you don't have an absolute sense of where June might check out? You know, I think the shutdowns that we communicated based on the days of inventory that we closed in December and what we have indicated are going to be at the end of March are required steps we need to take. Those are not necessarily trying to provide an indication of where the June business is going to be. Vivek, the real answer is, I don't know.

Ganesh Moorthy: And I think, you know, the world is not falling apart. So we know that consumption is taking place. We know that inventory needs to drain. We're trying to gauge it between, www.microsoft.com.

Ganesh Moorthy: And then my bigger question, Ganesh, is that, you know, how would you contrast your strategy of maintaining kind of a hybrid manufacturing model, right, where lead times can suddenly get extended, but your capex is low, and your profitability is high, to say your other US competitor who has high capex, you know, they can usually keep lead times very low, and they have managed to avoid, right, these kind of very, very large swings. How would you kind of contrast the two strategies, and do you think, you know, what you're going through could make you change your strategy about maybe, you know, having higher capex in the future and always trying to maintain lower lead times? Again, you know, there are many people that fit into what you described.

Ganesh Moorthy: I'll describe our strategy, which is, you know, we run inside of Microchip, the product that we know how to run cost effectively and consistently within our manufacturing footprint. That includes both our front end as well as our back. We have grown that front-end footprint over time, but also our foundry products have grown over time, and that balance has been roughly 40% plus or minus internal, 60% external. We don't try to guide where that percentage needs to go.

Operator: The market demand drives, is it higher or lower from there, but we know what products and technologies make sense within our footprint and what makes sense to drive with our partners. And that's the way we think about it. And in the aggregate, you know, barring any near-term changes like we had last quarter and this quarter, it's been a very successful strategy in terms of how gross margins over time have accreted and how, you know, over many cycles, we've got higher highs and higher lows. So we're very happy with the strategy we have. And, you know, I leave others to their strategies to speak for themselves.

Tore Egil Svanberg: Thank you. Thank you. Our next question comes from the line of Tore Svanberg with Stiefel.

Ganesh Moorthy: Please proceed with your question. Yes, thank you. So my first question is on the PSP program. It was obviously put in place to try and avoid volatility, but it doesn't look like that has happened.

Ganesh Moorthy: You know, maybe it was just the nature of the pandemic cycle. I don't know. But why do you think the PSP program did not sort of buffer the volatility that we're actually seeing? I know it's a great question.

Operator: You know, although the PSB program was aimed at discouraging speculative demand by making orders NCNR and then giving us confidence to make investment on it, I think there was a combination of very strong OEM market demand, our customers, and their customers, and what they were seeing. There were persistent shortages over a long period of time and very long lead times. And I think when you put all that together, you know, OEM customers ended up placing more backlog because they believed their business was a lot stronger than they thought. And they were trying to place orders for a lot longer than they normally would have done in that situation. So that's the way it, from our perspective, played out.

Chris Danely: How it did phenomenally for them in the 2021-2022 timeframe, where those that were in the program were able to keep their business going, take market share away, and drive things. But at the end of the day, the longer lead times get, the farther out someone is trying to predict where their business is going to be. And I think that's the, you know, the issue at some point in time is that you don't know what your demand is with any kind of high confidence. www.microsoft.com. Thank you very much. Well, that's very fair.

Ganesh Moorthy: Yeah, I would say, you know, if you look at our aerospace and defense market, there are strengths in those. Commercial aviation remains strong, the defense remains strong, and space has always been very lumpy in where it's at. Our portion of the data center, which is around AI platforms, those are doing extremely well. It's not big enough to move the microchip needle overall, but it's certainly a pocket of strength that we see.

Chris Danely: And, Great, thank you very much. You're welcome. Thank you. Our next question comes from the line of Chris Danely with Citi. Please proceed with your question. Hey, thanks guys. I guess just a little clarification. Any comments?

Ganesh Moorthy: www.microchip.com that have been the worst, and then also, you know, given your revenue decline. Notably, more than some of your peers, why do you think it's hurting? More at www.microsoft.com. Sorry, what was the last part of your question? Why do you think what?

Chris Danely: But why is your revenue declining much more than some of your competitors? So on your second question, as I said, if you look at it over a year's period of time, you're going to find that fiscal 24 at the midpoint of our guidance is about nine and a half percent down from, I don't think that's outside of where the normal is. Within a two-quarter period of time, absolutely, we are correcting and correcting at a faster rate than where we were. But I think we have to look at the area under the curve for revenue rather than just peak to trough alone, in terms of what you can. In terms of the end market, you know, we... Sorry, was there a question? I know, I said, thanks.

Ganesh Moorthy: Okay, in terms of end markets, as I mentioned, it's weak across the board. We don't track at the quarterly level kind of how they're all moving, but we have enough anecdotal data. I think we were among the earliest people, as early as two or three quarters ago, saying automotive was starting to weaken and roll over, and, you know, industrial did, and data center had been. So we've seen this for some time.

Ganesh Moorthy: And at this point in time, I would say they're all weak, you know; there might be individual customers who are stronger or weaker than what on average that these. But nothing to write home about other than the two exceptions I spoke about, which are aerospace and defense, which is still holding up, and our portion of the AI servers that we provide. Thanks, Ganesh. And then just a quick clarification on the utilization rates. Do you guys anticipate utilization rates declining again in the June quarter from March, or will they stay flattish? We don't know the answer yet.

Ganesh Moorthy: We will have to see, you know, how this kind of business evolves over time. Okay, thanks, Eric. Thank you. Our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed with your question. Yeah, hi, I had a quick question. I was wondering between the CAPEX and the funding that Microchip was getting, how much capacity you would be adding on the front end or the back end, as you look at calendar 24. So our capital expenditures for fiscal 24, we laid out for you, and that's $300 to $310 million. We have not yet given a number for next fiscal year.

Operator: I expect it to be lower than that. We've actually taken in quite a bit of equipment this year that we have not essentially released into place in service for production purposes. So we've got capital that's paid for and at our facilities that we can deploy as the market returns to a more normalized level, and we need that capacity. But I expect capital. Microsoft Office Word Microsoft Office Word 97-2003 Document MSWordDoc Word. Document.8, that's school.

Vijay Raghavan Rakesh: The Bulletproof Executive 2021. Here's how I would think about it from a, how are we positioned for growth from our capacity? You know, our initial response as the thing changes is going to be utilizing the inventory that we have built and being able to ship using the inventory we have. Our next response will be around getting our factories to more full utilization. We are underutilizing them at this point in time.

Eric Bjornholt: Our third response would be taking equipment that we have already ordered and received, which we will begin to place into production. And then finally, adding more equipment or bottleneck equipment, as the case might be. So we believe we have plenty of firepower for being able to respond to an upcycle through a combination of those four things.

Ganesh Moorthy: And if you were to combine all of that, you mentioned your channel disk inventory was at 37 days versus the optimal high 20s, I guess, that you mentioned before, and, you know, your in-house inventory DUI probably goes up a little bit as you go into March. Any thoughts on when you actually see that starting to realign or, you know, start to stabilize or start to come down? Is that more of a second half?

Vijay Raghavan Rakesh: When do you actually see that happening? You know, if I had a better picture of the demand environment, I could give you a better answer. So what we're doing is we're taking action on the things we can control, which is our internal capacity, and those are the shutdown days, the lowering of the utilization factors, and all that other stuff that we're doing. And that is all in, you know, anticipation that at some point, the market will return, and at that point in time, it will reverse its cycle at that point in time, first by us producing less, which we're taking And last question, on the margin trajectory for the March quarter, did you say that all of it was because of utilization and, Should we expect that underutilization to continue into June, or how do you see that, or do you expect utilization to pick back up again? So, you know, we didn't we didn't say it was all of it.

Ganesh Moorthy: There's a large portion of the change that is utilization driven. There's always product mix and inventory reserves and other things that impact it. I think it will probably be difficult for capacity utilization, www.microchip.com, Thank you, and then it just takes a while to ramp that back up even if the market dynamics are better. And so, you know, that's something that we'll watch very closely and make sure that we're making the appropriate investments in people, but it tends to be like moving a battleship out in the ocean. You have to, it turns relatively. I got it.

Vijay Raghavan Rakesh: Thank you very much. Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question. Great, thank you. I guess I wonder if you could address a couple of the bear cases that I hear about.

Operator: One, you sort of talked about PSP and what it accomplished and what it didn't. You know, do you think that having more flexibility about customer cancellations when this started to slow down would have, you know, sort of made the issue less bad now? Is that, you know, part of the reason why the hole is a little bit deeper, maybe?

Joe Moore: You know, perhaps, and, I think, again, in retrospect, you know, as a Monday morning quarterback, I know exactly what I would have done, but, you know, we were under for many, many, many quarters, and even as recently as last March and June quarters. There were CEO-level calls that were pushing and driving for more product than we had. If you remember, we would provide statistics about how much of what customers wanted that we couldn't ship was there. So in the throes of all of that, were there parts of it where perhaps we should have taken our foot off the accelerator? Perhaps, But it isn't something that was knowable as we went through it.

Ganesh Moorthy: And if we ever were to do a PSP program again, those are some lessons learned we'll take, and we'll look at how we would adjust the program so that the intended outcomes are available, and as many of the unintended outcomes are avoided. Great, thank you. And then, you know, the other kind of negative question that I get, you know, China, obviously building a significant amount of trailing edge capacity. You know, can you talk about what types of, I don't think you see a lot of direct competition from sovereign China today. But can you talk about, you know, how much of your business might see competition from that direction over the next few years? I think you've talked about that being single digits, but maybe if you could just update us on your thinking there.

Ganesh Moorthy: Sure, so mainland China today is about 28% of our revenue. www.microchip.com. So it doesn't, the point of design is outside of China, and we're comfortable with that. So the other 10% of our business that's in China, that is designed in China, has, you know, another half of that, which... Very complex designs, and these are not the ones that are easy to dislodge and would require a significant amount of knowledge about systems, the software that goes with them, the hardware and software interaction, and all that.

Ganesh Moorthy: So that means about 5% of our business, about one-fourth of the business in mainland China, that is our more broad-based microcontrollers and analog, and those types of products. And there, fragmentation is our friend. It is a very, very fragmented market. Any one opportunity is a small percentage of revenue, you know; it is not easy to go to the place, but theoretically, you could say if somebody had an identical kind of offering and, by the way, a lot of that business is not just about having silicon. It's about having silicon, having tools, having design guides, having software that we make available. There's a lot of help.

Joe Moore: Self-help that we provide for our customers as well. So, yes, you know, there is more going on in China. We're trailing at both technologies and capacity, and we will pay attention, and we will, through our product line and innovation, and cost reduction, be continuing to work to go head-to-head against. But it's the portion of the business that you might think about is more broad-based, where they would come after that business is less than 5% and is very, very fragmented and difficult to get to. Does that help?

Operator: Great, thank you. Yes, so much, thank you. Thank you. Our next question comes from the line of Joshua Buchalter with TD Cowan.

Joshua Buchalter: Please proceed with your question. Hey guys, thanks for taking my questions. I wanted to ask about utilization rates and sort of the strategic decisions you're making to shut down the fabs for two weeks in March and June and also keep utilization rates, you know, lower over those two quarters. I guess why start and stop the FABs, but also why not just take the utilization rates much lower in the March quarter and then see where things play out, given you're trying to get inventory down, but expectations are that it'll still go Thank you.

Ganesh Moorthy: You know, it's a balanced decision that we had to think through and make, but as inventories climbed, there was a point at which the pain got high enough, and as we looked at that, we felt unbalanced, and you know, we don't know what other supply-demand balances are. And in the meanwhile, the inventory is high enough that we're comfortable that if the recovery were to accelerate, we're in But right now, we need to prepare for where March and June, to the best of our ability to call it, are going to be, and that includes running at lower utilization and taking a two-week shutdown in our FABs in each of the two quarters. Thanks, Ganesh.

Steve Sanghi: And then as my follow-up, and I know you have a formulaic approach to your capital return program, but you've also in the past talked about potentially going above the rates that you've outlined. As we go through this period where you're going through the digestion and pre-cash flows depressed versus where they were in the last few quarters, any thought to either using the balance sheet or returning more than you would have returned under the formula that you've outlined? Thank you. So maybe I'll start.

Steve Sanghi: So you mean we actually have a very healthy cash return this quarter, right? We increased from 77.5% to 82.5%. The adjusted free cash flow in the December quarter was quite high, and even though the dividend is going up again, we are going to have a kind of record share buyback in the quarter based on that formula that you spoke to. So we think it's appropriate, and we're glad that we're going to be buying back a bunch of shares this quarter. Stephen and Ganesh can give commentary if the board would think of doing anything different, but I think that program is kind of in place as it is.

Steve Sanghi: If the market changed and the stock price declined significantly, it would be a discussion with the board. I think it just came out naturally that our cash flow was extremely healthy last quarter, and with the return being 82 and a half percent. Back to Shareholders with Dividend increasing, still creates a record stock buyback in a quarter, a record that we have ever done before, $386.8 million. This was a very, very healthy buy

Operator: I think Steve and myself and the rest of the board see that as a way that we should continue. Thank you. Thank you. Our next question comes from the line of Quinn Bolton with Needham.

Quinn Bolton: Please proceed with my question. I guess the first one for Eric, you know, you talked about the lower utilization, you're shutting down the factories for two weeks in both March and June. I'm just kind of wondering if you could walk us through the accounting, how much of that hits you in the current period? How much of those lower utilization charges flow through inventory?

Eric Bjornholt: And given how much inventory you have, could it be, you know, something that hits gross margin for a longer period of time? As that, you know, flows through inventory and then the income statement. Then I got a quick follow-up. So our three large wafer fabs will, even without the shutdowns, with the attrition that we've had, be running below what we would call normal utilization. And so these two-week shutdowns will be period costs in the quarter and not capitalized. Now, we are running at lower utilization rates than we were. So the costs that are being capitalized on an inventory on a per unit basis are higher than what they were when we were running at full board.

Ganesh Moorthy: But, yeah, I think that answers your question, shut down. www.microchip.com. That's very, very clear. Thank you. And then, I guess just for Ganesh, you mentioned you're ending the PSP program.

Operator: You know, the backlog has been shrinking for some time, and really, what we're telling customers is that, you know, no more orders get accepted that are PSP or www.microsoft.com.au www.microsoft.com.ca. Got it. Thank you. Thank you. Our next question comes from the line of William Stein with Truist.

William Stein: Please proceed with your question. Great, thanks for squeezing me. And I was also going to ask about PSP and the mechanics of how it rolls out of backlog, but I think you just answered that. But I do have a sort of financial question around it.

Eric Bjornholt: I believe that for many of these orders, you are getting prepaid by customers, and you might have been likewise prepaying for capacity at Foundry. Can you walk through how those roll off the financial activity of the company and when you expect them to be sort of in the rearview mirror? Is that done, you think, by the end of the March quarter? Okay, so with PSP, those were not typically, you know, customers paying cash in advance for any of that. We have certain long-term supply agreements, and those have a cash prepayment element to them.

Eric Bjornholt: Those are still in place. Those aren't. There's nothing that's happening with those programs related to the cancellation. So those programs are still in place, and those tend to be three to five-year agreements, most of them five-year agreements. And those will just kind of run out over time. In some cases where customers' demand is not as strong as originally anticipated, work with them to find a mutually workable answer on that. Maybe it's to extend the program longer, or they can add something else into the program for their volume commitments, but we're not looking to penalize them. www.microchip.com www.microsoft.com. Great, thank you. Thank you. And our next question will come from the line of Janet Ramkisson with Quadra Capital. Please proceed with your question.

Operator: Yes, thanks for taking my question. Can you guys give us a sense of what's going on with design activity? I know you've seen this real cutback, and you're saying that there's really not much of a shortfall in terms of actual demand. Do you have any visibility, less visibility, the same as before? Could you give us some sense of what's going on to give us a better sense of the long-term outlook beyond the June quarter? Yeah, no, thank you.

Janet Ramkisson: So design activity, as I said in my prepared remarks, is at a very high level. And I think it is because, for a number of reasons, customers were in triage for some time as they were dealing with shortages, and as all that went behind them, they went back to focusing on innovation. Our products and technologies are enabling innovation in many new fields. So by many measures, both what we measure internally, in terms of design lens and design funnel and all that, and what some of our partners who are more design-in focused, particularly the catalog distributors, a good example where much of the feeding activity that takes place, are also seeing very high levels of that.

Ganesh Moorthy: So I think the innovation machine is strong, and the inventory correction will pass and go, and ultimately, the long-term growth of the business, as you noted, will come from how this innovation plays out and how the overall role and content that semiconductors will play in that innovation being delivered. Thanks, that's very helpful. And just one last one, if I could sneak it in.

Ganesh Moorthy: So, you know, we're back, going back all the way to 2022 when... www.microchip.com. But I think we've seen weakness in all geographies, pretty much all end markets with the exception of Microsoft Office Word Microsoft, Inc., Microsoft, Inc., Microsoft Office Word, MSWordDoc Word. Document.8, a bit of the data center that was all in. And I believe the end market data that was posted on our website still references the last full fiscal year, and that hasn't been updated. That's a process that we do once a year, so we'll take a look at the slide to make sure it's not confusing, but that's what I believe to be the case. Okay, thanks guys, I appreciate it. Thank you. Thank you.

Presentation.

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.

It is now my pleasure to introduce your host CFO, Mr. Eric Bjorn hope.

Thank you you may begin.

Thank you operator, good afternoon, everyone. During the course of this conference call, we will be making projections and other forward looking statements regarding future events for 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.

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

Tenants with me today are Ganesh Moorthy, Microchips, President and CEO, Steve Sammy Microchips executive chair and sides of Dowdy Microchips head of Investor Relations.

I will comment on our third 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.

We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip dotcom and.

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

[music].

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, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our earnings press release.

And in the reconciliations on our website.

Net sales in the December quarter were $176 6 billion, which was down 21, 7% sequentially.

Greetings and welcome to the Microchips third quarter fiscal year, 'twenty 'twenty four financial results conference call.

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

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

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

On a non-GAAP basis gross margins were 63, 8% operating expenses were at 22, 5% and operating income was 41, 2%.

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.

non-GAAP net income was $592 7 million and non-GAAP earnings per diluted share was $1 eight.

It is now my pleasure to introduce your host CFO, Mr. Eric be on hold.

Eric: Thank you you may begin.

On a GAAP basis in the December quarter gross margins were 63, 4% total operating expenses were $590 6 million and included acquisition intangible amortization of $151 3 million special charges of $1 1 million.

Eric: Alright. Thank you operator, good afternoon, everyone. During the course of this conference call, we will be making projections and other forward looking statements regarding future events for the future financial performance of the company.

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

Share based compensation of $38 8 million and $1 5 million of other expenses.

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

GAAP net income was $419 2 million, resulting in 77 in earnings per diluted share the.

The GAAP tax rate was favorably impacted from an IRS notice that clarify the treatment of cost incurred by our research provider under contract that we had been accruing for and that accrual was released in the quarter.

Eric: Tenants with me today are going to ask Marty Microchips, President and CEO, Steve Sandy Microchips executive chair and sides of Dowdy Microchips head of Investor Relations.

Marty Microchips: I will comment on our third quarter fiscal year 2024 financial performance and will then provide commentary on our results and discuss the current business environment as well as our guidance and Steve will provide an update on our cash return strategy.

Our non-GAAP cash tax rate was 13, 2% in the December quarter for.

Our non-GAAP cash.

Tax rate for fiscal year 2024 is expected to be just under 14%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

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

Eric: We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at Www Dot Microchip dotcom and.

Our fiscal 'twenty forecast tax rate is higher than our fiscal 'twenty three tax rate was for a variety of factors, including lower availability of tax attributes such as net operating losses and tax credits lower tax depreciation with our expectation for lower capital expenditures in the U S in fiscal 'twenty four as well as the impact of current.

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

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

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

Eric: I will now go through some of the operating results, including net sales gross margin and operating expenses other than net sales I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our earnings press release.

We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed the house actually pass the tax Bill last night that would achieve this and we will see how this progresses through the Senate.

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

Eric: And in the reconciliations on our website.

Yes.

Eric: Net sales in the December quarter were one 706, 6 billion, which was down 21, 7% sequentially.

Our inventory balance at December 31, 2023 was 131 billion.

We had 185 days of inventory at the end of the December quarter, which was up 18 days from the prior quarter's level, although 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.

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

Eric: On a non-GAAP basis gross margins were 63, 8% operating expenses were at 22, 5% and operating income was 41, 2%.

Eric: non-GAAP net income was $592 7 million and non-GAAP earnings per diluted share was $1 eight.

<unk>.

At the midpoint of our March 2024 quarter guidance, we would expect inventory to be up modestly and days of inventory to be in the range of 225 to 230 days due to the significant reduction in revenue and cost of goods sold.

Eric: On a GAAP basis in the December quarter gross margins were 63, 4% total operating expenses were $590 6 million and included acquisition intangible amortization of $151 3 million special charges of $1 1 million.

We also continued 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 December.

Eric: Share based compensation of $38 8 million and $1 5 million of other expenses.

Eric: GAAP net income was $419 $2 million, resulting in 77 in earnings per diluted share. The GAAP tax rate was favorably impacted from an IRS notice that clarify the treatment of cost incurred by our research provider under contract that we had been accruing for and that accrual was released in the quarter.

Inventory at our distributors in the December quarter were at 37 days, which was up two days from the prior quarter's level.

Our cash flow from operating activities was $853 3 million in the December quarter <unk>.

Included in our cash flow from operating activities was $30 4 million of long term supply assurance receipts from customers.

Eric: Our non-GAAP cash tax rate was 13, 2% in the December quarter.

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

Eric: non-GAAP cash tax.

Eric: Tax rate for fiscal year 2024 is expected to be just under 14%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Our adjusted free cash flow was $763 4 million in the December quarter.

Eric: Our fiscal 2000 and for cash tax rate is higher than our fiscal 'twenty three tax rate was for a variety of factors, including lower availability of tax attributes such as net operating losses and tax credits lower tax depreciation with our expectation for lower capital expenditures in the U S in fiscal 'twenty four as well as the impact of current.

As of December 31, our consolidated cash and total investment position was $281 million.

Our total debt decreased by $392 million in the December quarter, and our net debt decreased by $416 4 million in the quarter.

Over the last 22 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we've paid down $7 $1 billion of debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt.

Eric: Tax rules, requiring the capitalization of R&D expenses for tax purposes, we.

Eric: We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed the house actually passed the tax Bill last night that would achieve this and we will see how this progresses through the Senate.

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

Our adjusted EBITDA in the December quarter was $796 2 million and 45, 1% of net sales.

Our trailing 12 month, adjusted EBITDA was $4 6 billion.

Eric: Yes.

Eric: Our inventory balance at December 31, 2023 was $1 31 billion.

Our net debt to adjusted EBITDA was one seven times at December 31, 2023 down from 156 times at December 31 2022.

Eric: We had 185 days of inventory at the end of the December quarter, which was up 18 days from the prior quarter's level.

Although were 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 that pushed out delivery schedules for products that were very far through the manufacturing process.

Capital expenditures were $59 5 million in the December quarter, our expectation for capital expenditures for fiscal year 2024 is between 300 $310 million, which is down from the $300 million to $325 million, we shared with investors last quarter as we are delaying certain capital given the more challenging.

Eric: At the midpoint of our March 2024 quarter guidance, we would expect inventory dollars to be up modestly and days of inventory to be in the range of 225 to 230 days due to the significant reduction in revenue and cost of goods sold.

Gnomic backdrop.

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

Eric: 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 December.

Depreciation expense in the December quarter was $47 1 million.

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

Eric: Inventory at our distributors in the December quarter were at 37 days, which was up two days from the prior quarter's level.

Thank you Eric and good afternoon, everyone.

Our December quarter results were disappointing and below our expectations with net sales down 21, 7% sequentially and down 18, 6% from the year ago quarter.

Eric: Our cash flow from operating activities was $853 3 million in the December quarter include.

Eric: Included in our cash flow from operating activities was $34 million of long term supply assurance receipts from customers.

non-GAAP gross and operating margins came in at 63, 8% and 41, 2% respectively.

Eric: 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 dividends and share repurchases as these supply assurance payments will be refundable overtime as purchase commitments are fulfilled.

Down from our recent strong performance, but somewhat resilient despite the significant sequential decline in revenue.

Our consolidated non-GAAP diluted EPS came in at $1 eight per share down 38% from the year ago quarter.

Eric: Our adjusted free cash flow was $763 4 million in the December quarter.

Adjusted EBITDA was 45, 1% of net sales in the December quarter.

Eric: As of December 31, our consolidated cash and total investment position was $281 million.

Continuing to demonstrate some resiliency.

As a result, we had good debt reduction in the December quarter, and despite the lower adjusted EBITDA, we generated a net leverage ticked down to 127 X.

Eric: Our total debt decreased by $392 million in the December quarter, and our net debt decreased by $416 4 million in the quarter.

However, we expect our net leverage ratio to rise for a few quarters as trailing 12 month, adjusted EBITDA drops when replacing stronger prior year quarters with weaker ones.

Eric: Over the last 22 full quarters since we closed the microsemi acquisition and incurred over $8 billion in debt to do so we've paid down $7 $1 billion of debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt.

Our capital return to shareholders in the March quarter with increased to 82, 5% of our December quarter adjusted free cash flow.

We continue on our path toward a kind of a 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025.

Eric: Our adjusted EBITDA in the December quarter was $796 2 million and 45, 1% of net sales.

My thanks to our worldwide team for their support hard work and diligence as we navigated a difficult environment.

Eric: Our trailing 12 month, adjusted EBITDA was $4 $2 6 billion.

Eric: Our net debt to adjusted EBITDA was one seven times at December 31, 2023.

And focus on what we could control so that we are well positioned to thrive in the long term.

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

Eric: Down from 156 times at December 31, 2022.

Our mixed signal microcontroller net sales were down 22, 3% sequentially and down 18, 5% on a year over year basis.

Eric: Capital expenditures were $59 5 million in the December quarter, our expectation for capital expenditures for fiscal year 2024 is between 300 $310 million, which is down from the $300 million to $325 million, we shared with investors last quarter as we are delaying certain capital given the more challenging.

And our analog net sales were down 39% sequentially and down 29% on a year over year basis.

Now for some color on the December quarter.

And the general business environment.

Eric: Gnomic backdrop.

All regions of the World and most of our end markets were weak.

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

Our business was weaker than we expected as our customers continued to respond to the effects of increasing business uncertainty.

Eric: Depreciation expense in the December quarter was $47 1 million.

Slowing economic activity and the resultant increase in their inventory.

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

In addition, many customers implemented extended shutdowns of closures at the end of the December quarter as they managed operational activities.

Ganesh: Thank you Eric and good afternoon, everyone.

Ganesh: Our December quarter results were disappointing and below our expectations with net sales down 21, 7% sequentially and down 18, 6% from the year ago quarter.

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 the increased uncertainty that we're experiencing.

non-GAAP gross and operating margins came in at 63, 8% and 41, 2% respectively.

And we weren't able to push out or canceled backlog to help many customers with these inventory positions.

With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe that as inventory destocking underway at multiple levels.

Ganesh: Down from our recent strong performance, but somewhat resilient despite the significant sequential decline in revenue.

Ganesh: Our consolidated non-GAAP diluted EPS came in at $1 eight per share down 38% from the year ago quarter.

Our direct customers and distributors, who buy from us.

Our indirect customers, who buy through our distributors and in some cases, our customers' customers.

Ganesh: Adjusted EBITDA was 45, 1% of net sales in the December quarter.

The very strong up cycle over the last two to three years drove many of our customers to build inventory in order to be able to capitalize on strong business conditions and an uncertain supply environment.

Ganesh: Continuing to demonstrate some resiliency.

Ganesh: As a result, we had good debt reduction in the December quarter, and despite the lower adjusted EBITDA regenerated net leverage ticked down to 127 X.

The term just in case instead of just in time with used by customers to express their approach to these conditions.

Ganesh: However, we expect our net leverage ratio to rise for a few quarters as trailing 12 month, adjusted EBITDA drops when replacing stronger prior year quarters with weaker ones.

But as the macro environment slowed many of our customers for their business expectations to be too optimistic.

Ganesh: Our capital return to shareholders in the March quarter with increased to 82, 5% of our December quarter adjusted free cash flow.

And ended up with high levels of inventory and as a result, this ought to cancel or reschedule backlog.

An update on our PSP program.

Ganesh: We continue on our path toward a kind of a 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025.

During the early stages of the up cycle, we launched our PSP program, requiring noncancelable backlog in exchange for supply priority in a hyper constrained supply environment.

Ganesh: My thanks to our worldwide team for their support hard work and diligence as we navigated a difficult environment.

Program was aimed to discourage speculative demand and achieve mutual commitments between our customers and us to future demand for future demand.

Ganesh: And focus on what we could control so that we are well positioned to thrive in the long term.

The program work extremely well for many customers who participated during all of 2021 and 2022 as well as the early part of 2023.

Ganesh: Taking a look at our December quarter net sales from a product line perspective our.

Ganesh: Our mixed signal microcontroller net sales were down 22, 3% sequentially and down 18, 5% on a year over year basis.

Supporting strong growth in their businesses.

However, the business challenges, which led to the creation of the PSP program are no longer relevant.

Ganesh: And our analog net sales were down 39% sequentially and down 29% on a year over year basis.

And we have therefore decided to discontinue the program effective today.

Ganesh: Now for some color on the December quarter.

If business conditions warranted, we may at some point in the future initiate a similar program, which will of course have to be adapted to whatever that situation requires.

Ganesh: And the general business environment.

Ganesh: All regions of the World and most of our end markets were weak.

Ganesh: Our business was weaker than we expected as our customers continue to respond to the effects of increasing business uncertainty.

Reflecting the slowing macro environment, our distribution inventory grew to 37 days at the end of the December quarter as compared to 35 days at the end of the September quarter.

Slowing economic activity and the resultant increase in their inventory.

We are working with our distribution partners to find the right balance of inventory required to serve their customers manage their cash flow requirements and be positioned for the eventual strengthening of business conditions.

Ganesh: In addition, many customers implemented extended shutdowns so closures at the end of the December quarter as they managed their operational activities.

Ganesh: 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 the increased uncertainty that we're experiencing.

Our internal capacity expansion actions remain poised.

Given the severity of the down cycle, our factories around the world will be running at lower utilization rates and also taking up to two shutdown weeks in each of the March and June quarters in order to help control the growth of inventory.

Ganesh: And we weren't able to push out or canceled backlog to help many customers with these inventory positions.

Ganesh: With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe that as inventory destocking underway at multiple levels.

We expect our capital investments in fiscal year, 'twenty, four and fiscal year 'twenty five will be low.

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

Ganesh: Our direct customers and distributors, who buy from us.

To that end, we reached a preliminary memorandum of terms with the department of Commerce for $162 million in grants targeted at existing projects for two of our U S patents.

Ganesh: Our indirect customers, who buy through our distributors and in some cases, our customers' customers.

Ganesh: The very strong up cycle over the last two to three years drove many of our customers to build inventory in order to be able to capitalize on strong business conditions and an uncertain supply environment.

These grants are subject to diligence by the chips office as well as capacity investments by microchip over multiple years.

We have been driving our lead times down and have reduced average lead times from roughly 52 weeks at the start of 2023 to roughly eight weeks.

Ganesh: The term just in case instead of just in time, let's use by customers to express their approach to these conditions.

Ganesh: But as the macro environment has slowed.

By the end of 2023 on average.

Ganesh: Any of our customers for their business expectations to be too optimistic.

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

Ganesh: And ended up with high levels of inventory and as a result, they start to cancel or reschedule backlog.

Ganesh: An update on our PSP program.

Ganesh: During the early stages of the up cycle, we launched our PSP program, requiring noncancelable backlog in exchange for supply priority.

As it enables our customers and microchip to enable to engage and uncertain environment with more agility and effectiveness.

However, a significant reduction in lead times is also resulting in lower bookings and reduced near term visibility for our business.

Ganesh: Hyper constrained supply environment.

Ganesh: The program was aimed to discourage speculative demand and.

Ganesh: We achieved mutual commitments between our customers and us to future demand for future demand.

We're also taking steps to reduce our expenses.

Ganesh: The program work extremely well for many customers who participated during all of 2021 and 2022 as well as the early part of 2023.

In addition to the variable compensation programs, which provide automatic reductions during a downcycle and normal containment of discretionary expenses.

We will be implementing broad base pay reductions.

Ganesh: Supporting strong growth in their businesses.

Ganesh: However, the business challenges, which led to the creation of the PSP program are no longer relevant.

Our team members, who are not a part of the factory shutdowns will take a 10% pay cut and consistent with our normal practice the executive team will take the largest reduction with a 20% pay cut.

Ganesh: And we have therefore decided to discontinue the program effective today.

Ganesh: If business conditions warrant it we may at some point in the future initiate a similar program, which will of course have to be adapted to whatever that situation requires.

The shutdowns for manufacturing team members and pay cuts for Nonmanufacturing team members are consistent with our long standing culture of shared sacrifices in down cycles.

Ganesh: Reflecting the slowing macro environment, our distribution inventory grew to 37 days at the end of the December quarter.

<unk> rewards in up cycles.

Avoiding layoffs and in the process protecting manufacturing capability as well as high priority projects, which are important for our customers and us to thrive in the long term.

Ganesh: As compared to 35 days at the end of the September quarter.

Ganesh: We are working with our distribution partners to find the right balance of inventory required to serve their customers manage their cash flow requirements and be positioned for the eventual strengthening of business conditions.

We took similar actions in prior periods of business uncertainty such as the Covid pandemic in 2020, and the global financial crisis in 2008, and 2009, and we believe such actions were quite effective to navigate our business.

Ganesh: Our internal capacity expansion actions remain poised.

Ganesh: Given the severity of the down cycle, our factories around the world will be running at lower utilization rates and also taking up to two shutdown weeks in each of the March and June quarters in order to help control the growth of inventory.

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

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 position to push out or cancel their backlog.

Ganesh: We expect our capital investments in fiscal year, 'twenty, four and fiscal year 'twenty five will be low.

We recognize that our short lead times and increased flexibility with backlog will result in customers reducing inventory aggressively.

Ganesh: Even as we prepare for the long term growth of our business.

Ganesh: Does that and we reached a preliminary memorandum of terms with the department of Commerce for $162 million in grants targeted at existing projects for two of our U S patents.

And that this could result in some degree of overcorrection.

However in response to these conditions, we are continuing to work with our customers to absorb as much of the inventory correction as we can at this time.

Ganesh: These grants are subject to diligence by the chips office as well as capacity investments by microchip over multiple years.

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

Ganesh: We have been driving our lead times down and have reduced average lead times from roughly 52 weeks at the start of 2023 to roughly eight weeks.

We expect our net sales for the March quarter to be between one to $2 5 billion.

145 billion.

The guidance range is larger than normal to reflect the macro uncertainty and the resultant low business visibility.

Ganesh: By the end of 2023 on average.

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

We expect our non-GAAP gross margin to be between 59% and 61, 6% of sales.

We expect non-GAAP operating expenses to be between 26, 9% and 37% of sales.

Ganesh: How is it enables our customers and microchip to enable to engage and uncertain environment with more agility and effectiveness.

We expect non-GAAP operating profit to be between 28, 3% and 34, 7% of sales.

Ganesh: However, a significant reduction in lead times is also resulting in lower bookings and reduced near term visibility for our business.

And we expect our non-GAAP diluted earnings per share to be between <unk> 46.

Ganesh: We're also taking steps to reduce our expenses.

And 68.

To keep things in perspective, while our business results of degraded significantly over the last two quarters as a larger than normal inventory correction has played out or.

Ganesh: In addition to the variable compensation programs, which provide automatic reductions during a downcycle and normal containment of discretionary expenses.

Ganesh: We will be implementing broad based pay reductions.

Our full fiscal year 'twenty for revenue decline at the midpoint of the March quarter guidance is expected to be roughly nine 5% comparing favorably with weakness that other industry players have experienced.

Ganesh: Our team members, who are not a part of the factory shutdowns will take a 10% pay cut and consistent with our normal practice the executive team will take the largest reduction with a 20% pay cut.

Our non-GAAP operating margin for full fiscal year 'twenty four at the midpoint of our March quarter guidance is expected to be 43, 6% continuing to be among the best results across other companies in our industry.

Ganesh: The shutdowns for manufacturing team members and pay cuts for Nonmanufacturing team members are consistent with our long standing culture of shared sacrifices in down cycles.

Ganesh: <unk> rewards in up cycles.

Ganesh: Avoiding layoffs and in the process protecting manufacturing capability as well as high priority projects, which are important for our customers and us to thrive in the long term.

While we don't know how and when the inevitable up cycle will play out we believe the fundamental characteristics of our business remain intact.

Finally, notwithstanding any near term macro weakness we are confident that our solutions remain the engine of innovation for the applications and end markets we serve.

Ganesh: We took similar actions in prior periods of business uncertainty such as the Covid pandemic in 2020, and the global financial crisis in 2008, and 2009, and we believe such actions were quite effective to navigate our business.

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

Speaker Change: Now, let's get into our guidance for the March quarter.

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

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

Thank you Dennis and good afternoon, everyone.

Speaker Change: We are continuing to support customers and channel partners with inventory position to push out or cancel their backlog.

I would like to provide you with a further update on our cash return strategy.

Speaker Change: We recognize that our short lead times and increased flexibility with backlog will result in customers reducing inventory aggressively.

Board of directors announced an increase in the dividend of 25, 7% from the year ago quarter to <unk> 45 per share.

Speaker Change: And that this could result in some degree of over correction.

During the last quarter, we purchased $114 $6 million of our stock in the open market.

Speaker Change: However in response to these conditions, we are continuing to work with our customers to absorb as much of the inventory correction as we can at this time.

We also paid out 237 4 million in dividends.

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

Thus the total cash return was $352 million.

Speaker Change: We expect our net sales for the March quarter to be between one to $2 5 billion.

This amount was 77, 5% of our actual adjusted free cash flow.

Speaker Change: $145 billion.

Speaker Change: The guidance range is larger than normal to reflect the macro uncertainty and the resultant low business visibility.

$454 3 million during the September 2023 quarter.

Speaker Change: We expect our non-GAAP gross margin to be between 59% and 61, 6% of sales.

Our net leverage at the end of December 2023 quarter was $1 two seven times.

Speaker Change: We expect non-GAAP operating expenses to be between 26, 9% and 37% of sales.

<unk>.

Ever since we achieved an investment grade rating for our debt in November 2020 run and pivoted to increasing our capital return to shareholders. We have returned $3 6 billion to shareholders through December 31, 2023 by a combination of dividends and <unk>.

Speaker Change: We expect non-GAAP operating profit to be between 28, 3% and 34, 7% of sales.

Speaker Change: And we expect our non-GAAP diluted earnings per share to be between <unk> 46.

And 68.

Speaker Change: To keep things in perspective, while our business results have degraded significantly over the last two quarters as a larger than normal inventory correction has played out are.

Share buybacks.

During this time, we have bought back approximately $26 million shoes.

Our common stock from the open market, representing approximately four 5% of our shares outstanding.

Speaker Change: Our full fiscal year 'twenty for revenue decline at the midpoint of our March quarter guidance is expected to be roughly nine 5% comparing favorably with weakness that other industry players have experienced.

Yeah.

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

Speaker Change: Our non-GAAP operating margin for full fiscal year 24 at the midpoint of our March quarter guidance is expected to be 43, 6% continuing to be among the best results across other companies in our industry.

Adjusted free cash flow excludes a net $34 million that we collected from our customers for long term supply assurance payments. These payments are refundable room purchase commitments are fulfilled.

Speaker Change: While we don't know how and when the inevitable up cycle will play out.

Speaker Change: We believe the fundamental characteristics of our business remain intact.

The adjusted free cash flow for the December quarter was $763 4 million.

Speaker Change: Finally, notwithstanding any near term macro weakness we are confident that our solutions remain the engine of innovation for the applications and end markets we serve.

We plan to return 82, 5% or $629 $8 million of that amount to our shareholders with the dividend expected to be approximately $243 million.

Speaker Change: Focus on total system solutions and key market Mega trends continue to fuel strong design win momentum, which we expect will drive above market long term growth.

Speaker Change: With that let me pass the baton to Steve to talk more about our cash return to shareholders.

And the stock buyback expected to be approximately $386 million to $8 million.

Steve: Thank you <unk> good afternoon, everyone.

Which will be a new quarterly quarterly record for stock buyback since we initiated our enhanced capital return strategy.

Steve: I would like to provide you with a further update on our cash return strategy.

Steve: The board of Directors announced an increase in the dividend of 25, 7% from the year ago quarter to 45 per share.

Going forward, we plan to continue to increase our adjusted free cash flow returned to shareholders by 500 basis points every quarter until we reach to 100% of adjusted free cash flow returned to shareholders. They will take four more quarters and we expect the dividends over.

Steve: During the last quarter, we purchased $114 $6 million of our stock.

Steve: Stock in the open market.

Steve: Also paid out 237 4 million in dividends.

Time will represent approximately 50% of our cash return.

Steve: The total cash return was $352 million.

Steve: This amount was 77, 5% of our actual adjusted free cash flow.

With that operator will you please poll for questions.

Yes.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Steve: $454 3 million.

Steve: During the September 2023 quarter.

Steve: Net leverage at the end of December 2023 quarter, whereas 127 times.

Confirmation tone will indicate that your line is in the question queue.

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

Steve: Yeah.

Steve: Ever since we achieved an investment grade rating for our debt in November 2021, and pivoted to increasing our capital return to shareholders. We have returned $3 6 billion to shareholders through December 31, 2023 by a combination of dividends and share.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Okay.

Thank you and our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Steve: Buybacks.

Steve: During this time, we have bought back approximately 26 million shares of our common stock from the open market representing approximately four 5% of our shares outstanding.

Hi, Thanks, a lot I wanted to ask about how much of a headwind.

Inventory inside of distribution still is.

Shipments into distribution were down about 30% well actually more than that.

Some of your largest just these are still saying that they're having a hard time working down inventory. So.

Steve: In the current March quarter.

Steve: We will use the adjusted free cash flow from the December quarter to target the amount of cash returned to shareholders.

Can you provide any guidance like does the March guidance assume that shipments into distribution will be down a lot more than what the corporate.

Steve: Just your free cash flow excludes a net $34 million that we collected from our customers for long term supply assurance payments.

<unk>.

Guidance is again just like it wasn't December.

We are expecting that we will drain inventory in distribution in the March quarter.

These statements are refundable RIN purchase commitments are fulfilled.

Okay great.

Steve: The adjusted free cash flow for the December quarter was $763 4 million.

Great and then.

Eric can you talk about utilization rates and the potential for some write downs.

Steve: We plan to return 82, 5% or $629 $8 million of that amount to our shareholders with the dividend expected to be approximately $243 million and the stock buyback expected to be approximately 386.

We sort of haven't been at a level, yet where you would write things down but can you talk about that thanks.

Sure. So we have been kind of working on a employee attrition basis, and our three large fabs and through the December quarter that does not put us in a situation, where we were taking underutilization charges from from those three fabs that will change this quarter.

Steve: $8 million.

Steve: This will be a new quarterly quarterly records for stock buyback since we initiated our enhanced capital return strategy.

As we have continued to address and is going to ask kind of walk through we've got two.

Two week shutdowns scheduled and all three of those large factories. So we arent going to break out a utilization percentage, but underutilization is absolutely impacting our business our gross margins in the current quarter.

Steve: Going forward we.

Steve: We plan to continue to increase our adjusted free cash flow.

Steve: Tuned to shareholders by 500 basis points every quarter until we reach to 100% of adjusted free cash flow returned to shareholders. They will take four more quarters and we expect the dividends over time will represent approximately 50% of our cash returned.

And on top of that with the change that we've seen in demand and inventory still being high we have been taking.

Relatively large charges for inventory reserves based on our accounting policies that we have in place in all of those things are really factored into the margin guidance that we've given to the street.

Speaker Change: With that operator will you please poll for questions.

Speaker Change: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Thanks, a lot.

Speaker Change: Information tone will indicate that your line is in the question queue.

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

Speaker Change: And you May press Star two if you would like to remove your question from the queue.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Alright, thank you.

My first question is on cancellation rates and what Youre seeing from a from a customer push out perspective.

Speaker Change: One moment, please while equal for questions.

Are you seeing any signs of stabilization in.

Speaker Change: Okay.

In terms of cancellation rates are.

Speaker Change: Thank you and our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Pretty much the same so far in the quarter relative to December December in September of last year.

Speaker Change: Hi, Thanks, a lot I wanted to ask about how much of a headwind.

We don't have a.

Numerical tracking process, we still have customers that.

Timothy Michael Arcuri: Inventory inside of distribution still is.

Vascular health, we have done a lot of that and build it into what we have into our guidance.

Timothy Michael Arcuri: Shipments into distribution, we would add about 30% well actually more than that.

Timothy Michael Arcuri: And yet some of your largest just these are still saying that theyre, having a hard time working down inventory.

I don't know if you have a better.

Cancellation rate.

I would say as we kind of talked about the customers and distributors are feeling like they have excess inventory and with that if they have backlog in place for those products. They are either not placing backlog, but if they have backlog in place there looking to see if there is a bill ability for.

Timothy Arcuri: No.

Timothy Arcuri: Can you provide any guidance like it does the March guidance assume that shipments into distribution will be down a lot more than what the corporate.

Timothy Arcuri: No.

Timothy Arcuri: Guidance is again just like it wasn't December.

Timothy Arcuri: We are expecting that we will drain inventory and distribution in the March quarter.

Then to at least push that out and so we're having those ongoing discussions.

Okay.

Speaker Change: Great and then.

Speaker Change: Eric can you talk about utilization rates and the potential for some write downs.

I would say that there is still at a relatively high rating.

Got it thank you and as my follow up.

Eric: We sort of haven't been.

Eric: Level, yet, where you would write things down but can you talk about that thanks.

I was hoping to get your comments on pricing.

Eric: Sure. So we have been kind of working on a employee attrition basis, and our three large fabs and through the December quarter that does not put us in a situation, where we were taking underutilization charges from from those three fabs that will change this quarter.

The headwinds Youre seeing today is it mostly volume driven or are you starting to see prices erode as well between your microcontroller business an analog business.

It seems like at the industry level, you've got more supply coming online over the next couple of quarters several quarters. So can you.

Curious, how youre, what youre seeing today, and how youre thinking about pricing as we progress through calendar 'twenty four thank you.

Speaker Change: As we have continued to address <unk>.

Speaker Change: And is going to ask kind of walk through we've got.

Yeah all of the revenue declines are really volume declines in our pricing related pricing is stable. It is not contributing to the revenue change that.

Speaker Change: Two weeks shutdown schedule in all three of those large factories. So we arent going to break out a utilization percentage, but other utilization is absolutely impacting our business our gross margins in the current quarter.

As in our guidance.

Our.

Our business is one which is based on design ins.

And on top of that with the change that we've seen in demand and inventories still being high we have been taking.

That are done.

123 years before in production that takes place for many many years, it's not an easy.

Speaker Change: Relatively large charges for inventory reserves based on our accounting policies that we have in place in all of those things are really factored into the margin guidance that we've given to the street.

Substitution that takes players on short term price adjustments et cetera.

Clearly at the point, where new designs are taking place we will be price competitive to what the new design requires but today's revenue adjustments downward on not happening because of price prices table.

Speaker Change: Thanks, a lot.

Speaker Change: Thank you. Our next question comes from the line of Toshi Hari with Goldman Sachs. Please proceed with your question.

Thank you.

Toshi Hari: Alright, thank you.

Thank you and our next question comes from the line of Chris Caso with Wolfe Research. Please proceed with your question.

Toshi Hari: My first question is on cancellation rates and what Youre seeing from a from a customer push out perspective.

Yes. Thank you good evening.

Toshi Hari: Are you seeing any signs of stabilization in.

My question is and it's a difficult question about sort of where do you think aggregate inventory levels are and how much progress with.

Toshi Hari: In terms of cancellation rates are.

Toshi Hari: Pretty much the same so far in the quarter relative to December December in September of last year.

Speaker Change: We don't have a.

Some of these lower revenue shipping rates that we'll make in getting those inventories down over time.

Speaker Change: Numerical tracking process, we still have customers that.

Speaker Change: I've asked for help we have done a lot of that and build it into what we have into our guidance.

I know thats difficult to answer for your end customers your indirect customers, but perhaps you could address it from the distribution channel, where you have a little more visibility.

Speaker Change: I don't know if you have a better.

Speaker Change: Cancellation rate.

Speaker Change: I would say as we kind of talked about the customers and distributors are feeling like they have excess inventory and with that if they have backlog in place for those products. They are either not placing backlog, but if they have backlog in place there looking to see if there is availability for.

And where does the target inventory levels are and we expect to get over time.

As you said.

Inventory in some cases as <unk>.

Care to us we have to estimate based on where customers are placing orders what kind of <unk>.

Speaker Change: Then to at least pushed that out so we're having those ongoing discussions and I would say that there is still at a relatively high rating.

Feedback they are giving us.

We know we're going to be substantially under shipping to where consumption is going to be but it's very hard to put a number on what that is and how much of the inventory has been taken out and then as I said in some cases it is multiple layers of inventory and especially as people are getting to that point, where.

Speaker Change: Got it thank you and as my follow up.

Speaker Change: I was hoping to get your comments on pricing.

Speaker Change: The headwinds Youre seeing today is it mostly volume driven or are you starting to see prices erode as well between your microcontroller business an analog business.

They are less willing to carry inventory, perhaps even take it to the low end of what they might historically do.

Speaker Change: It seems like at the industry level, you've got more supply coming online over the next couple of quarters several quarters or so.

So supply is plentiful.

Not all of this is just inventory reduction as you would normally expect but it is going to be at multiple levels.

Curious, how youre, what youre seeing today, and how youre thinking about pricing as we progress through calendar 'twenty four thank you.

To our customers to their customers and in some cases, if they have an OEM that goes to the OEM there as well. So we don't have a good way to put a number on what you are asking for.

Speaker Change: Yeah all of the revenue declines are really volume declines in our pricing related pricing is stable. It is not contributing to the revenue change that.

Speaker Change: As in our guidance.

Okay fair enough.

Speaker Change: Our.

One of the things you've also said in prior downturns.

Speaker Change: Our business is one which is based on design ins.

Typically you've seen three down quarters.

Speaker Change: <unk> are done.

Speaker Change: One two or three years before in production that takes place for many many years, it's not an easy.

Before you achieve a bottom.

You kind of add that now although September quarter was obviously, a much smaller magnitude than now.

Speaker Change: Substitution that takes players on short term price adjustments et cetera.

Okay.

Speaker Change: Clearly at the point, where new designs are taking place we will be price competitive to what the new design requires but today's revenue adjustments downward and not happening because of price prices stable.

Given where we are right now.

Do you think that still holds and perhaps you could.

Okay.

Characterize this downturn against some of the prior ones that you've been through.

Speaker Change: Thank you.

Well theres nothing typical about this downturn.

Speaker Change: Thank you.

Speaker Change: Thank you and our next question comes from the line of Chris Caso with Wolfe Research. Please proceed with your question.

I don't think that is a good comparison to history and you could say in magnitude. It is on the order of what we have seen in the global financial crisis, I think we were down 36% or so at that point in time.

Chris Caso: Yes. Thank you good evening.

Chris Caso: My question is and it's a difficult question about sort of where do you think aggregate inventory levels are and how much progress with.

We have very limited visibility in today's market conditions, and so it's difficult to say where exactly this is and as I mentioned, we believe we are significantly under shipping to end demand.

Chris Caso: Some of these lower revenue shipping rates that we'll make in getting those inventories down over time.

But we are unable to provide any kind of.

Chris Caso: I know thats difficult to answer for your end customers your indirect customers, but perhaps you could address it from the distribution channel, where you have a little more visibility.

Forecast for our guidance beyond this quarter.

Thank you.

Youre welcome.

Thank you. Our next question comes from the line of Christopher Rolland with SRT.

Chris Caso: And where does the target inventory levels are and we expect to get over time.

Please proceed with your question.

Speaker Change: As you said.

Hey, guys. Thanks for the question.

Inventory in some cases as <unk>.

So around cycle times and lead times.

Speaker Change: <unk> to us we have to.

Speaker Change: Estimated based on where customers are placing orders what kind of feedback they're giving us.

We have found that some of your products, particularly through distribution.

They have lead times that are even below your cycle times I'm, assuming your cycle times are something like four weeks or six weeks something like that.

Speaker Change: We know we're going to be substantially under shipping to where consumption is going to be but it's very hard to put a number on what that is and how much of the inventory has been taken out and then as I said in some cases it is multiple layers of inventory and especially as people are getting to that point, where they are.

I guess my question is how long would you expect this dynamic to last I think this is for you.

You do a big inventory corrections like we're going through you see that phenomenon occasionally.

Speaker Change: Are less willing to carry inventory, perhaps even take it to the low end of what they might historically do because supply is plentiful.

But how long might this last and when are you expecting lead times to maybe expand again, obviously, we have some inventory dynamic we're going through here.

Speaker Change: Not all of this is just inventory reduction as you would normally expect but it is going to be at multiple levels.

But maybe talk about that lead times versus cycle times, and when you think those might actually rise again.

Speaker Change: To our customers to their customers in some cases, if they have an OEM that goes to the OEM there as well. So we don't have a good way to put a number on what you are asking for.

So Chris let me just define two terms and then we'll work through it so cycle time.

It takes from when you begin with raw material and get to finished goods.

Speaker Change: Okay fair enough.

Speaker Change: One of the things you've also said in prior downturns is typically you've seen three down quarters.

That cycle time for semiconductors, depending on which product and what process can be anywhere from three to five months, sometimes longer depending on the specialty so thats. The typical production cycle time, we've always been able to manage lead times, which we define as from him in a customer places an order on us when can we ship the product to them to be a lot shorter than that.

Speaker Change: Before you achieve a bottom.

Speaker Change: You kind of at that now although September quarter was obviously, a much smaller magnitude than now.

Speaker Change: Okay.

Speaker Change: Given where we are right now.

Speaker Change: Do you think that still holds and perhaps you could.

And historically pre pandemic.

Speaker Change: Okay.

Four to eight weeks was not an unusual number for 80% to 90% of our line items.

Speaker Change: Characterize this downturn against some of the prior ones that you've been through.

Where we have come back to is where those lead times on average where a customer places an order they can get in less than eight weeks and in some cases, if we have it in finished goods.

Speaker Change: Well there is nothing typical about this downturn.

Speaker Change: I don't think that is a good comparison to history and you could say in magnitude. It is on the order of what we have seen in the global financial crisis.

They can get it much sooner than that as well.

So.

Speaker Change: I think we were down 36% or so at that point in time.

I don't have a good view.

When does lead times go back out and I'm not sure that's a good thing.

Speaker Change: We have very limited visibility in today's market conditions, and so it's difficult to say where exactly this is and as I mentioned, we believe we are significantly under shipping to end demand.

I think we have to obviously work to manage the supply and demand consistent with where demand is growing but for years. We ran in that four to eight week is a reasonably stable lead time outside of any major increases or decreases in demand in the marketplace.

Speaker Change: But we are unable to provide any kind of.

Speaker Change: Forecast for guidance beyond this quarter.

Speaker Change: Fair enough. Thank you.

Speaker Change: Youre welcome.

And right now we think we're going to be at low lead times for quite some time, we have inventory that is high and we will be growing into the March quarter, and we're going to position that inventory to be able to take advantage of.

Speaker Change: Thank you. Our next question comes from the line of Christopher Rolland with <unk>. Please proceed with your question.

Christopher Rolland: Hey, guys. Thanks for the question.

Orders that come in with short cycles, because visibility is low and we need to be able to position and take that as quickly as it comes in so all of our systems are geared towards having shorter lead times and being able to take orders off the.

Christopher Rolland: So around cycle times and lead times.

Christopher Rolland: We have found that some of your products, particularly through distribution.

They have lead times that are even below your cycle times I'm, assuming your cycle times are something like four weeks or six weeks something like that.

Is that a place with short lead times as quickly as we can.

Maybe just one thing I think Chris maybe what you were getting at is when we have product that is staged in die bank. So its through the wafer fab that in many cases, we can turn that through assembly and test in the four to six weeks that you were talking about and so if thats the case or if it's in die bank that would be the case, but we've got we've got finished goods today.

Christopher Rolland: I guess my question is how long would you expect this dynamic to last I think this is if you do a big inventory corrections like we're going through you see that phenomenon occasionally.

Christopher Rolland: How long might this last and when are you expecting lead times to maybe expand again, obviously, we have some inventory dynamic we're going through here.

We're staging the products that are high runners and die bank. So our lead times are quite short across the board.

Christopher Rolland: But maybe talk about that lead times versus cycle times and when do you think.

Yes. Thank you very much guys. So there was some good stuff there.

Christopher Rolland: Those might actually rise again.

While I have you gross margin just for kind of simplicity sake, my model's roughly like 300 basis points below for next quarter, where I was previously.

So Chris let me just define two terms and then we'll work through it so cycle time.

Christopher Rolland: It takes from when you begin with raw material and get to finished goods.

Christopher Rolland: That cycle time for semiconductors, depending on which product and what process can be anywhere from three to five months, sometimes longer depending on the specialty so thats the typical production cycle time.

Don't know if you can kind of walk us.

Through that.

Whats mix versus.

Underutilization versus inventory rate down it sounds like pricing is not an issue here.

We have always been able to manage lead times, which we define as from him in a customer places an order on us when can we ship the product to them to be a lot shorter than that and historically pre pandemic that was four to eight weeks was not an unusual number 480, 90% of our line items.

Like for like but.

Would love to know how those kind of various things contribute.

Yeah. So I would say the biggest change quarter to quarter is going to be in the factory utilization and that's a combination of continued attrition and lower production rates on a steady state weekly basis, and then we're having these two weeks shutdown on top of that.

Christopher Rolland: Where we have come back to is where those lead times on average where a customer places an order they can get in less than eight weeks and in some cases, if we have it in finished goods.

And we're having no time off and some of our back end factories, too which is larger than the previous quarter. So all of those things impacted I would say the inventory reserve piece is a part of it.

They can get it much sooner than that as well.

Christopher Rolland: So I.

Christopher Rolland: I don't have a good view.

Christopher Rolland: Windows lead times go back out and I'm not sure. That's a good thing I think we have to obviously work to manage the supply and demand consistent with where demand is growing but for years. We ran in that four to eight week is a reasonably stable lead time outside of any major increases or decreases in <unk>.

But we have relatively.

Significant charges last quarter on that and I wouldn't expect those to be.

Significantly more of this quarter that will probably be larger but the biggest piece is going to be what we're doing on utilization.

Excellent thanks, guys.

Christopher Rolland: And in the marketplace.

Christopher Rolland: And right now we think we're going to be at low lead times for quite some time, we have inventory that is high and we will be growing in.

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

Christopher Rolland: Into the March quarter.

Hey, guys. Good afternoon, Thanks for taking my question.

Christopher Rolland: And we're going to position that inventory to be able to take advantage of.

Looking at the March quarter guidance, that's basically a peak to trough in revenue terms.

Christopher Rolland: Orders that come in with short cycles, because visibility is low and we need to be able to position and take that as quickly as it comes in so all of our systems are geared towards having shorter lead times and being able to take orders off peak.

More than 40% all within the same fiscal year and so clearly the rate.

K has been extreme and I'm, calling on your experience here given that you've all been through a lot of cycles in the past and you hinted to in your prepared remarks, maybe some overcorrection on your customers part in terms of inventory depletion.

Christopher Rolland: In a place with short lead times as quickly as we can.

Christopher Rolland: Maybe just one thing I think Chris maybe what you were getting at is when we have product that is staged in die bank. So its through the wafer fab that in many cases, we can turn that through assembly and test in the four to six weeks that you were talking about and so if thats the case or if it's in die bank that would be the case, but we've got we've got finished goods today.

Culinary experience how would you say the slope of the recovery May look given your lead times is it a gradual one or.

Are we going to see just a.

We're staging the products that are high runners and die bank. So our lead times are quite short across the board.

Sharper rebound as we saw in terms of this correction.

Speaker Change: Yes. Thank you very much guys. So there were some good stuff there.

So I'll start and gas received can add to this I think I think it is unknown at this point in time right we have limited.

Speaker Change: While I have you gross margin just for kind of simplicity sake, my model's roughly like 300 basis points below for next quarter, where I was previously.

Limited backlog visibility as we look out in time, which I know you're asking about beyond this quarter lead times are really short and customers are sitting on a certain level of inventory beyond what they think is necessary for their business today.

Speaker Change: I don't know if you can kind of walk us.

Speaker Change: Through that.

And until we start getting short term orders kind of at our lead times and we see that backlog start to build its hard for us to really imagine what it's going to do as <unk> said before.

Speaker Change: What's mix versus.

Speaker Change: Underutilization versus inventory write down it sounds like pricing is not an issue here like.

Speaker Change: For like but.

Speaker Change: Would love to know how those kind of various things contribute.

Clearly in this quarter with our revenue guidance we are shipped.

Speaker Change: Yeah. So I would say the biggest change quarter to quarter is going to be in the factory utilization and that's a combination of continued attrition and lower production rates on a steady state weekly basis, and then we're having these two weeks shutdown on top of that and we're having no time off and some of our <unk>.

Shipping below what the end consumption for our products are and we think that's relatively material, but giving you any guidance in terms of what the slope of the recovery is I think it's hard for us to do at this point I think the recovery has many components to it one is just if you assume business is flat.

And as the inventory trained.

Speaker Change: And factories, too, which is larger than the previous quarter. So all of those things impacted I would say the inventory reserve piece is a part of it.

People will at some point just have to order enough to get back to flat.

<unk>.

And there is also what is the macro do.

And what happens in actual consumption over time.

Speaker Change: But we have relatively.

Speaker Change: Significant charges last quarter on that and I wouldn't expect those to be.

That depends on many things and where GDP at what is and what our interest rates doing et cetera.

Speaker Change: Significantly more of this quarter that will probably be larger but the biggest piece is going to be what we're doing on utilization.

And I think those are all variables, which you can't at least we're not able to plug in and say this is how the next three four quarters. The shape of the recovery will look and we don't have the visibility and backlog to give us any insight into that today.

Speaker Change: Excellent thanks, guys.

Speaker Change: Thank you. Our next question comes from the line of Gary Mobley with Wells Fargo. Please proceed with your question.

No I was asking for a lot there, but I appreciate the color.

So it sounds like your Opex management is more so variable versus structural and obviously you've done this in the past.

Gary Mobley: Hey, guys. Good afternoon, Thanks for taking my question.

Gary Mobley: Looking at the March quarter guidance, that's basically a peak to trough.

In this recent round, where you've asked employees to take a 10% pay reduction what was communicated to them in terms of when that might be.

Gary Mobley: Revenue terms.

Gary Mobley: More than 40% all within the same fiscal year, so clearly the rate.

Gary Mobley: K has been extreme and I'm, calling on your experience here given that you've all been through a lot of cycles in the past and you pointed to in your prepared remarks, maybe some over correction on your customers part in terms of inventory depletion.

Recouped.

Based on some sort of revenue or performance metrics.

I have not been able to speak to the entire microchip community until.

I do that on Monday morning, I did write them all a message today after the market closed and before this call to let them know what people are doing so those are details that.

Gary Mobley: Joining experience how would you say the slope of the recovery May look given your lead times. This is a gradual one or.

I would prefer to first speak to our employees.

Gary Mobley: Are we going to see just.

Gary Mobley: Sharper rebound as we saw in terms of this correction.

And give them all of that but this is not new to us we've done this multiple times.

So I'll start and get extra Steve can add to this I think I think it is unknown at this point in time right we have limited.

Our culture allows.

Allows people to understand how shared sacrifice and shared rewards go hand in hand, and how that create excellent outcomes for the company and for the individuals in the process of doing that and so I am confident in our team.

Gary Mobley: Limited backlog visibility as we look out in time, which you're asking about beyond this quarter lead times are really short and customers are sitting on a certain level of inventory beyond what they think is necessary for their business today.

Especially the team that have been through many cycles with US you will see it.

Help us with it and pull everybody else along as well.

Steve: And until we start getting short term orders kind of at our lead times and we see that backlog start to build its hard for us to really imagine what it's going to do it's going to have said before.

Thank you Ganesh.

Youre welcome.

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

Steve: Clearly in this quarter with our revenue guidance we are shipped.

Thanks for taking my question Dennis I appreciate youre, not going beyond the quarter, but I still wanted to get some help then.

Steve: Shipping below what the end consumption for our products are and we think that's relatively material, but giving you any guidance in terms of what the slope of the recovery is I think it's hard for us to do at this point.

Getting some directional sense of what their June could be flat.

<unk> up or down because.

Steve: The recovery has many components to it right. One is just if you assume business is flat.

You do have some shutdowns and in June.

Are you planning for that so that's not a great data point, but then June 10, so also be seasonally up for you historically.

Steve: And as the inventory trains people will at some point just have to order enough to get back to flat consumption.

So just give us some more color what is true demand right now and if you were sitting in our shoes would you think about June being kind of up down flat. Even if you don't have an absolute sense of we're doing might shake out.

Steve: And there is also what does the macro do and what happens in actual consumption over time.

Steve: And that depends on many things, whereas GDP at what is into what our interest rates doing et cetera and.

Steve: And I think those are all variables, which you can't at least we're not able to plug in and say this is how the next three four quarters the shape of the recovery a little up.

I think the shutdowns that we communicated based on the days of inventory that we closed December and what we have indicated are going to be at the end of March our required steps, we need to take that.

Speaker Change: And we don't have the visibility and backlog to give us any insight into that today.

Speaker Change: No I was asking for a lot there, but I appreciate the color.

So not necessarily trying to provide.

An indication of where the June business is gonna be vivek. The real answer is I don't know and I think.

Speaker Change: So it sounds like your Opex management is more so variable versus structural and obviously you've done this in the past.

The world is not falling apart. So we know that consumption is taking place we know that inventory needs to train we're trying to gauge between.

Speaker Change: In this recent round, where you've asked employees to take a 10% pay reduction what was communicated to them in terms of when that might be.

The environment in the market the inventory at multiple levels and how all of that will drain. We know this business will come back and it has.

Speaker Change: Recouped.

Speaker Change: Based on some sort of revenue or performance metrics.

Every previous cycles done that but I think what you're asking for is a level of precision, which we don't have any empirical data to be able to say, yes. This is what's going to happen and when.

Speaker Change: I have not been able to speak to the entire microchip community until.

Speaker Change: I do that on Monday morning, I did write them all our message today after the market closed and before this call to let them know where people are doing so those are details that.

And then my bigger question the name says that.

How would you contrast, your strategy maintaining kind of a hybrid manufacturing model right, where lead times can suddenly get extended but your capex is low your profitability is high.

Speaker Change: I would prefer to first speak to our employees.

Speaker Change: And give them all of that but this is not new to us we've done this multiple times.

Speaker Change: Our culture.

Speaker Change: Allows people to understand how shared sacrifice and shared rewards go hand in hand, and how that create excellent outcomes for the company and for the individuals in the process of doing that and so I am confident that our team.

Your other U S competitor, who has high capex. They can usually keep lead times are very low and they have managed to avoid these kind of very very large swings. How would you contrast, the two strategies and do you think what you're going through.

Speaker Change: Especially the team that have been through many cycles with US you will see it.

Could make you change your strategy about maybe.

Speaker Change: <unk>.

Speaker Change: Help us with it and pull everybody else along as well.

Having higher capex in the future and all of US trying to maintain lower lead times.

Speaker Change: Thank you Ganesh.

Speaker Change: Youre welcome.

Speaker Change: Okay.

Again.

Speaker Change: Thank you.

Speaker Change: Next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question.

There are many people that fit into what you described I will describe our strategy, which is we run inside of microchip.

Thanks for taking my question Dennis I appreciate youre, not going beyond the quarter, but I still wanted to get some help Ben.

<unk> that we know how to run cost effectively and consistently within our manufacturing footprint that includes both our front end as well as our backend we have grown that front end footprint over time, but also our foundry products have grown over time and that balance has been roughly 40% plus or minus in tunnel, 60% extra.

Vivek Arya: Getting some directional sense of whether June could be.

Vivek Arya: That up or down because.

Vivek Arya: You do have some shutdowns in June I do are already planning for that so that's not a great data point, but then June tends to also be seasonally up for you historically.

So we don't try to guide where that percentage needs to go the market demand drives is it higher or lower from there, but we know what products and technologies makes sense within our footprint and what makes sense to drive with our partners and Thats. The way, we think about it and in the aggregate.

Ben: So just give us some more color on what is true demand right now and if you were sitting in our shoes would you think about June being kind of up down flat, even even if you don't have an absolute sense of we're doing might shake out.

Barring any near term changes like we had last quarter and this quarter. It's been a very successful strategy in terms of how gross margins over time have accreted and how.

Ben: I think the shutdowns that we communicated based on the days of inventory that we closed December and what we have indicated are going to be at the end of March our required steps, we need to take that.

Over many cycles, we've got higher highs and higher lows. So we're very happy with the strategy, we have and I leave others that their strategy to speak for themselves.

Ben: Those are not necessarily trying to provide an indication of where the June business is gonna be vivek. The real answer is I don't know and I think.

Thank you.

Okay.

Ben: The world is not falling apart. So we know that consumption is taking place we know that inventory needs to train.

Thank you. Our next question comes from the line of.

Sandburg with Stifel. Please proceed with your question.

Ben: We're trying to gauge between where the environment in the market the inventory at multiple levels and how all that will drain we know this business will come back.

Yes. Thank you.

So my first question is on the PSP program. It was obviously put in place to try and avoid volatility.

Ben: Yes.

Ben: In every previous cycles done that but I think what youre asking for is a level of precision, which we don't have any empirical data to be able to say, yes. This is what's going to happen and when.

Doesn't look like that happened.

It was just the nature of the pandemic cycle I don't know, but what why do you think the PSP program did not sort of buffer the volatility that we're actually see.

Speaker Change: And then my bigger question is that.

No. It's a great question.

Speaker Change: How would you contrast, your strategy maintaining kind of a hybrid manufacturing model right, where lead times can suddenly get extended but your capex is low your profitability is high.

Although the PSP program was aimed at discouraging speculative demand.

By making orders and CNR, and then giving us confidence to make investments on it I think there was a combination of very strong OEM market demand, our customers and their customers and what they were seeing.

Speaker Change: You say your other U S competitor, who has high capex. They can usually keep lead times very low.

Speaker Change: And they have managed to avoid these kind of very very large swings how would you kind of contrast, the two strategies and do you think what youre going to.

They are a persistent shortages over a long period of time and very long lead times.

And I think when you put all that together.

Speaker Change: It would make you change your strategy about maybe.

OEM customers ended up placing more backlog because they believe their business with a lot stronger than they thought and they were trying to place orders for a lot longer than they normally would and that so that's the way in our perspective played out how did phenomenally for them in the 2021 2022 timeframe were those that were in the program we're able.

Speaker Change: Having higher capex in the future and always trying to maintain lower lead times.

Speaker Change: Again.

Speaker Change: There are many people that fit into what you described I will describe our strategy, which is we run inside of microchip.

To keep their business going take market share away and dry thing, but at the end of the day.

Speaker Change: Products that we know how to run cost effectively and consistently within our manufacturing footprint that includes both our front end as well as our backend we have grown that front end footprint over time, but also our foundry products have grown over time and that balance has been roughly 40% plus or minus in tunnel, 60% extra.

The the longer lead times get.

The further out someone is trying to predict where their business is going to be.

And I think thats the.

The issue at some point in time as.

You don't know what your demand is with any kind of high confidence.

Speaker Change: We don't try to guide where that percentage needs to go the market demand drives is it higher or lower from there, but we know what products and technologies makes sense within our footprint and what makes sense to drive with our partners and Thats. The way, we think about it and in the aggregate.

One year or 18 months out yet people, replacing those orders as the noncancelable thinks.

Thinking that the demand was strong.

And assuming that the risk was the good risk for them to take.

Speaker Change: Barring any near term changes likely have had last quarter and this quarter. It's been a very successful strategy in terms of how gross margins over time have accreted and how.

No that's very fair and then as my follow up.

I recognize that all end markets are going to be weak in the march quarter, but any sort of relative comment on the end markets anything holding up relatively better than others.

Speaker Change: Over many cycles.

Speaker Change: Higher highs and higher lows. So we're very happy with the strategy, we have and I leave others that their strategy to speak for themselves.

Yeah, I would say if you look at our aerospace and defense market.

There are strengths in those.

Speaker Change: Yeah.

Speaker Change: Thank you.

The commercial aviation remains strong the defense remains strong space has always been very lumpy.

Speaker Change: You're welcome.

Tore: Thank you. Our next question comes from the line of tore.

Lumpy <unk>, our portion of the data center, which is around AI.

Tore Egil Svanberg: Sandburg with Stifel. Please proceed with your question.

Platforms those are doing extremely well, it's not big enough to move the microchip needle overall, but its certainly a pocket of strength that we see as well.

Tore Egil Svanberg: Yes. Thank you.

Tore Egil Svanberg: So my first question is on the PSP program. It was obviously put in place to try and avoid volatility.

Great. Thank you very much.

Tore Egil Svanberg: And.

Tore Egil Svanberg: Doesn't look like that happened.

Yeah.

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

Tore Egil Svanberg: It was just the nature of the pandemic cycle I don't know, but what why do you think the PSP program did not sort of buffer the volatility that we're actually see.

Hey, Thanks, guys I guess, just a little clarification on.

Speaker Change: No. It's a great question.

On the decline here.

Speaker Change: Although the PSP program was aimed at discouraging speculative demand by.

Sure.

Any comments on just your sense of end demand maybe talk about the end markets that are that have been the worst.

Speaker Change: By making orders and CNR, and then giving us confidence to make investments on it I think there was a combination of very strong OEM market demand, our customers and their customers and what they were seeing.

And then also given your revenue decline is notably more than some of your peers. Why do you think it is hitting you more than some of the competition.

Speaker Change: They are a persistent shortages over a long period of time and very long lead times.

Sorry, what was the last part of your question why do you think.

Why is your revenue declining much more than some of your competitors.

Speaker Change: And I think when you put all that together.

Speaker Change: OEM customers ended up placing more backlog because they believe their business with a lot stronger than they thought and they were trying to place orders for a lot longer than they normally would and that so that's the way in our perspective played out how did phenomenally for them in the 2021 and 2022 timeframe were those that were in the program we're able.

Okay.

So on your second question.

As I said, if you look at it over a year's period of time Youre going to find that the fiscal 'twenty four at the midpoint of our guidance is about nine 5% down from fiscal 'twenty three I don't think thats outside of where the normal.

Within a two quarter period of time, absolutely. We are correcting in correcting at a faster rate than where we were at but I think we'd have to look at area under the curve for revenue rather than just peak to trough alone.

Speaker Change: To keep their business going take market share away and dry thing, but at the end of the day.

Speaker Change: The the longer lead times get.

Speaker Change: The further out someone is trying to predict where their business is going to be.

In terms of what you're going to look at.

In terms of end markets.

Speaker Change: And I think thats the.

Sorry, what was your question.

Speaker Change: The issue at some point in time as.

Thanks.

Speaker Change: You don't know what your demand is with any kind of high confidence.

Okay in terms of end markets as I mentioned, it's weak across the board, we don't track at a quarterly level kind of how they are all moving but we have enough anecdotal data I think we were among the earliest people as early as two or three quarters ago, saying automotive is starting to weaken and rollover in industrial.

Speaker Change: One year or 18 months out yet people, replacing those orders as noncancelable thinking.

Speaker Change: And thinking that the demand was strong.

Speaker Change: And assuming that the risk was the good risk for them to take.

Speaker Change: No that's very fair and then as my follow up.

Industrial did in data center had been so we've seen this for some time.

Speaker Change: Recognize that all end markets are going to be weak in the march quarter, but any sort of relative comment on the end markets anything holding up a little bit of relatively better than others.

And at this point in time, I would say that all week.

There might be individual customers, who are stronger or weaker than what on average that PC, but nothing to write home about other than the two exceptions I spoke about which is aerospace and defense is still holding up and our portion of the AI servers.

Yeah, I would say if you look at our aerospace and defense market.

Speaker Change: There are strengths in those.

Speaker Change: The commercial aviation remains strong the defense remains strong space has always been very lumpy.

We provide solutions too.

Thanks, and then just a quick clarification on the utilization rates.

Speaker Change: Lumpy and Where's that our portion of the datacenter, which is around AI.

Do you guys anticipate utilization rates declining again in the June quarter from March or will they stay flattish from March to June.

Speaker Change: Platforms those are doing extremely well, it's not big enough to move the microchip needle overall, but its certainly a pocket of strength that we see as well.

We don't know yet we will have to have to see how the business evolves over the coming months.

Speaker Change: Great. Thank you very much.

Speaker Change: Yes.

Speaker Change: Okay.

Okay. Thanks, Eric.

Speaker Change: Thank you. Our next question comes from the line of Chris Danley with Citi. Please proceed with your question.

Yeah.

Thank you. Our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed with your question.

Chris Danely: Hey, Thanks, guys I guess, just a little clarification on.

Chris Danely: On the decline here.

Yeah, Hi, Ed a quick question and was funding between the Capex and.

Chris Danley: Yes.

Chris Danely: Any comments on just your sense of end demand maybe talk about the end markets that have that have been the worst.

Funding the bankruptcy was getting how much capacity you would be adding on the front end of the back end.

Chris Danely: And then also given your revenue decline is notably more than some of your peers why do you think its hitting you more than some of the competition.

We look at 'twenty calendar.

Any forward I guess.

So our capital expenditures for fiscal 'twenty four we like we laid out for you and Thats $300 million to $310 million, we have not given a number for next fiscal year.

Speaker Change: Sorry, what was the last part of your question why do you think.

Speaker Change: Why is your revenue declining much more than some of your competitors.

I expect it to be lower than that.

Speaker Change: Okay.

Actually taken in quite a bit of equipment. This year that we have not.

Speaker Change: So on your second question.

Speaker Change: As I said, if you look at it over a year's period of time Youre going to find that the fiscal 'twenty four at the midpoint of our guidance is about nine 5% down from fiscal 'twenty three I don't think thats outside of where the normal is that within a two quarter period of time, absolutely. We are correcting in correcting at a faster rate and where.

Essentially released and placed in service or product for production purposes. So we've got capital that is paid for and at our facilities that we can deploy as the market returns to a more normalized level and we need that capacity, but I expect capex to be quite low and our fiscal year 2025.

Speaker Change: We were at but I think we'd have to look at area under the curve for revenue rather than just peak to trough alone.

And say, here's how I would think about it from a how are we positioned for growth from our capacity.

Our initial response as the thing changes is going to be utilizing the inventory that we have built and being able to ship using the inventory we have.

Speaker Change: In terms of what you can look at.

Speaker Change: In terms of end market.

Speaker Change: Sorry was there a question.

Speaker Change: Thanks.

Speaker Change: Okay in terms of end markets as I mentioned, it's weak across the board, we don't track at a quarterly level kind of how they're all moving but we have enough anecdotal data I think we were among the earliest people as early as two or three quarters ago, saying automotive is starting to weaken and rollover in industrial.

Our next response will be around getting our factories to more full utilization we are under utilizing them at this point in time.

Our third response would be taking equipment that we have already ordered <unk> and received which we will begin to place into production and then finally into adding more equipment or bottleneck equipment as the case might be so we believe we have plenty of firepower for being able to respond to an up cycle through a combination of those four things.

Speaker Change: Industrial did in data center had been so we've seen this for some time.

Speaker Change: And at this point in time, I would say that all week.

Speaker Change: There might be individual customers, who are stronger or weaker than what on average that we see but nothing to write home about other than the two exceptions I spoke about which is aerospace and defense is still holding up and our portion of the AI servers.

Got it and if you if you were to combine all of that.

And you mentioned you have seen.

China, just inventory was at 37 days versus the optimal <unk> I guess that you had mentioned before.

Speaker Change: We provide solutions too.

In house inventory.

Speaker Change: Thanks, and then just a quick clarification on the utilization rates.

It goes up a little bit.

Into March.

And when you actually see that starting to realign.

Speaker Change: Do you guys anticipate utilization rates declining again in the June quarter from March or will they stay flattish from March to June.

Start to stabilize those start to come down.

Is that more of a second half.

When do you actually see that happening I guess.

Speaker Change: We don't know yet we will have to have to see how the business evolves over the coming months.

If I had a better picture on the demand environment I could give you a better answer so what we're doing is we're taking actions on the things we can control, which is our internal capacity and those are the shutdown days the lowering of the utilization.

Speaker Change: Okay. Thanks, Eric.

Speaker Change: Thank you. Our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed with your question.

Utilization factors and all that other stuff that we're doing and.

And that is all in.

Vijay Raghavan Rakesh: Hi, I had a quick question and was funding between the Capex and.

In anticipation that at some point the market will return.

Vijay Raghavan Rakesh: Funding.

And it will reverse cycle at that point in time first by us producing less which we're taking steps floor and second by the market consuming more which is what is unknown.

Vijay Raghavan Rakesh: Bankruptcy was getting how much capacity you would be adding.

Vijay Raghavan Rakesh: On the front end to the back end.

Vijay Raghavan Rakesh: If you look at 'twenty calendar 'twenty four I guess.

Got it.

Vijay Raghavan Rakesh: So our capital expenditures for fiscal 'twenty four.

And last question on the margin trajectory for March quarter did you say all of it is because of utilization.

Vijay Raghavan Rakesh: Laid out for you in that $300 million to $310 million, we have not given a number for next fiscal year I expect it to be lower than that we've actually taken in quite a bit of equipment. This year that we have not.

Should we expect.

That underutilization to continue into June or how do you see that or do you expect it to pick back up again.

Vijay Raghavan Rakesh: Essentially released and placed in service per protocol for production purposes. So we've got capital that is paid for and at our facilities that we can deploy as the market returns to a more normalized level and we need that capacity, but I expect capex to be quite low and our fiscal year 2025.

So we didn't we didn't say it was all of it there's a there's a large portion of the change that is utilization driven.

Theres always product mix and inventory reserves and all those other things that impact that.

<unk>.

I think it will be probably difficult for capacity utilization to increase.

Vijay Raghavan Rakesh: And say, here's how I would think about it from a how are we positioned for growth from our capacity.

In the June quarter, just because we are we are running on an attrition basis and that is continuing each week as some people leave and then it just takes a while to ramp that back up even if the market dynamics are are better.

Vijay Raghavan Rakesh: Our initial response as this thing changes, there's going to be utilizing the inventory that we have built and being able to ship using the inventory we have.

So that's something that we'll watch very closely and make sure that we're making the appropriate investments in people, but it tends to be like moving a battleship out in the ocean. It turns relatively slow.

Vijay Raghavan Rakesh: Our next response will be around getting our factories to more full utilization we are under utilizing them at this point in time.

Vijay Raghavan Rakesh: Our third response would be taking equipment that we have already ordered and received which we will begin to place into production and then finally into adding more equipment or bottleneck equipment as the case might be so we believe we have plenty of firepower for being able to respond to an up cycle through a combination of those four things.

Got it thank you very much.

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

Great. Thank you.

I Wonder if you could address a couple of the bear cases did I hear.

Speaker Change: Got it and if you if you were to combine all of that.

One you sort of talked about PSP and what did accomplish on what it didn't.

Speaker Change: And you mentioned you have seen.

Speaker Change: I noticed inventory was at 27 days versus the optimal high <unk> I guess that you had mentioned before and.

Do you think that.

Having.

More flexibility about customer cancellations when they started to slow down would that have.

Speaker Change: In house inventory.

Speaker Change: It goes up a little bit as we go into March.

Sort of made the issue less bad now as that is the PSP.

Speaker Change: And when you actually see that starting to realign.

Part of the reason why the whole is a little bit deeper maybe.

Speaker Change: Start to stabilize those start to come down.

Perhaps and.

Speaker Change: Is that more of a second half.

I think again in retrospect as of Monday morning, quarterback and I know exactly what I would have done.

Speaker Change: When do you actually see that happening I guess.

Speaker Change: If I had a better picture on the demand environment I could give you a better answer so what we're doing is we're taking actions on the things we can control, which is our internal capacity and those are the shutdown days the lowering of the utilization.

We were.

Under for many many many quarters and even as recently as last March and June quarters.

There were CEO level calls that we're pushing and driving for getting more product than we had if you remember we would provide the statistic about how much of.

Speaker Change: Utilization factors and all that other stuff that we're doing and.

Speaker Change: And that is all in.

Speaker Change: In anticipation that at some point the market will return.

Speaker Change: And it will reverse cycle at that point in time first by us producing less which we're taking steps floor and second by the market consuming more which is what is unknown.

Unsupported, which is customer what customers wanted and we Couldnt ship was there so in the throes of all of that where there are parts of it where perhaps we should have taken our foot off the accelerator, perhaps but it isn't something that was knowable as we went through it and if we ever want to do with PSP program again.

Speaker Change: Got it.

Speaker Change: And last question on the margin trajectory for March quarter did you say all of it is because of utilization.

Those are some lessons learned we'll take and we will look at how would we adjust the program. So that the intended outcomes are available and as many of the unintended outcomes that are avoided.

Speaker Change: Should we expect.

Speaker Change: That underutilization to continue into June or how do you see that or do you expect to pick back up again.

Speaker Change: So we didn't we didn't say it was all of it theres a theres a large portion of the change that is utilization driven.

Great. Thank you and then the other kind of negative question that I get.

Speaker Change: As always product mix and inventory reserves and all those other things that impact that.

China, obviously building significant amount of trailing edge capacity.

Speaker Change: I think it will be probably difficult for capacity utilization to increase.

Can you talk about what types of I don't think you see a lot of direct competition from sovereign China today, but can you talk about.

Speaker Change: In the June quarter, just because we are we are running on an attrition basis and that is continuing each week as some people leave and then it just takes a while to ramp that back up even if the market dynamics are better.

How much of your business might see competition from that direction over the next few years I think you've talked about that being single digits, but maybe if you could just update us on your thinking there.

Speaker Change: So that's something that we'll watch very closely and make sure that we're making the appropriate investments in people, but it tends to be like moving a battleship out in the ocean. It turns relatively slow.

Sure. So mainland China today is about 20 ish percent of our revenue.

About half of it we estimate is designed elsewhere and just happens to be manufactured in mainland China and some of that is that frankly moving out of China as people diversify.

Speaker Change: Got it thank you very much.

Speaker Change: Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

So it doesn't the point of design is outside of China, and we're comfortable with that.

So the other 10% of our business that's in China that are designed in China.

Joe Moore: Great. Thank you.

Joe Moore: I Wonder if you could address a couple of the bear cases did I hear.

Has a another half of that which is a very complex designs and these are not the ones that are easy to dislodge.

Joe Moore: One you've sort of talked about PSP and what did accomplish on what it didn't.

Joe Moore: Do you think that.

And would have significant amount of knowledge of our system. The software that goes with it the hardware and software interaction and all that so that leaves about 5%.

Joe Moore: Having.

Joe Moore: More flexibility about customer cancellations when they started to slow down would that have.

Joe Moore: Sort of made the issue less bad now as that is the PSP.

Our business about one fourth of the business in mainland China that is a more broad based microcontrollers and analog and those type of products.

Joe Moore: Part of the reason why the whole is a little bit deeper maybe.

Speaker Change: Perhaps and.

And they are fragmentation is our friend it is a very very fragmented market.

Speaker Change: I think again in retrospect as of Monday morning quarterback I know exactly what I would have done.

Any one opportunity is a small percentage.

Revenue and it is not easy to go into place, but theoretically you could say if somebody had a identical in <unk>.

Speaker Change: But we were.

Speaker Change: Under for many many many quarters and even as recently as last March and June quarters.

Offering and by the way a lot of that business is not just about having silicon.

Speaker Change: Our CEO level calls that we're pushing and driving for getting more product than we had if you remember we would provide the statistic about how much of.

It's about having silicon having tools, having design guides, having software that we make available there's a lot of health and self help that we provide for our customers as well that is there so yes.

Speaker Change: Unsupported, which is customer what customers wanted and we couldnt ship it there.

There is more going on in China with trailing edge.

Speaker Change: In the throes of all of that where there are parts of it where perhaps we should have taken our foot off the accelerator, perhaps but it isn't something that was knowable as we went through it and if we ever wanted to do with PSP program again those are some lessons learned will take and we'll look at how would we adjust the program so that the intended.

Both technologies and capacity and we will pay attention and we will through our product line and innovation cost reduction be continuing to work to go head to head against that.

But it's the portion of the business that you might think about is more broad based where they would come after that business is less than 5%.

Speaker Change: The outcomes are available and as many of the unintended outcomes that avoided.

And it's very very fragmented and difficult to get at.

Does that help great. Thank you so much. Thank you. Thank.

Speaker Change: Great. Thank you and then the other kind of negative question that I get.

Thank you.

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

Speaker Change: China.

Speaker Change: Building significant amount of trailing edge capacity.

Speaker Change: Can you talk about what types of I don't think Youll see a lot of direct competition from sovereign China today, but can you talk about.

Hey, guys. Thanks for taking my question.

I wanted to ask about utilization rates in sort of the strategic decisions you are making to shut down the fabs for.

Speaker Change: How much of your business might see competition from that direction over the next few years I think you've talked about that being single digits, but maybe if you could just update us on your thinking there.

Two weeks in March and June and also keep utilization rates lower over those two quarters I guess why.

Speaker Change: Sure. So mainland China today is about 20 ish percent of our revenue.

Start and stop the Fabs, but also.

Why not just take the utilization rate much lower than the March quarter, and then see where things play out.

Speaker Change: About half of it we estimate is designed elsewhere and just happens to be manufactured in mainland China and some of that is that frankly moving out of China as people diversify. Thanks. So it doesn't the point of design is outside of China, and we're comfortable with that.

Given youre trying to get inventory down but expectations are that it will still go up in March.

<unk>.

In fact, it's a balanced.

Isn't that.

Speaker Change: So the other 10% of our business that's in China that are designed in China.

We had to think through and make but as inventories climbed.

Speaker Change: As a another half of that which is a very complex designs and these are not the ones that are easy to dislodge.

There is a point at which the pain gets high enough and as we looked at that.

We felt on balance.

Speaker Change: And would have significant amount of knowledge about system. The software that goes with it the hardware and software interaction and all that so that leaves about 5%.

We don't know what other supply demand.

No.

Dynamics may take place that on balance this is a way in which we could navigate to different scenarios that might play themselves out and in the Meanwhile, the inventory is high enough that we're comfortable that if the recovery would accelerate when we're in a good place and we are if the recovery where something different.

Speaker Change: While our business about one fourth of the business in mainland China that is a more broad based microcontrollers and analog and those type of products.

Speaker Change: And Theyre fragmentation is our friend it is a very very fragmented market.

Speaker Change: Any one opportunity is a small percentage.

We are ahead of us and we have two options and what we can do in the June quarter, but right now we need to prepare for where March and June to the best of our ability to call. It is going to be and that includes the running at a lower utilization and taking a two week shut down in the <unk> in our fabs in each of the two quarters.

Speaker Change: Revenue and it is not easy to go to place, but theoretically you could say if somebody had a identical.

Speaker Change: Offering and by the way a lot of that business is not just about having silicon.

Speaker Change: It's about having silicon having tools, having design guides, having software that we make available there's a lot of help and self help that we provide for our customers as well that is there so yes.

And then as my follow up.

And I know you have a formulaic approach to your capital return program, but you are also in the past talked about opportunistically potentially going above the rate that you've outlined as we go through this period, where youre going through the digestion and free cash flows depressed versus where it was last few quarters.

Speaker Change: There is more going on in China with trailing edge.

Speaker Change: Both technologies and capacity and we will pay attention and we will through our product line and innovation cost reduction will be continuing to work to go head to head against that.

Any thought to using the balance sheet of returning more than you are.

Speaker Change: But it's the portion of the business that you might think about is more broad based where they would come after that business is less than 5%.

Would have been retired under the formula that you've outlined thank you.

Speaker Change: And is very very fragmented and difficult to get at.

So maybe I'll start so you mean, we actually have a very healthy cash return this quarter, we increased from 77, 5% to 82, 5%.

Speaker Change: Does that help me. Thank you so much. Thank you. Thank.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from the line of Joshua <unk> with PD Cowen. Please proceed with your question.

Adjusted free cash flow in the December quarter was quite high and even though the dividends is going up again, we're going to have kind of record share buyback in the quarter based on that formula that you that you spoke to so.

Joshua: Hey, guys. Thanks for taking my question.

Joshua: I wanted to ask about utilization rates in sort of the strategic decisions you are making to shut down the fabs for.

Joshua: Two weeks in March and June and also keep utilization rates lower over those two quarters I guess why.

We think it's appropriate.

We're glad that we're going to be buying back a bunch of shares this quarter.

Stephen can ask him give commentary of the board, but think of any doing anything different but I think that program. It's kind of in place as it is and if the market change and the stock price declined significantly it would be a discussion with the board.

Joshua: Start and stop the Fabs, but also.

Joshua: Why not just take those utilization rates much lower in the March quarter, and then see where things play out.

Joshua: Given youre trying to get inventory down but expectations are that it will still go up in March. Thank you.

I think it just came out naturally that our cash flow was extremely healthy last quarter.

Joshua: In fact, it's a balanced.

Joshua: Isn't that.

And with the return being 82, 5%.

Joshua: We have to think through and make but.

Back to shareholders with the dividend increasing it still creates a record stock buyback in the quarter.

Joshua: As inventories climbed.

Joshua: There is a point at which the pain gets high enough and as we looked at that.

After that we have ever done before $386 $8 million.

Joshua: We felt on balance.

Joshua: We don't know what other supply demand.

So it's a very very healthy buyback.

Joshua: No.

If there was not to be the case, where the cash flow wasn't as healthy as last quarter. Then the question would be valid or should we do an extra ordinary stock buyback.

Joshua: Dynamics may take place that on balance this is a way in which we could navigate to different scenarios that might play themselves out and in the Meanwhile, the inventory is high enough that we're comfortable that if the recovery would accelerate we're in a good place and we are if recovery where something different.

This quarter, if the stock were to become weak, but I think we just formulaic legally buy formula.

There is a very very healthy.

Joshua: We are ahead of us and we have two options and what we can do in the June quarter, but right now we need to prepare for where March and June to the best of our ability to call. It is going to be and that includes the running at lower utilization and taking a two week shutdown in the two in our Fabs and in each of the two quarters.

The amount of cash reserved for.

Stock buyback this quarter.

For the last many quarters, we've been steady as she goes I think having a program that doesn't try to have quarter to quarter a major variations.

That has been a way in which to establish the consistency of the capital return program and I think Steve and myself and the rest of the board and see that as a way that we should continue with this thing.

Speaker Change: And then as my follow up.

Speaker Change: And I know you have a formulaic approach to your capital return program, but you've also in the past talked about opportunistically potentially going above the rate that you've outlined as we go through this period, where youre going through the digestion in free cash flow is depressed versus where it was last few quarters.

Thank you.

Welcome.

Thank you. Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

So thanks for taking my question I guess first one for Eric you talked about.

Speaker Change: Any thought to using the balance sheet of returning more than you are.

Lower utilization you are shutting down factories for two weeks in both March and June I'm, just kind of wondering if you could walk us through the accounting how much of that hits you in the current period, how much of those lower utilization charges flow through inventory and given how much inventory you have could could be.

Speaker Change: Would have be retired under the formula that you've outlined thank you.

Speaker Change: So maybe I'll start so you mean, we actually have a very healthy cash return this quarter, we increased from 77, 5% to 82, 5% the adjusted free cash flow in the December quarter was quite high and even though the dividends is going.

Something that hits gross margin for a longer period of time as that flows through.

Speaker Change: Again, we are going to have kind of record share buyback in the quarter based on that formula that you that you spoke to so we think it's appropriate.

Inventory and then and then the income statement then I got a quick follow up.

Yeah. So our three large wafer fabs will even without the shutdowns with the attrition that we've had be running below what we would call a normal utilization and so these two week shutdowns will be period costs in the quarter and not capitalized inventory now.

Speaker Change: We're glad that we're going to be buying back a bunch of shares this quarter.

Speaker Change: Stephen can asking give commentary if the board would think of doing anything different but I think that program is kind of in place as it is and if the market change and the stock price declined significantly it would be a discussion with the board.

Now we are running at lower utilization rates than we were at the peak. So the costs that are being capitalized inventory on a per unit basis are higher than what they were when we were running at full board but.

Speaker Change: I think you just came out naturally that our cash flow was extremely healthy last quarter.

I think that answers your question essentially the two week shutdowns will be an impact to the current period and not capitalized into inventory.

Speaker Change: And with the return being 82, 5%.

Speaker Change: Back to shareholders with dividend, increasing it still creates a record stock buyback in the quarter record that we've ever done before $386 $8 million.

That's very very clear. Thank you and then I guess just for Ganesh you mentioned youre ending the PSP program and so I'm curious does that just mean youre not signing anyone to new PSP does that mean that existing PSP have now been canceled and folks have.

Speaker Change: So it's a very very healthy buyback.

Speaker Change: If there was not to be the case, where the cash flow wasn't as healthy as last quarter. Then the question would be valid should we do an extra ordinary stock buyback.

Greater rates to cancel existing backlog just just what happens with the current PSP.

Participants.

Speaker Change: This quarter, we have to start to become weak, but I think we just formulaic.

The backlog has been shrinking for some time and really what we're telling customers is that no more orders get accepted that our PSP orders.

By Formula.

Speaker Change: There is a very very healthy.

Speaker Change: The amount of cash reserve for stock buyback this quarter.

And customers have seen that lead times are short <unk>.

Speaker Change: Hey.

Capacity is available as I said the premise of why we kicked it off.

Speaker Change: For the last many quarters, we've been steady as she goes I think having a program that doesn't try to have quarter to quarter a major variations.

No longer exist and therefore.

It will come to a natural end here fairly quickly and we just stopped taking more orders that anyone may if they didn't already understand be placing is PSP.

Speaker Change: That has been a way in which to establish the consistency of the capital return program and I think Steve and myself and the rest of the board see that as a way that we should continue with this thing.

Got it thank you.

Welcome.

Thank you. Our next question comes from the line of William Stein with please proceed with your question.

Speaker Change: Thank you.

Speaker Change: Welcome.

Speaker Change: Thank you. Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

Great. Thanks for squeezing me in I was also going to ask about PSP.

Quinn Bolton: So thanks for taking my question I guess first one for Eric you talked about.

<unk> of how it rolls.

Out of backlog, but.

Quinn Bolton: Lower utilization, you're shutting down the factories for two weeks in both March and June I'm, just kind of wondering if you could walk us through the accounting how much of that hits you in the current period, how much of those lower utilization charges flow through inventory and given how much inventory you have could could be.

I think you just answered that.

But I do have a sort of financial question around it I believe.

Many of these orders you are getting prepaid by customers and you might have been likewise prepaying for capacity at foundry can you walk through how those roll off.

Quinn Bolton: Something that hits gross margin for a longer period of time as that flows through inventory and then and then the income statement then I got a quick follow up.

Yeah.

The financial activity of the company and when you expect them to.

To be sort of in the rearview mirrors that.

John do you think by the.

At the end of the March quarter.

Okay, so with with PSP those were not typically.

Customer paying cash in advance for any of that we have certain long term supply agreements and those had a cash prepayment element to them. Those are still in place those aren't there's nothing that's happening with those programs related to the cancellation of PSP.

Quinn Bolton: Now we are running at lower utilization rates than we were at the peak. So the costs that are being capitalized inventory on a per unit basis are higher than what they were when we were running at full board, but I think that answers. Your question essentially the two weeks shutdowns will be an impact to the current period and not capitalized.

So those programs are still in place and those tend to be three to five year agreements most of them five year agreements and those will just kind of run out over time.

In some cases, where customers demand is not as strong as originally anticipated we work with them to find a mutually workable answer on that maybe it's extend the program longer or they can add something else under the program for their volume commitments, but we're not looking to penalize customers with that program and then on the supplier side we.

Quinn Bolton: Inventory.

Speaker Change: That's very very clear. Thank you and then I guess just for Ganesh you mentioned youre ending the PSP program and so I'm curious does that just mean youre not signing anyone to new PSP does that mean that existing PSP have now been canceled and folks have.

Have had certain prepayments that are made in contractual obligations that we have that's the same thing there, it's a negotiation with our suppliers and they're working with us and I don't see that there's any significant financial disadvantage to us coming from those but in some cases, we have taken on more inventory, maybe raw materials than what we would have.

Speaker Change: Later rates to cancel existing backlog just just what happens with the current PSP.

Speaker Change: Participants.

Speaker Change: The backlog has been shrinking for some time and really what we're telling customers is that no more orders get accepted that our PSP orders.

Speaker Change: And customers have seen that lead times are short.

Otherwise.

Great. Thank you.

Speaker Change: Capacity is available as I said the premise of why we kicked it off.

Okay.

Thank you and our next question will come from the line of Janet Ramkissoon with QUADRA capital. Please proceed with your question.

Speaker Change: No longer exist and therefore.

Speaker Change: It will come to a natural end here fairly quickly and we just stopped taking more orders that anyone may if they didn't already understand be placing is PSP.

Thanks.

Thanks for taking my question.

Can you guys.

Speaker Change: Got it thank you.

Give us a sense.

Speaker Change: Yeah.

Some of what's going on with design activity.

Thank you. Our next question comes from the line of William Stein with please.

Are you seeing this cutback.

Saying that there is really no it's not.

William Stein: Please proceed with your question.

Not much of a shortfall in terms of actual demand.

William Stein: Great. Thanks for squeezing me in I was also going to ask about PSP.

Do you have any.

Mechanics of how it rolls.

Bill any less visibility.

William Stein: Out of backlog, but.

Same as before can you give us some sense on what's going on.

Speaker Change: I think you just answered that.

Speaker Change: But I do have a sort of financial question around it I believe.

Give us a better sense of the long term.

Speaker Change: For many of these orders you are getting prepaid by customers and you might have been likewise prepaying or capacity at foundry can you walk through how those roll off.

Good luck.

Yes, John.

Yes.

Yeah no. Thank you.

So design activity as I said in my prepared remarks is that very high levels.

And I think it is because a number of reasons why customers were in triage for some time as they were dealing with shortages and as all of that went behind they went back to focusing on innovation, our products and technologies that are enabling innovation and many new fields and so by many measures both what we measure internally in terms of design wins and design.

Speaker Change: <unk>.

Speaker Change: The financial activity of the company and when you expect them to.

Speaker Change: To be sort of in the rearview mirrors that.

Speaker Change: John do you think by the.

John: At the end of the March quarter.

John: Okay, so with with PSP those were not typically.

John: Customer paying cash in advance for any of that we have certain long term supply agreements and those had a cash prepayment element to them. Those are still in place those aren't there's nothing that's happening with those programs related to the cancellation of PSP.

And all of that and what some of our partners who are more design and focus, particularly the catalog distributors. A good example, where much of the seeding activity that takes place are also seeing very high lots of that so I think the innovation machine is strong.

And.

The inventory correction will pass and go and ultimately the long term growth of the business. As you noted will come from how this innovation plays out and how the overall role and content as semiconductors will play in that innovation being delivered on end products.

John: So those programs are still in place and those tend to be three to five year agreements most of them five year agreements and those will just kind of run out over time.

John: In some cases, where customers demand is not as strong as originally anticipated we work with them to find a mutually workable answer on that maybe extend the program longer or they can add something else under the program for their volume commitments, but we're not looking to penalize customers with that program and then on the supplier side.

That's very helpful. And then just one last one if I could sneak it in.

Any particular geography.

Thank you.

John: We have had certain prepayments that are made in contractual obligations that we have that's the same thing there, it's a negotiation with our suppliers and they're working with us and I don't see that there's any significant financial disadvantage to us coming from those but in some cases, we have taken on more inventory may be raw materials than what we would have.

A segment that you saw.

Set of faster rate of decline and noticed that industrial.

So that total was down.

Just from the supplemental slides.

Any color that you could give us.

In terms of geography or end markets, where you saw.

John: Otherwise.

Most of the weakness.

Speaker Change: Great. Thank you.

Okay.

Speaker Change: Okay.

They are all week I don't have any numerical way to give you and I can tell you that China. For example has been weak for an extended period of time.

Speaker Change: Thank you and our next question will come from the line of Janet Ramkissoon with QUADRA capital. Please proceed with your question.

So.

Look back going back all the way to 2022, when they had their shutdowns and it really hasnt recovered from there.

Speaker Change: Thanks.

Janet Ramkissoon: Thanks for taking my question.

Janet Ramkissoon: Can you guys give us a sense of what's going on with the design activity.

We've seen weakness in all geographies are in pretty much all end markets with the exception of.

Janet Ramkissoon: Are you seeing this will cut back.

The aerospace and defense and a bit of the data center that was all AI focused.

Janet Ramkissoon: Saying that there is really not.

Janet Ramkissoon: Not much of a shortfall in terms of actual demand.

And I believe the the end market data that was posted on our website still references last full fiscal year and that hasn't been updated thats a process that we do once a year. So we will take a look at slide to make sure it's not confusing, but that's what I believe to be the case.

Janet Ramkissoon: Do you have any visibility less visibility.

Janet Ramkissoon: The same as before can you give us some sense on what's going on.

Janet Ramkissoon: It will give us a better sense of the long term.

Okay. Thanks, guys appreciate it.

Janet Ramkissoon: Outlook.

Speaker Change: Yes, John.

Thank you.

John: Yes, no. Thank you.

Thank you there are no further questions at this time I would like to turn the floor back over to Ganesh Moorthy for closing comments.

John: Design activity as I said in my prepared remarks is at very high levels and I think it is because a number of reasons why customers were in triage for some time as they were dealing with shortages and as all of that went behind they went back to focusing on innovation, our products and technologies that are enabling innovation and many new fields and so by <unk>.

Okay I want to thank everyone for taking the time to be on this call and all of your questions. We look forward to having further discussions during some of the conferences coming up this year.

And on that note we are closing this call.

John: Many measures both what we measure internally in terms of design wins and design funnel and all of that and what some of our partners who are more design and focus, particularly the catalog distributors are a good example, where much of the seeding activity that takes place are also seeing very high lots of that so I think the innovation machine is strong.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

And.

Speaker Change: That's very helpful. And then just one last one if I could sneak it in.

Speaker Change: Any particular geography or a particular.

Speaker Change: Sure.

Speaker Change: A segment that you saw.

Speaker Change: Sort of a faster rate of decline I noticed that.

Speaker Change: That's fair.

As a percent of total was down.

Speaker Change: Just from the supplemental slides.

Speaker Change: Any color that you could give us.

Speaker Change: In terms of geography or end markets, where you saw.

Speaker Change: Most of the week.

Speaker Change: I think theyre all week I don't have any new medical way to give you I can tell you that China. For example has been weak for an extended period of time.

Speaker Change: So.

Speaker Change: Back going back all the way to 2020 to win.

Speaker Change: The shutdowns and it really hasnt recovered from there, but I think we've seen weakness in all geographies are in pretty much all end markets with the exception of <unk>.

Speaker Change: The aerospace and defense and a bit of the data center that was all AI focused.

Speaker Change: And I believe the the end market data that was posted on our website still references last full fiscal year and that hasn't been updated thats a process that we do once a year. So we'll take a look at the slide to make sure it's not confusing but.

Speaker Change: What I believe to be the case.

Speaker Change: Okay. Thanks, guys appreciate it.

Speaker Change: Thank you.

Speaker Change: No.

Speaker Change: Thank you there are no further questions at this time I would like to turn the floor back over to Ganesh Moorthy for closing comments.

Ganesh Moorthy: Okay I want to thank everyone for taking the time to be on this call and all of your questions. We look forward to having further discussions during some of the conferences coming up this year.

Speaker Change: On that note we are closing this call.

Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Speaker Change: Greetings and welcome to the micro chips third quarter fiscal year 2024 financial results Conference call.

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

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

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

Speaker Change: As a reminder, this conference is being recorded.

Speaker Change: It is now my pleasure to introduce your host CF.

Speaker Change: CFO, Mr. Eric beyond hope.

Eric: Thank you you may begin.

Eric: Okay. Thank you operator, good afternoon, everyone. During the course of this conference call, we will be making projections and other forward looking statements regarding future events or the future financial performance of the company.

Eric: Just to caution you that such statements are predictions and that actual events or results may differ materially. We refer you to our press releases of today as well as our recent filings with the SEC that identify important risk factors that may impact <unk> business and results of operations and a.

Eric: Tenants with me today are going to ask Marty Microchips, President and CEO, Steve Sanger, Microchips executive chair and size of Dowdy Microchips head of Investor Relations.

Eric: I will comment on our third 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.

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

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

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

Eric: I will now go through some of the operating results, including net sales gross margin operating expenses other than net sales I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our earnings press release and.

Eric: The reconciliations on our website.

Eric: Net sales in the December quarter were one 706, 6 billion, which was down 21, 7% sequentially.

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

Eric: On a non-GAAP basis gross margins were 63, 8% operating expenses were at 22, 5% and operating income was 41, 2%.

Eric: non-GAAP net income was $592 7 million and non-GAAP earnings per diluted share was $1 eight.

Eric: Share based compensation of $38 8 million and $1 5 million of other expenses.

Eric: GAAP net income was $419 2 million, resulting in 77 in earnings per diluted share the.

Eric: The GAAP tax rate was favorably impacted from an IRS notice that clarify the treatment of costs incurred by our research provider under contract that we had been accruing for and that accrual was released in the quarter.

Eric: Our non-GAAP cash tax rate was 13, 2% in the December quarter.

Eric: Our non-GAAP cash.

Eric: Tax rate for fiscal year 2024 is expected to be just under 14%, which is exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years.

Our fiscal 2004 cash tax rate is higher than our fiscal 'twenty three tax rate was for a variety of factors, including lower availability of tax attributes such as net operating losses and tax credits lower tax depreciation with our expectation for lower capital expenditures in the U S in fiscal 'twenty four as well as the impact of current.

Eric: Tax rules, requiring the capitalization of R&D expenses for tax purposes.

Eric: We're still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed the house actually pass the tax Bill last night that would achieve this and we will see how thats progressing through the Senate.

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

Eric: Yes.

Eric: Our inventory balance at December 31, 2023 was 131 billion.

Eric: We had 185 days of inventory at the end of the December quarter, which was up 18 days from the prior quarter's level, although were 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.

<unk>.

Eric: At the midpoint of our March 2024 quarter guidance, we would expect inventory to be up modestly and days of inventory to be in the range of 225% to 230 days due to the significant reduction in revenue and cost of goods sold.

Eric: We also continued 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 December.

Eric: Inventory at our distributors in the December quarter were at 37 days, which was up two days from the prior quarter's level.

Eric: Our cash flow from operating activities was $853 3 million in the December quarter <unk>.

Eric: Included in our cash flow from operating activities was $30 4 million of long term supply assurance receipts from customers.

Eric: Our adjusted free cash flow was $763 4 million in the December quarter.

Eric: As of December 31, our consolidated cash and total investment position was $281 million.

Eric: Our total debt decreased by $392 million in the December quarter, and our net debt decreased by $416 4 million in the quarter.

Eric: Our adjusted EBITDA in the December quarter was $796 2 million and 45, 1% of net sales.

Eric: Our trailing 12 month, adjusted EBITDA was $4 $2 6 billion.

Eric: Our net debt to adjusted EBITDA was one seven times at December 31, 2023.

Eric: From 156 times at December 31, 2022.

Eric: <unk> backdrop.

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

Eric: Depreciation expense in the December quarter was $47 1 million.

Speaker Change: I will now turn it over to <unk> to give his comments on the performance of the business in the December quarter as well as our guidance for the March quarter.

Speaker Change: Thank you Eric and good afternoon, everyone.

Speaker Change #100: Our December quarter results were disappointing and below our expectations with net sales down 21, 7% sequentially and down 18, 6% from the year ago quarter.

Speaker Change #101: non-GAAP gross and operating margins came in at 63, 8% and 41, 2% respectively.

Speaker Change #102: Down from our recent strong performance for somewhat resilient, despite the significant sequential decline in revenue.

Speaker Change #102: Our consolidated non-GAAP diluted EPS came in at $1 eight per share down 38% from the year ago quarter.

Speaker Change #102: Adjusted EBITDA was 45, 1% of net sales in the December quarter.

Speaker Change #102: Continuing to demonstrate some resiliency.

Speaker Change #102: As a result, we had good debt reduction in the December quarter, and despite the lower adjusted EBITDA regenerated, our net leverage ticked down to one <unk>.

Speaker Change #102: However, we expect our net leverage ratio to rise for a few quarters as trailing 12 month, adjusted EBITDA drops when replacing stronger prior year quarters with weaker ones.

Speaker Change #102: Our capital return to shareholders in the March quarter with increased to 82, 5% of our December quarter adjusted free cash flow.

Speaker Change #102: We continue on our path toward a kind of 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025.

Speaker Change #102: My thanks to our worldwide team for their support hard work and diligence as we navigated a difficult environment.

Speaker Change #102: And focus on what we could control so that we are well positioned to thrive in the long term.

Speaker Change #102: Taking a look at our December quarter net sales on a product line perspective our.

Speaker Change #102: Our mixed signal microcontroller net sales were down 22, 3% sequentially and down 18, 5% on a year over year basis.

Speaker Change #102: And our analog net sales were down 39% sequentially and down 29% on a year over year basis.

Speaker Change #102: Now for some color on the December quarter.

Speaker Change #102: And the general business environment.

Speaker Change #102: All regions of the World and most of our end markets were weak.

Speaker Change #102: Our business was weaker than we expected as our customers continue to respond to the effects of increasing business uncertainty.

Speaker Change #102: Slowing economic activity and the resultant increase in their inventory.

Speaker Change #102: In addition, many customers implemented extended shutdowns of closures.

Speaker Change #102: At the end of the December quarter as they managed their operational activities.

Speaker Change #102: We continue to receive request to push out or cancel backlog as customers start to rebalance their inventory in light of the weaker business conditions and the increased uncertainty that we're experiencing.

Speaker Change #102: And we were able to push out our canceled backlog to help many customers with these inventory positions.

Speaker Change #102: With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe that as inventory destocking underway at multiple levels.

At our direct customers and distributors, who buy from us.

Our indirect customers, who buy through our distributors and in some cases, our customers' customers.

Speaker Change #102: The very strong up cycle over the last two to three years drove many of our customers to build inventory in order to be able to capitalize on strong business conditions and an uncertain supply environment.

Speaker Change #102: The term just in case instead of just in time whats used by customers to express their approach to these conditions.

But as the macro environment slowed many of our customers found their business expectations to be too optimistic.

Speaker Change #102: And ended up with high levels of inventory and as a result, they start to cancel or reschedule backlog.

Speaker Change #102: An update on our PSP program.

Speaker Change #102: During the early stages of the up cycle, we launched our PSP program, requiring noncancelable backlog in exchange for supply priority in a hyper constrained supply environment.

Speaker Change #102: Program was aimed to discourage speculative demand and achieve mutual commitments between our customers and us to future demand for future demand.

Speaker Change #102: The program works extremely well for many customers who participated during all of 2021 and 2022 as well as the early part of 2023.

Speaker Change #102: Supporting strong growth in their businesses.

Speaker Change #102: However, the business challenges, which led to the creation of the PSP program are no longer relevant.

Speaker Change #102: And we have therefore decided to discontinue the program effective today.

Speaker Change #102: If business conditions warrant we may at some point in the future initiate a similar program, which will of course have to be adapted to whatever that situation requires.

Speaker Change #102: Reflecting the slowing macro environment, our distribution inventory grew to 37 days at the end of the December quarter as compared to 35 days at the end of the September quarter.

Speaker Change #102: We are working with our distribution partners to find the right balance of inventory required to serve their customers.

Speaker Change #102: Manage their cash flow requirements and be positioned for the eventual strengthening of business conditions.

Speaker Change #102: Our internal capacity expansion actions remain cost.

Speaker Change #102: Given the severity of the down cycle, our factories around the world will be running at lower utilization rates.

Speaker Change #102: And also taking up to two shutdown weeks in each of the March and June quarters.

Speaker Change #102: Order to help control the growth of inventory.

We expect our capital investments in fiscal year, 'twenty, four and fiscal year 'twenty five we'll be low.

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

Speaker Change #102: Does that and we reached a preliminary memorandum of terms with the department of Commerce for $162 million in grants targeted at existing projects for two of our U S patents.

Speaker Change #102: These grants are subject to diligence by the chips office.

Speaker Change #102: Well as capacity investments by microchip over multiple years.

Speaker Change #102: We have been driving our lead times down and have reduced the average lead times from roughly 52 weeks at the start of 2023 to roughly eight weeks by the end of 2023 on average.

Speaker Change #102: During a period of macro weakness and business uncertainty. We believe short lead times are the best way to help customers navigate the environment successfully.

Speaker Change #102: And improve the quality of backlog placed with us.

Speaker Change #102: Now as it enables our customers and microchip to enable to engage and uncertain environment with more agility and effectiveness.

Speaker Change #102: A significant reduction in lead times is also resulting in lower bookings and reduced near term visibility for our business.

Speaker Change #102: We're also taking steps to reduce our expenses.

Speaker Change #102: In addition to the variable compensation programs, which provide automatic reductions during a downcycle and normal containment of discretionary expenses.

Speaker Change #102: We will be implementing broad based pay reductions.

Speaker Change #102: Our team members, who are not a part of the factory shutdowns will take a 10% pay cut and consistent with our normal practice the executive team will take the largest reduction with a 20% pay cut.

Speaker Change #102: The shutdowns for manufacturing team members and pay cuts for non manufacturing team members are consistent with our long standing culture of shared sacrifices in down cycles.

<unk> rewards in up cycles.

Speaker Change #102: Avoiding layoffs and in the process protecting manufacturing capability as well as high priority projects, which are important for our customers.

Speaker Change #102: To thrive in the long term.

Speaker Change #102: We took similar actions in prior periods of business uncertainty such as the Covid pandemic in 2020.

Speaker Change #102: The global financial crisis in 2008, and 2009, and we believe such actions were quite effective to navigate our business.

Speaker Change #103: Now, let's get into our guidance for the March quarter.

Speaker Change #103: As our customers take further actions to adjust to a weakening macro environment and uncertain business conditions.

Speaker Change #103: We are continuing to support customers and channel partners with inventory position to push out or cancel their backlog.

Speaker Change #103: We recognize that our short lead times and increased flexibility with backlog will result in customers reducing inventory aggressively.

Speaker Change #103: And that this could result in some degree of overcorrection.

Speaker Change #103: However in response to these conditions, we are continuing to work with our customers to absorb as much of the inventory correction as we can at this time.

Speaker Change #103: Taking all the factors we have discussed on the call today into consideration.

Speaker Change #103: We expect our net sales for the March quarter to be between one to $2 5 billion.

Speaker Change #103: One 4% to $5 billion.

Speaker Change #103: The guidance range is larger than normal to reflect the macro uncertainty and the resultant low business visibility.

Speaker Change #103: We expect our non-GAAP gross margin to be between 59% and 61, 6% of sales we.

Speaker Change #103: We expect non-GAAP operating expenses to be between 26, 9% and 37% of sales.

Speaker Change #103: We expect non-GAAP operating profit to be between 28, 3% and 34, 7% of sales.

Speaker Change #103: And we expect our non-GAAP diluted earnings per share to be between <unk> 46.

Speaker Change #103: 68.

Speaker Change #103: To keep things in perspective, while our business results have the greatest significantly over the last two quarters as a larger than normal inventory correction has played out are.

Speaker Change #103: Our non-GAAP operating margin for full fiscal year 24 at the midpoint of our March quarter guidance is expected to be 43, 6% continuing to be among the best results across other companies in our industry.

While we don't know how and when the inevitable up cycle will play out we believe the fundamental characteristics of our business remain intact.

Speaker Change #103: Finally, notwithstanding any near term macro weakness we are confident that our solutions remain the engine of innovation for the applications and end markets we serve.

Speaker Change #103: Our focus on total system solutions and key market Mega trends continue to fuel strong design win momentum, which we expect will drive above market long term growth.

Speaker Change #103: With that let me pass the baton to Steve to talk more about our cash return to shareholders.

Steve Sanghi: Thank you Dennis and good afternoon, everyone.

I would like to provide you with a further update on our cash return strategy.

Steve: The board of Directors announced an increase in the dividend of 25, 7% from the year ago quarter to <unk> 45 per share.

Steve: During the last quarter, we purchased $114 $6 million of our stock in the open market.

Steve: We also paid out 237 4 million in dividends.

Steve: Thus the total cash return was $352 million.

Steve: This amount was 77, 5% of our actual adjusted free cash flow.

Steve: $454 3 million during.

Steve: During the September 2023 quarter.

Steve: Our net leverage at the end of December 2023 quarter, whereas 127 times.

Steve: Yeah.

Steve: Ever since we achieved an investment grade rating cutover that in November 2021, and pivoted to increasing our capital return to shareholders. We have returned $3 6 billion to shareholders through December 31, 2023 by a combination of dividends and share.

Steve: Buybacks.

Steve: During this time, we have bought back approximately 26 million shares of our common stock from the open market representing approximately four 5% of our shares outstanding.

In the current March quarter.

Steve: We will use the adjusted free cash flow from the December quarter to target the amount of cash returned to shareholders.

Adjusted free cash flow excludes a net $34 million that we collected from our customers for long term supply assurance payments.

Steve: These statements are refundable when purchase commitments were fulfilled.

Steve: The adjusted free cash flow for the December quarter was $763 4 million.

Steve: We plan to return 82, 5% or $629 $8 million of that amount to our shareholders with the dividend expected to be approximately $243 million.

Steve: The stock buyback expected to be approximately $386 million to $8 million.

Steve: Which will be a new quarterly quarterly record for stock buyback since we initiated our enhanced capital return strategy.

Steve: Going forward.

Steve: We plan to continue to increase our adjusted free cash flow.

Speaker Change #105: With that operator will you please poll for questions.

Speaker Change #106: Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Speaker Change #107: Information tone will indicate that your line is in the question queue.

Speaker Change #108: You May press Star two if you would like to remove your question from the queue.

Speaker Change #108: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change #108: One moment, please while we poll for questions.

Speaker Change #108: Okay.

Speaker Change #108: Thank you and our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Timothy Michael Arcuri: Hi, Thanks, a lot I wanted to ask about how much of a headwind the inventory.

Timothy Michael Arcuri: Inventory inside of distribution still is.

Timothy Michael Arcuri: Shipments into distribution, we would add about 30% well actually more than that.

Timothy Michael Arcuri: Yet some of your largest just these are still saying that they are having a hard time working down inventory. So.

Timothy Michael Arcuri: Can you provide any guidance like does the March guidance assume that shipments into distribution will be down a lot more than what the corporate.

Timothy Michael Arcuri: <unk>.

Timothy Michael Arcuri: Guidance is again just like it wasn't December.

Timothy Michael Arcuri: We are expecting that we will drain inventory in distribution in the March quarter.

Speaker Change #109: Okay great.

Speaker Change #110: Great and then.

Speaker Change #110: Eric can you talk about utilization rates and the potential for some write downs.

Eric: We sort of haven't been at a level, yet where you would write things down but can you talk about that thanks.

Speaker Change #111: As we have continued to address and is going to just kind of walk through we've got.

Two weeks shutdown schedule in all three of those large factories, so we arent going to break out.

Speaker Change #111: Utilization percentage, but other utilization is absolutely impacting our business our gross margins in the current quarter.

Speaker Change #111: And on top of that with the change that we've seen in demand and inventories still being high we have been taking.

Relatively large charges for inventory reserves based on our accounting policies that we have in place and all those things are really factored into the margin guidance that we've given to the street.

Speaker Change #112: Thanks, a lot.

Speaker Change #112: Thank you. Our next question comes from the line of Toshi Hari with Goldman Sachs. Please proceed with your question.

Toshi Hari: Alright, thank you.

Toshi Hari: My first question is on cancellation rates and what Youre seeing from a from a customer push out perspective.

Toshi Hari: Are you seeing any signs of stabilization in terms of cancellation rates are.

Toshi Hari: Pretty much the same so far in the quarter relative to December December in September of last year.

Speaker Change #113: We don't have a.

Speaker Change #113: Numerical tracking process, we still have customers that have asked for health, we have done a lot of that and built it into what we have into our guidance.

I don't know if you have a better.

Speaker Change #113: Cancellation rate I would say as we kind of talked about the customers and distributors are feeling like they have excess inventory and with that if they have backlog in place for those products. They are either not placing backlog.

They have backlog in place there looking to see if there is availability for them to at least pushed that out so we're having those ongoing discussions.

Speaker Change #113: I would say that they are still at a relatively high rating.

Speaker Change #114: Got it thank you.

As my follow up.

Speaker Change #114: Hoping to get your comments on pricing.

Speaker Change #114: The headwinds Youre seeing today is it mostly volume driven or.

Speaker Change #114: Are you starting to see prices erode as well between your microcontroller business an analog business.

Speaker Change #114: It seems like at the industry level, you've got more supply coming online over the next couple of quarters several quarters or so.

Speaker Change #115: Curious, how youre, what youre seeing today, and how youre thinking about pricing as we progress through calendar 'twenty four thank you.

Yeah all of the revenue declines are really volume declines in our pricing related pricing is stable. It is not contributing to the revenue change that.

Speaker Change #115: As in our guidance.

Speaker Change #115: Our.

Speaker Change #115: Our business is one which is based on design ins.

Speaker Change #115: <unk> are done.

Speaker Change #115: One two or three years before in production that takes place for many many years, it's not an easy.

Speaker Change #115: Substitution that takes place on short term price adjustments et cetera.

Speaker Change #115: Clearly at the point, where new designs are taking place we will be price competitive to what the new design requires but today's revenue adjustments downward and not happening because of price prices stable.

Speaker Change #116: Thank you.

Speaker Change #117: Thank you.

Speaker Change #117: Thank you and our next question comes from the line of Chris Caso with Wolfe Research. Please proceed with your question.

Chris Caso: Yes. Thank you good evening.

Chris Caso: My question is and it's a difficult question about sort of where do you think aggregate inventory levels are at.

Chris Caso: How much progress with.

Chris Caso: Some of these lower revenue shipping rates that we'll make in getting those inventories down over time.

<unk>.

Chris Caso: Where does the target inventory levels are and we expect to get over time.

Speaker Change #118: As you said.

Speaker Change #118: Inventory in some cases as well.

Speaker Change #118: Obscure to us we have to estimate based on where customers are placing orders what kind of feedback they're giving us.

Speaker Change #118: We know we're going to be substantially under shipping to where consumption is going to be but it's very hard to put a number on what that is and how much of the inventory.

Speaker Change #118: It's been taken out.

Speaker Change #118: And then as I said in some cases it is multiple layers of inventory and especially as people are getting to that point, where they are less willing to carry inventory, perhaps even take it to the low end of what they might historically do because supply is plentiful.

Speaker Change #118: Not all of this is just inventory reduction as you would normally expect but it is going to be at multiple levels.

Speaker Change #118: To our customers to their customers and in some cases, if they have an OEM that goes to the OEM there as well. So we don't have a good way to put a number on what you are asking for.

Speaker Change #119: Okay fair enough.

Speaker Change #119: One of the things you've also said in prior downturns is typically you've seen three down quarters.

Speaker Change #119: Before you achieve a bottom.

Speaker Change #119: Youre kind of at that now although September quarter was obviously, a much smaller magnitude than now.

Speaker Change #119: Okay.

Speaker Change #119: Given where we are right now.

Speaker Change #119: Do you think that still holds and perhaps you could.

Speaker Change #119: Okay.

Speaker Change #119: Characterize this downturn against some of the prior ones that you've been through.

Speaker Change #120: Well there is nothing typical about this downturn.

Speaker Change #120: I don't think that is a good comparison to history and you could say in magnitude. It is on the order of what we have seen in the global financial crisis, I think we were down 36% or so at that point in time.

Speaker Change #120: We have very limited visibility in today's market conditions, and so it's difficult to say where exactly this is and as I mentioned, we believe we are significantly under shipping to end demand.

Speaker Change #120: But we are unable to provide any kind of.

Speaker Change #120: Forecast for our guidance beyond this quarter.

Speaker Change #121: Fair enough. Thank you.

Speaker Change #122: Youre welcome.

Speaker Change #122: Thank you. Our next question comes from the line of Christopher Rolland with <unk>. Please proceed with your question.

Christopher Rolland: Hey, guys. Thanks for the question.

Christopher Rolland: So around cycle times and lead times.

Christopher Rolland: We have found that some of your products, particularly through distribution.

Christopher Rolland: They have lead times that are even below your cycle times I'm, assuming your cycle times are something like four weeks or six weeks something like that.

Speaker Change #123: I guess my question is how long would you expect this dynamic to last I think this is.

Speaker Change #123: You do a big inventory corrections like we're going through you see that phenomenon occasionally.

Speaker Change #123: But how long might this last and when are you expecting lead times to maybe expand again, obviously, we have some inventory dynamic we're going through here.

Speaker Change #123: But maybe talk about that lead times versus cycle times and when do you think those might actually rise again.

Speaker Change #124: So Chris let me just define two terms and then we'll work through it so cycle time.

Chris: It takes from when you begin with raw material and get to finished goods.

Chris: That cycle time for semiconductors, depending on which product and what process can be anywhere from three to five months, sometimes longer depending on the specialty so thats. The typical production cycle time, we.

Chris: We have always been able to manage lead times, which we define as from him in a customer places an order on us when can we ship the product to them to be a lot shorter than that and historically pre pandemic that was four to eight weeks was not an unusual number 480, 90% of our line items.

Chris: Where we have come back to is where those lead times on average where a customer places an order they can get in less than eight weeks and in some cases, if we have it in finished goods.

Chris: They can get it much sooner than that as well.

Chris: So I.

Chris: I don't have a good view.

Chris: When does lead times go back out and I'm not sure that's a good thing.

Chris: I think we have to obviously work to manage the supply and demand consistent with where demand is growing but for years. We ran in that four to eight week is a reasonably stable lead time outside of any major increases or decreases in demand in the marketplace.

Chris: And right now we think we're going to be at low lead times for quite some time, we have inventory that is high and we will be growing into the March quarter.

Chris: And we're going to position that inventory to be able to take advantage of.

Chris: Orders that come in with short cycles, because visibility is low and we need to be able to position and take that as quickly as it comes in so all of our systems are geared towards having shorter lead times and being able to take orders of.

Chris: Is that a place with short lead times as quickly as we can.

Speaker Change #126: Maybe just one thing I think Chris maybe what you were getting at is when we have product that is staged in die bank. So its through the wafer fab that in many cases, we can turn that through assembly and test in the four to six weeks that you were talking about and so if thats the case or if it's in die bank that would be the case, but we've got we've got finished goods today.

We're staging the products that are high runners and die bank. So our lead times are quite short across the board.

Speaker Change #127: Yes. Thank you very much guys. So there were some good stuff there.

Speaker Change #127: While I have you gross margin just for kind of simplicity sake, my model's roughly like 300 basis points below for next quarter, where I was previously.

Speaker Change #127: Don't know if you can kind of walk us.

Speaker Change #127: Through that.

Speaker Change #127: Whats mix versus.

Speaker Change #127: Underutilization versus inventory write down it sounds like pricing is not an issue here.

For like but.

Speaker Change #127: Would love to know how those kind of various things contribute.

Speaker Change #128: Yeah. So I would say the biggest change quarter to quarter is going to be in the factory utilization and that's a combination of continued attrition and lower production rates on a steady state weekly basis, and then we're having these two week shutdowns on top of that and we're having no time off and some of our <unk>.

Speaker Change #128: Back end factories, too, which is larger than the previous quarter. So all of those things impacted I would say the inventory reserve piece is a part of it.

Speaker Change #128: But we have relatively.

Speaker Change #128: Significant charges last quarter on that and I wouldn't expect those to be.

Speaker Change #128: Significantly more of this quarter that will probably be larger but the biggest piece is going to be what we're doing on utilization.

Speaker Change #129: Excellent thanks, guys.

Speaker Change #129: Thank you. Our next question comes from the line of Gary Mobley with Wells Fargo. Please proceed with your question.

Gary Mobley: Hey, guys. Good afternoon, Thanks for taking my question.

Gary Mobley: Looking at the March quarter guidance, that's basically a peak to trough.

Gary Mobley: Revenue terms.

Gary Mobley: More than 40% all within the same fiscal year. So.

Gary Mobley: So clearly the.

Gary Mobley: Great.

Gary Mobley: K has been extreme and I'm, calling on your experience here given that you've all been through a lot of cycles in the past and you hinted to in your prepared remarks, maybe some over correction on your customers part in terms of inventory depletion.

Gary Mobley: Joining experience how would you say the slope of the recovery May look given your lead times is it a gradual one or.

Gary Mobley: Or are we going to see just.

Gary Mobley: Sharper rebound as we saw.

Gary Mobley: In terms of this correction.

So I'll start and getting us receive can add to this I think I think it is unknown at this point in time right we have limited.

Gary Mobley: Limited backlog visibility as we look out in time, which you are asking about beyond this quarter lead times are really short and customers are sitting on a certain level of inventory beyond what they think is necessary for their business today.

Gary Mobley: And until we start getting short term orders kind of at our lead times and we see that backlog start to build its hard for us to really imagine what it's going to do it's going to have said before.

Gary Mobley: Clearly in this quarter with our revenue guidance we are shipped.

Gary Mobley: Shipping below what the end consumption for our products are and we think that's relatively material, but giving you any guidance in terms of what the slope of the recovery is I think it's hard for us to do at this point.

Gary Mobley: The recovery has many components to it right. One is just if you assume business is flat.

Gary Mobley: And as the inventory trains.

Gary Mobley: People will at some point just have to order enough to get back to flat <unk>.

Gary Mobley: Consumption.

Gary Mobley: And there is also what is the macro do and what happens in actual consumption over time.

Gary Mobley: And that depends on many things, whereas GDP at what is into what our interest rates doing et cetera and.

Gary Mobley: And I think those are all variables, which you can't at least we're not able to plug in and say this is how the next three four quarters the shape of the recovery a little up.

Speaker Change #130: And we don't have the visibility and backlog to give us any insight into that today.

Speaker Change #131: I was asking for a lot there, but I appreciate the color.

Speaker Change #131: So it sounds like your Opex management is more so variable versus structural and obviously you've done this in the past.

Speaker Change #131: In this recent round, where you've asked employees to take a 10% pay reduction what was communicated to them in terms of when that might be.

Speaker Change #131: Recouped.

Speaker Change #131: Based on some sort of revenue or performance metrics.

Speaker Change #131: I have not been able to speak to the entire microchip community until.

Speaker Change #132: I do that on Monday morning, I did write them all our message today after the market closed and before this call to let them know where people are doing so those are details that.

Speaker Change #132: I would prefer to first speak to our employees.

Speaker Change #132: And give them all of that but this is not new to us we've done this multiple times.

Speaker Change #132: Our culture.

Speaker Change #132: Allows people to understand how shared sacrifice and shared rewards go hand in hand, and how that creates excellent outcomes for the company and for the individuals in the process of doing that and so I'm confident that our team.

Speaker Change #132: Especially the team that have been through many cycles with us we'll see it.

Speaker Change #132: <unk>.

Speaker Change #132: Help us with it and pull everybody else along as well.

Speaker Change #133: Thank you Ganesh.

Speaker Change #134: Youre welcome.

Speaker Change #134: Okay.

Speaker Change #134: Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Please proceed with your question.

Vivek Arya: Thanks for taking my question Dennis I appreciate youre, not going beyond the quarter, but I still wanted to get some help then.

Vivek Arya: Getting some directional sense of where their June could be.

Speaker Change #135: <unk> up or down because.

Vivek Arya: You do have some shutdowns in June right.

Vivek Arya: The planning for that so that's not a great data point, but then June tends to also be seasonally up for you historically.

Vivek Arya: So just give us some more color what is true demand right now and if you were sitting in our shoes would you think about June being kind of up down flat, even even if you don't have an absolute sense of where June might shake out.

Vivek Arya: I think the shutdowns that we communicated based on the days of inventory that we closed December and what we have indicated are going to be at the end of March our required steps, we need to take that.

Vivek Arya: Those are not necessarily trying to provide an indication of where the June business is gonna be vivek. The real answer is I don't know and I think.

Vivek Arya: The world is not falling apart. So we know that consumption is taking place we know that inventory needs to train.

Vivek Arya: We're trying to gauge between where the environment in the market the inventory at multiple levels and how all that will drain we know this business will come back.

Vivek Arya: Yes.

Vivek Arya: In every previous cycles done that but I think what you are asking for is a level of precision, which we don't have any empirical data to be able to say, yes. This is what's going to happen and when.

Vivek Arya: And then my bigger question, then they said that.

Vivek Arya: How would you contrast, your strategy maintaining kind of a hybrid manufacturing model right, where lead times can suddenly get extended but your capex is low your profitability is high.

Vivek Arya: You say, you're rather use competitor who has high capex. They can usually keep lead times are very low.

Vivek Arya: And they have managed to avoid these kind of very very large swings how would you kind of contrast, the two strategies and do you think what youre going to.

Vivek Arya: Could make you change your strategy about maybe.

Vivek Arya: Having higher capex in the future and always trying to maintain lower lead times.

Vivek Arya: Again.

Vivek Arya: There are many people that fit into what you described.

Vivek Arya: Drybulk strategy, which is we run inside of microchip the products that we know how to run cost effectively and consistently within our manufacturing footprint that includes both our front end as well as our backend we have grown that front end footprint over time, but also our foundry products have grown over time and that balance has been roughly.

Vivek Arya: A 40% plus or minus in tunnel, 60% external we don't try to guide where that percentage needs to go to market demand drives is it higher or lower from there, but we know what products and technologies makes sense within our footprint and what makes sense to drive with our partners and Thats. The way, we think about it and in the aggregate.

Vivek Arya: Barring any near term changes like we've had last quarter and this quarter. It's been a very successful strategy in terms of how gross margins over time have accreted and how.

Vivek Arya: Over many cycles.

Vivek Arya: Higher highs and higher lows. So we're very happy with the strategy, we have and I leave others that their strategy to speak for themselves.

Vivek Arya: Yeah.

Speaker Change #136: Thank you.

Speaker Change #137: You're welcome.

Tore: Thank you. Our next question comes from the line of tore.

Tore: <unk> with Stifel. Please proceed with your question.

Tore: Yes. Thank you.

Tore: So my first question is on the PSP program. It was obviously put in place to try and avoid volatility.

Tore: And it doesn't look like that happened.

Tore: Maybe it was just the nature of the pandemic cycle I don't know, but what why do you think the PSP program did not sort of buffer the volatility that we're actually see.

Speaker Change #138: No. It's a great question.

Speaker Change #138: Although the PSP program was aimed at discouraging speculative demand by.

Speaker Change #139: By making orders and CNR, and then giving us confidence to make investments on it I think there was a combination of very strong OEM market demand, our customers and their customers and what they were seeing.

Speaker Change #139: They are a persistent shortages over a long period of time and very long lead times and.

Speaker Change #139: And I think when you put all that together.

Speaker Change #139: OEM customers ended up placing more backlog because they believe their business with a lot stronger than they thought and they were trying to place orders for a lot longer than they normally would and that so that's the way in our perspective played out how did phenomenally for them in the 2021 'twenty two time frame, where those that were in the program we're able.

Speaker Change #139: To keep their business going take market share away and dry thing, but at the end of the day.

Speaker Change #139: The the longer lead times get.

Speaker Change #139: The further out someone is trying to predict where their business is going to be.

Speaker Change #139: And I think thats the.

Speaker Change #139: The issue at some point in time as.

Speaker Change #139: You don't know what your demand is with any kind of high confidence.

Speaker Change #139: One year or 18 months out yet people, replacing those orders as noncancelable thinking.

Speaker Change #139: And thinking that the demand was strong.

Speaker Change #139: And assuming that the risk was the good risk for them to take.

Speaker Change #140: No that's very fair and then as my follow up.

Speaker Change #140: Recognize that all end markets are going to be weak in the march quarter, but any sort of relative comment on the end markets anything holding up a little bit relatively better than others.

Speaker Change #141: Yeah, I would say if you look at our aerospace and defense market.

Speaker Change #141: There are strengths in those.

Speaker Change #141: The commercial aviation remains strong the defense remains strong space has always been very lumpy.

Speaker Change #141: Lumpy and Where's that our portion of the datacenter, which is around AI.

Speaker Change #141: Platforms those are doing extremely well, it's not big enough to move the microchip needle overall, but its certainly a pocket of strength that we see as well.

Speaker Change #142: Great. Thank you very much.

Speaker Change #142: Yes.

Speaker Change #142: Thank you. Our next question comes from the line of Chris Danley with Citi. Please proceed with your question.

Hey, Thanks, guys I guess, just a little clarification on that.

Chris Danely: On the decline here.

Chris Danely: Any comments on just your sense of end demand maybe talk about the end markets that have that have been the worst.

Chris Danely: And then also given your revenue decline is notably more than some of your peers why do you think its hitting you more than some of the competition.

Speaker Change #143: Sorry, what was the last part of your question why do you think what.

Speaker Change #143: Why is your revenue declining much more than some of your competitors.

Speaker Change #143: Okay.

So on your second question.

Speaker Change #143: As I said, if you look at it over a year's period of time Youre going to find that the fiscal 'twenty four at the midpoint of our guidance is about nine 5% down from fiscal 'twenty three I don't think thats outside of where the normal as act.

Speaker Change #143: A two quarter period of time, absolutely we are correcting in correcting at a faster rate than where we were at but I think we'd have to look at area under the curve for revenue rather than just peak to trough alone.

Speaker Change #143: In terms of what you can look at.

Speaker Change #143: In terms of end markets.

Speaker Change #144: Sorry was there a question.

Speaker Change #144: Thanks.

Speaker Change #144: In terms of end markets.

Speaker Change #144: As I mentioned, it's weak across the board we don't.

Speaker Change #144: At a quarterly level kind of how they are all moving but we have enough anecdotal data I think we were among the earliest people as early as two or three quarters ago, saying automotive is starting to weaken and rollover in.

Industrial did in datacenter had been so we've seen this for some time.

Speaker Change #144: And at this point in time, I would say that all week.

Speaker Change #144: There might be individual customers, who are stronger or weaker than what on average that we see but nothing to write home about other than the two exceptions I spoke about which is aerospace and defense is still holding up and our portion of the AI servers.

Speaker Change #144: We provide solutions to them.

Speaker Change #145: Thanks, and then just a quick clarification on the utilization rates.

Speaker Change #145: Do you guys anticipate utilization rates declining again in the June quarter from March or will they stay flattish from March to June.

Speaker Change #146: We don't know yet we will have to have to see how the business evolves over the coming months.

Speaker Change #147: Okay. Thanks, Eric.

Speaker Change #147: Thank you. Our next question comes from the line of Vijay Rakesh with Mizuho. Please proceed with your question.

Vijay Raghavan Rakesh: Yeah, Hi, Ed a quick question and was funding between the Capex and.

Vijay Raghavan Rakesh: Funding.

Vijay Raghavan Rakesh: She was getting how much capacity would be adding on the front end of the back end.

Vijay Raghavan Rakesh: If you look at 'twenty calendar 'twenty four I guess.

Speaker Change #148: So our capital expenditures for fiscal 'twenty four.

Speaker Change #149: Laid out for you in that $300 million to $310 million, we have not given a number for next fiscal year I expect it to be lower than that we've actually taken in quite a bit of equipment. This year that we have not sn.

Speaker Change #149: Essentially released and placed in service.

Speaker Change #149: For production purposes. So we've got capital that is paid for and at our facilities that we can deploy as the market returns to a more normalized level and we need that capacity, but I expect capex to be quite low in our fiscal year 2025.

Speaker Change #149: Here's how I would think about it from a how are we positioned for growth from our capacity.

Speaker Change #149: Our initial response as the thing changes is going to be utilizing the inventory that we have built and being able to ship using the inventory we have.

Speaker Change #149: Our next response will be around getting our factories to more full utilization we are under utilizing them at this point in time.

Speaker Change #149: Our third response would be taking equipment that we have already ordered and received which we will begin to place into production and then finally into adding more equipment or bottleneck equipment as the case might be so we believe we have plenty of firepower for being able to respond to an up cycle through a combination of those four things.

Speaker Change #150: Got it.

Speaker Change #150: To combine all of that.

Speaker Change #150: And you mentioned you have seen.

Speaker Change #150: Channel inventory was at 27 days versus the optimal high <unk> I guess that you mentioned before.

Speaker Change #150: In house inventory, probably goes up a little bit as we go.

Speaker Change #150: Into March.

Speaker Change #150: And when you actually see that starting to realign.

Speaker Change #150: Start to stabilize those start to come down.

Speaker Change #150: Is that more of a second half.

Speaker Change #150: When do you actually see that happening I guess.

Speaker Change #150: If I had a better picture on the demand environment I could give you a better answer so what we're doing is we're taking actions on the things we can control, which is our internal capacity and those are the shutdown days the lowering of the utilization.

Speaker Change #150: Utilization factors and all that other stuff that we're doing and.

Speaker Change #150: And that is all in.

Speaker Change #150: In anticipation that at some point the market will return.

Speaker Change #150: And it will reverse cycle at that point in time first by us producing less which we're taking steps four and second by the market consuming more which is what is unknown.

Speaker Change #151: Got it.

And last question on the margin trajectory for March quarter did you say all of it is because of utilization.

Should we expect.

Speaker Change #151: That underutilization to continue into June how do you see that or do you expect it to pick back up again.

Speaker Change #151: So we didn't say it was all of it theres a theres a large portion of the change that is utilization driven.

Speaker Change #151: As always product mix and inventory reserves and all those other things that impact that.

Speaker Change #151: I think it will be probably difficult for capacity utilization to increase.

Speaker Change #151: In the June quarter, just because we are we are running on an attrition basis and that is continuing each week as some people leave and then it just takes a while to ramp that back up even if the market dynamics are better.

Got it thank you very much.

Speaker Change #151: Thank you. Our next question comes from the line of Joe Moore with Morgan Stanley. Please proceed with your question.

Joe Moore: Great. Thank you.

Joe Moore: I Wonder if you could address a couple of the bear cases did I hear.

Joe Moore: One you've sort of talked about PSP and what it accomplished what it didn't.

Joe Moore: Do you think that.

Joe Moore: Having.

Joe Moore: More flexibility about customer cancellations when they started to slow down would that have.

Joe Moore: Sort of made the issue less bad now as that is the PSP.

Joe Moore: Part of the reason why the whole is a little bit deeper maybe.

Speaker Change #152: Perhaps and.

Speaker Change #152: I think again in retrospect as of Monday morning, quarterback and I know exactly what I would have done.

Speaker Change #152: But we were.

Under for many many many quarters and even as recently as last March and June quarters.

Our CEO level calls that we're pushing and driving for getting more product than we had if you remember we would provide the statistic about how much of.

Speaker Change #152: Unsupported, which is customer what customers wanted and we Couldnt ship was there.

Speaker Change #152: So in the throes of all of that where there are parts of it where perhaps we should have taken our foot off the accelerator, perhaps but it isn't something that was notable as we went through it and if we ever wanted to do with PSP program again those are some lessons learned we'll take and we will look at how would we adjust the program so that the intended.

Speaker Change #152: The outcomes are available and as many of the unintended outcomes that avoided.

Speaker Change #153: Great. Thank you and then the other kind of negative question that I get.

Speaker Change #153: China, obviously building significant amount of trailing edge capacity.

Speaker Change #153: <unk>.

Speaker Change #153: Can you talk about what types of I don't think Youll see a lot of direct competition from sovereign China today, but can you talk about.

Speaker Change #153: How much of your business might see competition from that direction over the next few years I think you've talked about that being single digits, but maybe if you could just update us on your thinking there.

Speaker Change #154: Sure. So mainland China today is about 20 ish percent of our revenue.

Speaker Change #154: About half of it we estimate is designed elsewhere and just happens to be manufactured in mainland China and some of that is that frankly moving out of China as people diversified. Thanks. So it doesn't the point of design is outside of China, and we're comfortable with that.

Speaker Change #154: So the other 10% of our business that's in China that is designed in China.

Speaker Change #154: Has a another half of that which is a very complex designs and these are not the ones that are easy to dislodge.

Speaker Change #154: And would have significant amount of knowledge about system. The software that goes with it the hardware and software interaction and all that so that leaves about 5% of.

Speaker Change #154: Our business about one fourth of the business in mainland China that is a more broad based microcontrollers and analog and those type of products.

Speaker Change #154: And they are fragmentation is a friend it is a very very fragmented market.

Speaker Change #154: Any one opportunity is a small percentage.

Speaker Change #154: Revenue and it is not easy to go to place, but theoretically you could say if somebody had identical.

Speaker Change #154: Offering and by the way a lot of that business is not just about having silicon.

Speaker Change #154: It's about having silicon having tools, having design guides, having software that we make available there's a lot of help and self help that we provide for our customers as well that is there so yes.

Speaker Change #154: There is more going on in China with trailing edge.

Speaker Change #154: Both technologies and capacity and we will pay attention and we will through our product line and innovation cost reduction be continuing to work to go head to head against that.

Speaker Change #154: But it's the portion of the business that you might think about is more broad based where they would come after that business is less than 5%.

Speaker Change #154: And is very very fragmented and difficult to get at.

Speaker Change #155: Does that help me. Thank you so much. Thank you. Thank.

Speaker Change #156: Thank you.

Speaker Change #156: Thank you. Our next question comes from the line of Joshua <unk> with TD Cowen. Please proceed with your question.

Joshua: Hey, guys. Thanks for taking my question.

Joshua: I wanted to ask about utilization rates in sort of the strategic decisions you are making to shut down the fabs for.

Joshua: Two weeks in March and June and also keep utilization rates lower over those two quarters I guess why.

Speaker Change #157: Start and stop the Fabs, but also.

Speaker Change #157: Why not just take those utilization rates much lower in the March quarter, and then see where things play out.

Speaker Change #157: Given youre trying to get inventory down but expectations are that it will still go up in March. Thank you.

Speaker Change #157: In fact, it's a balanced.

Speaker Change #157: Isn't that.

We had to think through and make but.

Speaker Change #157: Inventories climbed.

Speaker Change #157: There is a point at which the pain gets high enough and as we looked at that.

Speaker Change #157: We felt on balance.

Speaker Change #157: We don't know what other supply demand.

Speaker Change #157: No.

Speaker Change #157: Dynamics may take place that on balance this is a way in which we could navigate to different scenarios that might play themselves out and in the Meanwhile, the inventory is high enough that we're comfortable that if the recovery would accelerate we're in a good place and we are if it recovery where something different.

Speaker Change #157: We are ahead of us and we have two options and what we can do in the June quarter, but right now we need to prepare for where March and June to the best of our ability to call. It is going to be and that includes the running at lower utilization and taking a two week shutdown in the two in our Fabs and in each of the two quarters.

Speaker Change #158: And then as my follow up.

Speaker Change #158: And I know you have a formulaic approach to your capital return program, but you've also in the past talked about opportunistically potentially going above the rate that you've outlined as we go through this period, where youre going through the digestion in free cash flow is depressed versus where it was last few quarters.

Speaker Change #158: Any thought to using the balance sheet of returning more than you are.

Speaker Change #158: Would have be retired under the formula that you've outlined thank you.

Speaker Change #159: So maybe I'll start so you mean, we actually have a very healthy cash return this quarter, we increased from 77, 5% to 82, 5% the adjusted free cash flow in the December quarter was quite high and even though the dividends is going.

Speaker Change #159: Again, we are going to have kind of record share buyback in the quarter based on that formula that you that you spoke to so we think it's appropriate.

Speaker Change #159: We're glad that we're going to be buying back a bunch of shares this quarter.

Speaker Change #159: Stephen can asking to give commentary if the board would think of doing anything different but I think that program is kind of in place as it is and if the market change and the stock price declined significantly it would be a discussion with the board.

Speaker Change #159: I think you just came out naturally that our cash flow was extremely healthy last quarter.

Speaker Change #159: And with the return being 82, 5%.

Speaker Change #159: Back to shareholders with dividend, increasing it still creates a record stock buyback in the quarter record that we've ever done before $386 8 million.

Speaker Change #159: So it's a very very healthy buyback.

Speaker Change #159: If there was not to be the case, where the cash flow wasn't as healthy as last quarter. Then the question would be valid should we do an extra ordinary stock buyback.

This quarter, we have to start to become weak, but I think we just formulaic.

Speaker Change #159: By Formula.

Speaker Change #159: There is a very very healthy.

Speaker Change #159: The amount of cash reserve for stock buyback this quarter.

Speaker Change #159: Hey.

Speaker Change #159: For the last many quarters, we've been steady as she goes I think having a program that doesn't try to have quarter to quarter a major variations.

Speaker Change #159: That has been a way in which to establish the consistency of the capital return program and I think Steve and myself and the rest of the board and see that as a way that we should continue with this thing.

Speaker Change #160: Thank you.

Speaker Change #160: Welcome.

Speaker Change #161: Thank you. Our next question comes from the line of Quinn Bolton with Needham. Please proceed with your question.

Quinn Bolton: So thanks for taking my question I guess first one for Eric you talked about.

Something that hits gross margin for a longer period of time as that flows through.

Quinn Bolton: Inventory and then the income statement, then I got a quick follow up.

Quinn Bolton: Yeah. So our three large wafer fabs will even without the shutdowns with the attrition that we've had be running below what we would call normal utilization and so these two week shutdowns will be period costs in the quarter and not capitalized inventory now.

Quinn Bolton: I think that answers your question essentially the two week shutdowns will be an impact to the current period and not capitalized into inventory.

Quinn Bolton: That's very very clear. Thank you and then I guess just for Ganesh you mentioned, you're ending the PSP program and so I'm curious does that just mean youre not signing anyone to new PSP does that mean that existing PSP have now been canceled and folks have.

Quinn Bolton: Greater rates to cancel existing backlog just just what happens with the current PSP.

Participants.

Quinn Bolton: The backlog has been shrinking for some time and really what we're telling customers is that no more orders get accepted that our PSP orders.

Quinn Bolton: And customers have seen that lead times are short capacity is available as I said the premise of why we kicked it off.

Quinn Bolton: No longer exist and therefore, it will come to a natural end here fairly quickly and we just stopped taking more orders that anyone may if they didn't already understand replacing is PSP.

Speaker Change #162: Got it thank you.

Speaker Change #162: Okay.

Thank you. Our next question comes from the line of William Stein with please proceed with your question.

William Stein: Great. Thanks for squeezing me in I was also going to ask about PSP.

William Stein: The mechanics of how it rolls.

William Stein: Out of backlog.

I think you just answered that.

William Stein: But I do have a sort of financial question around it I believe.

William Stein: For many of these orders you are getting prepaid by customers and you might have been likewise prepaying or capacity at foundry can you walk through how those roll off.

William Stein: Uh huh.

William Stein: The financial activity of the company and when you expect them to.

William Stein: To be sort of in the rearview mirrors that.

William Stein: John do you think by the end of the March quarter.

John: Okay. So with PSP those were not typically.

So those programs are still in place and those tend to be three to five year agreements most of them five year agreements and those will just kind of run out over time.

John: In some cases, where customers demand is not as strong as originally anticipated we work with them to find a mutually workable answer on that maybe is to extend the program longer or they can add something else under the program for their volume commitments, but we're not looking to penalize customers with that program and then on the supplier side we.

John: Otherwise.

Speaker Change #163: Great. Thank you.

Speaker Change #163: Awesome.

Speaker Change #163: Thank you and our next question will come from the line of Janet Ramkissoon with QUADRA capital. Please proceed with your question.

Janet Ramkissoon: Thanks for taking my question.

Janet Ramkissoon: Can you guys give us a sense of what's going on with the design activity.

Janet Ramkissoon: Are you seeing this cutback.

Janet Ramkissoon: Saying that there is really no it's not.

Janet Ramkissoon: Not much of a shortfall in terms of actual demand.

Janet Ramkissoon: Do you have any visibility less visibility.

Janet Ramkissoon: Same as before can you give us some sense on what's going on.

Give us a better sense of the long term.

Janet Ramkissoon: Outlook.

Speaker Change #164: Yes, John.

John: Yes, no. Thank you.

Design activity as I said in my prepared remarks is at very high levels and I think it is because a number of reasons why customers who are in triage for some time as they were dealing with shortages and as all of that went behind they went back to focusing on innovation, our products and technologies that are enabling innovation and many new fields and so by.

John: Also seeing very high lots of that so I think the innovation machine is strong and the.

John: The inventory correction will pass and go and ultimately the long term growth of the business. As you noted will come from how this innovation plays out and how the overall role and content as semiconductors will play in that innovation being delivered on end products.

Speaker Change #165: That's very helpful and just one last one if I could sneak it in.

Speaker Change #165: Is that any particular geography.

Speaker Change #165: Keller.

Speaker Change #165: Segment that you saw.

Speaker Change #165: <unk>.

Speaker Change #165: Faster rate of decline I noticed that industrial park.

Speaker Change #165: Total was down.

Speaker Change #165: Just from the supplemental slides.

Speaker Change #165: Any color that you could give us.

Speaker Change #165: In terms of geography or end markets, where you saw.

Speaker Change #165: Most of the week.

Speaker Change #165: I think theyre all week I don't have any medical way to give you and I can tell you that China. For example has been weak for an extended period of time.

Speaker Change #165: So.

Speaker Change #165: Back going back all the way to 2020 to win.

Speaker Change #165: The shutdowns and it really hasnt recovered from there, but I think we've seen weakness in all geographies are in pretty much all end markets with the exception of <unk>.

Speaker Change #165: The aerospace and defense and.

Speaker Change #165: A bit of the data center that was all AI focused.

Speaker Change #165: And I believe the the end market data that was posted on our website still references last full fiscal year and that hasn't been updated thats a process that we do once a year. So we'll take a look at the slide to make sure it's not confusing, but that's what I believe to be the case.

Speaker Change #166: Okay. Thanks, guys appreciate it.

Speaker Change #167: Thank you.

Speaker Change #167: No.

Speaker Change #167: Thank you there are no further questions at this time I would like to turn the floor back over to Ganesh Moorthy for closing comments.

Okay I want to thank everyone for taking the time to be on this call and all of your questions. We look forward to having further discussions during some of the conferences coming up this year.

Speaker Change #168: On that note we are closing this call.

Speaker Change #169: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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