Good day, everyone, and welcome to Microchip Second Quarter Fiscal 2022 Financial Results. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to Microchip's Chief Financial Officer, Mr. Eric Bjornholt. Please go ahead.

Alright. Thank you, and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward-looking statements regarding future events or the future financial performance of the Company. We wish to caution you that such statements are predictions and that actual event or results may differ materially. We refer you to our press release of today, as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. And in attendance with me today are Ganesh Moorthy, Microchip's President and CEO, Steve Sanghi, Microchip's Executive Chair, and Sajid Douty, Microchip's Head of Investor Relations who just joined us over the course of the last month. I will comment on our second quarter fiscal year 2022, financial performance, Ganesh will then provide commentary on our results, discuss the current business environment, as well as our guidance, and Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and in this conference call on various GAAP and non-GAAP measures, we have posted a full GAAP to non-GAAP reconciliation on the Investor Relations page of our website at www.microchip.com and included reconciliation information in our press release, which we believe you will find useful when comparing our GAAP and non-GAAP results. We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of our operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses prior to the effects of our acquisition activities, share-based…

Thank you, Eric, and good afternoon, everyone. Our September quarter results continued to be strong, with the revenue growing 5.1% sequentially, to achieve another all-time record at $1.65 billion. September quarter revenue would've been even stronger, but for constraints due to some of our capacity improvements coming in later than we wanted. On a year-over-year basis, our September quarter revenue was up 26%. Non-GAAP gross margin was another record of 65.3%, up 50 basis points from 64.8% in the June quarter, and above the high-end of our guidance as we continue to ramp our internal factories and benefit from improved fixed cost absorption, as well as product mix changes. Non-GAAP operating margin was also a record at 42.5%, up 80 basis points from 41.7% in the June quarter and above the high-end of our guidance. Our consolidated non-GAAP EPS was a split - adjusted record $1.07 per share and was up 37.6% from the year-ago quarter. Adjusted EBITDA at 46.2% of revenue and free cash flow at 32.3% of revenue were both very strong, continuing to demonstrate the robust profitability and cash generation capabilities of our business. This in turn, enabled us to pay down another $415.6 million in debt, and bring our net leverage ratio down to 2.99 in the September quarter. With the progress we've already made and progress we expect to continue making in bringing down our debt and leverage ratio, we believe we are well-positioned to achieve an investment grade rating in the coming months. The September quarter marked a 124th consecutive quarter of non-GAAP profitability. I would like to thank all our stakeholders who enabled us to achieve these outstanding and record results in the September quarter, and especially thank the worldwide Microchip team, whose tireless efforts not only delivered our strong financial results, but…

Thank you, Ganesh. And good afternoon everyone. Today I would like to reflect on our financial results announced today and provide you further updates on our cash return strategy. Reflecting on our financial results, I continue to be very proud of all employees of Microchip that have delivered another exceptional quarter and making new records in many respects. Namely: 1. record net sales, 2. record non-GAAP gross margin percentage, 3. record non-GAAP operating margin percentage, 4. record cash flow from operations and 5. record adjusted EBITDA. Reflecting on our journey of debt and leverage ratio since the acquisition of Microsemi, three-plus years ago. I note the following. First, we financed the micro semi -acquisition by adding $8.1 billion of debt, which increased our net leverage ratio in the June 2018 quarter to 4.95, which we know was a concern for many of you. In the last three plus years, we have paid down a cumulative $4.4 billion of debt and brought our net leverage ratio down to 2.99. The allocated substantially all of our excess cash generation beyond what we paid to shareholders in dividends to pay down significant debt every quarter. Number two, within the last 6 months, based on the debt pay down and the continued strong cash and our Adjusted EBITDA generation of our business, both Moody's and Fitch changed their rating outlook from stable to a positive outlook. And now last quarter with very strong debt pay-down and getting to a leverage ratio of below 3.0, we believe we will receive an investment-grade rating in the coming months. Regarding our capital return strategy, we're continuing to provide more cash return to the shareholders. Just today, we announced a dividend of $0.232 per share. Our dividend is reflective of Microchip's 2for1 stock split that was effective last month. This is our fourth consecutive quarter with a large dividend increase, increasing the dividend by 6.2% sequentially, and 25.9% over a year-ago quarter. And in the coming quarters, we expect to continue with more actions to increase the cash returned to shareholders. We plan to give you more information about our capital return strategy, next week at our Investor and Analyst Day. We hope to see you all there. With that Operator, will you please poll for questions?

Thank you. . We'll pause just a moment to let everyone an opportunity to signal for questions. We'll take our first question from John Pitzer with Credit Suisse. Please go ahead.

Yes, good afternoon, guys. Thanks for letting me ask the questions. And congratulations on the solid results. Ganesh, I wanted to get into a little more detail about the difference between your microcontroller business being down sequentially and analog being up. It's -- your down is a lot less than TI s, and your up is a lot more than TI s, but it's the same dynamic that they saw in their September quarter. And they highlighted the fact that perhaps, customers were requesting less expedited orders, that there was a little bit of a cooling off. I'm just curious when you look at that gap, what was the big driver in the quarter? And as you look at the December guide, would you expect the microcontroller business to start to show some accelerating growth?

It's a great question. I think they are just quarter-to-quarter timing, if you look at our June quarter results, microcontrollers were super strong in that quarter. We had more constraints that hit the microcontroller business in the September quarter. I wouldn't look at anything I don't want to one-quarter basis. Businesses, microcontroller as well as Analog are doing extremely well and I expect both of them will have nice growth as we go through the December quarter. There is no customer slowdown on one product line and the other product line. They're all constrained, they all have a substantial unsupported exiting the quarters.

Perfect. Thank you.

We'll take our next question from Gary Mobley with Wells Fargo. Please go ahead.

Hey, everybody. Thanks for taking my question. I look forward to catching up with everybody next week. I wanted to ask about the backlog, and your ability to fill that backlog over the next 4 consecutive quarters. I appreciate your commentary about how the capital equipment you plan intend to put in place is supportive of four quarters of sequential revenue growth. But what is the risk of not receiving the capital equipment because of long lead times, or lead times, or the inability to get desired capacity from partners, And is this roughly 6% sequential revenue growth, supported by more capacity, indicative of how you see it, unwinding for those remaining three quarters or so?

So firstly, the 6% growth is a December quarter midpoint of guidance that we have. We're not making predictions for quarters beyond the December quarter. What we do see is enough capacity coming online. We have line of sight to what we're doing internally. We have line of sight to what we are working with our partners, so that we expect that every quarter, for the next four quarters, including December in it, we’ll have the opportunity for supply side growth. And right now, there's enough and more demand for all those quarters. It's really a matter of bringing their supply on and we don't see any major risks and being able to bring capacity on. There's always timing of pieces of equipment for a given factory, but that all comprehended in the way we're thinking about it. As we have gone along through this year, almost every month, we've been able to bring on something incremental in the capacity, which is why you've seen every quarter we've been able to show sequential growth in each of the quarters.

Appreciate that color Ganesh, with the ability to supply being the main strength of revenue, is it fair to say that over the next four quarters it's going to be hard to build distributor inventory anywhere above the 20-day level roughly where it's at today?

We don't know. We expect that it's going to be difficult just judging by what we see as the intensity of the demand, what we see as a sell-through, and what's going on. But it's hard to tell what exactly distributions in the inventory will be that far out in time. I don't know Eric, if you have any more insight?

I really don't. I mean, just -- and Ganesh mentioned that earlier, but our unsupported backlog, that's -- it's both split between direct and distribution. So distributors would love to have more products and we're just not able to supply at this point in time. So I think it will be challenging, but it's hard to predict.

Appreciate it, guys. Thanks.

We'll take our next question from Vivek Arya with Bank of America Securities, please go ahead.

Thanks for taking my question. There is some debate whether the preferred supplier programs or some of your peers, you call them antsy on our programs, are they ready enforceable or dependable? Because some of your competitors have chosen not to use them as much. So I'm just curious to get your perspective, why there is so much debate on use of these programs? What is their enforceability and dependability because ultimately your products are going in end markets that need products from your competitors as well, so those markets are not doing as well, then how enforceable are your contracts? How should we think about the fact you have this PSP backlog as to how dependable the forward outlook is. Thank you.

Firstly, I don't know all the different programs different people have and so I won't try to contrast with what we're doing. What we know in talking too many of our key customers, who really by the way drove how we designed and implemented this system, the PSP program, is that it is 1. Seen as highly valuable, 2. That it has grown over time, and 3. It continues to not only be strong, but people want to extend that PSP outlook. We have 12 months as our standard backlog requirement for it. There are people placing beyond 12 months, honest. And I think everybody is recognizing that the semiconductor content and the products that they are making are extremely important to their achieving the innovation in their products, their growth objectives, and therefore are much more in the mode of making sure that they have that thought through in the demand they place on us. And because it is non - cancellable, I also expect, and I believe every one of them is putting thought into where to have PSP backlog and where not to have PSP backlog, given by the strength of their business and the views they have for their growth.

Thank you very much.

We'll take our next question from Tore Svanberg with Stifel. Please go ahead.

Congratulations on the solid results. I was hoping you could talk a little bit about the end markets, especially in relation to delinquencies. Are there any areas where the delinquencies are more or less?

It's hard to find one where there is no delinquency at this point. If I judged by the number of customer escalations I get involved in calls that I have to be able to respond to, it's an every segment. Clearly, what the news plays out has a -- got a higher component of automotive.

But it's absolutely not the only place where there are constraints. Constraints on an industrial communications infrastructure and data center in the home appliances and even in parts of defense and aerospace. And so all end markets are finding that there is needs and there is demand and excess of what they had thought of a year ago. And we see these constraints in all end markets.

I would like to add that automotive tends to have the largest megaphone, so they make the most noise. People think that the constraints are the biggest in automotive. That is definitely not true. We're seeing similar constraints in the industrial market and consumer markets and other places, but just automotive gets talked about more.

We'll take our next question from Prajib Rahmani with UBS, please go ahead.

Hi, congratulations, great quarter. Thanks for taking my question. I had a little bit more of a longer-term question. I guess, a lead time for at least the 32-bit MCU seem to be still stretching and they’re well beyond 22 weeks is what I'm hearing. But if you look into 2022, how would you sort of paint the picture for investors around where -- I mean, where lead times had to buy, say, mid-2022? Do you get a sense that in the current market scenario that lead times might not compress much at all in 2022, or can you help us gauge that a little bit more?

There are two sides of that equation. There's one side of that equation which is supply, and the other side of that equation is demand. If you look a year ago where we were, to where we are today, despite having brought significant supply online, we are farther behind in terms of the constraint or the unsupported that we have. And that's because demand grew even faster than the supply did. I don't know how 2022 is demand picture, and we have a good sense of our own supply and what we're doing. But how the demand picture will change and when that will change, I don't know. But at this point in time, if you judge by how much unsupported did we have every quarter, exiting each quarter, we've had five quarters in a row where we produced more, but had more unsupported exiting the quarter. And I am fully expecting that exiting December, it will be the 6th consecutive quarter where that's going to happen.

Great. Thank you.

We'll take our next question from Matt Ramsay with Cowen. Please go ahead.

Thank you very much, guys. Good afternoon. I wanted to ask a little bit about the pricing environment and that's been topical given the big supply-demand imbalance in the industry. Ganesh, maybe you could talk a little bit about the comments that you made about having support for growth over the next four quarters from here. How much of that is based on supply coming online and how much of that is based on, I guess, better pricing or passing through higher input costs in terms of pricing? And whatever pricing you're putting in place right now, how durable do you feel that is as supply and demand may be converged down the line? Thank you.

So it's a multi-variable equation. It's hard to break out exactly what is from price and what is from capacity. We do have -- clearly what we're doing on the capacity side of adding more wafers to be able to run either in our fabs and our partner’s fabs, adding more assembly and test capacity, and so there is a significant amount of unit growth that we're expecting going into 2022 and into 2023. The pricing for us is largely to be able to pass along cost increases that we're seeing, and to make sure that -- we usually will bunch them rather than try to do it on a regular basis. And -- so we wait to see how cost increases are coming into us, bunch of together at some point in time, and then pass on the price increase. But the exact mix of car -- or price increase versus unit thing I don't have, there is a significant amount of unit growth going into next year. As far as what happens far down time, I don't get the sense that input costs are going down and that pricing has to come down out in time. Things like the labor costs that have been going up, those are in -- they're not coming back down. A lot of the costs for material and equipment are requiring companies, not just us, but even our supply chain, to have significant capital spending to be able to not just expand factories, but build brand-new factories. And the cost structure when you are involved there are quite significant as well. So it is my belief that these price increases are here to stay. and at least to stay for a fair amount of time into '22 and '23.

Very clear. Thank you.

We'll take our next question from Harlan Sur with JPMorgan, please go ahead.

Good afternoon and congratulations on the solid results and execution. Macro trends in China have been somewhat mixed, obviously, building in construction activity has been muted. Industrial activity seems to be relatively okay. Consumer is mixed and the team has really great real-time visibility on the end markets in China. Have you guys seen any slight inflections in China demand or is the supply demand gap just so wide that they're not able to provide enough supply even if things have down-shifted a bit?

You know, it's a little early to put all that together. Some of the power changes were really in the late September time frame. The effects of Evergrande or any of the other ones when it percolates down to the rest of the chain that's involved there takes some time. There is no discernible end market color we have to provide on China. We continue to have enough demand and excess of supply that even if some of that demand were to soften, we still have a lot of unsupported demand for China today.

Okay. Thank you.

We'll take our next question from William Stein with Truist Securities. Please go ahead.

Great. Thank you for taking my question and I'll add my congratulations, especially on the outlook. One of the great things that Microchip's done over time is that you were very early on to recognize that similar to the industrial -- industrial companies, acquisitions in semi's could provide great opportunities for both cost synergies, but also revenue synergies. I'm hoping you might use this time to update us on your integration of Microsemi. It's been a couple of years, and I wonder if the current strong environment has either delayed or accelerated the synergies. Is there a lot more to go that maybe we all forgot about because demand has been so good? Thank you.

The integration of Microsemi is substantially complete. There are some small amounts on the business systems, and maybe I'll let Eric speak to it.

Yes. So I mean, there's still some business system integration to go I would say from a cost perspective or synergy perspective that's relatively small. The things that we continue to work on which are ongoing stories are going to be TSS, or Total System Solutions, for the products that we've acquired from Microsemi, and the sales and business units are working very hard on that and we're getting good traction. And the other piece is ongoing manufacturing integration, which just takes time. And some of that is bringing more assembly and test in-house. And some of that will be looking at some of the smaller factories over time and how that can play out to bring some cost improvements to us over multiple years. But other than that, most of the benefit is in the P&L already.

And Steve may want to speak to -- we, last quarter, shared with you where we were from a combined Company earnings-per-share versus what we had set 3 years ago. So, maybe Steve, you want to speak to that?

So, if you recall, back in May-June of 2018, when we acquired Microsemi, we've guided to a run-rate earnings per share of $2 per share, three-years out. So now we are three-years out -- there's three years and one quarter, and we just announced to earnings of dollars 7, which is splitter, just $2 to $2.14 pre-split, versus a $2 guidance we had given as a target 3 years ago. So we essentially have completely delivered on that promise in the middle of substantial issues for our most of that period, including an inventory correction in the late 2018, followed by U.S.-China trade tensions which affected our industrial business, consumer business, and others, followed by 2020, the year of COVID, which also created a lot of issues and all the COVID constraints, some of them are continuing. Followed by a strong demand cycle that we're seeing right now. So a combination of all these things, we still have delivered on that Permian --

Plus the Huawei ban and various other --

Huawei ban and many other smaller companies that have been banned from being shipped too.

So it's done outstanding for us and I think all the results we had hoped for and more have been delivered.

Yup, thank you.

We'll take our next question -- excuse me. We'll take our next question from Chris Danely with Citi. Please go ahead.

Hey, thanks, guys. Just wondering about your lead times. How do you think your lead times compare versus the competitors? And does the difference in lead times, does that drive any share shifts? Do you think it will drive any share shifts?

So Chris, I think lead time is not one number for the Company, across our 100,000 plus skills, we have products that are available in 4 weeks, and there are products that are not even available in 52 weeks. So, people talk about an average lead time terms. But I don't think it's fairly very meaningful. It's like putting one foot in icy water and another foot in boiling water, and creating the average and think a percentage is comfortable. We have lots and lots of products where the product is available earlier, but we have lots and lots of products which are not available even in a year. We do not know the lead time of every single competitor on every single part, because their situation is similar where the lead times are different across products. But given all that, I think when you look at the totality of results, our year-over-year growth compared to many of our competitors, and our last quarter and the current quarter guidance, it clearly shows we are gaining share. I think that we can see. Now, do we have customers from other companies were not able to get products coming to us for help? Yes, lots and lots of them. Are we able to help them all? No, but we're able to help some of them or many of them. You could also have a situation where somebody who is not able to get product from us, seeking product from one of our competitors. That's only natural, and I'm sure they are able to help some of them, if they happen to have a product which is available in shorter lead time. But when you take all the puts and takes, you got to, at the end of the day, look at the overall growth where we're exceeding what we're seeing from the competition, especially in the two markets of microcontrollers and Analog and we're gaining share in both.

Of course, as we win those customers coming over to us because we are able to help them, we're also getting long-term commitments from them to stay with Microchip beyond the cycle.

Yeah. Thanks, guys. That's very helpful.

Thanks.

We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you for taking the question. I wanted to ask about PSP. Is there a skill or are there any patterns by device type or end market? Is the uptake of PSP stronger? For example, MCU s versus Analog versus FPGA or by end market. And I guess more importantly, customers who aren't signing up -- who are not signing up for PSP. What's typically the reason or the rationale that pretty much just wanting the flexibility, or is it something around pricing? Just curious why some customers opt to not sign up. Thank you.

The PSP by product line isn't particularly different. By end market, certainly that our end markets with more demand certainty, more demand durability. There are certain customers who have more financial capability to go behind the commitments that they are making with PSP. And those customers, and that end -- those end markets do have a higher proportion of the PSP backlog that we have. What a given customers rationale for not doing it can be any number of things. Either the markets or the financial strength could also be their view of, do they or don't they need to be in the program? I can tell you that everybody who has signed up a PSP is getting priority and is seeing results that are to their benefit in a highly constrained environment where demand far exceeds supply. And we're leaving unsupported, going out of every quarter.

Thank you.

You're welcome.

We'll take our next question from Ambrish Srivastava with BMO. Please go ahead.

Thank you very much. Ganesh I'm going to put my lack of knowledge on full display here on the unsupported backlog. So there's an -- all is well concerned when lead times get stressed out and we're in such a tight environment for so long. So you're referring to the unsupported backlog as one of the reasons why you say your visibility is so high. Is this included in your book-to-bill? Is this noncancellable? Why is that the right metric to look at? Could you please explain?

Let me separate two different things for you. We have backlog over multiple quarters. Orders placed on us and they can be asked for delivery in March and June, this quarter, etc. Unsupported that I'm referring to is what was requested in a given quarter that we could not ship. Meaning if we could ship at all, that would have added to the revenue within the quarter. That's what we said at a record level, exiting September, and actually has been growing for 5 quarters at this point in time. And I expect it will be at another record level, exiting the December quarter. So unsupported just represents the current quarter of backlog that somebody would like to have shipped to them, but which we are unable to ship to them. So you can see what we report, our revenue which is what we actually shipped, what you don't see is what people wanted in the quarter that we could not ship. And then the back -- that continues to remain as backlog that ships into whenever it is that we can ship. And then there's other backlog which is in addition to that, that goes all the way to 1 and 2 years depending on what program customers are on. Does that make sense?

But there's no -- it does, that's helpful, but there's no noncancellable term to this, right? It's just what's you could not fulfill. So it could be canceled down the road, just like any other backlog which is where multiple quarters, right?

Our standard non - cancelable window is 90 days. Almost by definition, if somebody was asking for product in this quarter that we could not fulfill, it is all non - cancelable. PSP adds a second dimension of 12 months of non - cancelable on a rolling basis that customers would have. PSP backlog, which is significantly over 50%, is all 12 months of non - cancelable. Plus, anything non - PSP, in the next three months, is also non - cancelable.

Got it.

Maybe just to make --

That's helpful.

To make sure this is clear, the unsupported backlog is both PSP backlog and non - PSP backlog. So, there's a lot of unsupported that is in the PSP program. We just can't meet the commitment. The requested committed

,

Ambrish is that, we don't even have enough supply to meet all the PSP needs. There is a sufficiently even PSP backlog, which is unsupported in the current quarter. And we'll continue to be unsupported for several quarters, will ship the last quarter and supported this quarter. But some of the current quarter backlog will not be supported this quarter we will support our next quarter. So some of the capacity quoted doors, byproduct, by technology, by fab are so constrained that PSP backlog is over 100% of that capacity.

Got it.

And that is noncancellable over the next 12 months.

Appreciate you for taking the time to explain it. Thank you.

Okay. We'll go next to Chris Caso with Raymond James. Please go ahead.

Yes, thank you. Good evening. Two quick questions on pricing. And first, a clarification on the PSP program. And when the customer places the order on the PSP program, is there a firm pricing commitment with that order such that to protect it against further price increases? And if so, does that create a risk for you if your input costs increase over the next year when that product is on the books? And then just longer-term, do you feel that there is a structural element to these input cost increases? The fear is that 1 point demand will eventually slow and will catch up with supply and demand and costs will start to come down again. Do you feel that's not likely to happen and if so why?

To your first question. The PSP program is a priority for delivery, has nothing to do with pricing. Pricing is what we would need to make adjustments to, when there are reasons to make those adjustments based on input costs going up. So there is no guarantee of fixed pricing being part of the PSP program. On your second question with respect to input costs, there are certain input costs which are structurally in, for example, labor costs that go in. Now, perhaps in time as factories scale and size, they would get amortized over more units. But right now, labor cost is going up. And you don't take labor costs down when the cycle begins to change, that our material costs and maybe some of the material costs could be more driven by with the cost of the commodity involved, topper, etc., are going to be and we don't know how those will change. And then there are equipment costs as we buy them, we're we have in the past, to grow our capacity, typically been buying used equipment at discounted prices. In the current environment, where all fabs are full, all capacity is full, that is not available option to us. We are paying more expensive, or buying more expensive equipment to be able to outfit the capacity growth that we need. And that will of course stay in structurally as well. But scale will help with some of that costs and how it gets amortized. But I don't fundamentally think pricing is going to change given all these moving parts and that's the general sense I get from all of our supply chain partners and how they're thinking about it, and what the input variables are to them as they look at what pricing they're going to be doing.

So Matt, maybe I can -- expand a little bit on Ganesh 's first point on pricing, just to explain how it works. So if we have a price increase, the customer has 5 days once that price increase goes out to make the decision, do they want to accept that price increase or not? And if they don't accept the price increase that comes back to Microchip and does Microchip choose to ship it at a lower price, or do we reallocate that capacity when there's so much capacity on the books when customers are screaming for product to another customer. And what we've seen, what we've had price increases, is that there has been hardly any consumers that cancel their orders or choose not to accept the price increase because they understand the situation on the supply side.

Very interesting. Thank you.

Thanks, Chris.

We will take our next question from Christopher Rolland with Susquehanna. Please go ahead.

Hey, guys. Just following up on that as well. And Ganesh, you may have already answered this, but we are hearing about pricing increases from a bunch of your competitors across microcontroller and Analog. And some of this is input costs, but some of this is also opportunistic. So I guess my first question is, how you guys feel about that and whether you have a plan around pricing moving forward. And then Steve, I always love your big picture thoughts. And so, as it relates to pricing, the more pricing power that's enacted here, when this all ends, does this pricing revert or is there something structural and you think it might be stickier this cycle versus other cycles, given that there are fewer competitors out there than in past decades?

Okay, I'm trying remembering, what was the first part of the question again?

That first part is pricing increases from your competitors. Do you guys have a plan there, and then thoughts on a bigger picture on pricing and sticking.

We view pricing as a strategic exercise, not a tactical exercise. We don't subscribe to trying to raise prices just because we can. These are proprietary products. Our customers entrusting us to be able to make their designs 2 years before they go to production. And they need to have the understanding that pricing will be thought of in a long-term perspective. And so we do the changes this year or we did the changes this year only because of the significant increase in input costs. But on an ongoing basis, we do not view pricing as something to tactically go changes, not a commodity product like memory products might be. These are proprietary products with strategic engagements and long-term relationships with customers, and their trust that we expect to be able to maintain. Let Steve answer the second half.

So, my feeling is that the pricing, wherever the pricing has increased, I do not see that pricing coming down longer term on the proprietary products. On some of the commodity products, if there is a lot of supply becomes available and there is a competition that is able to ship DRAM, or a flash, or NAND. Those pricing may come down, but I don't see pricing on our microcontroller products or analog products, connectivity products, 98% of what we make is largely proprietary, those prices to come down, because when you look at the components of the pricing, the -- I don't see that fabs are going to lower the wafer cost, outside, because they're making huge investments because of shortage and that equipment is being placed in -- now. And what would be the reason to lower the price later? The -- if the commodity prices come down, there is a small component of the overall costs where that will come down. And as Ganesh mentioned earlier, the label cross-sell are not likely to come down. The assembly test costs are not likely to come down. Our internal fabrication and other costs are not going to come down. We're paying more for the equipment and that structurally stays in the cost structure. So I don't really see that the price increases that were passing onto their customers are temporary in nature, nor are we giving that kind of impression to our customers. I think they're largely there to stay. Could there be a minor adjustment here and there if there was a significant cost downwards from the input cost perspective? Then it's possible, but I don't really see it.

Helpful answers. Thanks, guys.

We'll take our next question from Harlan Sur with JPMorgan. Please go ahead.

Thanks for letting me ask a follow up. The gross margin expansion has been very impressive. And I know you'll be providing your long-term margin target next week, but more near-term. If I look at the December quarter guide and the last 3 reported quarters, you guys ' incremental gross margins are in a pretty tight range, right? 74% to 77% fall through very strong, very predictable, given that you're at full utilizations and will be so at least through most of next year, is this how we should think about the gross margin expansion on incremental revenue growth kind of near-term, around 75% fall-through?

Yeah, we're whenever really comfortable providing that metric. Where it's a complex equation with many, many factories, and lots of input cost changes and whatnot, labor costs increases. We are being as efficient as we can. Obviously PSP backlog, having so many backlogs in place allows our factories to be efficient and what they're doing. And we do expect gross margin to continue to rise, but don't want to take away from our messaging that we're going to give at the Investor Day next week on gross, on what, the gross margin target is going to be?

We also have outside manufacturing, right? So it does not have some of the same factory benefits as when we do it inside. So there are a lot of different pieces of this puzzle. And so, I would not draw a straight line through whatever equation that you had for the last 3 or 4 quarters. I think there are many more puts and takes that will give you more guidance on kind of how we see things for the longer term. But we have had good success in the last 3, 4 quarters that you've seen in the results we posted.

And even the insight factories, the gross margin goes up -- incremental gross margin is much higher when you're going from under-utilized factories to full utilization. Once you're at full utilization, and you're adding capital which you are adding depreciation, then you're shipping that product, the incremental gross margin is not as high as you would think. Remember, we also ship first-in, first-out. So even when the factory becomes full, under-utilization goes away, you're still shipping product which you built earlier, when the utilize -- the increasing capital wasn't added. Now we're adding incremental capital to grow the capacity and that depreciation comes in. Therefore, the incremental gross margin is better than the average because you're utilizing the factory better, the management, fixed infrastructure, the ecosystem the water, they air, everything else; you are using it more efficiently. So there is incremental gross margin, which is higher than corporate. But your metric of what it has been in the last four quarters may not stay.

Perfect. Okay. Looking forward to next week. Thank you.

Thank you.

We'll take our next question from David O'Connor with Exane. Please go ahead. David O’Connor: Great. Good afternoon and thanks for squeezing me in here. Maybe just one follow-up, Ganesh, to your comment earlier in your prepared remarks about a license for wafer manufacturing technology on an 8-inch. And what was the just wondering what for that what you need to take that . Was it some large design win or was there some change in the technology road map that requires this or even anything around the end market, where that is going and how significant it could be? That would be helpful. Thank you.

It's an 8-inch trailing edge technology that we see having lots of legs for many years in key end markets and with key customers that the products are built on. The appetite to invest, there are the priority invest there did not rise to the level to make that investment from our partners. And so we worked to get it licensed and to be able to do it ourselves, very consistent with what we said last time and this time, that we will be increasing our capacity investments in trailing edge technologies, where our partners do not see the same opportunity to invest. But we see that opportunity and priority for what we do. So that's all that it represents. David O’Connor: That's helpful. Thank you.

We'll take our next question from Nick Todoros with Longbow Research. Please go ahead. David O’Connor: Good afternoon, everyone, and congrats on the results. Ganesh, your comment that the growth and unsupported backlog, I think it implies that your bookings continue to accelerate or at least they're outgrowing your billings. A, is that correct? And B, if that's the case, why do you think you continue to see such acceleration or outgrowth in your bookings, and is that implied that you're seeing increasing number of expedites because I'm assuming that also ties up to how many -- how much broader customers are asking for the current quarter.

You have a number of questions on what you asked and not all of them necessarily are linked. So first of all, bookings have been strong, remains strong, but we also have so many backlogs in front of us that bookings are not necessarily the best indicator for where strength of the business is. Unsupported can come both from a business that is -- something which is booked inside of the quarter. But more often than not, what is happening is that people are pulling in their requirements. So it's already backlog

We have and people would like to get it sooner than we can provide it to them, and so a lot of factors that go into that unsupported. But the bottom line is, that whatever we are able to produce and the growth that we're able to deliver, despite it being 26% year-over-year, is far from what is required to meet what customers are telling us what they want in a given quarter. And that keeps squeezing out and we keep shipping more every quarter and we'll squeeze some more out in the several subsequent quarters that we can't ship into this quarter. And it just reflects how demand is continuing to outstrip, or the demand growth is continuing to outstrip the supply growth for multiple quarters. And we do not see a bending of that curve through much of 2022. David O’Connor: Got it. Thanks. Good luck.

We'll take our final question from John Pitzer with Credit Suisse. Please go ahead.

Guys, thanks for letting me ask the follow-up. I had two quick ones. Eric, just on the CapEx, you guided for this year. I'm just kind of curious how we should think about next year, especially given the exit trajectory. And then Ganesh, you guys are really kind enough to give us both kind of a revenue number and an end market demand number. I'm just kind of curious of how to think --how we should think about the relationship between the two, because this quarter, it did look like your revenues were above end demand, and I'm just trying -- to understand what that means, especially in light of how constrained you seem to be in the business.

So I'll start with CapEx. So CapEx, as I indicated, is the forecast is between $350 million and $400 million for FY'22. In our investor and Analyst Day next Monday, we will give you some parameters in terms of how to think about CapEx and percentage of revenue on a go-forward basis, but again, not going to take away from that messaging today. We haven't given a FY'23 forecast as of yet. And overall, it will depend on what the shape of the demand picture looks like and how our capacity is coming in and what is needed in the business to support customers.

You want to talk about end markets; did you want me to do that?

Go ahead

For multiple quarters, you've seen that the end market demand has been higher and the GAAP revenue that we've had. The difference at this quarter is small. Distribution inventory still continue to decline by one day. In this case, there's nothing meaningful in that number for this quarter.

Perfect. Thank you.

Well, it's basically constrained by distribution inventory. They don't have much to ship. What they have left is really all slower moving slots. They need a lot of new product from us to be able to increase the end-market demand, and in some cases, some of the product has been prioritized to PSP customers and there is more direct PSP backlog than the distribution backlog. Significantly, more direct customers have gone PSP than through distribution. So therefore, much more of the product has been skewed towards direct customers, and distribution would like more, but there is no capacity. So I think that would limit --

That it makes a lot of sense, Steve; I think we're all learning that perhaps supply chains are a little bit more complex than that we once thought.

Yes, exactly. Okay.

Ladies and gentlemen, this does conclude today's question-and-answer session. At this time for closing remarks, I'd like to turn the conference back to Mr. Moorthy. Please go ahead.

Well, thank you, everyone for attending. We look forward to providing you a lot more insight on Monday, when we have the Investor and Analyst Meeting. And we will be doing some of the circuit during the quarter as well for other investor meetings. Thank you.

Ladies and gentlemen, this concludes today's conference, we appreciate your participation. You may now disconnect.