MCHP - Earnings call transcript Q1 2022 | Microchip Technology Incorporated

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Operator

Good day, everyone and welcome to Microchip’s First Quarter Fiscal 2022 Financial Results.

As a reminder, today’s call is being recorded. At this time, I’d like to turn the conference over to Microchip’s CFO, Mr. Eric Bjornholt. Please go ahead sir.

Eric Bjornholt

afternoon, good and you, everyone. Thank

of that of During such be or call, wish predictions actual recent events filings to We you performance business give may business materially. will may or conference Steve projections cash impact our Microchip’s and results that the that and commentary Steve the attendance on are XXXX well I caution press factors as releases In CEO; results on fiscal-year and on that an identify with financial quarter our with our environment guidance. refer And events well and today course Microchip’s then Sanghi, Moorthy, making future other financial we regarding as We of this forward-looking and will statements our important provide SEC risk you Ganesh strategy. differ company. comment the of the future Chair. to statements today Executive our first update financial will are operations. Microchip’s performance. return and as will me our as President results Ganesh

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

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

to GAAP comparing release, which posted we when a reconciliation results. investor have of press our useful at reconciliation page non-GAAP our find our relations believe We website full non-GAAP GAAP on the on will included www.microchip.com, information and and you

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

these in activities, on effects prior quarterly of on points than be margins about is billion, on compensation which of sales, net a and Other guidance non-GAAP the adjustments expenses. of X% expenses quarter May the X. in certain the now operating was June results some share-based midpoint described our basis, to which results, gross above press We will and the XXX will were sales, as basis $X.XXX referring I to our net go and Net our operating release. up through sales other acquisition based sequentially, given including

at at GAAP our a We have posted on your $X.XX impact GAAP as line the a a by website expenses reference. record of On demand product our of include geography costs, and basis, well acquisition special or and for guidance. record include total gross summary gross market operating $XX.X record share-based expense. was compensation margins record were of net XX.X% On and as non-GAAP in million XX.X%. $X.X diluted net million. $XXX.X were sales million, $X.X share-based our share million related net share. Non-GAAP compensation the acquisition the basis a per record and $XX.X was million Non-GAAP diluted $XXX.X million and a $XXX.X charges a were amortization of and was income margins income above of XX.X% of of $X.XX, earnings million, of GAAP our a other midpoint intangible was operating June quarter of per and $X.XX $XXX.X income Total million.

was the expense of tax associated factors. limitations releases reserve a statute impacted tax quarter Our with by GAAP June expiring. variety of Notably

operations X% associated Our with expect audit tax, and global prior we tax XXXX structure the quarter, into cash settlements fiscal in any rate was non-GAAP rate Microchip transition taxes non-GAAP be in to potential tax for the cash tax the any tax years. our to X% about fiscal of related June restructuring accrued exclusive Microsemi the

XX days our from the level days, at We level. a was which had the from XXXX Our distributors days is XX Inventory the were quarters’ the down June $XXX.X inventory low in the million. at June prior at a XX, at end at record of was XXX quarter, day end which of quarter. balance inventory the and one of quarter down prior

becoming We possible to as at $X offering XXXX another us requirements. this that as note bearing from much support senior factories so external X.XXX%. In company. X.XXX%. billion maturing product secured grade customer X, internal X, capital We can ship interest the on are senior June enhance $X bond note and as an on repay and structure transaction XXXX our of We to ramping an we interest rated believe path to issued proceeds for September continue we in matured secured a that had the billion capacity our our we a was on June rate to quarter, investment use this excellent

the from at a operating cash flow activities June record was in Our quarter. $XXX.X million

of down $XXX cash paid $XXX.X quarter. in was debt XX, We consolidated total our and million position million. June June As total the of investment

the to paid dividends substantially since all cash have we excess down Over this over we closed allocate our Microsemi continue incurred billion debt. and debt almost quarters beyond the down to full aggressively acquisition, last in and billion of the $X debt to do so, bring XX $X

have the as testimony feel market of a which to our as our well this ongoing and adverse We macro is during time cash of the most accomplished period, we business, this operating despite capabilities discipline. conditions generation

expect continue to to We the over reduce next levels debt several significantly our years.

and was $X.XXX month the record a billion. million XX in EBITDA June record Our also trailing adjusted adjusted quarter our a was at of EBITDA $XXX.X

adjusted equity-like our XXXX, March XX, at in to matures convertible from down long-dated was EBITDA at very nature that debt in net June XX. debt there’s X.XX Our And X.XX XXXX. excluding more

June million. were quarter Our dividend $XX.X expenditures the in million Capital quarter. June was in the payment $XXX.X

and XX between Our forecast for the capital is September XXXX million. million quarter’s expenditures $XX

to for expected expenditures between million. all $XXX XXXX and are $XXX year million capital be of Our fiscal

our industry lead fiscal originally longer than times due due expenditures year deliveries capital to in lower planned reminder, to XXXX out equipment conditions. a came As pushing and overall

maintain, growth to We operations expected our operate and the grow continue to to business. internal our add equipment support capital of manufacturing

production it our September the June to was over periods industry-wide us these now expect expense the the control to as quarter. to margin in over improvement the constraints. will Ganesh? investments of us Ganesh our the We of during capital comments give for will well $XX.X and quarter, quarter Depreciation business business guidance give increased gross bring June our performance turn I million. on as in

Ganesh Moorthy

Thank you, everyone. good afternoon, Eric, and

results the from Non-GAAP absorption. improved quarter points strong, revenue X% Non-GAAP ramp up operating XXXX basis to June to XXX leading our provided cost an margins on and and year-over-year record a a as quarter and was basis, up were all points internal Our time at basis sequentially, revenue our was was X. growing factories higher year positive fixed be our quarter note. of was June billion May of continued On a on June margin off points midpoint benefit quarter record continue the fiscal record March XX.X% guidance quarter. XX.X%. basis XX XXX another than from March the we also gross from up XX.X% our $X.XX

find was a partners set outstanding results The Microchip record. record business records. not efforts Our $X.XX stakeholders year-over-year also June basis, the achieve capabilities new our revenue to only microcontroller and record consecutive work our who take On and guidance this continuing all XX.X% very but microcontroller profitability. strong marked business for an lines team supply constrained was high line difficult our of through revenue whose with cycles. chain was our to would our who compared of June navigate end $XXX.X at delivered XX%. results, XX-bit to look our at a customers quarter X-bit, XXX to to non-GAAP in Taking to a these business a consolidated our financial quarterly was occasion And new worldwide share. from above EPS demonstrate per thank the achieved extremely and June again EBITDA in creative XX-bit, Adjusted non-GAAP quarter. as product and perspective, environment. quarter quarter a generation of at like constructively sequentially tireless our our all time of us revenue product a March especially cash the quarter supported and established up the enabled the quarter profitability challenging Each up strong environment I and million, another record the the the June robust to thank and microcontroller solutions

quarter. many customers product a wide require rumors of been microcontrollers the told have exaggerated. solutions of X-bit XX-bit our fragmented, in depth we represented of our lines. and times past applications the microcontroller The XX.X% served the you span and in highly of the As range by June greatly and have of that revenue not microcontrollers, breadth Microcontrollers

X.X% up up to of back was the sequential the a revenue as basis, up also revenue setting from our sequentially Other analog our was Taking XX.X% March analog revenue March represented June a revenue at compared process. look the of in sequentially. perspective, record XX.X%. June performance geographic off business and revenue of On the quarter. quarter, growth very in XX% Americas June X.X% in March June Other the Analog than quarter. in sequentially, sequential came the down a quarter. X.X% quarter Our sequentially Europe year-over-year decline XX.X% a revenue bouncing was quarter, in which represented X.X% was our up was better is typical the quarter. seasonal from our a in a strong X.X%

and constrained the of or conditions through to sequentially our quarter implement the markets an our up From in quarter. the be continued most exceptionally for improvements be product continues outpaced to better the to PSP, XX% the bookings than able XXX% were with capacity capacity we in Supply backlog we market end multiple reflecting was XX.X% perspective, our were by strong typical accentuated over shipped Preferred backlog strong be a quarters areas. were or Business growth. product all quarter. Asia Demand backlog strong over able which record of end make in seasonal June to and Program to aggregate

stretch chains. manufacturing backlog, lead for As We constraints significantly our and to of quarter which climb continuing want all internal resulting in to June a factories line items in related our experienced continued many result unsupported the and and external out. supply to shipped their customers time

assembly and proportion to our constraints backlog and well PSP secure continue wafer least possible. at constrained factory and a with for wafer raw combination We at ramps. hire position, in we revenue we each is especially we of materials the Through solid through partners who of to expect next chain be support internal work growth four test assembly, the Despite fab our that capacity persist supply least We have foundation invest employees actions as capacity, of giving will believe to wherever backlog expanding support closely taken, acquire foundry, and that external test also us our a middle factory provide quarters. to we position prudently XXXX. to that, as of expect in the the materials, additional will

business, we our believe investments in Our well fill outsourced edge, spending increase opportunities level our gross and capital test workhorse market control as for be to years capital consider are for will to rising fab, spending of give in trailing and capitalize response destiny be the come. by they capacity opportunities trailing may on improve technologies but in us over as technologies which in partners plans in edge The our to and growth to us growth will gaps enable increase that us technologies. for more to many share, our margins, our assembly

utilize goal their will ours. not be may is the constrained outsourced of available But which capacity to with our our by priorities less continue We partners. from align course investment to

to given very looked our view, spending believe year, the a rolling intensity slightly guidance. expect have any at of of much in of also revenue our the in in range the capital X% capital will guidance past. in we we that We X% When may while and we context be year the be provided three higher

Now, me the into the quarter. September guidance for let get

Our backlog is quarter for the very strong. September

growing have we quarters into the cannot quarter today chain because very later call the considerable This entire from we the be currently by have is constrained. discussed addition, customers us last fulfilled requested on quarter. remains factors supply capacity September In Taking that all semiconductor until consideration. in backlog despite the

sequentially. X% the our net be sales between X% up expect quarter for to We and September

assumes of the remarkable resilient of pandemic was level believe diversity how given our achievement future would during over that which for revenue quarter, guidance, work the guidance of itself. of September We even quarters. Our constraints, in some meaningful. making others through market year-over-year tougher during quarter revenue be continued we operational be range be the worked thus XX.X%. At more will to of growth a But our year-over-year and ago the midpoint the would carry end so our exposure, in year the our business would comparisons much that of because and this

For the September to and quarter, we XX.X% expect sales. non-GAAP between be XX.X% of gross margins

We between expect of and XX.X% sales. non-GAAP to XX.X% be operating expenses

our be And to share. per profit $X.XX we and operating and be sales. share per XX.X% between of per earnings non-GAAP expect to share, between XX.X% $X.XX expect We non-GAAP

another September also in quarter. approximately of We debt the expect to pay million down $XXX our

we gross and targets long-term margin just the Now, to guidance with recognize our operating you us nine months gets that ago. we percentage effectively shared

working annual our and will our margin with We be conclusions year. share business operating you update for to we’ll growth, And margin gross later model percentage. this

first to report continue a the all accounting more acquisitions acquisitions, to Given except which GAAP results a intangibles, meaningful sales, quarters, non-GAAP call. of on we complications comparison estimates it that our be to and restructuring to and guidance will analysts of charges, net We provide track basis, provide amortization on will on prior inventory continue for right non-GAAP basis. that for and their believe including request up Microchip results non-GAAP

pass to me about to let return shareholders. Steve cash to the talk Steve? Now, our baton

Steve Sanghi

and the XX.X% you, note of years in one, our to margin results, three time record significantly financial we At we I in non-GAAP the following. Namely at respects. gross of from XXXX I on percentage, and would Reflecting time by proud XX-bit EPS of to to Thank the return operating individually results that have continue acquisition. Microsemi, June analog sales. product the run after delivered cash records employees many our the and and journey updates strategy. all and Today, quarter our net new on Microchip strategic lines, cash which EBITDA new $X.XX another margin, good midpoint provided further anticipated everyone. and of percentage, Reflecting Ganesh XXXX our exceeded non-GAAP achieved all very model that making the just $X of we like I today year on X-bit, the records you afternoon the provide financial in time quarter record exceptional since EPS Between Number on reflect net the non-GAAP also above record in adjusted our the target and be microcontrollers, each sales, our record operating acquisition, XX-bit guidance. record flow of third operations margin $X.XX XX.X%. time operating quarter at of indicated we non-GAAP at guided quarter. the EPS acquisition, for that first long-term for acquisition a of the we’re the also the we announced an achieving end of September the quarter for June March ago, rate And we the announced

was we of effectively headwinds billion years brought a you. the have were billion a In down to trade leverage tensions which down not well the of $X.X we as adding international three know last faced These to exceptional matters leverage years, quarter predictable achieved which Microsemi driving financed have results were expectation. this for two; the debt, delivered net as $X numerous global the cumulative tariffs, concern from paid on three we ago. we by and XXXX despite Number acquisition a We pandemic, the up of ratio debt June ratio net X.XX, our in X.XX. many and

down, within We based the generation to continue and strong significant three, EBITDA continued debt in of Number all substantially our paid last to pay business shareholders dividends generation every allocate we cash quarter. beyond debt achieved what on and cash to pay the our are bring the the year down of target adjusted leverage rating we At quarter grade stable We to rating their Fitch, and our positive we an pay achieve further change to fiscal debt outlook. down. on the of net down investment believe to rate, sometime outlook and end a expect by Moody’s we both XXXX. our had from

provide return our Regarding the to more return cash strategy, to continuing we shareholders. cash are

over quarter. Just please quarters, sequentially, and today, more increase cash that, ago continue you operator of with largest to by X.X% return for will per shareholders. expect $XX.X And share, With year in coming we a by we third announced dividend XX.XX% increase to dividend poll the the to our the questions? actions increasing dividend a

Operator

[Operator Absolutely. a from Thank so question And first Sachs. will with today Goldman you our much. Instructions] Hari come Toshiya

Toshiya Hari

you taking results. the strong much thank question guys, Hi so on congrats my and for

your to gross talked rates? strong your about, the Ganesh going it very margins wanted what expectations? margins as clearly forward, as margin. you well forward? primarily of about ask gross you quarter ability should utilization line June model, vis-à-vis there results and end as about in gross Just the to processing And the was in there upside you about, beat. test, potential outlook I margins drove And, Thank with the quarter, you your and behind end above in guys think in the guess the as performing Or long-term front Was how we curious, the think terms in something source both in else already going coming high forward. upside guidance, wafer with going you. assembly expand Again, of

Ganesh Moorthy

have to Let I’ll second Eric respond me respond part. first to part, the the and

Eric Bjornholt

the with. your our gross orders, at resources, we know we we to with utilizing time, on what so and quarter, And Okay, efficient manufacturing that this are our point have quite margin in being operation. we’re manufacturing in do fully more

in can, increase really, effective just best test have. we But our that and we assembly we’re of percentage major as was the So And equipment utilizing of that investment the quickly it’s capital, and that utilization obviously online what as internally. in capacity. driver to continue do bringing make factories we

Ganesh Moorthy

just long-term the there’s we the are are, described, of how year some with Many we discipline. numbers. But comes drivers And you question, some back more are play, which how all Those that we will will a there should will a in model some with come we gross time complete more mix to to richer second There’s back going to to, sourcing. be. picture what pricing and what see where later them of where important we is be be process thought we’ll as what that into do parts. you we you time, to building and come put give get your into we need what over this time product To can margins some to get us then be.

Toshiya Hari

Thank Understood. you.

Operator

Pitzer John we’ll Thank from Suisse. Credit you. And next hear with

John Pitzer

of a strong the on your congratulations down the guys, rely is there, end what’s positive, to in model, are XX then just astounding happening of closer getting me two, and more inventory that more valuable. margins? And on inventory to for customers might and the Yes, an little yourself Thanks case, pretty see the that makes disti what on it risk time, you in disti going inventories do now one. that to disti going Ganesh, bit ask build it’s I’m mean let question. disti results. strategically? idea a on in see, for can kind can’t days, of And given curious, less kind this customers what there’s just management, end of time of you over so kind

Ganesh Moorthy

are distribution the that. to their number production we we has to able for to at, as unable get can, John, ship but some them At because form. we part across that in through, doing downs for we’re their get or to want, large where place. cases grow is customers them pretty they over requests distribution In spectrum. to ability are medium is on to the lines customer point, When represented nor be direct number inventory customers getting inventory. customers. as But group help all look to more in able able them the help than other. term, grow in any if product. more But who we our product right? than are of continue trying indirect the get or one constrained all and It source trying to So it’s moment, the are the be the short what up isn’t and better are build neither meaningful one customers well of to inventory are more distributors get they There serve constraints either will some to through the of that, low, we not a the distribution are shortages,

you of or I’m so And inventory inventory customer distribution, something building a read days into can seeing not channel that, the inventory. in way

John Pitzer

to second you’re this so disti the get of capture structurally customers, does to now? that that for some maybe margin of change Ganesh, giving there And is my distribution question and opportunity them half you, the model and closer an

Ganesh Moorthy

to someone we But of relatively reaching help. channels, clearly the necessarily if and who then us direct, adds us escalation, shift it. a And customers wants be is that that through good them. part on customers important opportunity or distribution So, effective from serve. channel an wants will payment from for tail our directly for that customers we have they reach time that to channel final so serve of find ways value see to an to not distribution But an agnostic what the long who that in support, for have that bringing they so inventory And they to someone directly. have XXX,XXX other we’re of distribution have is get they do to move be continue of with through is of distribution doing, from to And buy stay are the they be when to choice in customers Clearly to opportunity they them distribution. customers. is that we model channel, in XXXish, make does web to and buy buy whatever distribution an they off value and direct, distribution that buy to terms mean want more buy, opportunity where to so them. and most they the pipelining that But, it

Eric Bjornholt

today. low part they sorts which John, They distribution provides. I value with but services Also to that’s inability value distribution will our payment add shape only of And provide provide provides. very not the they that inventory of is the one charge. carrying customers programming, to have clearly, they terms, all kitting, do inventory that only for for

distribution think an very, will important which reaches strategy, long of continue I very Microchips to element So, go-to-market be a tail.

John Pitzer

you. Thank Eric. Okay,

Eric Bjornholt

Welcome.

Operator

And Vivek Arya of hear next, you. Bank we’ll from Thank Securities. America with

Vivek Arya

Thanks for taking question. my

You case, it’s of rate with the the quarter; in about is quarters. the kind if the the incremental that for supply for September could growth, you I gave seen a we think Because if really how growth line quarters? sequential by online I rates, X% to come X% driven expect to few that quarters, should believe grow sequential we growth this in said correctly. have last Is next being supply the and several on heard that next has Ganesh four sequentially in

should as to the Thanks. mind, be X% model in try we keeping we X% four quarters? to So, growth sequential out this rate next

Ganesh Moorthy

So, I kind providing to of clear, want goes not any September be quarter. we’re beyond guidance that the

outsourced assembly, our capacity partners who we’re increase of that constrained we supply. not working doing our by supply in are are growth control, is are our work do is and we runs tests, our that. all on through. with to were but our in us And supply there capacity with materials our what all improvements making demand, And through manufacturing partners internally, bring what We working by today, on supply at that of working we’re There improvements. each fabs are improvements clearly chain which our of our

will which will in confident the guidance you and capacity how and the come March we’re expect stable we as know But to think all capacity quarters a December growth quarter-by-quarter the growth, for what and have don’t the enough that. do think, the we we’ll see a and to bit that. bring hard coming give get June each on on subsequent do on what I So, But we quarters we quarters. because, that is when in coming call in next capacity all there. enough we have the that And four the timing of equipment is we will on, I environment exactly see in

Vivek Arya

Thank you.

Operator

Thank Ambrish from you. with And next hear Srivastava BMO. we’ll

Ambrish Srivastava

you thank natural that you. program? the a we’re back it must industry, said equation of you this? under business is there to XX% feeling to this capacity. And over Can PSP Hi, the kind and tougher to think to a a get back both we that analog. Ganesh to, get be I microcontroller and was tied is of And it’s very getting the to fragmented XX%

versus So, there’s do what person are they is thinks only doing, the everybody but it’s what not you DRAM, capacity guys balance how others other increase three know of like doing. and kind

So, you oversupply? potential down versus and Steve, there when do Ganesh balance the could a road the be capacity how increase

Ganesh Moorthy

right. the PSP me Let start first on question,

really the the early to Our PSP backlog backlog. we important exiting extend was PSP the launching program. the continuing as June during metric something in to time that customers to And us And throughout was well quarter the have the they’re as convey is providing quarter. that of over stages XX%. it program, grew enroll us the But, the

at it in backlog our will that of just Certain or we already, whenever it And us side we us can better XXX% rather a to provide are normal point it, and I’ve business part so a, those it who customers month-by-month corridors, gives us time, doing. as service in explained, this quarter-by-quarter booked of then update, ways, And gives make have, can we trying sure have it’s we’re to many cycle they that to long-term question, than the place, the ability one managed was the is be visibility, just other manage second your of that a PSP that what what of helps not element to non-cancelable. well. objective is, that whole are That capacity did.

all in of time. trying also get not steps, on, bringing We’re to, a capacity unsupported of short in we’re measured period done the

we’re So quarter, every capacity. increasing

be that so such we’re of doing capacity side. manage on with that to confidence doing what get PSP in us combination and the don’t able steps capacity, And to we’re over and cycle committed what the gives all measured way with program, the of reasonable a we

Ambrish Srivastava

That you. Thank makes sense.

Operator

much. you so thank And

with come Our from Harsh next Kumar question Piper Sandler. will

Harsh Kumar

I results. had for first next guys, Hey, growth the want asked back a go quarters. four to of actually Yes, to question the Vivek that about I couple all, on stellar the congratulations

see comfortable revenue also if demand you for for But So, let next supply robust. therefore are you your the just Ganesh, you quarters. pretty quarters, expect that referring the exist? me next the supply four environment will meet enough you I this in to able And expect be correctly remain understand you’re pretty to constrains demand growth growth solid or have forecasting to to four

Ganesh Moorthy

us. on We have demand very a backlog strong

We have of a substantial portion on PSP us. backlog

– is large to were unsupported. amount continue have a that that We

see very So strong. the very, demand environment is we

Now, the bring supply can we the to our can on? as balance really is much how give continue ability we And us to supply? what see bring lines can And we quarter-after, next giving grow into take line sight quarters, quarter-after-quarter of at the to demand on the every supply and us that having more advantage of that capability least four quarter. for

Harsh Kumar

then in that time, and semi the cash my in yourself, Steve. but And industry. strategy maybe more very one there’s that’s in for flow at established the the cash everybody Understood, industry about for more clarity. from same good talking Steve, follow-up, the so accounting, for thanks guys like are otherwise growth

Or cash us industry acquisitions? the growth? things growing, some help of you we argument? cash Just for But like still with like maybe appreciate that why that other So, the use could not return. balance things

Steve Sanghi

think we ago, I company. below competitors. probably before think, the billion business a a $XXX $XXX acquisition trying we competitive I our company. have we And described we were, process were we scale back we about so have to XXx, were that, that well when begin And $X we don’t XX a only larger disadvantage way against were years the million, is million worth

provide power solution of of can STs some that, analog them building in entire and XX microcontroller that last Ethernet, wanted still Infineons of $X.X and system Maxim’s So having caught others we And of somewhere scaling in connectivity, almost quarter many or so the and years else. but we’re current billion. some TI products around the and and, a really to memories the do by Bluetooth, and portfolio in management up while all XX to in the all larger, we USB, that Wi-Fi, to total at we’re everything the the customers, guidance, ADIs business the excess is running XXx

be accomplished. So a these and complete to we build customers organically two We XXx those scale business the to almost we all things products able solution. acquired

times think a have and the this couple next acquisition we don’t at point in of to be we necessary. that time, find So said I

and here if looking the acquisitions small we’re strategically Given today. opportunity there not on we tuck-in and large really not at because that’s tied, working acquisition, any would arises, needed but

it total very and we your our a from product customers hole somewhere do what $X.X you seeing, don’t and further, with not to working find force seeing, show Microchip have pay do today. And strategically then pocket. in debt of you and do and to And down needed to adopt I’m growth. the pay to larger, already, entire continue have You’re why burning billion around solution we we and portfolio that that use be that? organic acquire, We enough amount able we’re the as as system and substantial sales hard train strategy, we

planning is, getting larger we form and down to then some starting to as what some further, investment the in program. buyback and shareholders, back dividend comes grade we So, the debt and start larger of amount rating, achieve as cash of level the we’re do the

where sort of our the that’s summary strategy is. So, current of

Ganesh Moorthy

any And right, Steve to needed the capital we’re really in business that may Harsh I if allocation to in CapEx was doing that’s to, what then question, built It’s is that respect do OpEx describing. into think what we grow part of I our model. or that with is the every add quarter, business of, beyond your

Steve Sanghi

smaller do of some we years, and buying companies, concluded were maybe when something prior they And in somebody buying maybe the think, something today. important. of I don’t we is strategy out which edge strategy, they’re laid We because think, strategy, sort I phase. had the not else doing, that no longer cutting the XX really part is a acquiring, of And that completed the we

going the we’re therefore, So phase. to next

Harsh Kumar

Appreciated, it. guys. Thanks. Got

Operator

with Sur JPMorgan. Harlan from hear we’ll next, And you. Thank

Harlan Sur

demand have to extended the and the your ability strong congratulations or and may had even the like above early had gap that trends late execution. May, think to gap the were supply May, XX%. either then XX% widened sounds results on said It I Good and remained expanded. Back afternoon by in the team

the as how of if only supply demand wide can us the getting seems stronger. And So is sitting you the today second XX%. is sense half of it give if a demand above we into sort of gap just it’s move as year,

strongly any areas have of end half You softer accelerating like to were are data weak is other first enterprise, center for which first year, demand starting which example, the a and markets where from and half? pick last year this up into

Ganesh Moorthy

where hence, backlog June, on the demand they was was, in well call increase conference said Harlan what backlog. than The end the So, the unsupported Exiting the our as what we quarter unsupportive And have was the unsupported we June. June first in in the, September both was as higher March. will at go we as of could it that it that make. through higher every percentage where we indication expect, of September, end be it exiting improvements than at supply outpaced is the of

continues. So that trend

into We demand question? to itself. converge, are second any the kind of of seeing starting get there a supply not or part Was and balance

Harlan Sur

the as accelerate end markets you’re half? is in Is a slightly Just were demand accelerating move starting feel that half? that year, seeing we other softer center and in weak for first this where the enterprise, of end example, they’re last strongly year like that and half markets a data into maybe of dynamic which any from either into to first like terms second

Ganesh Moorthy

quarter. as So, as said, strong through the went we end all markets were we June

market And what strong I the But data of that year-over-year some correct. But been quarters there well. year. market anecdotally, do prior as you’re is in the half don’t the saying track comparisons a markets centers it. on we basis on what by And quarter-to-quarter don’t right see is Some were recall strengthened weak. no have We in end end them. on now, second of feeling is,

Harlan Sur

you very thank much. Great,

Operator

hear from Thank Gary you. Fargo Wells with Mobley securities. we’ll And next

Gary Mobley

and haven’t some long-term But of I agreements yet. I and competitors XX% on the the guys support seen of give may a entering LTSAs, of your entered front last officially your quarter. to your filings for that guys? XX% coin, and they non-cancelable, question. customers SEC of agreements maybe rank side And for that and some about you the us sense end non-returnable to that on queue in quantifying in you be sourced end have Want externally have LTSAs I the relative more and Everybody, may can are flip what of, just was penalties sales, to back curious side. taking to side supply you how entered the thanks rank backlog them those my ask your into sales your then relative sort or financial they are know know how that

Ganesh Moorthy

have enough with our of any we those respect we in don’t a to how right, agreements, of believe range So been them queues. to I be LTAs have have big

you’re So, That not of see have end, front back this there. with a partners to the long both on going time. point something at worked constructively, quite we in the and set we’ve them

and for we of that’s it. capacity where need do So we to secure our what and in XXXX beyond terms on at are to

this this have on many, many purchase the portions which business, And, our is legal NCNR these, into, on and of new. for are, done we found NCNR on our We’ve have, years the a obligations we’ve the On enforcing side. smaller problems our contracts. themselves, obligations and customer agreements purchase agreement had not there’s not a that agreement, subset we enter side, of that’s a those

Gary Mobley

sense. Makes

Operator

question Truist you. with Our from Securities. next come Instructions] Thank Stein will [Operator William

William Stein

question. taking the add Great, great congrats results and thanks my my on outlook. for I’ll

grow debt or wind EBITDA like that ratio, debt to what ratio would What debt repurchases? capital continued have the that ratio? to Because be get the clarification I’d First, leverage you When adding a leverage around that? And naturally, if is and target certain allocation. after having to you would and up, slow down stop typically decline. your you you’re continuing to plan

So, debt I’m plans clarify the repurchase. the sort around if wondering you tapering can of

Ganesh Moorthy

I’ll Well, this add and Okay. and can start they Steven to on ask to want. if going

independent that. business. even grade debt, have assume we we’ve as and more pay fiscal year, something increase on get buyback it debt decision, we shouldn’t down more don’t by achieving net our you’ll for we’ll flexibility So, to rating. will once have appropriate good believe stopped And debt, there, we to we or have achieve flex we continue dividends can program, but that investment this but our on to paying And, that very you down a rating stock we’re clear it’s the that making focused progress for that made we’re that that’s an agencies, a obviously, stated in EBITDA. target But

you would add to what Steve, So like that? to

Steve Sanghi

might. board really you paying will the at we cash think In has the not that well, down debt essentially of for bottom and I leverage a number have Yes, it number. give future which start debt defined said the back. defined XXX% they not They

In addition, add stop paying debt. even if we Sundays

the which a your EBITDA of and down continue to paying point business rises As also. rises, was without even will one leverage debt, the come

quarter. where that’s in a keep think progress, it’s So update I we are, every you giving we work

in to fiscal we which the we next the rating independent agencies, should That’s of is by by increase lot end board And expect the there point financial the achieve again, comments, then. us have at a, close year a fairly where it’s a year, to flexibility to time, getting said, and grade We’re XXXX, by dividend. investment rating. today. we more buyback March the In leverage my which give but start metrics, I decision also that get program are will that, and

Ganesh Moorthy

just the that, we it’s our significant have dividend but the three made. sequential up I’d three we’ve made in with large add to quarters, increases that year-over-year last increases XX.X%, and in

but the grade, capital step take in next heading it standpoint, the definitely investment we’ll we’re direction right from from there. is and So then a return

William Stein

or of good lot it close part the signs key others, cycle peaking to Thank the looking in wonder one a in going role you what And you. you you raises highlight to us, you’re very fade rolling could around more as can, business to which are. compare – of? cycle Great. think to the some people cycle? and ways questions for this describe could or people I extended if or to a we’re of of are sort certainly about a some cycles reminds I it to how if it’s for provide environment, we maybe how you prior over for how it. this the warning be yourselves One as manage a to peak, there’s as describe maybe this But peak, to

Ganesh Moorthy

many I precipitated what any resembles happening. don’t think extent, this prior and of to them and question some cycle. of what in of are And extraordinary all the themselves cycles unique one at these is

before, in internal many seen indicators is at this unlike ahead us the a are We possibly see run a sell-through, rate to peek have of reasons. something corner to billings, have the and look one around changing. when of backlog. we look at, for able which So, what set to in confidence customers cycle the bookings, they’re They gamut constantly is placing with

Our anecdotal of channel of our executives our conversations customers the many of partners. with

early able see warnings. point, historically what the see of what indication it’s us? no process we’ve we is on to weekly tell does a this data, we of many, At early. And compare things do too. points a meet will many time see, basis data terms of So, that there been and notes of same a the this we hope as I team and in any

William Stein

Thank you.

Operator

And Janet Thank hear we’ll next Quadra Ramkissoon with from Capital. you.

Janet Ramkissoon

what your if going Congratulations, and Thank trends about guys, see on China, demand auto specifically? you you. insights of the from you also, forward what see just more was in if or terms might to give quarter. what some nice I make what and might are, you you any able wondering industry be be the us can in comments

Ganesh Moorthy

China is for of Asia. So, reporting part our

of portion a revenue. fact, In substantial Asia it’s our

expect, a We over thirds is as remains revenue. think that so it geography XX% that two reported I we it little grew strong. it’s performing of XX%, last about quarter, that or

automotive. that to issues China respect demand increase see. With So, no there are continuing we are we then the visible automotive, shipments and what are to to

we the to matter do buy to you their car able automotive automotive we and plans. the that quite we down hear It but that we’re shutting to consistent that they pre-pandemic, customers like are were factories can with build products We for many product for still short well not what would and rate their where providing above growth is want. build is a and supply manufacturing. And a what growth about to our But at also a they so provide are is many, substantially companies higher. of demand shipping have

Janet Ramkissoon

Thank you.

Operator

Thank you And Danely so with Citi. next we’ll from Chris much. hear

Chris Danely

and guess, is guys. from all talked alternatively, worst I anything Actually semiconductor normal to that think do of shortages? that cycles all a cycles supplier? industry you never headlines semis apparently, Do Or Or the sure ever read that future different standpoint? these a politicians again, about anything in any is upturn customer kinds course make is just thanks, And going you cycles there’s these and could you of guy’s you it’s best these your a worst Hey, about the ever. the try do looking the being shortages that prevent do I ever And Or and that this business? argue we looking are think this differently? upturn differently – from just I perspective. are to the guys appreciate guess to

Ganesh Moorthy

The create was of and spend only things part and issues required are. trade tariff had, the they There required the for side we of supply demand work things money they sorry, another consumers spent that not they it, that. a that to got out And created the a lot one it, – of set side make of on to before it home. pandemic electronics part that, issues, but that to circumstances an of and where were extraordinary us year that then was wanted

there Clearly factors et they I we down the run standpoint, preparing brings. then of the many course, many uncertainty are that through they came it how So, future And, their should and able into demand the more are. from think are what inventory go. they themselves, know through, cycles, so – to of they’re far. pandemic I down where took kinds that that in realize and customers are where too taking customers all an be cetera, in stable of thinking our don’t

can I long a to usually, what something, know through determine they next those help of is will what importantly, would to passed to will responses shape more certainly I is respect of strong that. going the And government the the the what don’t where cycles. what selling to to be. demand any don’t a answer think cycle the think government next the are they’re cycle of large from before would and there think think be And building act I a with begins people of even these be extent, causes And I continued the is doing. And be. cycle? when

market industry, to way on do this So, has is same figured this and than with through to don’t very Steve, confident am at. cycles, many, the you’ve that where such I And out build they will I in many know, how consistent the years a adjustments many, in cycle. is do? the that got I make how longer

Steve Sanghi

end two this people that think ago. Well, I in all years not cyclicality cycle be Like is think there’ll forecasted in wrong. been of events semiconductor could the last Ganesh several precipitated have years, that have we business, read I more reports, the said, calling no the cycles, the

from haven’t where medical it line it years. and XX that home we now, sides, the on and create years this now, from Similar a increasing in major in other. cycle in from will five and XX It situations and when that So, seen other pressure a the come supply from created by put decreasing to driven supercycle years happens, again. certain demand, the industry cases both work

repealed. So do been some and really inventory, maybe make those things. larger keep have some cycles People adjustments, will not other

people much play will those and five agreements need excess If are you supply. how there is agreements going to ending. product. their pay get not now, inventory, of see recession, well from work for But agreements a to bad many long-term out that usually. people supplies for needed trying predictable be don’t Some it’s not years a have are will There’ll very

Chris Danely

perspective for Thanks it. guys. the Got

Steve Sanghi

Thanks.

Operator

Thank with you. And from our come Company. next Gill and Raji question will Needham

Raji Gill

of Ganesh I how gross that for price revenue. A you’re dynamic the you quarter. that wondering this well? and that a in were reflected last increases, pricing was I’m on on describing affecting How environment, that kind in the the margin well. one engaged is some congratulations, if quarter, you sequential improvement How pricing mentioned basis taking couple may, thanks as affecting is as Yes, had of the and my the revenue? questions questions,

Ganesh Moorthy

Sure.

increases current along, price on a template the So instantaneously. we largely in to that we we’ve continue all pass material cost do what and depending have get don’t increases And the environment, had. on it they to on increases we the basis regular come cost product to as need pretty buy the a that or

We at will figure which increase it. points go do with will out and prices batch to the it we in it

there’s patch And data. as of in terms and time, when point We at collecting would so it us different time, that’s three there this price absorb. and some there continuous in if process at are a from a is increase. increases months point it pricing, and what If process, the that I the needed, need, along thought that said And cannot in nothing our be ago. in we we is costs pass

Raji Gill

wondering in terms to think And that each nodes. test of will that the which kind four if growth have coming had on on harder? laggy I foundry edge increases, quarters. the areas foundries you you spend is side to more capacity, get was which assembly, for further my I support could follow-up, the of next mentioned on you easier you would in think revenue been are that to reluctant and the capacity of areas elaborate are the do have capacity

but color side, helpful. the be more wafer in it challenging, That on would capacity. a the any So it might bit Thank terms of you. specifically be

Ganesh Moorthy

multiple have area we quarters where have the factories. the in is been most. internal investing our The we And for

from will be assembly and cetera. et in factories, depends So, our and is we doesn’t mean we But we’re getting them is we test the not getting. our more are, the coming, there have we’re our from where it’s expect coming assembly, on it which It partners anything help partners. selective, is correct more our test that control situation control, really from factories, that help where foundry fabs, more we and it’s

Raji Gill

Thank Appreciated. you.

Operator

much. so you Thank

Matt hear from Cowen. we’ll with Next Ramsay

Matt Ramsay

up obviously were Thank pass the long-term of to that under some sort Good you is One the are And you’re And what to or to guys. able follow or length new moderate But those with how program, bit last expect very and putting from stable the input noticed costs afternoon, as little some a if the the releases the is, about on unrelated, there moderate cost negotiations pricing in input durable having? when how change question. down PSP silicon the you’re to if a to place Ganesh, the pricing margins bit, you’re Two going higher they guys. agreements situation some do? to carbide come and given Or question input do much. much second unrelated. costs completely of you I be from you press questions of on customers. a is are,

guys Is a have important expansive past. much week, is a in seems Thank going than it forward? you. right for And how the that you guess you like program read? Within might program the more I that of last had the

Ganesh Moorthy

Okay.

we the nothing XXXX. costs to input at input right, insight say input If costs, to regards the And hand is hand markets, directions I In industrialized into on benefits plays. there our have markets, is is going that revenues with By there, consistent change we point in to components to power is trajectory both an which those So costs up conversion at been input already and bringing it will point growing. products way with part which where bringing and Silicon in the there input a and costs, play are time, out in that indication is is and basis when sooner. we’re that up strategy is it carbide has costs growth of at in about this carbide many nicely carbide, XXXX. that these into in no important important, relook of silicon go time, time. program capitalize changing pricing the which really they have to pretty a of of on in At think starting front, is point going automotive on hear every mean, microcontrollers realizing this and industrial of a our in are silicon I so opportunities, focused,

product a for an important for and yes, big deal we line it initiative growth it. But haven’t us. important of So is it’s, made

Matt Ramsay

much. Thank you very

Operator

hear next Raymond And with you. Caso we’ll James. Thank Chris from

Chris Caso

Yes, going about as thank bit opposed I a you’re you. about a relying Good to more ask evening. bit wanted forward. to what capacity about internal on foundries more talking earlier,

CapEx at causing First, capacity stay expand X% really forward? the recognizing does willingness shortage what and there’s reliance none edge the just kind then happened the of is But the internal left that didn’t within now? foundry same Where you your that. if and why going that, that this we extend didn’t industry lagging on that nodes that to past? to point is the How no And within industry of – X% increase industry capacity, following going it are in in foundry work and you model? revenue how are we really to

Ganesh Moorthy

first a it’s planning have versus to is foundries why cost to done. perspective, they capacity of trailing reaction where of other edge of saying Well, economics all, they aren’t industry think, it’s – That available the that edge have, capacity capital on is? no to consider that foundries in always more? they’re overwhelming, would just lend the So, the not I the well, growth don’t making say lagging is, at opportunity they’re the that of Well, building fast rate And far It’s they normal enough. an important themselves from be not we normal be any that the the they’re you and that they technologies products for ahead that are, they for invested. us. not want that – what is rate seeing these objectives investments, for but so

doing will available to available picking investment. and it across us we to our that and foundry significant is we use partners. well there that capacity our can only And we that’s all board, where not Now, able we’re outside continue be seeing. what that fab, the for true in why choosing as for us, we is mean test we’re constraint and It we’re assembly from be opportunity from to we’re think it. assembly will make we as not will only additional just doing test constrained places not capacity the is true in And try to the Plus, by that sure to itself. of make have partners where to our what

I I seen XX X% if itself, were back think last you’ll previous we X% about CapEx cycle you’ve X, terms that’s to and needed to you mean, of what number, was, years this, to look – X%. have And above where at two X% our we the the the and that’s – In X% gone that. that we in that years, find history, go below at

we breathe think that this a the any it, look it at in gives than But have But will bringing choice And to spend that’s that year, with. gross and was we’ll over in you be If at we in all and capacities take build time, need we growth only had, investing, that more enabled you on, all then look, all year posted. all this we better investing time. what sense. not think to accretive our point let X% we keep would that if our margins, changes we’re time at comfortable it a outside. So, otherwise will feel we’re that is capital with of and there, to capacity we’ll out when three time, I given as that could X% a

Steve Sanghi

freeing the usually rate, node trailing that by the kept answer. normal enough clarify of part of the years, like Ordinarily, a XX XX, over kind I’d the foundry edge to capacity. whatever when guys, edge has up to industry growth the movement faster it was leading last the

five, the guys XX% built has because many industry edge our that’s grown, of grew about up. then was trailing plus ago, quarter the trailing six XX% this down is companies a on trailing ordinary was a the more And the up nodes versus year-over-year September today edge. originally people is much, process announced leading available higher, when it became growth the that think edge guidance rates growth much rate And capacity become capacity for later it then the I of years edge constrained, there would of moving rate edge of have for a is technology is how then year that trailing So didn’t year, trailing wanted most what available the available, who because same line. really at get But leading through edge. capacity edge years

leaving choice edge the are quite therefore, much capacity constrained the capacity they to such the XX so XX-nanometer, today, over much it’s edge working and available at given trailing edge industry an like possible growth edge all constrained on because returns on aggressive But if priorities are trailing the constrained also. then not constrained on capacity is add years, be capacity, their to all more there’s normal leading a not the foundries the they willing of XX-nanometer the the And leading capacity they’re edge as leading are edge the back growth of then it’s again. more the capital the will and more of that the nodes relieving trailing also more allocation the

Chris Caso

you. Thank

Operator

will our Thank question next come you and with Christopher Rolland from Susquehanna.

Christopher Rolland

or guys Hey that thanks disti Or guys, there you of service any PSP increase on around on What’s your to hold inventory? direct this XX good days first around your question from and kind for color customers plan as ASAP? replenishment. the the quarter. timing customers Do is plan kind of you

Ganesh Moorthy

available numbers they what as are – us The what as to demand, but as the what carry. of should well. a distribution see inventory terms the customers this as current supply distribution, both condition, drive to don’t in in they in they them. to are, what their We see coming are, we report from much decisions PSP

are it. in not cannot channel supply, exceeds when far would direct or inventory many, on distribution is so customers PSP time. that take PSP The orders in it’s say are the who at you I only, internally point issue customers; customers that placing So, build and demand many

shipping go the to product they’re we is So, until out. not up. than help we where inventory more provide get can point, Distribution likely to

Steve Sanghi

amounts but out. because demand higher the door, shipping strong it out sales sucks quarter, We’re distribution the of higher for for and every

constrained, the So, is you cannot supply because anywhere. inventory really so build

Christopher Rolland

longer fab? But as understood. when example, And the would is ever XXX-millimeter Yes, a there same condition definitely or you has point on term For this guys you any question. have is you revenue consider guys runs have the the and that interest that wouldn’t and volumes has one? product guys and in? is have you that your guys it any sets Or given that you a something

Ganesh Moorthy

scenarios a there’s may to about for XX-inch which are in make sense there nothing in No, But at time. this really us. point talk fab

Steve Sanghi

us, company our you The example margin higher margin. operating mentioned is gross the than a good is not for

Christopher Rolland

Yes, guys. lot Thanks, more way for sure.

Operator

Thank up with JPMorgan. you. And from follow a take Sur Harlan we’ll

Harlan Sur

taking for my you thank Yes, follow-up.

COVID-XX Delta unfortunately, seems to assembly, potential in seeing resurgence are variants, in we of impacted of Southeast be quite tests idea in terms Thailand. Philippines and the and your uncertainties, Asia final In wafer

But surge, your team the through team the managed supply well hit, COVID-XX potential mitigating for sub very year. in which chain cons Malaysia, for the the last Some shutdowns disruptions? the probably is how’s are hardest recent of

Ganesh Moorthy

right. internal firstly, factories, taking our own So,

if So be many of the the have plans inside to planning. of protocols all and our safely to year, that contingency people we normal is implemented that of to factory last operate need part backup

steps accelerate to have in addition, how taken and In vaccines brought be can deployed. we

to over fully of Thailand this a our example, and week, factory course substantial the vaccinated. for is be So week, last of portion going

preventative do. we get things to steps taking can We’re

in We’re the Philippines trying we there. and have then to do overcome to same challenges to the some, get some thing

And, challenges. operating, are working from our they’re We’re factory with partners. there where

for is a far, loss enough in result issue major So nothing us really significant to in production.

that best But rules we as but it. see major are manage as which at, on we might no, go. as we issues. so the there’s and will being all around and I And regulations where – So no answer can says it’s unrolled, we have data as know things through And far thought where scenarios things contingency prudent we’re okay what plans. have are, we with

Harlan Sur

Absolutely. Thank you.

Operator

the over for concludes today’s that you And back turn to conference session. any additional you. Moorthy at Mr. closing remarks. Thank I’ll question-and-answer or this time,

Ganesh Moorthy

attending to call want for thank everybody today. I the

point and to you a And coming talking to We month many half have over timeframe. several look investor month, up at time. of we events of forward next the that in

So you. thank

Operator

this And concludes participation. thank Thank you. We you today’s your for conference.

disconnect. You may now

Microchip Technology (MCHP) 4 Aug 212022 Q1 Earnings call transcript