Operator:

Greetings and welcome to the Microchip Q4 of Fiscal Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Bjornholt, Senior Vice President and CFO. Thank you, Eric. You may begin.

Ganesh Moorthy :

Thank you, Eric, and good afternoon, everyone. Our March quarter results were consistent with our guidance with net sales down 24.9% sequentially and down 40.6% from the year ago quarter. As we endured through a major inventory correction. Non-GAAP gross margin came in as expected at 60.3% and non-GAAP operating margin was better than expected at 32.9% due to the strong expense control programs we had in place. However, as Eric mentioned, our tax rate was higher than expected and as a result our consolidated non-GAAP diluted EPS only met expectations at $0.57 per share. Our revenue decline resulted in March quarter EBITDA dropping and as a result our net leverage ratio rose to 1.57x. We expect our net leverage to rise modestly for a few quarters, as trailing 12-month adjusted EBITDA drops when replacing stronger prior year quarters, with weaker current year quarters. However, our cash generation capability remains strong and we are committed to our capital return plan. Our capital return to shareholders in the June quarter will increase to 87.5% of our March quarter adjusted free cash flow as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025. Reflecting on our fiscal year 2024 results, it was a roller coaster year with a positive start that was followed by a major inventory correction. As compared to fiscal year 2023, revenue declined 9.5% to $7.6 billion. Non-GAAP operating margin was resilient at 43.9% as we took the actions required to respond to the major inventory correction. Capital return to shareholders through a combination of dividends and share buybacks in fiscal 2024 was $1.89 billion, representing a 15.4% growth as compared to fiscal year 2023. My thanks to our worldwide team for their support, hard work, and diligence as we navigate a difficult environment and focus on actions that we believe position us well to thrive in the long-term. Taking a look at our fiscal year 2024 net sales from a product line perspective, our mixed-signal microcontroller net sales were down 10.2% and represented 56% of Microchip's overall revenue. Our analog net sales were down 15.2% and represented 26.4% of Microchip's overall revenue. While we don't normally break out our FPGA product line results, it is noteworthy that our fiscal year 2024 FPGA revenue exceeded $679 million and set another record. FPGA revenue grew over 22% as compared to fiscal 2023 and delivered operating margins of a north of corporate average. We deliver market-leading mid-range FPGA solutions with best-in-class low power, reliability, and security, and are especially well-suited for the fast emerging opportunities around artificial intelligence at the edge. Our overall FPGA design win momentum is strong across multiple end markets. A few other product line notes of significance. Early in April, we closed our acquisition of Seoul Korea-based VSI, an ADAS and Digital Cockpit Connectivity Pioneer, to extend our Automotive Networking Market leadership. This acquisition adds Automotive SerDes Alliance Motion Link technology, otherwise known as ASA-ML, to Microchip's broad Ethernet and PCIe automotive networking portfolio to enable next generation software defined vehicles. With the anticipated increase in the adoption of advanced camera-based driver assistance systems, in-cabin monitoring, safety and convenience features, and multi-screen digital cockpits for next-generation software-defined vehicles, there is a growing requirement for more highly asymmetric raw data and video links and higher bandwidths, which the ASA Motion Link Open Standard supports. Also last month, we closed our acquisition of Neuronix AI Labs, whose innovative software technology enhances AI-enabled intelligent edge solutions and increases neural networking capabilities. This technology expands our capabilities for power-efficient AI-enabled edge solutions deployed on FPGAs. Neuronix AI Labs provides neural network sparsity optimization technology that enables the reduction in power, size, and calculation for tasks such as image classification, object detection, and semantic segmentation while maintaining high accuracy. Finally, in July, we expect to announce our entry into the 64-bit embedded microprocessor market with a suite of products, development tools, and other support requirements to address high-performance embedded processing applications, including AI-enabled edge solutions. This will extend our strong 32-bit embedded microprocessor portfolio to higher performance and increased capabilities, while preserving Microchip's historically strong ecosystem of leading development tools to make adoption easy for embedded system design engineers. Microchip is the only company to offer the widest embedded control and processing platform from 8-bit to 64-bit, as well as FPGAs, with a common development tool ecosystem that's empowering customers to innovate and reuse their work across a wide spectrum of markets and applications. Now for some color on the March quarter and the general business environment. All regions of the world and most of our end-markets, with the exception of aerospace and defense and the artificial intelligence subset of data centers were weak. We believe that our product shipments were significantly lower than the end-market consumption of our products as our distribution channels drained inventory during the quarter. Our broad base of customers continued to lower their inventory and adjust their business plans in the midst of a weak macro environment and an uncertain outlook. With no major supply constraints, coupled with very short lead times and a weak macro environment, we believe that as inventory destocking, as well as reduction in target inventory levels that is underway at multiple levels, that our direct customers and distributors buy from us, our indirect customers who buy through our distributors, and in some cases our customers' customers. We are however, also seeing early signs of green shoots in our business. First, the level of requests to cancellations and push-outs has started to subside. Second, our bookings have started to pick up, albeit from low levels. February bookings were the highest in eight months. March bookings were the highest in all of fiscal 2024, and April bookings were higher than March. Third, the new bookings are aging over a shorter period of time. And fourth, the number of expedites and shipment pull-in requests are growing. Collectively, these green shoots, we believe, are pointing to the formation of a bottom. Our average lead times continue to be eight weeks or less. During a period of 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. However, the significant reduction in lead time is also resulting in reduced near-term visibility for our business. Given the severity of the inventory correction, our factories around the world are running at lower utilization rates. And our pre-major fabs will take another two-week shutdown in the June quarter in order to help control the growth of inventory. Our internal capacity expansion actions remain paused. We expect our capital investments in fiscal year 2025 will be low, even as we prepare for the long-term growth of our business. On the CHIPS Act front, we have nothing new to report. The CHIPS office has completed their diligence for the grants we are seeking, and we are working towards an agreement. At this stage of a major inventory correction, we believe that the days of inventory metric, whether for Microchip or for our distributors, can be deceptive, as this is a backward-looking indicator measuring off of the baseline that is well below where we believe end-market consumption is at. For inventory planning, we are, therefore focused on where we believe consumption is running and will likely run in the coming quarters. We continue to work with our distribution partners to attempt to find the right balance of inventory required to serve their customers, manage through their cash flow requirements and be positioned for the eventual strengthening of business conditions. The operating expense reduction efforts we implemented last quarter, including broad-based salary sacrifices are continuous this quarter. The shutdown 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 up cycles. Our culture of shared sacrifice protects our valuable employees from layoffs, helps enable us to support customers and maintain our design win momentum, helps ensure that manufacturing capacity can be turned on quickly as business conditions strengthen and helps enable our product development teams to maintain their pace of new solution introductions. Now let's get into the guidance for the June quarter. While we see a number of green shoots in our business indicators, we still need turns orders within the quarter to meet our guidance. Operating in a high turns environment has historically been normal for Microchip. It is just not a position we have found ourselves in over the last few years due to supply-constrained high backlog environment, we and the industry experience. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the June quarter to be between $1.22 billion and $1.26 billion. We believe that the June 2024 quarter marks the bottom of the cycle for Microchip and that our business will return to sequential revenue growth in the September 2024 quarter. We expect our non-GAAP gross margin to be between 59% and 61% of sales. We expect non-GAAP operating expenses to be between 28.25% and 28.75% of sales. We expect non-GAAP operating profit to be between 30.25% and 32.75% of sales, and we expect our non-GAAP diluted earnings per share to be between $0.48 and $0.56. We believe that the fundamental characteristics of growth, profitability and cash generation of our business remain intact. We are confident that our solutions remain the engine of innovation for the applications and end markets we serve. Our focus on total system solutions and key market megatrends continue to fuel strong design win momentum, which we expect will drive above-market long-term growth. We remain committed to executing our Microchip 3.0 strategic imperatives, which we believe will deliver sustained results and substantial shareholder value. Last but not least a month ago, we appointed Rich Simoncic as Chief Operating Officer. Rich is a Microchip Lifer who has been with us for 35 years in many different capacities, which has been expanding his role over the last few years, and he and I will jointly lead the Microchip global enterprise so that we can apply our combined leadership capacity to engage the opportunities and challenges that are ahead of us. With that, let me pass it back on to Steve to talk more about our cash return to shareholders. Steve?

Operator:

Thank you. Now we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Vivek Arya with Bank of America Securities. Please proceed with your question.

Ganesh Moorthy:

Great. Thank you, Vivek. I don't think we mentioned green shoots at the last earnings call, but we did say that one of our banking sessions that we were at. And that was the first time we began to see it was in the March time frame. And the momentum is picking up, right as we go through March and April and May. I mentioned what the bookings we are doing on a relative basis over that time. We can see how many more people are asking for pull-ins and expedites and all of that. So it's a qualitative view looking at how we integrate the last two or three months of where momentum is coming in, where the customer feedback is coming in that reflects our view that the June quarter is the bottom and September quarter is growth.

Vivek Arya:

Great. Thank you.

Operator:

Our next question is from Chris Caso with Wolfe Research. Please proceed with your question.

Ganesh Moorthy:

I don't -- on the stabilization, I can't really point to a particular end market or doing better or not. I said in the aggregate, aerospace and defense and the AI segment of data center are both doing well. And so that part is pulling it up. On the others, there can be some industrial customers, who are still seeing weakness, others who are beginning to see the bottom and trying to come back in with rush orders that goes into the other end markets as well. So no particular end market trend that is distinguishable on the bottoming out of where their inventories are.

Eric Bjornholt:

So it does depend on the revenue trajectory and then how we would run our factories to respond to that. And so it's not a question that I can 100% answer today. But our cost structures are still in good shape. Average selling prices are absolutely hanging in there. So with that, we have confidence in our long-term model and our ability to get back there, but the trajectory and how we get there is going to very much be revenue dependent, which will drive certain actions to increase output from our factories. So I know that's not specifically answering your question, but I think that's the best we can do right now.

Operator:

Our next question is from Harlan Sur with JPMorgan. Please proceed with your question.

Ganesh Moorthy:

So Harlan, thanks for the question. The level of inventory that is past what our distributors had that has been with our customers is not always visible to us. I think we can get some sense of that from what the distribution sell-through is. But there is also a second factor, which is some of those customers are also reducing the months of inventory they want to carry. So it's a multipronged answer to it. But what we can see is that distribution is part of the placing of additional orders on us. So they are seeing how they are managing their end customers, their inventory and placing incremental orders on us. So that must have some relevance to how they're viewing things, but I don't have a definitive answer on where sell-through is going to end up versus sell-in here in the June quarter, at least not at this time.

Ganesh Moorthy:

So we know and customers are placing backlog into the September quarter, into the December quarter. So there's not a single answer that everybody is following. And we can see that as the bookings are rising, they are placing them into the next three months to six months on a more predominant basis. So that level of where the momentum is coming in or how backlog is coming in is what gives us a sense of where the bottom is and how things are going to be as we into the September and December quarters.

Ganesh Moorthy:

Thank you.

Gary Mobley:

Hi guys. Thanks very much for taking my question. I know you guys communicated that you held the OpEx lower than expected. And I think it's today, what -- $355 million on a non-GAAP basis. My question is, how long can you hold that down? And is there any claw-back provisions for the lost wages during this temporary salary cut? And I'm just trying to get a sense of how we should think about the OpEx increasing as revenue increase?

Ganesh Moorthy:

This is a part of our culture that is not always as easily appreciable from an investor community. We have 98% of employees around the world that are participating in this voluntary. We have another 700 employees who have volunteered for a higher salary reduction than what we have requested from them. It's very difficult to quantify how powerful culture plays a role in these type of difficult situations and how much that the employees that are part of the solution. And of course, they are part of the shared rewards that come up as we get into better times as well. So this is very much of a program that has worked many times in the past and is another time we're applying it, and we expect it to be successful.

Gary Mobley:

Thank you for that color. This is my follow-up, I wanted to perhaps strike a more positive chord and ask about design win metrics for the fiscal year. I don’t know if you have those stats on handy with you, but maybe if you can just give us some qualitative or quantitative measure of the lifetime value of the design wins.

Gary Mobley :

Thanks Ganesh.

Operator:

Our next question is from Carlos Coronado with UBS. Please proceed with your question.

Ganesh Moorthy:

So book-to-bill was below 1. However, book-to-bill has never been an indicator for us of where the business is going as much as an indicator of where our lead times are. During the 2021, 2022 shortages, we had book-to-bill in many, many multiples of where they were at, reflecting the long lead times. Right now with short lead times that we have, we expect book-to-bill will be lower. But the bookings are rising, and I can't quite tell what May and June are going to complete. So I don't have a thing – but I -- we don't really look at book-to-bill as necessarily an indicator of where the growth is going to be. It's more a reflection of as lead times get short, people replace the booking consistent with the shorter lead times.

Eric Bjornholt:

Yes. So I'm honestly not quite sure where The Street had us modeled. We had talked about in our last conference call that inventory days are expected to be between about 225 to 230 days at the midpoint. We came in at 224. So I think we kind of deliver on what we told The Street we were going to do. In terms of utilization in the current quarter, we have been having some attrition in our factories. And because of that, we can start less wafers on a monthly basis than we can because we have a fewer number of employees. But it's -- in the big picture of things relatively modest. I don't think utilization will be significantly different than it was in the March quarter, maybe just modestly lower.

Eric Bjornholt :

Thank you.

Tore Svanberg:

Yes, thank you. Let me move on from cyclical questions. And I have a question on 64-bit microcontrollers. You also had an AI acquisition in the quarter. Just trying to understand, Ganesh, your conversations with customers, we hear AI at the edge a lot, but it's hard for us to get true visibility on that. So -- when will Edge AI become a much more meaningful part of your revenues, what you think?

Tore Svanberg:

Great. And as my follow-up, you said that you're basically shipping below consumption. You're about $1 billion from your trough. Obviously, you're running inventory at a certain level. So you must have some idea where the consumption is. Is that a number you could share with us?

Tore Svanberg:

That’s helpful. Thank you.

Operator:

Thank you. Our next question is from Toshiya Hari with Goldman Sachs. Please proceed with your question.

Eric Bjornholt:

Okay. All right. So on inventory days, longer term, our model is -- and this really hasn't changed from what we shared back in our Analyst and Investor Day that we're targeting 130 to 150 days. Now we're a long ways from that today, and I'm not going to put a time horizon on when we will get there, but that's still the goal, right? We think with that level in a more normalized environment, we can have short lead times and support our customers appropriately with that level. So I'll turn the pricing question over to Ganesh.

Toshiya Hari:

Great. Thank you.

Joshua Buchalter:

Hi guys. Thank you for taking my questions. I guess to start, maybe I can follow up on the previous one. You mentioned pricing hanging in overall, but competing more on new design wins. Have those -- are you observing those new design wins becoming any more price sensitive or more price competitive as the shortages have eased and we've entered this correction mode? Or sort of still normal operating and competitive conditions? Thank you.

Joshua Buchalter:

That's clear. Thank you. I appreciate the color there. And then for my follow-up, the CapEx guidance is obviously down meaningfully off of what was likely a peak two years ago. Could you maybe just speak to your confidence in having enough capacity both internally and perhaps more importantly, investment from your foundry partners at the process geometries that you ship your products on? Thank you.

Joshua Buchalter:

Thank you.

Chris Danely:

Hi, thanks guys. So now that we're yet another quarter into the correction and hopefully coming out of it, if we look at your total drop in terms of revenue, it is probably going to be like 45%, something like that. And that's worse than most of your competitors. So I guess, why do you think that is? Do you think that the PSP program encouraged a little double ordering? Is there some geographic or something else going on? Just looking for some for your take on why that's happened?

Chris Danely:

Got it. Thanks Ganesh.

Operator:

Thank you. Our next question is from Vijay Rakesh with Mizuho Securities. Please proceed with your question.

Ganesh Moorthy:

China has always been a competitor in many of the spaces that we're in. Their approach is a little bit different. They have a lot of their attention going into things that can be faster to market quicker. And those tend to take them into places like consumer electronics and the other areas that are faster designed in cycle, a lot of the power supplies for cell phones and those kind of things. Clearly, they are also making products that can go into other end applications. And that’s a competitive environment that is not different today. You could argue perhaps that there's a lot of attendant priority that they have. But we win with new products, we win with competitive solutions that we have. And we win by providing the customer with a solution that is better than what they can get otherwise. And that remains the way in which we've gone to market, and we'll continue to fight for new business in China and anywhere else.

Eric Bjornholt:

Yes. So we don't break out a specific utilization in total, we have -- it varies very much by factory. We have had some attrition in employee headcount, which I mentioned in response to an earlier question that just makes it as we go by the months and aren't rehiring that capacity utilization would come down modestly. So I'm not expecting a huge change from March to June, maybe just a little bit lower. And then obviously, actions depending on what our outlook is on revenue and inventory will drive what the rest of the year looks like as we gain a little bit more confidence in understanding where the business is heading over the coming months.

Operator:

Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.

Ganesh Moorthy:

So we have an internal development that works on the model that we have provided, which over the long term is the 68% gross margin, 23% operating expense, 45% operating margin. That allows for the prioritization of our internal activities and where we want to apply it for different opportunities that we have in front of us. From time-to-time, we find our external opportunities where the speed at which we could do something or the time that it would involve in trying to get to a solution can be a lot longer if we were to do it just organically. And there, we have applied these tuck-in acquisitions as a way to speed up what we're able to do, consistent with the direction that we are interested in or have been following for a while. And we've done about six or eight of them now in the last four or five years of time ever since. Microsemi was the last major public acquisition we did. We've done about six to eight smaller ones since then. And it always to speed up our agenda with a very tactical and a pinpoint strike on what the acquisition can do for the areas that we're driving growth in. And we will do more of those, as we continue on as well. Let's say we've always been public. That's an essential part of our strategy.

Eric Bjornholt:

So I will start with the response here. I mean I think the bottom-line is, well, with 125,000 customers, it is impossible to know when -- and all customers a majority of customers have kind of corrected in their inventory to what they think the right level is and that's somewhat a moving target as lead times adjust based on whatever point in the cycle that we're at. So we don't have a good answer to be able to answer your question there. We’ll obviously, give guidance for the next quarter, and we'll have more information that we can share at that time. But I think that from customers, this inventory correction is going to last beyond this quarter. I think that absolutely is the case.

William Stein:

Thank you.

Operator:

Our next question is from David O'Connor with BNP. Please proceed with your question.

Ganesh Moorthy:

Yes. So the green shoots are not limited to any one geography, not limited to any one end market. it's really across all of them. And as I mentioned, you're going to have in a geography or in an end market, both customers with continued pain and other customers who are starting to look at how to get back into growth mode and what they're doing. So no specific end market or geography leading to the green shoots.

Ganesh Moorthy:

I don't know if there's a numerical way to give you that. I think -- that's all I said. I believe that embedded customers are thinking about how AI can be used in delivering better solutions than what they have in the past. No different from -- if you go back in the chronology from 20 years, 25 years ago, people added intelligence first because you could make a product better with intelligent add it, then further out in time, people added connectivity as a way to now make it even better than just adding intelligence and then they added security thing. And now finally, I think AI is the next leg of how people will add capability to the products to make them better. So it's a journey, and there's going to be many customers who don't need to do anything with AI. Others who are seeing the opportunity, and we'll take advantage of that in the next generation of their products. But I think, you should think of it as a continuum of customers. They're all looking to innovate. AI gives them another opportunity in their platforms to be able to innovate and provide better products than their previous generations.

Ganesh Moorthy :

Thank you.

Mark Lipacis:

Thanks for taking my question. I think this is for Ganesh or Steve. I'm wondering what is the difference between the setup for Microchip's business over the next six months and the setup that you see at the bottom of every cycle? It seems like there's a lot of similarities, and I'm hoping you can tell me the difference. The similarities I see are -- there is some kind of demand shock or a big inventory build and then our customers and the supply chain downstream from them, recognize that, so they decide that they are going to supply themselves out of their own inventories, they cancel orders or they take orders down and then you don't get any visibilities. So you and your peers take your utilization rates down and sometimes do temporary fab shutdowns. And then your customers have an epiphany that they overcorrected on the downside and in three, four quarters from here everybody is taking their numbers up and everybody scrambled in to get components. So those are the similarities I see. What are the differences? And if you have a disagreement over those similarities, I'd love to hear that, too. Thank you.

Ganesh Moorthy:

Mark, I was going to welcome you back -- answer as well. And as you said, I think this is a cycle we've seen play out many times, and the elements that you answered or the elements that you proposed are there. I don't know if any differences in this one. Obviously, the length of the up cycle sometimes affects the depth of the down cycle. But other than that, the elements are very similar.

Ganesh Moorthy:

No. So yes, I had assumed that during the depth of the constraints with all the different discussions I was having with the senior executives at our customers that they would come out of this cycle with a better understanding of how semiconductor supply works and what they would need to be to be more strategic. But I have been surprised at how quickly people have forgotten and how quickly people have returned back to the way they used to think. Basically, they think semiconductors are like water in your tap. You turn on the tap and the water comes and you turn off the tap, and it goes away. And so I am of the belief that those lessons will have to be relearned again as we go through the cycle. And we'll see how the cycle goes. But no, there has not been any -- there are a few. But for the most part, those learnings have not carried forward.

Steve Sanghi:

Yes. Mark, from time to time, some people have written or talked about industry has matured, and there will not be any cycles anymore. I think, all those predictions have been wrong. Industry has always been cyclic and will always be cyclic. I think our customers, our distributors, vendors, suppliers, they don't learn. And I think, people change new purchasing managers come in, new people come in. And as Ganesh described, the lessons I've forgotten very rapidly, leading just these cycles never going away. And this one was the most pronounced cycle, both on the upside and now we're seeing on the downside.

Mark Lipacis:

Very, helpful. Thanks everybody.

Operator:

Thank you. Our next question is from Joe Moore with Morgan Stanley. Please proceed with your question.

Ganesh Moorthy:

Sure. So our FPGA business has, in fact performed better than our other businesses. And in part, it's because our FPGA business has historically had a large aerospace and defense component and continues to. Now we have, over the last four, five years, been creating the new design opportunities for FPGA in the longer term to grow in industrial and automotive and the historical end market strengths that Microchip had before we got the FPGA business. And so this -- it is not immune to market forces and where things are going to go. But it has got a better end market mix than some of our other businesses and therefore, has performed better. And of course, we are picking up designs that in the long term that are falling off of Erstwhile, Xilinx and Erstwhile [Ultera] (ph), as they take focus away from the mid care over many years that they have done or end-of-lifeing products, right? Those are all creating opportunities for our FPGA business. And so I am very, very optimistic about prospects for our FPGA business.

Operator:

Thank you. Our next question is from Christopher Rolland with Susquehanna. Please proceed with your question.

Ganesh Moorthy:

I think not so much my product, but I think if you look at specific customers, in many cases, even in the same market, right? So we can have an end market, say, industrial. And we have examples of certain customers who have burned through their inventory and they're back asking for new orders at expedited times. We also have other customers, same industry who are still burning through inventory and taking longer where it goes. So I think a lot depends on a customer, their market prospects, what did they do to create and grow their business and how well are they executing? And so that's really been the difference is that it's customer by customer, the stories are different.

Ganesh Moorthy:

No, I think there's going to be customers at different points in the correction cycle. Some will have corrected and moved on, others will still be correcting. So I think seasonality is perhaps one of the things which you need a level of normalcy for some period of time before you can say, okay. We now have all these variables that have been taken out. So I can't say we have seasonality in the September quarter. I can say that incrementally, on a weighted average basis, there are more customers who are going to be out of their inventory correction, but not that they're all done.

Operator:

Our next question is from Tore Svanberg with Stifel. Please proceed with your question. Please proceed with your question.

Eric Bjornholt:

So we are not going to break out the amount of turns that are required, but we do have turns and take to meet our guidance, and our guidance is obviously to have another down quarter. But lead times are short. We are getting these requests for pull-in. I don't have a good comparison to give you in terms of prior cycles. If this turns out to be the bottom for us, which we believe it will, we can probably give some commentary when we talk about our September guidance as we kind of hit and move through that bottom.

Tore Svanberg:

Very clear. Thank you.

Vivek Arya:

Hi, thanks for the quick follow-up. I just wanted to clarify what is the contribution of the acquisitions in the June quarter or in fiscal '25? And then, Ganesh, back to the September quarter, I think you did say that you expect it to grow. I understand that it's had to put a seasonal number on it. But based on what you have seen in prior downturns, just the fact that Microchip has gone down so much from peak to trough, should we also expect kind of sharper recovery back to when you do start recovering?

Vivek Arya:

Thank you.

Ganesh Moorthy:

Great. I want to thank everybody for joining us on the call. I know we ran over a little bit. But I appreciate the questions, and we look forward to seeing and talking to many of you in the coming days as well as many of the conferences that are coming up. Thank you.

Operator:

Greetings and welcome to the Microchip's Third Quarter Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions] 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.

Ganesh Moorthy:

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. Non-GAAP gross and operating margins came in at 63.8% and 41.2%, respectively, 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 $1.08 per share, down 30.8% from the year ago quarter. Adjusted EBITDA was 45.1% of net sales in the December quarter, 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, 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. Our capital return to shareholders in the March quarter will increase to 82.5% of our December quarter adjusted free cash flow as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025. My thanks to our worldwide team for their support, hard work, and diligence as we navigated a difficult environment 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 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. Our business was weaker than we expected as our customers continue 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 of closures at the end of the December quarter as they manage their operational activities. We continue to receive requests 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. And we were able to push out or cancel 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 is 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. The very strong up cycle of 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 in an uncertain supply environment. The term, just in case, instead of just in time, was 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 and ended up with high levels of inventory. And as a result, they sought to cancel or reschedule backlog. An update on our PSP program. 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. 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 businesses. 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. 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. 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. 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 to 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 2024 and fiscal year 2025 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. fabs. These grants are subject to diligence by the Chip's 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 programs, which provide automatic reductions during a down cycle and normal containment of discretionary expenses, we will be implementing broad-based paid reductions. 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. 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 up cycles. 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 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. 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. We recognize that our short lead times and increased flexibility with backlog will result in customers reducing inventory aggressively, 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. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the March quarter to be between $1.225 billion and $1.425 billion. 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% of sales. We expect non-GAAP operating profit to be between 28.3% and 34.7% of sales and we expect our non-GAAP diluted earnings per share to be between $0.46 and $0.68. 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 decline at the midpoint of the March quarter guidance is expected to be roughly 9.5% and comparing favorably with weakness that other industry players have experienced. Our non-GAAP operating margin for full fiscal year 2024 at the midpoint of our March quarter guidance is expected to be 43.6% and 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. 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. Our focus on total system solutions and key market megatrends continue to fuel strong design win momentum, which we expect will drive above-market long-term growth. With that, let me pass the baton to Steve to talk more about our cash return to shareholders. Steve?

Operator:

[Operator Instructions] And our first question comes from the line of Timothy Arcuri with UBS. Please proceed with your question.

Ganesh Moorthy:

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

Eric Bjornholt:

Sure. So we have been 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 continued to attrit. And as Ganesh kind of walked through, we've got two-week shutdowns scheduled in all three of those large factories. So, we aren't going to break out a utilization percentage, but underutilization is absolutely impacting our business, our gross margins in the current quarter. 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. And all those things are really factored into the margin guidance that we've given to the Street.

Operator:

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

Ganesh Moorthy:

We don't have a numerical tracking process. 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, on cancellation rates.

Toshiya Hari:

Got it. Thank you. And as my 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, curious how you're - what you're seeing today and how you're thinking about pricing as we progress through calendar 2024? Thank you.

Toshiya Hari:

Thank you.

Operator:

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

Ganesh Moorthy:

As you said, inventory in some cases is obscure to us, we have to estimate based on where customers are placing orders, what kind of feedback they're 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 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. Not all of this is just inventory reduction as you would normally expect. But it is going to be at multiple levels 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're asking for.

Ganesh Moorthy:

Well, there's nothing typical about this downturn. And I don't think that is a good comparison to history. You could say in magnitude, it is on the order of what we've seen in the global financial crisis. I think we were down 36% or so at that point in time. 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, but we're unable to provide any kind of forecast or guidance beyond this quarter.

Ganesh Moorthy:

You're welcome.

Christopher Rolland:

Hi guys. Thanks for the question. So around cycle times and lead times, 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. I guess my question is, how long would you expect this dynamic to last? I think this is – 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 again, obviously, we have some - an inventory dynamic we're going through here. But maybe talk about that lead times versus cycle times and when you think that those might actually rise again.

Eric Bjornholt:

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 it's through the wafer fab that, in many cases, we can turn that through assembly and test in the four to six weeks that you're talking about. And so if that's the case, if it's in die bank, that would be the case. But we've got finished goods today. we're staging the products that are high runners and die bank or lead-times are quite short across the board.

Eric Bjornholt:

Yes. So, I would say the biggest change quarter-to-quarter is going to be in the factory utilization, and that's a combination of the 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 what we're having time off and some of our back-end factories too, which is larger than the previous quarter. So, all those things impacted, I'd say, the inventory reserve piece is a part of it, but we had relatively significant charges last quarter on that, and I wouldn't expect those to be significantly more this quarter. They'll probably be larger, but the biggest piece is going to be what we're doing on utilization.

Operator:

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

Eric Bjornholt:

So I'll start and Ganesh or Steve can add to this. I think it is unknown at this point in time, right? We have 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. So until we start getting short-term orders at our lead times and we see that backlog start to build. It's hard for us to really imagine what it's going to do. As Ganesh said before, clearly in this quarter with our revenue guidance, we are 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:

I know I was asking us for a lot there, but I appreciate the color. 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 when you've asked employees to take a 10% pay reduction, what was communicated to them in terms of when that might be recouped based on some revenue or performance metrics?

Gary Mobley:

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.

Ganesh Moorthy:

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 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 at. Vivek, the real answer is I don't know. And I think 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 between the environment in the market, the inventory at multiple levels and how all that will drain. We know this business will come back, right? It has - and every previous cycle 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.

Ganesh Moorthy:

Again, there are many people that fit into what you described. I'll describe our 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 back end. 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. 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, 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 got higher highs and higher lows. So, we're very happy with the strategy we have, and I leave others with their strategy to speak for themselves.

Ganesh Moorthy:

You're welcome.

Tore Svanberg:

Yes, thank you. So, my first question is on the PSP program. It was obviously put in place to try and avoid volatility and doesn't look like that happened. 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?

Tore Svanberg:

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 a little bit relatively better than others?

Tore Svanberg:

Great. Thank you very much.

Operator:

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

Ganesh Moorthy:

Sorry, what was the last part of your question? Why do you think what?

Ganesh Moorthy:

Okay. 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 the fiscal 2024 at the midpoint of our guidance is about 9.5% down from fiscal 2023. I don't think that's outside of where the normal is at. Within a two-quarter period of time, absolutely, we are correcting and correcting at a faster rate than where we were at. But I think we have to look at area under the curve for revenue rather than just peak to trough alone in terms of what you're going to look at. In terms of end markets, we - sorry, was there a question?

Ganesh Moorthy:

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 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 that they're all week. 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 that we provide solutions to.

Eric Bjornholt:

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

Operator:

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

Eric Bjornholt:

So, our capital expenditures for fiscal 2024 we laid out for you, and that's $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 essentially released and placed 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 CapEx to be quite low in our fiscal year 2025.

Vijay Rakesh:

Got it. And if you were to combine all of that, you mentioned your channel disti inventory was at 37 days versus an optimal high 20s, I guess that you mentioned before. And your in-house inventory I probably goes up a little bit as you go to 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? When do you actually see that happening, I guess?

Vijay Rakesh:

Got it. And last question on the margin trajectory for 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?

Vijay Rakesh:

Got it. Thank you very much.

Joe Moore:

Great. Thank you. I guess, I wonder if you could address a couple of the bear cases that I hear. One, you've 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 they started to slow down, would that have sort of made the issue less bad now? Is the PSP part of the reason why the hole is a little bit deeper, maybe?

Joe Moore:

Great. Thank you. And then the other kind of negative question that I get, China obviously building significant amount of trailing edge capacity. Can you talk about what types – I don't think you see a lot of direct competition from sovereign China today, but can you talk about 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.

Joe Moore:

Thank you. Yes, so much. Thank you.

Operator:

Our next question comes from the line of Joshua Buchalter with TD Cowen. Please proceed with your question.

Ganesh Moorthy:

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 on balance and we don't know what other supply-demand dynamics may take place. But 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 the recovery were something different, that were ahead of us and we have options on 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 be running at a lower utilization and taking a two-week shutdown in the - in our fabs in each of the two quarters.

Eric Bjornholt:

So, maybe I'll start. So I 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 kind of record share buyback in the quarter based on that formula that you spoke to. So, we think it's appropriate. We're glad that we're going to be buying back a bunch of shares this quarter. Steve, 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. And if the market changed and the stock price decline significantly, it would be a discussion with the Board.

Ganesh Moorthy:

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 major variations has been a way in which to establish 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.

Ganesh Moorthy:

You're welcome.

Quinn Bolton:

Thanks for taking my question. I guess, first one is for Eric. You talked about the lower utilization, you're 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 be something that hits gross margin for a longer period of time as that flows through inventory and then the income statement then I've got a quick follow-up.

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 you're not signing anyone to new PSP? Does that mean that existing PSPs have now been canceled and folks have greater rights to cancel the existing backlog? Just what happens with the current PSP participants?

Quinn Bolton:

Got it. Thank you.

Operator:

Thank you. Our next question comes from the line of William Stein with Truist. Please proceed with your question.

Eric Bjornholt:

Okay. So, 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. 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 to extend the program longer, they can add something else into the program for their volume commitments. But we're not looking to penalize customers with that program. And then on the supplier side, we have had certain prepayments that are made and 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 otherwise.

Eric Bjornholt:

Welcome.

Janet Ramkissoon:

Hi yes. thanks for taking my questions. 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 is 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 on what's going on to give us a better sense of the long-term outlook beyond the June quarter?

Janet Ramkissoon:

That's very helpful. And just one last one, if I could sneak it in. Is there any particular geography or a particular segment that you saw a faster rate of decline. I noticed that industrial as a percent of total was 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?

Eric Bjornholt:

And I believe the end market data that was posted on our website still references 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.

Ganesh Moorthy:

Thank you.

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. And on that note, we are closing this call.

Operator:

Greetings and welcome to the Microchip Technology Q2 Fiscal Year 2024 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Eric Bjornholt, Chief Financial Officer.

Ganesh Moorthy:

Thank you, Eric and good afternoon, everyone. Our September quarter results were about as we expected, with net sales coming in just under the midpoint of our guidance and well within our guidance range. Net sales were down 1.5% sequentially and up 8.7% on a year-over-year basis. Non-GAAP gross and operating margins remained strong at 68.1% and 48.1%, respectively. Our consolidated non-GAAP diluted EPS was at the midpoint of our guidance at $1.62 per share, up 11% from the year ago quarter. Adjusted EBITDA was 51.1% of net sales and adjusted free cash flow was 20.2% of net sales in the September quarter, continuing to demonstrate the strong cash generation characteristics of our business. Our net leverage exiting September dropped to 1.28x. We had higher cash flow outflows in the September quarter compared to the June quarter, due to the timing of tax payments and because of record capital return to shareholders in dividends and share repurchases totaling $562.6 million. This is 61% higher than the capital returned to shareholders in the June quarter. Our capital return to shareholders in the December quarter will increase to 77.5% of our September quarter adjusted free cash flow. As we continue on our path, [indiscernible] down 100% of our adjusted free cash flow to shareholders by the March quarter calendar year 2025. My thanks to all our stakeholders, who enabled us to achieve these results despite the increasingly challenging macro environment and especially to the worldwide Microchip team, whose effort and engagement enables us to navigate effectively through the business cycles. Taking a look at our September 1st quarter net sales from a product line and geographic perspective. Our mixed signal Microcontroller [ph] net sales were down 1.7% sequentially and up 8.5% on a year-over-year basis. Our Analog product line, net sales were down 1.7% sequentially and up 8.8% on a year-over-year basis. On a sequential revenue basis, Asia was down, Europe was about flat and the Americas was slightly up. Now for some color on the September quarter. Our business slowed down as expected, as our customers continue to respond to the effects of increasing business uncertainty, slowing economic activity and a result in increase in inventory. The combined effects of persistent inflation and high interest rates, we believe, are contributing to the weak macro environment. All regions of the world and most end markets experienced varying degrees of weakness. We continue to receive requests to push out or cancel backlog, as customers start to rebalance their inventory in light of the weaker business conditions and increased uncertainty they were experiencing. And we were able to push out meaningful amounts of backlog to later quarters to help many customers with inventory positions. We are seeing customers continue to adjust the demand expectations as they derisk the inventory position whenever possible. Our experience from prior cycles is that at this stage of the cycle, customers tend to overcorrect their inventory and backlog due to their business uncertainty, combined with the availability of product with very short lead times. This is, in effect, the flip side of what we saw during 2021 and 2022, when demand was historically strong and seemingly insatiable. Reflecting the slow macro environment, our channel inventory grew 235 days [ph]. We are working with our channel partners to find the right balance of inventory required to serve customers, as well as to be positioned for the eventual strengthening of business conditions. Most of our internal capacity expansion actions remain paused and we expect this will result in lower capital investments in fiscal year '24 and fiscal year '25, even as we prepare for the expected robust long-term growth of our business. In the meanwhile, we have been driving our lead times down and have reduced average lead times from approximately 52 weeks at the start of 2023 to approximately 26 weeks at the end of June and exited the September quarter at approximately 13 weeks. We expect to continue to drive average lead times down further, to less than 8 weeks by the end of 2023. 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 on us, as it enables our customers and Microchip to engage an uncertain environment with more agility and effectiveness. However, the significant reduction in lead times is also resulting in lower bookings and reduced near-term visibility. Now let's get into the guidance for the December 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 positions to push out their backlog. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the December quarter to be between down 15% and down 20% sequentially. At the midpoint of our net sales guidance for the December quarter, our year-over-year decline for the quarter would be 14.3%. We expect our non-GAAP gross margin to be between 64% and 65% of sales. We expect non-GAAP operating expenses to be between 22.7% and 23.3% of sales. We expect non-GAAP operating profit to be between 40.7% and 42.3% of sales and we expect our non-GAAP diluted earnings per share to be between $1.09 and $1.17 per share. Given the current macro weakness and resultant business uncertainty, combined with our lower bookings and reduce near-term visibility, we anticipate that our March quarter revenue is likely to decline again sequentially, although to a lesser extent than the December quarter decline. Notwithstanding any near-term macro weakness, we are confident that semiconductors remain the engine of innovation for the applications and markets we serve. Our focus on total system solutions and key market megatrends is fueling strong design win momentum that we expect will drive above-market long-term growth. If you review Microchip's speak to crop performance on a trailing 12-month basis, through the business cycles over the last 15-plus years which is included in the investor presentation posted on our website, you will observe our consistent and resilient cash generation gross margin and operating margin results. We remain confident that our non-GAAP operating margins on a trailing 12-month basis should remain above 40% through the business cycles. With that, let me pass the baton to Steve to talk more about our cash return to shareholders.

Operator:

[Operator Instructions] First question comes from the line of Toshiya Hari with Goldman Sachs.

Ganesh Moorthy:

Sure. So firstly, there is no pricing that is driving the changes. It's all volume. The weakness is very broad-based across the different geographies, across the different end markets, with perhaps the one end market which continues to have reasonable resilience is aerospace and defense, as you might expect. But it's extremely broad-based at this point.

Eric Bjornholt:

Okay. So on utilization, we have left the wafer fabs kind of reduced from where they were at the peak when they were running just full out and that has dropped modestly. We're still not in a situation where we are taking underutilization charges and that's not anticipated in the gross margin guidance that we've provided but they are running at lower levels and not as efficiently. On the assembly and test side, we definitely have reduced the activities in assembly and tests. We'd rather build the product through Dibang [ph] through the wafer fab and then have it ready when orders come in to be able to turn it quite quickly with short lead times to the assembly and test process. So the assembly and test is more kind of in line with where consumption is. We actually reduced finished goods last quarter and we'll continue to be very focused on that.

Ambrish Srivastava:

Ganesh, you mentioned cancellations in your prepared remarks and I just wanted to get -- if you could provide us with a little bit more details around that. This is the first time you mentioned that. And so what percentage is it of your orders. And then for you, is just starting the year-over-year decline which is kind of a related second part question is the typical cycle, I don't know, 5 to 7 quarters, year-over-year decline. What's your sense of how long does the year-over-year decline last, given the programs you have in place. Now if you look back, clearly, you were over shipping over the last few quarters. So color on both would be very helpful.

Ambrish Srivastava:

And then the period of year-over-year declines on a -- if you just compare it to the last few cycles?

Operator:

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

Ganesh Moorthy:

So I think in any given quarter, as revenue declines, the operating margin had a very large change in revenue. It's not -- you can't draw a line and say, it will never fall below this line. We look at our operating margins on a trailing 12-month basis. That's what we've always had in terms of the data we've presented, the truck numbers that we have put out there. And we don't know exactly what the magnitude of what might take place in March is. But we're confident that if you look at a 4-quarter rolling or trailing 12 months, we will still be at that 40% trough as where we see it going.

Gary Mobley:

Okay. And the follow-up I want to ask about distribution inventory which was up sequentially. I know you don't really have a sense of how quickly they think is draining or the channel is draining [ph]. But maybe if you could just give us a sense of when you could get -- see that work down a bit?

Operator:

The next question comes from the line of Timothy Arcuri with UBS.

Ganesh Moorthy:

So this is not the first quarter in which we have been doing that. We have mentioned that at prior calls as well. When customers are trying to place orders further out in time, they do the best they can and that conditions change. We will have discussions with them to see what we can do to help and what they can do to help us in terms of what future business is and any business relationship that's give and take. And of course, we have done a significant amount of push-outs to help them out.

Eric Bjornholt:

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

Eric Bjornholt:

Yes, I would say that we still have more backlog on our books in total than what would be typical for us but lead times down.

Vivek Arya:

I had one on sales and one on gross margins. On the sales side, I think Ganesh mentioned that the March quarter could decline again. And I'm wondering if there is a conceptual way to size it? So let's say, if you assume that June and September have kind of been the peak of the cycle, you should be thinking, I don't know, 25% peak to trough that kind of smart sales down mid-single digit. Is that a reasonable way to think about -- just bigger picture, do you think 25% peak to trough is a reasonable expectation of decline in this cycle but what does history kind of tell us?

Vivek Arya:

Okay. On the gross margin side, I'm trying to get a sense of both the kind of the downside risk from here? And then whenever we get to back to kind of the revenue levels in the next cycle, will gross margins get back to prior levels? So on the downside, I think you're guiding gross margins down about 350 basis points. That's also below what we have seen in prior down cycles. Is there a way to think about what is the kind of the trough is potential level? I think, Eric, you mentioned you're still keeping utilization if I recall. So what happens if you have to start cutting them? So what's the downside risk? And then part B of that is, let's say we come back to these revenue levels sometimes, right? Over the next several quarters. Will gross margins get back to 68%? Or will it be different? Because the 68% right plus/minus was achieved during a period of very strong industry pricing and shortages.

Ganesh Moorthy:

I would say if the revenue was back at the levels that we can a, I see no reason why our gross margin would be back to the levels that we are at.

Tore Svanberg:

I know this is a tricky one that we talk about over shipping and undershipping. Do you have a sense for what the true consumption is of your business at this point on a quarterly or annual basis?

Tore Svanberg:

That's fair. And then moving on to the operating margin and not to sort of like focus on the math here but when you position as a trailing 12 month, I mean 1 quarter could be as low as 25%, right? So I'm just trying to understand just conceptually with your OpEx, how much variability do you have if we continue to see sequential declines in revenues?

Operator:

Our next question comes from the line of Joshua Buchalter with TD Cowen.

Eric Bjornholt:

I'll start and Ganesh and/or Steve can add to this. But again, our products have very, very long life cycles. If we were to cut utilization in the factories significantly, there is a large portion of the cost that you can't take out because of the very heavy fixed cost environment. And so the balance does it make sense to build the inventory, have that higher inventory, have it available to support your customers when the business environment turns positive which it will. And that's kind of how we're managing it right now. Now, you can obviously get to a point where that inventory is too high and it doesn't make sense and we don't think that we're in that position today but we have let fab utilization fall from where it was and we'll continue to monitor it on a really a weekly, monthly basis and make decisions as we go.

Joshua Buchalter:

I appreciate all the color there. And for my follow-up, I wanted to ask about pricing. I guess it's encouraging to hear pricing still hanging in but there's a big investor concern that it will roll over. Can you, I guess, provide some anecdotes or what do you think is allowing firmer pricing in past cycles, because that's what's allowing margins to hang in, I think, better than far given the top line but also a major concern for investors.

Operator:

Our next question comes from the line of William Stein with Truist Securities.

Ganesh Moorthy:

Well, there's so little visibility that we can apply to any kind of intelligent answer at this point in time. We need to get further down the time to see how next quarter takes shape. And we're guiding to just one quarter -- the December quarter at this point in time. We've given you some directionally where our sense is for the March quarter but in terms of the magnitude, there's nothing that we can provide at this point that would be helpful.

Ganesh Moorthy:

So you're right. PSP had a time when it was far more important for customers to be enrolled and to be taking advantage of that priority. As cycle times come down, there are fewer PSP orders that are needed for any customers. It's not that it's gone away. It's still there in a reasonable amount but it's typically the customers who are very long cycle in their design and very high value in their end products. Because quite honestly, there are many parts of the market that are concerned about what happens on the flip side of the cycle, whatever that is in the second half of '24, etcetera. So it's a customer choice. No customer has to use PSP unless they believe it provides them a tool. And we made adjustments to the program to give them more flexibility, have shorter amount of window of time, etcetera. And we'll continue to evolve the program. And if there's use for it, customers will take advantage of it. And if they want, if there isn't, then they won't.

Chris Danely:

Question on the geos, I guess. So in terms of all these cancellations and pushouts in the forecast, have any geographies fared any better or worse as we're going through this correction?

Chris Danely:

Okay. Yes, I know you said North America was flattish in the previous quarter. I was wondering if anything was still holding up or worse. As my follow-up, so we've seen some of these internal China OEMs finally start to do their own analog or mixed signal chips. BYD doing their own BMS solution is one of them. And it seems like they don't really care about quality or cost or what have you. Can you give us a sense if you know of roughly how much of your business goes to domestic China? And do you see any risk that the non-China MCU business could kind of issues with this?

Operator:

Our next question comes from the line of Christopher Rolland with SIG.

Ganesh Moorthy:

So let me start and then Eric might want to chime in here as well. So firstly, new bookings are not the place where people are trying to push things out, because if they are new bookings within the last 3 to 6 months of time, those are with much more informed sense for demand, supply market, etcetera. A lot of the pushout requests for backlog that was placed 9, 12 or longer months where, as time has gone on, the need as they perceive this when they place the orders and the need as they see it today when they are facing the reality of what the markets have changed to, are different. So new bookings actually are in far better shape just because they are much more informed about current market conditions.

Ganesh Moorthy:

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

Ganesh Moorthy:

It's a question we ask ourself all the time. But I think you also have to look at not 12 months as a stand-alone piece of information, right? It is what were the lead times. So even if -- when lead times are 52 weeks, you really can't offer somebody something inside of that because there isn't -- all the capacity within that window is already consumed. So like all programs, they have to be designed with a sense of the information at a given point in time and they have to evolve as that information changes. And so even on PSP, right, it used to be 12 months. Today, 6 months. We made that change several months ago. The flexibilities, etcetera, around or have changed. And each program is designed to create a customer solution. And that solution has to be sensitive to what problem we're trying to solve at a given point in time. PSP was a fantastic program for '21 and '22 and parts of '23 when there was very long lead times, then the customers who participated got the most benefit from there. Today, it has less value when cycle -- when lead times come down dramatically and for other than a small set of customers, it is not as important to provide that much visibility.

Christopher Rolland:

Makes sense.

Chris Caso:

The question is on the cash return program and the buybacks and understand that the program is really meant to be formulaic. But the question is, is there any flexibility within that program to be more opportunistic at times like these? And obviously, you guys are still generating a good amount of cash but taking advantage when the downturn in the stock is down, have you contemplated that?

Steve Sanghi:

So while the main body of the program is formulaic, where we are increasing the cash return to shareholders by 500 basis points [ph] every quarter and increasing our dividend by about 7% or so every quarter and the remaining amount becomes the stock buyback, the program doesn't prohibit us from taking advantage of the environment where start gets into a severe downdraft for any reason. We can certainly have the cash resources on our credit line and all that to the forward buy the stock from the following quarter and then buy less than the following quarter. So we didn't stop us from doing that. We have not done that so far. I think stocks has been kind of reasonably constant in the range of between $70 and $90 but if there was to be a substantial opportunity at a lower stock price which was to emerge for any reason, then Microchip has the flexibility to do anything we wanted to do.

Chris Caso:

Got it. That's helpful. As a follow-up, I just want to return to gross margin and the utilization. And I guess asking perhaps some of the questions that have been answered in a different way. Is there a particular level of inventory that would make you uncomfortable that would cause you to reduce the utilization? And I guess part of this depends upon somewhat the duration of the downturn, how long the downturn should last?

Operator:

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

Eric Bjornholt:

So our target levels that we said at our Analyst and Investor Day back in November of 2021 was 130 to 150 days. We are obviously above those levels today and there's reasons for that. And I think some of your question I responded to in response to the credit question. So we're not uncomfortable with where the inventory is today, we're going to watch it closely depending on the environment and then it's going to be what the outlook is in terms of are we comfortable continuing to run the fabs at the levels that they're running at today or if we need to do something different. Not at that point today where we're going to do something different. Yes, inventory is above our target levels but I think we're managing it appropriately and we'll continue to do so.

Vijay Rakesh:

Got it. No, the reason I ask is because the revenues [indiscernible] are down, the DOI might spike -- got it. And then as you look at the market conditions, can you talk to where the inventory levels are trending? And does that prompt -- are you seeing any pushback on pricing in the supply chain as supply comes on or has demand conditions soften a bit, if you can give some color on that?

Eric Bjornholt:

Pricing. Wasn't quite sure if that was a customer pricing or a supplier pricing? Is it supply chain pricing or are customer pricing that you're asking about?

Ganesh Moorthy:

All the purchasing managers are going to ask for a lower price in an environment that is softer. But these are products where the price elasticity isn't there where somehow if we put a lower price, we get more different this quarter or next quarter, etcetera. These are long design cycles. Prices have stepped 18, 24 or 36 [indiscernible] was at the point of designing and we will be competitive at the point where we do the design business. Business itself in the short term is not affected by the pricing.

Harlan Sur:

Maybe another one on just the inventories. Last quarter, you talked about the lower-than-expected sell-through in China which was largely responsible for the rising channel inventories in June? Or do I think days increased, I think it was 5 days back in June, days increased another 6 days here in the September quarter. Was this primarily continued disti [ph] sell-through weakness in China? Or was the pickup more pronounced in other geographies?

Ganesh Moorthy:

And China has continued to be weak. We have not seen the level of improvement we expected out of China and there's plenty of news information about what's happening from an economy standpoint here.

Ganesh Moorthy:

So I think on data center, I think the last breakout there was about 17% or so in that range. But there are many subsegments that go into it. We clearly have a tailwind on anything and everything that goes into the artificial intelligence and the generative AI space, etcetera. But in terms of the volume that, that drives and the dollars that it drives, while it is meaningful, it's not big enough to offset some of the other weakness we have in other parts of data set.

Joe Moore:

Ganesh, you talked about every cycle being different in this cycle in the upturn, it seemed like the shortages were more severe. You did see prices go up more on a like-for-like basis and your margins got higher than we've seen before. So I guess as you think about the downturn, is that going to reverse? Or do you have a situation where there's more awareness of the supply chain people want to hold more inventory because of the intensity of the shortages? Can you just tell us like how the strength in the last couple of years might portend for the next couple of quarters?

Operator:

And our next question will come again from the line of Ambrish Srivastava with BMO.

Eric Bjornholt:

So we don't really have a target. It's been all over the place historically. It's been as low as 17 days and it's been as high as, I think, is 47 in our history and probably as high as 41 over the last maybe 10, 12 years. So it's a broad range. And ultimately, it's the distributor's decision on the product that they purchase and how they support their customers. And obviously, they need a certain amount of inventory to effectively serve their customer base. And if they don't hold that inventory, the end customer will find another channel buy that product through. So we don't drive it to a certain number of days. I would not be surprised in the current environment that distributors with interest rates where they are, if they try to take their inventory down to some degree. But where that goes to, it's very hard for us to predict.

Ambrish Srivastava:

And your business has changed a lot also over the years, you have airspace. It depends what you don't have several years ago. So that's why I was asking. And I think you gave a helpful answer a little bit on the target of inventory days, Ganesh, that depend is also you're carrying at the end of life. So you're not that far out of the range on where you are versus your target shared at the Analyst Day.

Ganesh Moorthy:

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

Operator:

Welcome to the First Quarter Fiscal 2024 Conference Call. I will now turn the call over to today’s host Eric Bjornholt, Chief Financial Officer of Microchip. You may begin.

Ganesh Moorthy :

Thank you, Eric, and good afternoon everyone. Our June quarter results were strong in the context of a slowing macro environment, marked by our continued disciplined execution, as well as our resilient end markets and diversified customer base. Net sales grew 2.5% sequentially and 16.6% on a year-over-year basis to achieve another all-time record of $2.29 billion. The June quarter represented our 11th consecutive quarter of sequential revenue growth. Non-GAAP gross and operating margins were both records at 68.4% and 48.1% respectively. Our consolidated non-GAAP diluted earnings per share was $1.64 per share, another record by a whisker and up 19.7% from the year-ago quarter. Adjusted EBITDA was a record 51.2% of net sales and adjusted free cash flow was 33.9% of net sales in the June quarter, continuing to demonstrate the robust cash generation characteristics of our business. Our net leverage exiting June dropped to 1.29x. We returned $349.2 million to shareholders in dividends and share repurchases in the June quarter, representing 67.5% of our March quarter adjusted free cash flow. Our capital return to shareholders in the September quarter will increase to 72.5% of our June quarter adjusted free cash flow, as we continue on our path to return 100% of our adjusted free cash flow to shareholders by the March quarter of calendar year 2025. My profuse thanks to all our stakeholders who enabled us to achieve these outstanding results despite the increasingly challenging macro environment, and especially to the worldwide Microchip team whose tireless efforts and agility to adapt are what enable us to navigate effectively through the business cycles. Taking a look at our June quarter net sales from a product line perspective, our mixed signal microcontroller net sales set another all-time record, coming in sequentially up 0.8% in the June quarter and up 22.5% on a year-over-year basis. Our analog net sales also set another all-time record, coming in sequentially up 2.5% in the June quarter and up 9.2% on a year-over-year basis. Our FPGA net sales, which we comment on from time-to-time, had another record quarter with annualized revenue growth continuing to be in the double digits. Now for some color on the June quarter. While our overall business remains steady, our customers continue to feel the effects of slowing economic activity and increasing business uncertainty. Starting in early June, we saw business conditions deteriorate in three areas. First, our China business was much weaker than our expectations and has not recovered from the shutdowns of last year and the Lunar New Year holidays in the March quarter. This manifested in weak sell-through activity and the building of inventory in the distribution channel in China. Second, we started to see initial signs of weakness and uncertainty in the automotive and industrial segments, reflecting the impact of high inflation and high interest rates driving more cautious spending. And third, we are seeing early signs of an impending slowdown in Europe, exacerbated by some of our European customers being dependent on exports to countries like China, whereas we know that the business environment is much weaker than expected. As a result, we continue to receive requests to push out or cancel backlog as customers start to rebalance their inventory in light of the weaker business conditions and increased uncertainty they were experiencing. We were able to push out meaningful amounts of non-reschedulable backlog to later quarters to help many customers with inventory positions. While the rate of cancellation and push-out requests appears to be stabilizing, we expect request to push out or cancel backlog will likely be with us through the rest of calendar 2023, as customers adjust to their new demand environment and attempt to de-risk their inventory position commensurately. We are also seeing an increasing direct and indirect impact from the cumulative effect of U.S. export control actions, especially in China. These actions were less of an issue over the last few quarters when demand was significantly higher than supply, but are more of an issue now as demand and supply come more into balance. Despite all the factors mentioned so far, in the June quarter we were able to reverse the growth in days of inventory on our balance sheet, with inventory dropping by two days to 167 days, of which, eight days of inventory were from an investment in last-time buys of high-margin, long-lived products whose manufacturing capacity was being end of life by our supply chain. Reflecting the slowing macro-environment, especially in China, our channel inventory grew by 5 days to 29 days. We continue to take actions to further reduce the days of inventory on our balance sheet, while maintaining absorption in our internal wafer fabrication factories. We're also working with our channel partners to find the right balance of inventory required to serve customers and to be positioned for an eventual strengthening of business conditions. Finally, while our overall inventory is still a bit higher than our target, we made excellent progress to position our inventory at the best locations in manufacturing to be able to rapidly respond to demand growth when the macro environment strengthens. Consistent with the slowing macro environment and the higher than target level of inventory on our balance sheet, as well as with some of our customers and channel partners, most of our internal factory expansion actions remain paused. This we expect will result in lower capital investments in fiscal year ‘24 and fiscal year ‘25. During a period of macro weakness and business uncertainty, we believe shorter lead times are the best way to help customers navigate the environment successfully, and improve the quality of backlog placed on us. We have been able to reduce average lead time from roughly 52 weeks at the start of 2023 to roughly 26 weeks by the end of the June quarter, and we expect to continue to drive lead times down farther in the coming months. We have heard concerns from some of the investment community about falling lead times, because it results in lower backlog. While this is often true, we believe the level of backlog does not equate to true end market consumption. And in the final analysis, shorter lead times enable our customers and Microchip to navigate an uncertain environment with agility and more effectively. So now let's get into the guidance for the September quarter. Although our backlog for the September quarter is strong, we are continuing to take active steps to help customers with inventory positions to push out their backlog. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the September quarter to be between up 1% and down 3% sequentially. At the midpoint of our net sales guidance for the September quarter, our year-over-year growth for the quarter would be 9.3%. We expect our non-GAAP gross margin to be between 68.3% and 68.5% of sales. We expect non-GAAP operating expenses to be between 20.1% and 20.5% of sales. We expect non-GAAP operating profit to be between 47.8% and 48.4% of sales and we expect our non-GAAP diluted earnings per share to be between $1.60 and $1.64. At the midpoint of our non-GAAP earnings per share guidance, our year-over-year growth for the September quarter would be 11% despite a much higher tax rate than the year-ago quarter. As supply and demand come into balance, we expect normal seasonality to return to our business. Historically, the December quarter has been our seasonally weakest quarter. This year, we expect that our normal seasonality in the December quarter will likely be amplified by the macro weakness and business uncertainty that our customers are experiencing. As a result, we anticipate further business headwinds in the December quarter. However, notwithstanding any near-term macro weakness, we are confident that semiconductors remain the engine of innovation for the markets and applications we serve. Our focus on total system solutions and key market megatrends continues to fuel strong design momentum, which we expect will drive above-market long-term growth. Finally, as you can see from our June quarter results and our September quarter guidance, our Microchip 3.0 strategy which we launched 21 months ago, continues to be the foundation of our results, as we continue to build and improve what we believe is one of the most diversified, defensible, high-growth, high-margin, high-cash generating businesses in the semiconductor industry. However, we recognize that we operate in a cyclical industry and that we're not immune to the business cycles. If you review Microchip's peak to trough performance through the business cycles over the last 15-plus years, which is included in the investor presentation posted on our website, you will observe our robust and consistent cash-generation, gross margin and operating margin results. Although we don't know what exactly the future holds, if we were to experience a semiconductor inventory correction like what the industry has seen in the past, we are highly confident that our non-GAAP operating margins would remain well above 40%, and we expect our cash-generation, non-GAAP gross margin, and non-GAAP operating margin to once again demonstrate consistency and resiliency through the cycle. And with that, let me pass the baton to Steve to talk more about our cash return to shareholders. Steve.

Operator:

[Operator Instructions]. Our first question is going to come from Tore Svanberg with Stifel. Your line is open.

Ganesh Moorthy:

I think going through the month of July, we have not yet seen China recover. There are discussions I understand about things they may do in the rest of this quarter, those have to be seen. So I don't have anything more to add with respect to China. Our bookings have been weak. We do expect in time that those will begin to strengthen. There is still a lot of backlog that we are carrying and we are pushing out backlog. So there is not an immediate requirement for bookings to spring back to where they used to be.

Ganesh Moorthy:

You’re welcome.

Tore Svanberg:

Make sense. Thank you, Eric.

Vijay Rakesh :

Yes, hi. Just a quick question. I was wondering, when you look at your supply chain, where are you seeing any – what are you seeing on the pricing side if you were to look at China or just globally?

Vijay Rakesh :

Got it. And in general, if you look at trends as you look out on the pricing side, any thoughts you could share? I mean, what has been trends and what have you seen in the last two, three years and how you see that going forward, I guess. That's it, thanks a lot.

Vijay Rakesh :

All right, thank you.

Operator:

Our next question is going to come from Vivek Arya with Bank of America Securities. You're in line as open.

Ganesh Moorthy:

We haven't modeled what the December quarter nor are we guiding to what the December quarter is going to be. There are a range of scenarios that we are working with, and I don't really have any more color to offer on it. With respect to the gross margins, as we have said many times, we have a pretty strong resilience to the way the gross margin works. If you look at our inside-outside mix, we still have a 60% outside mix. We are continuing to run our fact, where for absorption purposes we are building the product that we need to build and building some inventory. So really, I'm not trying to provide any guidance for December that you might have, but you're absolutely right. We are expecting that the December quarter is going to be weaker than normal seasonality.

Operator:

Our next question is going to come from Ambrish Srivastava with BMO Capital Markets. Your line is open.

Ganesh Moorthy:

You know, it's very difficult for me to answer that question. There is that question of, which part of this is just inventory digestion that's taking place. And how much of it is consumption changes and how consumptions changes might change? So just using China as the example, China consumption was weak or weaker than anyone expected in the June quarter. Now, how does it come back in the September or December quarters is anybody's guess and where it's at. So I don't have a clear view of how long does automotive or industrial stay weak. We've gone through many cycles. They don't last forever obviously, and there are some typical cycles you can look back on and see how they perform.

A - Ganesh Moorthy:

Well, the purpose of the NCNR was to get a mutual commitment of investment we were going to make and benefit a customer was going to get. It's based on a set of assumptions about where business is going to go, and I think as lead times go farther and farther out, everybody's visibility gets to be less clear. And the vast majority of the customers who were part of the NCNR programs have been extremely happy with what they were able to get in an extremely different environment in 2021 and 2022. You know, no program is perfect. I believe that our programs have had substantially more benefit than issues with them. We are at a point of the cycle where the demand curve has changed, and as that demand curve changes, we have to adjust. And by the way, the same demand curve will change again as we go into 2024. So I think we have to look beyond the short-term view of where this all ends up and look at how do these programs provide mutual benefit in the medium to long term.

A - Ganesh Moorthy:

You're welcome.

Joe Moore :

Great. Thank you, guys. I guess you're describing an environment in which you're seeing weakness in multiple regions, weakness in multiple end markets, and you're characterizing that as kind of early signs of that, and yet you're only guiding down 1% quarter-on-quarter. So I guess its like, do you have a level of demand that's lower than this? I mean, you have a lot of backlog right now. What happens as that backlog runs out. Can you just give us a sense for what type of drawdown we might be looking at over the course of the next few quarters? Just anything qualitative you can help, so that would be great.

Joe Moore :

I can appreciate that. Thank you. And then, in terms of the 40% operating margin, can you give us a sense for what the parameters are of that? Like how much – you know, is that kind of a normal revenue weakness that you might have seen two or three years ago? Could you still do a north of 40% if it's worse than that? Can you just give us a sense for your confidence in the durability of that number?

A - Eric Bjornholt:

Yes, I think you've summed it up well Ganesh. We've done scenario planning and do not see a scenario where our operating margins on a non-GAAP basis could fall below 40%. So we're very comfortable in making that statement. Maybe the other piece that I would add to Ganesh's first response is, I think it's a little bit tricky for investors to understand what is normal seasonality for microchip, because the supply constraints have been under for the last couple of years now, they did play a part in that, and then we've done a lot of acquisitions historically, right? But we would say that probably a normal December seasonal might be down 3% or 4%. So hopefully that provides some context, and we're saying that based on the conditions that we're seeing, it you know likely could be – what's the word, Ganesh? [Cross Talk] yes, amplified.

Operator:

Our next question is going to come from Joshua Buchalter with TD Cowen. Your line is open.

Ganesh Moorthy:

You know, I think the channel inventory is driven by in part what the channel wants to carry, what we can supply, and what their demand intensity is. So we don't try to guide where's the channel inventory going to go. It goes where it goes based on those factors. We do take a lot of effort on the internal inventory inside microchip and we have an added factor at this point, which is we are customers who have inventory positions and are looking for push-out help. And that has caused us to go slower than we would normally have liked, but it's the right long-term answer for us and for our customers. And we do expect as Eric said, to have both, a reduction in absolute and days of inventory on our balance sheet in the September quarter.

A - Ganesh Moorthy:

Sure. So, our internal fabs are continuing to run relatively unchanged. These products are very long-lived products. In many cases had been depleted in the inventory points that we typically need to be able to serve at a high level of certainty, as well as the lead time we want. So our internal factories and the internal fabs in particular are continuing to run. And our foundry partners, depending on where the inventory levels were, in some cases, we will be adjusting and have adjusted the purchasing to bring that inventory into line with where we want to be long-term.

A - Ganesh Moorthy:

You're welcome.

Chris Caso:

Yes. Good evening, thank you. First question is about, I guess something we haven't spoken about in a while, a potential for the requirement for turns. And can you speak about that, given the reduction in lead times, the fact that customers are booking closer in? Are we in a situation… [Audio Gap]

Operator:

It looks like this is line hijacked. So, until he calls back, we'll just move on to the next person in queue. And that's going to be Harlan Sur with JP Morgan. Your line is open.

A - Ganesh Moorthy:

So first, to take the lead times. You know, we are continuing to drive lead times down. As I mentioned in my prepared remarks, we believe that short lead times is what makes us all effective and agile in an unpredictable business environment that we're in. And we're, on average, at just under 26 weeks right now. I think we will end the year at well under 13 weeks. It could be under 10 weeks by that time, but we'll know how we progress in that time. Four to eight weeks is where our lead times are for 90% or so of our line items as a historical benchmark for where we were. With respect to distribution inventory, as I mentioned a little earlier on, it has many functions. It's a function of what kind of sell-through are they seeing? What kind of inventory do they want to carry? What are we able to supply, that maybe they've been asking for some time to be able to do it? So, I don't have any color on what distribution inventory is likely to be doing, you know outside of what we've provided so far for June.

A - Ganesh Moorthy:

Welcome. Thanks Harlan. Chris, are you back?

Chris Caso :

Yes. Not sure what happened, but thank you. So, the question was on the terms environment. Yes, obviously you haven't seen turns in several quarters given the high backlog. Is that something you contemplate either for the September quarter and December quarter? And can you tell us how you're thinking about that returns business under the context of shortening lead time?

Chris Caso :

Okay. But it starts in December, not in September?

Chris Caso :

Right, right, that's helpful. As a follow-up, I wonder if you could expand on some of the comments about Europe. And we heard from various others in the industry, you know obviously we can say about China, you know there's been a bit here and there about industrial and auto, but really not any comments about Europe, that's something new, and if you could expand upon what you're seeing there.

Chris Caso :

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

Operator:

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

A - Ganesh Moorthy:

You know, we're not intentionally trying to bring backlog down. We are trying to help customers who have backlog placed on us, but would prefer to receive it, in some cases, later than what it’s presently scheduled for. Backlog will – over time has been coming down, as the fever of what was in 2022 and 2021, where people are placing huge amounts of backlog out in time. It starts to settle out, especially at these time are starting to come in. As the industry starts to normalize, backlog will get back to what it used to be normally, pre-COVID, and so that's really what's happening with backlog. We're not trying to force it down in any way.

A - Ganesh Moorthy:

In fact, it's a timely question. We just had a review with our China team here yesterday on exactly that topic, and there is little to no loss to the local China producers that we're able to see, either in design or in things that are in production today. So no, it is actual consumption that is weak. There is a lot of uncertainty in China with respect to what the amount of debt people are carrying are, what kind of stimulus is going to take place. And I think there is a consumption that is waiting to happen, and I hope it will open up at some point in time. But at the moment, I think things are uncertain enough that consumption is being held down.

Ganesh Moorthy:

Welcome.

William Stein :

Great. Thank you. I wanted to address the similar question about cancellations that we understand with the PSP and the NCNRs, you've been much more flexible, at least somewhat flexible on rescheduling, but much less so on cancelling, which I think we all respect. But when we look at the growth rates of a wide variety of competitors, they've seen this downturn.

Janet Ramkissoon:

Hi Steve, Ganesh. There’s somewhat of a different tone for this question. Could you provide a little bit of color on your efforts with the RISC-V and the PolarFire SoC FPGA program? Anything you could share with us about design-win activity and markets where you're gaining traction with this program? And any sense of when we're likely to see any real revenue growth from this area? My understanding is that there's a lot of interest in RISC-V for embedded applications.

Steve Sanghi :

Good to hear from you Janet. This is Steve.

Ganesh Moorthy:

So, I wouldn't place the RISC-V architecture as the reason for the gross margin or the performance of the product line. The product line is an enormously complex product. It comes with lots of software, lots of tools, a lot of application information that we put together. How we put it all together and turn it from a complex capability to an easy-to-use solution is what determines design wins, revenue growth, gross margins, customer adoption, etcetera. So it’s much, much more than anything about RISC-V alone or any other core for that matter.

Janet Ramkissoon:

Thanks very much guys. I appreciate it.

Operator:

Yes. William Stein, your line is open again.

Operator:

Unfortunately, it looks like his line has dropped again.

Ganesh Moorthy:

Where there other questions or other callers that are still in the queue?

Steve Sanghi :

Close it out then.

Operator:

Greetings, and welcome to the Microchip Technology's [Q3] and FY2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Mr. Eric Bjornholt, Senior Vice President and CFO. Thank you, and you may proceed, sir.

Ganesh Moorthy:

Thank you, Eric, and good afternoon, everyone. Our March quarter results were strong in the context of a slowing macro environment marked by our continued disciplined execution as well as our resilient to end market. Net sales grew 2.9% sequentially and 21.1% on a year-over-year basis to achieve another all-time record at $2.23 billion. The March quarter represented our 10th consecutive quarter of sequential growth. Non-GAAP gross margin came in at the high-end of our guidance at a record 68.3%, up 171 basis points from the year-ago quarter. Non-GAAP operating margin also came in close to the high-end of our guidance at a record 47.65%, up 292 basis points from the year-ago quarter. We continued to make investments that we expect to drive the long-term revenue growth, profitability, and durability of our business. Our consolidated non-GAAP diluted earnings per share was above the high-end of our guidance at a record $1.64 per share, up 21.5% from the year-ago quarter. Adjusted EBITDA was 51% of net sales and adjusted free cash flow was 23.2% of net sales in the March quarter, continuing to demonstrate the robust cash generation characteristics of our business. We returned $469.9 million to shareholders in dividends and share repurchases in the March quarter, representing 62.5% of our December quarter adjusted free cash flow. Our net leverage exiting March dropped to 1.45x. And as we do mentioned quarter ago, our capital returns this quarter will increase to 67.5% of our March quarter adjusted free cash flow, as we continue on our plan to return a 100% of adjusted free cash flow by the March quarter of calendar year 2025. Reflecting on our fiscal year 2023 results, it was another one for the record books. Revenue grew 23.7% to finish at a record $8.4 billion. Non-GAAP gross margin, non-GAAP operating margin, non-GAAP EPS, EBITDA and adjusted free cash flow all set new records. We significantly increased the capital return to shareholders in fiscal year 2023 to $1.64 billion, representing a 76.6% growth as compared to fiscal year 2022 through a combination of increasing dividends and our formulaic share buyback program. My heartfelt gratitude to all of our stakeholders who enabled us to achieve these outstanding results and especially to the worldwide Microchip team whose tireless efforts are what enabled us to navigate effectively through the business cycle. Taking a look at our March quarter net sales from a product line perspective, our mixed signal microcontroller net sales set another all-time record coming in sequentially up 5.8% in the March quarter and up 23.5% on a year-over-year basis. Our 32-bit mixed signal microcontrollers grew at the fastest rate among our mixed signal microcontroller product line and represented over 48% of our fiscal year 2023 mixed signal microcontroller revenue. As you may have noticed, we are clarifying the nomenclature for our microcontrollers going forward to be mixed signal microcontrollers as they have substantial analogs and mixed signal content integrated on chip. And as a result, exhibit business characteristics that are more like analog and mixed signal products. Staying with mixed signal microcontrollers for a moment. Gartner just published their rankings for calendar year 2022. Using our publicly reported mixed signal microcontroller revenue for calendar year 2022, which Gartner unexpectedly underreported for Microchip. We ranked number three and are just 1.4% away from number one. To put this in perspective, just three years ago in calendar year 2019, by our estimate combined with the Gartner data, we were 16.5% away from number one. We are fast closing on the number one spot. Moving next to our analog business. Our analog net sales also set another all-time record, coming in sequentially up 1.9% in the March quarter and up 19.9% on a year-over-year basis. Fiscal year 2023 analog sales were $2.4 billion and broke through the $2 billion mark for the first time ever. We are gaining share in our analog business with our total system solutions approach, continuing to provide a tailwind for this product line. While we don't normally breakout our FPGA product line results, it is note worthy to report that our March quarter and fiscal year 2023 revenue for FPGA for both records. In fact, our fiscal year 2023 FPGA revenue exceeded $550 million, grew more than 31% as compared to fiscal year 2022 and delivered operating margins up a north of corporate average. Our design win momentum is strong and we offer market-leading mid-range FPGA solutions with best-in-class low-power reliability and security. At our Investor Day in November 2021, we emphasized the importance of six market mega trends for our long-term growth and shared that we expected our revenue growth from customers and applications within the megatrends to be approximately 2x of Microchips growth rate. We just completed our revenue by megatrend analysis for fiscal year 2023. As compared to fiscal year 2021, which is the last time we conducted the same analysis, Microchip overall revenue grew 55.2% while revenue from our megatrends grew 108.5% right in line with our expectation of roughly 2x growth from the megatrend. Revenue from the six megatrends represented approximately 45% of our fiscal year 2023 revenue as compared to approximately 34% of our fiscal year 2021 revenue. We also just completed our revenue by end market analysis for fiscal 2023. As compared to fiscal 2022, our industrial business grew from 40% to 41% of our revenue. Our data center and computing business grew from 18% to 19% of our revenue and our consumer appliance business declined from 14% to 12% of our revenue. Automotive and communications infrastructure remained unchanged at 17% and 11% of our revenue respectively. As you can see from the data, slowly but surely, we continue to curate an increasing proportion of our business towards less volatile and more resilient end markets. Now for some color on the March quarter. While our overall business remained strong in the March quarter, many of our customers felt the effect of slowing economic activity and increased business uncertainty, request to push out or cancel backlog increased, and we were able to push out significant amounts of backlog to later quarters to help customers with inventory positions. This resulted in our days of inventory growing. We are comfortable with this inventory growth given the very long life cycles and durable end markets for our products by taking action to reduce customer inventory overbuild and carrying that inventory on our balance sheet, we expect to increase our odds of achieving a soft landing and also expect to be better positioned to respond to demand growth and the macro environment strengthened. Consistent with the slowing macro environment and the growth in our inventory, we have paused most of our internal factory expansion plans, reduced our capital investment plan for fiscal year 2024 and taken steps to lower our inventory in the coming quarters. As a result of the uncertain macro environment and multiple quarters worth of backlog on our books, our bookings have slowed down as expected over the last two quarters. In order to provide customers with more flexibility in an uncertain demand environment as well as to achieve a more healthy and sustainable long-term supply-demand down, we are striving to bring average lead times down to under 26 weeks over the course of the second half of 2023. We believe there are three reasons why Microchip's business continues to demonstrate more resilience in the midst of the weakness seen by some other semiconductor companies. First, on the demand side, the end markets that we have the most exposure to; industrial, which includes aerospace and defense; automotive and data center; and the applications within these end markets where we are strong, are less volatile and comparatively more resilient. Second, on the supply side, a vast majority of our products are built on specialized technologies requiring trailing edge capacity. This is the capacity that has been most constrained over the last two-plus years and where there was less opportunity to overship to consumption. And third, a laser focus on organic growth for multiple years by concentrating on total system solutions and higher growth megatrends, which we just discussed a few minutes ago, has translated into increased design wins, further share gains and a resultant revenue tailwind. A quick update regarding the CHIPS Act. We have been getting the benefit of the investment tax credit since the beginning of this year, and we are in the process of submitting our applications for grants to support expansion in several of our domestic factories. The timeline for when grants maybe approved is not yet determinable. Now let's get to the guidance for the June quarter. Although our backlog for the June quarter is strong, we expect to continue to take active steps to help customers with inventory positions to push out their backlog. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the June quarter to be up between 1% and 4% sequentially. At the midpoint of our net sales guidance, our year-over-year growth in the June quarter would be a strong 16.5%. We expect our non-GAAP gross margin to be between 68.3% and 68.5% of sales. We expect non-GAAP operating expenses to be between 20.1% and 20.5% of sales, and we expect non-GAAP operating profit to be between 47.8% and 48.4% of sales. We expect our non-GAAP diluted earnings per share to be between $1.63 and $1.65. At the midpoint of our non-GAAP EPS guidance, our year-over-year growth for the June quarter would be a strong 19.7% despite a much higher tax rate than the year-ago quarter. Finally, as you can see from our March quarter results and our June quarter guidance, our Microchip 3.0 strategy, which we launched 18 months ago is firing on all cylinders as we continue to build and improve what we believe is one of the most diversified, defensible, high growth, high margin, high cash generating businesses in the semiconductor industry. However, we also recognized that we operate in a cyclical industry and that we are not immune to business cycles. But if you review Microchip's speak to trust performance through the business cycles over the last 15-plus years, you will observe our robust and consistent cash generation, gross margin and operating margin results. Although we don't foresee any significant decline in our business, if we were to experience the semiconductor inventory correction, like the industry has seen in the past, we are highly confident that our non-GAAP operating margins would remain well above 40%. We remain cautiously optimistic about navigating to a soft landing for our business in this cycle and expect our cash generation gross margin and operating margin to once again demonstrate consistency and resiliency through the cycles. With that, let me pass the baton to Steve to talk about our cash return to shareholders. By the way, Steve just published a new book called Up and to the Right, which chronicles building Microchip into a technology juggernaut. Investors and analysts can get additional insights from the book about the foundational elements behind Microchip's long-term business success. Steve?

Operator:

Thank you very much. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Toshiya Hari from Goldman Sachs. Please proceed with your question.

Ganesh Moorthy:

Generally speaking, I would say there are a cross section of those requests from many geographies, many customers, many end markets. We also continue to have constrained products on which that are shortages that we're trying to accelerate product for. So it is not only one directional in which the demand requests are coming in at.

Ganesh Moorthy:

They're going to be darn good. If you look at our history, you can get a pretty good idea of what the gross margin trough-to-peak or peak-to-trough look like. We are sitting at 48% operating margin, giving you 8 percentage points as a bottom end of where is this going to be an operating margin, I think you can draw the conclusion relatively easily.

Eric Bjornholt:

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

Operator:

Thank you. The next question comes from Ambrish Srivastava from BMO Capital Markets. Please proceed with your question.

Ganesh Moorthy:

So we have not adopted a consistent practice of providing more than one quarter guidance. At certain points of time, we have elected to provide more than one quarter guidance or directional guidance sometimes and this is when we believed it would help investors and analysts better frame our current quarter guidance. Having provided the extra quarter of directional guidance for three quarters in a row, it did not appear to add much value to analysts or investors who are more worried about the overall semiconductor industry cycle. And in fact, it seemed to elicit more skepticism in our ability to provide guidance and confidence in our understanding of the business. And therefore, we've decided to end the temporary practice we started and over to just providing one quarter’s guidance.

Ganesh Moorthy:

So maybe let me clarify. All PSP backlog is non-cancelable, non-reschedulable. What I have said before is that we are not flexible in the non-cancelable portion, we are flexible on the non-reschedulable and that's where we're pushing up. So we are pushing our backlog, PSP or not into further quarters. And that's the way in which we support customers whose business environment has changed and who have concern about their inventory level and in the process, hopefully, create less of an overhang that we will run into and more of a soft landing for our own business. But we are flexible on the reschedulability, just not on the non-cancelablity.

Ganesh Moorthy:

You're welcome.

Vivek Arya:

Thank you for taking my question. Ganesh, I wanted to revisit again this question of end market. So there's a perception that aerospace defense, medical parts of data center these markets are holding up better. So can you give us a sense that in the last three months, specifically which end markets or customers in which end market have asked you or you have asked them and they have agreed to pushing off some of their demand because I just want to make sure that RV, when you say a soft landing, are we talking about revenues kind of floating at plus/minus the levels you're giving for June? Or is there some bigger drop off? And like having that end market view, I think we'll be better prepared to analyze, right, where – how we should be thinking about September and December?

Vivek Arya:

Got it. And for my follow-up, I just actually had two quick clarifications, perhaps for Eric. Eric just what is the right way to look at the other expense line? And any implication of kind of the rising rates on your debt servicing? And then OpEx, right, it's kind of – our OpEx intensity is lower than your long-term model. So how are you planning to manage expenses as the business goes through this kind of slowdown in the near term?

Ganesh Moorthy:

No. I think you stated it exactly so. And as we've always said, right, the operating expenses are an investment in the long-term growth profitability resilience of our results. And so those investments need to be made and to have years and years of return on those investments. And we are below our target, but as things settle out over time, that will creep up, but not at an accelerated rate.

Operator:

Thank you. The next question comes from Joshua Buchalter from Cowen & Company. Please proceed with your question, Joshua.

Ganesh Moorthy:

So pricing is not any difference between PSP and non-PSP. So I'll give you a more general answer for just our overall methodology. Pricing for us is a strategic exercise. We provide products that are sole-sourced products, they are proprietary products and customers place their trust in us years before they go to production and then they're with us for many, many years to come. Traditionally, over the years, we have not had annual price reductions necessarily as a consistent part of what we do. In the last two years, we've had inflation at a much higher rate than what we would absorb with our improvements, and we did pass along price increases that would absorb the cost increases, keeping it margin neutral, and that has not changed and that we don't expect to change as we go forward. So pricing is stable and strategic and I think, in our thought process.

Eric Bjornholt:

Yes. So utilization in the factories has been very high throughout the last year. That continues today. So we aren't facing underutilization charges or anything like that. We're still trying to get caught up on our backlog. So the factories are still running at a pretty high rate.

Joshua Buchalter:

Thank you.

Rajvindra Gill:

Yes. Thank you for taking my questions. And congratulations on kind of solid results in a tough environment. Just in terms of the backlog. So in the past, you mentioned as the backlog come down through the year as lead times start to normalize, you'll start to see that – you'll see more order volatility. And I think you're indicating that, but in the past, you mentioned that the delta between the backlog and the actual sales is still quite wide. That backlog to sales delta could offset that potential order volatility. So I wanted to get a sense of what are your thoughts on the backlog to sales delta as we stand today?

Rajvindra Gill:

Thank you, Ganesh for that. And just my follow-up, what is your latest pulse on China regarding customer order patterns and channel inventory? Thank you.

Rajvindra Gill:

Thank you.

Christopher Danely:

Hey, thanks guys. Can you give us a sense of how much of the backlog right now, let's just say, for the next 12 months is PSP versus, I guess, the "can be canceled or can be pushed out"? Any kind of percentage there?

Christopher Danely:

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

Christopher Danely:

Yes. Thanks a lot, Ganesh.

Operator:

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

Ganesh Moorthy:

So our visibility into customer inventory is not there because they don't share that with us. We can infer their inventory by their request for pushouts or cancellations as the case might be. Where there is cancelable backlog or cancelable – basically anytime there's – or reschedule backlog, they can do that. Where it is non-reschedulable and noncancelable and they ask for help, then we get involved in it. But it's hard for us to know where customer is and their inventory correction position. We can see that in distribution. And there, we get a weekly report, it tells us by distributor in different parts of the world where is that? As Eric mentioned, distribution days of inventory went up by two days from 22 to 24 days. Still well in control, below where it used to be historically and where is at. And so that's about as much color as we can give you on kind of customer inventory or end customer inventory.

Ganesh Moorthy:

So let me clarify. I don't know where that perception was set, maybe what we said in the past. We have been pushing out orders from customers, PSP customers for multiple quarters, right? I mean we're in this to be responsive to the market, but we also want to make sure that as noncancelable orders get placed, there is a symmetric responsibility from us and from our customers, and that's what creates some resistance to placing orders that they shouldn't be placing or that are speculative and where they're at. So we've done this multiple quarters. This is not the first quarter we're doing it. And it is in response to where markets and customers and specific situations are at. And we will continue to do it as needed, including in this quarter.

Steve Sanghi:

I just want to add one point. This is Steve. I think investors and analysts failed to appreciate that when a customer is placing a year worth of orders, which by contract non-cancelable and non-reschedulable. It goes through a level of review at the customer at much higher level than just only the purchasing person, and the resulting backlog that is placed on Microchip is a much higher quality. So therefore, even though we have taken some adjustments in rescheduling some of the PSP backlog, the fundamental fact is that the backlog is a very high quality relative to a similar backlog at any other competitor.

Steve Sanghi:

You're welcome.

Harlan Sur:

Hi. Thanks. Good afternoon. Was the unsupported backlog to actual revenue shift still above one in the March quarter? And where do you anticipate that ratio to be this quarter?

Harlan Sur:

Okay. Perfect. Thanks for that. And then your data center products are quite application specifically, right? So a bit easier to track rate storage controllers, enterprise – key controllers, Ethernet PHYs and so on, right? The demand dynamics in cloud and more so in Enterprise data center have clearly weakened. I know you guys have said some products are strong, some products are still weak, but is the aggregate data center franchise holding up on a quarter-over-quarter and year-over-year basis?

Harlan Sur:

Thank you, Ganesh.

Tore Svanberg:

Yes. Thank you. I had a follow-up on the rescheduling of backlog. I mean the semi industry has obviously been struggling for a while now. So would you say that this more recent phenomenon is due to some of the financial stresses that's going on? And the reason I'm asking that is because I'm just wondering if people are pushing out because they feel a little bit uncomfortable with the current financial environment and as soon as there's some stabilization, perhaps those pushouts will turn into pull-in. So I'm just hoping you could give us your view there?

Tore Svanberg:

Very good. And as my follow-up is one for Steve and Steve, congratulations on your new book. What was the reason behind the increase of the returns from 250 to 500 bps a quarter. I guess my question is more on the timing of it. I mean you just feel more confident about the profitability of the company during the soft landing period? If you could just elaborate on the timing, that would be great?

Tore Svanberg:

Great. Thank you again.

Tore Svanberg:

Great. Thank you, Eric.

Vijay Rakesh:

I’m sorry. Thank you. I was just wondering if you could give us some color on what ASP trends look like exiting 2022 and how they are looking this year? And then I have a follow-up.

Eric Bjornholt:

And some of those trends is not necessarily price increase driven. It's introducing new proprietary more complex products that bring more value to our customers.

Ganesh Moorthy:

It's next to impossible to give you a number because we serve about 125,000 customers, about 115 of them are indirect through our distributor channels. So we don't really hear customer by customer where it's at. I would say that it's not the majority of the business that we're doing, it's specific customers and specific markets in any given day, that's there. So there's not a wholesale. I want to push everything out that's out there.

Operator:

We'll move on to our next question, which is coming from the line of Chris Danely with Citi. Please proceed with your question.

Ganesh Moorthy:

Those two are interconnected, right? It's not that – it's only one or the other. So weaker demand results in more inventory, which last some longer or stronger demand results in needing to expedite as well. So it's hard to parse those out. There's some of both that's in there. And in many of these – our customers who are also facing uncertainty perhaps – so it may not just be demand alone, but the environment that they're in, and they are trying to decide how should they navigate their environment. And so what we see in the end is the aggregate feedback or request that they provide us. And with all of that, we're able to show continuing growth into this quarter, into the June quarter. As it stands right now, we believe it is highly unlikely at the September quarter is going to have a sequential down quarter and that's a basis of all of our integrated information from customers on what they're seeing on internal data that we see in all of our indicators, bookings, backlog, expediter class, pushout requests, all the external data that we track, GDP, PMI, consumer confidence, inflation, et cetera. And so that's what gives us the confidence in our business.

Ganesh Moorthy:

You are welcome.

Ganesh Moorthy:

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

Operator:

Good day everyone, and welcome to Microchip's Third Quarter Fiscal 2023 Financial Results Conference Call. As a reminder, today’s call is being recorded. At this time, I would like to turn the call over to Mr. Eric Bjornholt, our CFO. Please go ahead, sir.

Ganesh Moorthy:

Thank you, Eric, and good afternoon, everyone. Our December quarter results were well above the midpoint of our revenue guidance marked by our disciplined execution as well as our resilient end markets. Net sales grew 4.6% sequentially and 23.4% on a year-over-year basis to achieve another all time record are $2.17 billion. The December quarter also marked our ninth consecutive quarter of growth. Non-GAAP gross margins came in above the high-end of our guidance at a record 68.1%, up 38 basis points from the September quarter and up 202 basis points from the year ago quarter. Non-GAAP operating margin also came in above the high-end of our guidance at a record 47.5%, up 62 basis points from the September quarter and up 283 basis points from the year ago quarter. Due to a rapid increase in net sales over the last 2 years, operating expenses at 20.65% were 185 basis points below the low end of our long-term model range of 22.5% to 23.5%. Our long-term operating expense model will continue to guide our investment actions to drive the long-term growth, profitability and durability of our business. Our consolidated non-GAAP diluted earnings per share was at the high-end of our guidance at a record $1.56 per share, up 30% from the year ago quarter. Adjusted EBITDA at 51% of net sales and adjusted free cash flow at 34.6% of net sales for both very strong in the December quarter, continuing to demonstrate the robust cash generation capabilities of our business. As Eric mentioned, we have excluded $385 million of long-term supply assurance payments made by customers from our adjusted free cash flow calculation. Since these payments are refundable when customers fulfill their purchase commitments. Net debt declined by $701.2 million, driving our net leverage ratio down to 1.56x, exiting the December quarter. During the December quarter, we returned $409.8 million to shareholders in dividends and share repurchases, representing 60% of the prior quarters free cash flow. We expect to get below 1.5x net leverage by the end of the March quarter. And as Steve will share with you later, the Microchip Board has decided to increase the rate at which capital will be returned to shareholders starting in the June quarter. My heartfelt gratitude to all our stakeholders who enabled us to achieve these outstanding results and especially to the worldwide Microchip team whose tireless efforts and strong sense of ownership are what enabled us to navigate effectively in the midst of turbulent times. Taking a look at our net sales from a product line perspective, our microcontroller net sales were sequentially up 3.5% in the December quarter, and set another all time record. On a year-over-year basis, our December quarter microcontroller net sales were up 25.6%. Microcontrollers represented 56.3% of our net sales in the December quarter. Our analog net sales were sequentially up 5.9% in the December quarter, and also set an all time record. On a year-over-year basis, our December quarter analog net sales were up 21.2%. Analog represented 28% of our net sales on the December quarter. In the December quarter, our FPGA net sales also achieved a new record. While our overall business remains strong in the December quarter, the consumer appliance and market was weak as was our overall business in China. Our China business was initially impacted by COVID lockdowns and then subsequently impacted by the rapid transmission of COVID when lockdowns were lifted. Both actions adversely impacted our customers operations during the December quarter, resulting in inventory of many customers and distributors being higher than normal. In response to the weaker business environment in China, and a small but increasing number of other customers who have inventory and requested push outs, we took action in the December quarter to delay or redirect some shipments and plan to do more of the same in the March quarter. This is designed to reduce customer and channel inventory overbuilt, but will also increase the inventory on our balance sheet in the near-term. In the medium term, we expect this will give us a better chance to achieve a soft landing and position us well to respond to a stronger demand growth as the macro environment improves. As a result of the uncertain macro environment, and the multiple quarters with a backlog on our books, most of which is non cancelable, our bookings have slowed down as we expected. Given the circumstances we view the bookings slowdown as a positive which will serve to preserve the quality of new backlog that gets placed. Our unsupported backlog which represents backlog customers wanted shipped to them in the December quarter, but which we could not deliver in the December quarter remain well in excess of the actual net sales we achieved. Unsupported backlog did declined slightly for the first time in nine quarters. And we are continuing to work hard to further reduce our unsupported backlog, as well as our lead times to more manageable levels. While we have seen an increase in requests to push out or cancel backlog, these requests remain a small fraction of the very large backlog we have over multiple quarters, and hence they have not had a material effect on our business. Despite supply gradually improving, we expect to have supply constraints from much of 2023. However, in order to achieve a more healthy and sustainable business environment, we are driving to bring average lead times down to 26 weeks or less by the time we get to the second half of 2023. And we will be publishing a customer letter to this effect shortly. We believe there are three reasons why Microchip's business is demonstrating more resilience in the midst of the weakness seen by some other semiconductor companies. First, on the demand side, the industrial, automotive, aerospace and defense, data center and communications infrastructure end markets, which make up approximately 86% of our net sales remain solid. The consumer end market, which is about 14% of our net sales is experiencing some weakness, but it's dominated by home appliances which are comparatively more resilient. There are some signs that the data center end market could see some headwinds in 2023. Although our business remains strong, based on the market share gains we have had. And our overall demand remains quite durable, because of the end market mix we have consciously gravitated towards over the years. Second, on the supply side, a vast majority of our products are built on specialized technologies requiring trailing edge capacity. This is the capacity that has been most constrained over the last 2 years, which still remains constrained and where there was less opportunity to over ship [ph] to consumption. And last but not least, our laser focus on organic growth through total system solutions and higher growth mega trends for multiple years is giving us increased design momentum, farther share gains and a result in revenue tailwind. If you review Microchip's peak to trough performance through the business cycles over the last 15 plus years, you will observe a robust and consistent cash generation, gross margin and operating margin results. The investor presentation posted on our IR website has details of our performance through the business cycle. We remain cautiously optimistic about navigating to a soft landing for our business and expect our cash generation gross margin and operating margin to once again demonstrate consistency and resiliency through the cycle. Last quarter, we mentioned that Microchip was in the early stages of considering building a 300 millimeter U.S based fab for specialized trailing edge technologies. After a detailed analysis, we have concluded not to move forward with this project. And that our business objectives would likely be better achieved through our relationships with our foundry suppliers with lower execution risk, and a better return on invested capital. The CHIPS Act is already making a positive impact on our business through the investment tax credit, which started on January 1. And with impending capacity expansion grants that we will be seeking with several of our U.S semiconductor factories. We believe that CHIPS Act is good for the semiconductor industry and for America, as it enables critical investments, which will help even the global playing field while being strategically important for American economic and national security. Now, let's get into the guidance for the March quarter. Our backlog for the March quarter is strong, and we have more capacity improvements coming into effect. However, we are also taking active steps to help customers with inventory positions to selectively push out some of their backlog. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the March quarter to be up between 1% and 4% sequentially. Further, we expect sequential net sales growth again in the June quarter. At the midpoint of our net sales guidance, our year-over-year growth for the March quarter would be a strong 20.6%. We expect our non-GAAP gross margin to be between 68.1% and 68.3% of sales. We expect non-GAAP operating expenses to be between 20.6% and 20.8% of sales. We expect non-GAAP operating profit to be between 47.3% and 47.7% of sales. And we expect a non-GAAP diluted earnings per share to be between $1.61 per share and $1.63 per share. At the midpoint of our earnings per share guidance, our year-over-year growth for the March quarter would be a strong 20% despite a much higher tax rate than the year ago quarter. Finally, as you can see from our December quarter results and our March quarter guidance, our Microchip 3.0 strategy, which we launched 15 months ago, is firing on all cylinders as we continue to build and improve what we believe is one of the most diversified, defensible, high growth, high margin, high cash generating businesses in the semiconductor industry. Our Board of Directors and leadership team operate just as long-term owners of the business would thoughtfully making the key investments in people, technology, capacity, culture and sustainability required to thrive in the long-term. While being prudent, pragmatic and nimble about whatever short-term adjustments may be required. We are confident we will effectively navigate through whatever macro business challenges may unfold in 2023. Let me now pass the baton to Steve to talk more about our cash return to shareholders. Steve?

Operator:

[Operator Instructions] Our first question comes from the line of Toshiya Hari with Goldman Sachs. Please proceed.

Ganesh Moorthy:

So the price increases in 2022, we're -- at various stages, and different based on customer what contractual agreements we had with them. Our philosophy is the price increases are there to cover the cost increases that we saw in 2022. So we don't have a nice, easy breakout of what was cost driven -- price driven increase versus product shipment increases. And that is a component of both obviously. The intensity of cost increases we're seeing in 2023 are less than what they were in 2022. And we have not really made any judgment yet on price increases for this calendar year. Our intent would be that at some point, we'll look at it, and again have the same philosophy that we want to make sure that the cost increases are covered in any price increases we make. Pricing for us is a strategic exercise. It is intended to make sure that customers get comfort in being able to design, proprietary designs that they're going to run with us for a long time. It is not a tactical exercise to be able to maximize either the price or the revenue or the profits that come from it. Thank you.

Vivek Arya:

Thanks for taking my question. Ganesh, I'm curious, do you think the share gains that you're seeing when I compare your sequential or year-on-year growth in calendar Q1 versus your peers. Is that a cyclical thing? Is that a structural thing, because many of your peers also have lower consumer exposure. They have high industrial, automotive exposure, and many of them have guided sales down, yet you're guiding it up in March and suggesting that they could grow again in June. So I'm curious how much of this is just a cyclical issue where you just had a difference and when supply was available? Or is it really you're gaining share or there is something more structural and you can maintain this kind of market share gain advantage over time? Thank you.

Vivek Arya:

Thank you.

Operator:

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

Ganesh Moorthy:

Firstly, we're not trying to guide anything beyond the June quarter. And for June, like we did in prior quarters, we're giving you a directional expectation that we have, but not an absolute expectation that we have. And we'll get to that when we get to the May conference call. But for now, we feel confident we can grow in the June quarter on top of the guidance we're providing in the March quarter.

Ganesh Moorthy:

Thanks, Gary.

Joshua Buchalter:

Hey, guys. Thanks for taking my questions. This is Josh Buchalter on behalf of Matt Ramsay. I wanted to ask you about the capital return program. I think some may have expected more binary event when you hit the leverage target, but you're taking the more gradual approach. You called out the rate environment. Can you walk us through sort of why the decision to more gradually take it up? And then also is there I guess an intermediate target leverage where you would stop doing debt repayments altogether and just do 100% repurchases and dividends. Thank you.

Ganesh Moorthy:

Joshua, if I will add to it, I think, circumstances have changed from 2021 when interest rates were very low, money was freely available to where we are, and we have to adjust as the circumstances change. And that's what the Board in its deliberation had to think about, and decided in terms of how we're going to go forward. We're absolutely committed to what we said. But we're going into glide slope, that is different today given what we know is the circumstances today.

Ganesh Moorthy:

Thank you.

Raji Gill:

Yes, thank you, and congrats as well. Wanted to get a view on the trailing edge capacity. How do you see investments in trailing edge capacity going forward with future projects on 300 millimeter. There's chatter that other major companies are increasing CapEx significantly. So just wanted to get a sense of the view of the industry on lagging edge capacity that's obviously been the issue with supply constraints, and how do you think the industry is adjusting to that dynamic?

Raji Gill:

Thank you, Ganesh. And for my follow-up, with respect to lead times, as the lead times come in, you did mention that you're starting to see some order push outs, your goal is to kind of get to 26 weeks by the second half of the calendar year. I'm just wondering if you could elaborate a little bit further on customers and their backlog. As you -- as they start to reduce long lead time orders as more supply comes online, do you anticipate more order volatility, or how do you manage that? Thanks.

Raji Gill:

Thank you.

Operator:

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

Ganesh Moorthy:

So we would expect that our internal inventory is likely to go up from where it is. It will get to a point where it will reverse course, I don't have a precise time for when it will. The channel inventory is really in the hands of the channel for them to decide at what level of inventory do they want to run consistent with their working capital, their customer support requirements and all of that. I don’t know, Eric, if you want to add more on that.

Ganesh Moorthy:

Now the way to think about the inventory is this is inventory of product that are very long lifetimes. There is no obsolescence risk on them. It is positioned well to respond to customers and their requirements. If there is a stronger up cycle in the second half of the year, it gets us in a running start to be able to go do that. So we don't see the inventory levels that we are seeing today and predicting for this quarter has anywhere close to being an issue for us.

Ganesh Moorthy:

Thank you.

Toshiya Hari:

Thank you for the follow-up. Maybe one for Steve, just on kind of the philosophy or the approach toward the PSP, I personally was under the impression that you were pretty adamant about customers taking product at least business that, that was tied to PSP. It sounds like you're being a lot more flexible with that, I guess what's changed over the past couple of months. I completely agree with you. It's a win-win, if you -- I guess go for a soft landing, but curious what's changed internally and around the philosophy there. Thank you.

Ganesh Moorthy:

So the philosophy of PSP backlog being high quality backlog, something we would like to get and have on our books, hasn't really changed. The non-cancelability of PSP backlog hasn't really changed. What we have always said is that the non-cancelable part of it is not where we are willing to negotiate. It's on the non-reschedulability or the ability to push it out that we are. And we are working to make sure that where we see customers who have inventory and other customers who don't have product, being able to take and redeploy from one to the other, and that's a common sense way of set -- of helping two customers with one action that we would go do. On the other hand, where we see potential customers who need some help in terms of pushing inventory out quarter boundaries as the case might be, we'll work with them. These are long-term customer relationships that we want to have. What we've always wanted was responsibility from a customer placing PSP backlog on us to be able to honor the non-cancelability, because we make commitments based on that responsibility to our supply chain. And I think you got to have some reliability in the people in that chain who make and meet commitments on the non-cancelability.

Ganesh Moorthy:

Thank you.

William Stein:

Great. Thanks for taking my question. You noted that OpEx is tracking below your long-term target right now. And I'm hoping you can help us understand where or maybe give us some expectations as to where that should trend through the year and then longer term, should we expect this percentage to increase?

Ganesh Moorthy:

Will lead the way I think about it philosophically also is that the OpEx investments we make are also critical investments that drive future gross margin improvements, future innovation for delivering to our customers. And the whole growth and profitability of the company is dependent on making good operating investment -- operating expense investments. And so that's why it's important to keep the investments consistent with where growth is, but for long-term growth and profitability.

Ganesh Moorthy:

Thanks, Will.

Ambrish Srivastava:

Hi. Thank you very much. I'll speak for myself, Ganesh. And Steve, you guys have proven me wrong. I thought, okay, it'd be. We have never seen this kind of "soft landing". So two quarters in a row, you have shown and you're given guidance beyond the quarter. So kudos to you for that. But I just wanted to drill in a little bit into a point you made Ganesh. You said that the lead times coming down to 26 weeks, and you made some comments on the PSP as well. It sort of make sure I understood, what are your assumptions for the second half demand that is kind of baked into your comments as you can get lead times after 26 weeks in the back half.

Stephen Sanghi:

Let me add to that a bit. Let me add a bit to the answer. As you have seen, many of our competitors and others in the semiconductor industry actually go down sequentially for the last couple of quarters, and most of them are guiding down for the March quarter. We have been growing every quarter. And Ganesh mentioned that earlier, has to do with our end market mix, focus on mega trends, focus on total system solutions, and we've been gaining share. So not having gone down all this time, and still guiding growth in March as well as June quarter. When you get to the second half, it's quite possible that others are saying second half demand will pick up again, that we get the wind on the back in the second half while never had gone down in the last two quarters and the forward looking couple of quarters. So that's the thesis of soft landing where we just didn't go down so far, and we pick up wind again in the second half. So looking at the that way, how we are differentiating ourselves.

Ambrish Srivastava:

Right. Thank you, guys. Appreciate it.

Harlan Sur:

Good afternoon. Thanks for taking my question. On the commentary on higher inventory levels driven by some of the supply and demand dislocations in China due to the easing of the zero-COVID policy, it looks like you guys are proactively helping customers here by pushing out shipments, maybe decreasing your sell-in into the channels in that region. Does this imply that within your March quarter guidance, that China region revenues will be down sequentially? And just given that China is through the first waves of COVID here this quarter, are you starting to see some signs of demand improvement?

Harlan Sur:

Thanks, Ganesh.

Harlan Sur:

Thanks, Steve. Thanks, Ganesh.

Operator:

Our next question comes from the line of Christopher Rolland with Susquehanna. Please proceed.

Ganesh Moorthy:

It remains well over 50% to this day.

James Eric Bjornholt:

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

Stephen Sanghi:

I mean utilization is essentially 100%, right?

Stephen Sanghi:

Every wafer we can move and every unit we can move to the factory, we're moving it.

Operator:

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

James Eric Bjornholt:

We don't really have that information to share. We just have anecdotal information from individual customer conversations, Vijay. So we don't get any sort of reporting on inventory being held by any of the end customers. We get that through distribution, and we shared that in my prepared remarks, the distribution inventory was up 3days in the quarter. Outside of that, I don't have anything else to say. I don't know if Ganesh or Steve would add anything.

Vijay Rakesh:

Got it. And then on the lead times, obviously, a good thing that they are coming in. But is that a function of broad industry supply improving? Or is it more a reflection of demand? Or how would you parse it? I guess, especially if we look at the different markets, right, every market may be different?

Vijay Rakesh:

Got it. Thanks.

Operator:

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

Ganesh Moorthy:

Let me take them one by one. So what I said was that China had weakness in the December quarter, and they were from two different COVID events. First, the lockdowns, then the reopening and the spread of COVID that took place. And that caused havoc at many, many of our customers and where it was at. We are expecting that those are behind us in this quarter, and that's what the information we have and the early signs we have are. And so a good chunk of this quarter is still ahead of us. We've just gone through January, almost 10 days of that were used for the Chinese New Year. And so we have all of February and all of March. And so in that context, we think China will be normal in this quarter. There's no incremental weakness compared to last quarter. And in fact, the COVID issues are largely behind where they were last quarter. In terms of customers who have inventory position, this is not something new. We've mentioned it in prior quarters as well is that if someone self-identifies as having product that they would like to get later, we will take that information and find other customers to the extent we can who can use that product and are short today so that we match where there is a supply-demand imbalance, but it's in the customer's location to be able to do it. And there's no particular end market where that is giving us grievance, et cetera. Clearly, the whole appliance market is one relative to some of the others where there is more weakness than that. But there's always going to be customers who can be in any end market who ask for relief to be able to help other customers. And we will, to the extent we can.

Ganesh Moorthy:

You’re welcome.

Chris Caso:

Yes, thank you. Good afternoon. I have a question about the manufacturing plan, given your decision not to go forward with the 300-millimeter investment. I guess for one, just what's driving that decision? And does that remove any possibility of internal capacity expansion going forward? And then following that, what do you think that means for Microchip competitively? Are you confident in your ability to get third-party wafers at competitive prices to support your growth going forward?

Chris Caso:

Okay. Thank you. As a follow-up, there's obviously been a lot of discussion about the PSP program. And I wanted to ask on it, in the context of as you achieve your goals of getting lead times down, what do you expect your customers' reaction to be? Obviously, the PSP program and bookings so far ahead was something we hadn't typically seen in the industry for Microchip generally. Do you expect that customers would naturally wean themselves off of PSP or at least put a smaller part of the backlog in PSP if the lead times come down? And clearly, it sounds like that's not happening right now.

Stephen Sanghi:

We said in our prepared remarks that we collected $385 million just last quarter from customers who signed up for a long-term supply agreement. So our customers do not see the environment that has lots of excess capacity and people are shutting down factories and laying off people. The capacity on the nodes that we use is still largely constrained and customers are still concerned about getting long-term capacity, and they're giving us money and signing up long-term supply agreements for us to put that capacity in place ourselves or to sign up with our foundry partners.

Chris Caso:

Got it. Thank you.

Operator:

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

Ganesh Moorthy:

Joe, book-to-bill in our business has never been a meaningful indicator. We're making proprietary products, but the customer doesn't buy from anybody else. It has always been an indicator of what is the customer sentiment about where the business is going and what kind of lead times are they going to have to prepare for. So clearly, in an environment in which lead times will start to come in, customers will pull back on some of the bookings. And I actually -- I said that in my prepared remarks as well. It doesn't mean that their needs have changed. It doesn't mean that their usage patterns are going to change, right? It's just how they want to work with us. Now customers also have been burned pretty badly over the last couple of years on trying to kind of optimize the last 5% of where they're going to hold inventory, et cetera. And so they do have an approach that is not tactical. They're trying to be more strategic in how they think about things. And where the bookings are low, our bookings are high, we know that they're going to come. And if I go back four quarters ago, bookings were out of this world. And we were seeing levels of bookings that were incredible. But that didn't mean we expected business was going to double next quarter or the quarter after that. They were being placed out in time. And so we feel good about where our backlog still is. We still have multiple quarters of backlog. We are still getting bookings that are coming in at a lower rate, but we think they're high-quality bookings because we're not expecting that they have to place backlog beyond a point where they're comfortable with. So I think it's a good environment at this point and bookings are low, but that's okay.

Operator:

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

James Eric Bjornholt:

Okay. So I will take both the questions and Ganesh or Steve can add on to it. So you're asking a guidance for the next year, does 10% or 11% make sense. We've made no comment beyond what we are going to grow in the March quarter other than we will grow again in the June quarter. So I can't really provide any color on what you're saying there. On gross margin, we are actually guiding gross margins to be up modestly in the quarter. Last quarter, we were at 68.1% non-GAAP gross margin. And if you look at the guidance table in our release, the midpoint of guidance is 68.2%. There's a GAAP and a non-GAAP column in there, and maybe you're just looking at the wrong one, but non-GAAP and GAAP margins should both be up in the quarter.

James Eric Bjornholt:

So we aren't at 68.5% yet. We are guiding to 68.2%. Our long-term model is a range of 67.5% to 68.5%. And we've done extremely well. We got to where we are very quickly. We just announced those targets at our Analyst Day in November of 2021. And we are always looking to continuously improve. So I would say that over time, as the top line grows, we think we will be efficient. We will be introducing highly value-added products that can drive higher gross margins, but we have not changed that target at this point.

Vivek Arya:

Understood. Thank you.

Operator:

Next question comes again from the line of Harlan Sur with JPMorgan. Please proceed.

Ganesh Moorthy:

So clearly, the reference designs, both ourselves, our partners and how we go are a key element of how we go and provide total system solutions. But really, we've taken it from just reference designs and products at the design stage to how are we conceiving our solutions, how our businesses working together to create products in parallel that together create the hardware, software and services that are needed for customers to be able to adopt a large portion of their design with our products. And so it's a complex set of processes that we are working on. You're seeing some of the benefits in terms of the differential results that you've seen with us. There is not an easy equation I can plug into that tells you, okay, this is the rate at which it's going. But you can see in the total results for the company, and it does come from years of honing in all aspects of the total system solutions from development to go-to-market to sales to how do we ensure that those designs stay and stay sticky with the Microchip solutions.

Ganesh Moorthy:

Thanks, Harlan.

Ambrish Srivastava:

Sorry about that. Thank you. Thank you for accommodating me in a follow-up. I had a question on 300-millimeters, Steve. I thought when you started to talk about it, you made a very compelling argument of why there hasn't been enough capacity, and then ROIC is a very compelling argument of why not doing it. I just wanted to make sure I understand the comment you made, Ganesh, that with your partners, you feel comfortable that they would be investing and we won't be back to that again in a -- I don't know how many quarters from now that we're again sitting here and saying, hey, look, there isn't enough capacity. So we feel comfortable enough to not go forward because of the commitment from your partners. Is that the right takeaway?

Ambrish Srivastava:

Okay, got it. Thank you.