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

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 events or results may differ materially. We refer you to our press releases of today, as well as our recent filings with the SEC that identify important risk factors that may impact Microchip's business and results of operations. In attendance with me today are Ganesh Moorthy, Microchip's President and CEO; Steve Sanghi, Microchip's Executive Chair; and Sajid Daudi, Microchip's Head of Investor Relations. I will comment on our first quarter financial performance. Ganesh will then provide commentary on our results and discuss the current business environment, as well as our guidance, and Steve will provide an update on our cash return strategy. We will then be available to respond to specific investor and analyst questions. We are including information in our press release and 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 the operating results, including net sales, gross margin, and operating expenses. Other than net sales, I will be referring to these results on a non-GAAP basis, which is based on expenses part of the effects of our acquisition activities, share-based compensation and certain other adjustments as described in our press release. Net sales in the June…

Thank you, Eric, and good afternoon, everyone. Our June quarter results continue to be strong across the Board, setting several records in the process. Revenue grew 6.5% sequentially and 25.1% on a year-over-year basis to achieve another all-time record at $1.96 billion. This was a seventh consecutive quarter where we achieved a record revenue mark. During the quarter, we worked through several COVID-related operational challenges, including, but not limited to, the shutdowns in Shanghai, which affected our customers and our supply chain partners. Non-GAAP gross margin was another record of 67.1%, up 50 basis points from the March quarter and up 230 basis points from the year ago quarter, benefiting from improved operational efficiencies as well as product mix changes. Non-GAAP operating margin was also a record of 45.6%, up 90 basis points from the March quarter and up 390 basis points from the year ago quarter, achieving the high end of our guidance. Due to our rapid increase in revenue, operating expenses at 21.5% or 100 basis points below the low end of our long-term model range of 22.5% to 23.5%. Our long-term operating expense model will continue to guide our investment actions to drive the long-term growth and profitability of our business. Our consolidated non-GAAP diluted EPS was a record $1.37 per share, up 38.4% from the year ago quarter and just above the high end of our guidance. Adjusted EBITDA at 50.2% of revenue and free cash flow at 36.6% of revenue were both very strong in the June quarter, continuing to demonstrate the robust cash generation capabilities of our business. Net debt declined by $293.3 million, driving our net leverage ratio down to 2.05 exiting the June quarter as we continue to aggressively drive down our net leverage. Recalling that our net leverage was almost 5x…

Thank you, Ganesh, and good afternoon, everyone. 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 while making new records in many respects, namely record net sales, record non-GAAP gross margin percentage, record non-GAAP operating margin percentage, record non-GAAP EPS and record adjusted EBITDA. And all of that in a very challenging supply environment. The Board of Directors announced an increase in the dividend of 9.1% from last quarter to $0.301 per share. This is an increase of 37.8% from the year ago quarter. During the last quarter, we purchased $195.2 million of our stock in the open market. We also paid out $153 million in dividends. Thus, the total cash return was $348.2 million. This amount was 55% of our actual free cash flow of $633.1 million during the March 2022 quarter. Our paydown of debt as well as record adjusted EBITDA drove down our net leverage at the end of June 2022 quarter to 2.05 from 2.32 at the end of March quarter. Ever since we achieved investment-grade rating for our debt in November of 2021 and pivoted to increasing our capital return to shareholders, we have returned $1.04 billion to shareholders through June 30, 2022, by a combination of dividends and share buybacks. In the September quarter, we will use the June quarter’s actual free cash flow of $718.5 million and plan to return 57.5% or $413.1 million of that amount to our shareholders. Out of this $413.1 million, the dividend is expected to be approximately $166.5 million and the stock buyback is expected to be approximately $246.6 million. With that, operator, will you please poll for questions?

Thank you sir. We will take the first question from Gary Mobley from Wells Fargo. Your line is open. Please go ahead.

Hi guys. Thanks for taking my questions and congrats on some solid results. Let’s just start out with the inevitability of the CHIPS Act being passed. I know you guys have a relatively high U.S. oriented manufacturing footprint employee base and not to mention a lot of U.S.-centric military business. And so I’m wondering if maybe you can give us a little more color in how the CHIPS Act may benefit you from a CapEx subsidization perspective or from an R&D tax credit perspective, anything you can add there?

So there are various components of the CHIPS Act and the rules of engagement of how they will be handed out are going to be different. So the most obvious one is the investment tax credit. And for any capital expenses and factories that are built, et cetera, that is the first thing that we think will take effect, and it’s probably the end of the year or the beginning of next year before that comes into effect, and that’s a 25% investment tax credit. There are then grants that are for both manufacturing and for R&D. And we have opportunities on both of those with the expansion plans that we have and some of the R&D programs that we are pursuing. But honestly, it’s too early because those are not quite clear yet in terms of how the requirements will be in that. We have, of course, been engaged with both Department of Commerce and Department of Defense for many months, with to give them an understanding of what the aligned interests are between what we are planning to do, are interested in doing and what the government sees as natural security imperatives. And so we expect that as that rolls out, we’ll have more to share, but not at this point in time.

Thank you, Ganesh. Appreciated.

We will take the next question from Raji Gil, Needham & Company. Your line is open. Please go ahead.

Yes, thank you and congrats, again on managing through this very on a very volatile period of time with great results. Just a question on your unsupported backlog. You mentioned it climbed again, it’s well above the actual revenue that you achieved. And you mentioned as part of your kind of scenario analysis that you can absorb any potential order push-outs or order cancelations. Wondering if you could maybe elaborate further and maybe help us understand if there is a significant decline in demand in some of these end markets. How much do you think you’ll be able to kind of absorb? And you mentioned there are some indications of order volatility. I’m wondering if you could maybe describe that as well? And where are you seeing it? Thank you.

So on your last question, the order volatility we see is sporadic. It’s very small, and it is well, well below the unsupported orders that we have, and they are easily substitutable with other orders we have. And we have indicated that the unsupported is in excess of what we are shipping. So, you can see the backlog would have to be cut by more than half just to get to where we’re at. And that’s a far, far cry from where today’s activity is taking place.

Thank you.

We will take the next question from Matt Ramsay from Cowen. Your line is open. Please go ahead.

Hey guys, this is John Buchalter on behalf of Matt. Thanks for taking my questions. And congrats on the solid results. The revenue and gross margins speak for themselves. But I was wondering, are there any metrics you can provide to help us understand how much of the upside was driven by pricing versus units as we try to square away how much your capacity investments on the CapEx line are flowing through to the model already, and what’s still on the come? Thanks guys.

So it’s not an easy way for us to break out pricing versus the increased number of units. Obviously, we have a component of both that go into it. On the units, we have a component, which is what are we doing from our own factories and then we have components of what are we trying to do and get from our partners. And what is coming from our factories, we at least have plans and things that we can measure what comes from our partners we can have upside sometimes that are unexpected that help us. So it is very clear, we’re shipping more parts. And there is a component of price that is included – the price increases we have made are to offset cost increases that we have experienced. And so the primary driver for us is to grow by growing units, not by growing price. Okay. We should move to the next question.

The next question is from William Stein from Truist Securities. Your line is open. Please go ahead.

Great. Thanks for taken my question. With regard to the strength of the backlog and the increase in capacity that you’re expecting? It sounds like you’re expecting that to continue over the next few quarters. Would you be willing to provide us perhaps not guidance, but some way to think about revenue growth in subsequent quarters? Could we think about at least, for example, into the December quarter having relative – having, let's say a relatively strong feeling that that will be an up quarter?

So we don't provide guidance obviously for subsequent quarters, but I did in my prepared remarks, say we will grow in the December quarter. And if you look at historically, December is a declining quarter from any measure of historical seasonality. And so we are quite confident we will grow into the December quarter. Does that answer your question Will?

He’s not on the line right now.

All right, go ahead.

In the meantime we will take the next questionnaire from Chris Danely from Citi. Your line is open. Please go ahead.

I guess just a question on capacity and the shortages. So are you seeing any improvement in the shortage or capacity situation, you talk about trying to squeeze a little bit more both internally and externally has your projected capacity gone up a little bit over the last few months as you've been able to maybe hunt around and find a few more parts out there and maybe just give us a little more color on that supply and demand balance situation?

Yeah. So for our internal factories, we have been investing in CapEx for many quarters. We made progress in our backend factories first because it was a shorter cycle time and easier to bring on. We have been making progress on our front-end factories and still have many quarters of capacity that we think we can bring on as we are able to get equipment. And some of the equipment that we have needed has been delayed as being able to hire people. And it has been harder in some prior quarters, but we're getting better in terms of being able to fill our positions in the factories, et cetera. So clearly internal capacity is growing and helping us support some of the backlog that we're unable to support at this point in time. We have had incrementally more constructive capacity improvements from our external partners, although it is still very small in the grand scheme of what we need in terms of that. And we are hopeful that some of perhaps the weaknesses that may be out there in other segments will in fact help free up some of the capacity we need, although there's not an exact mix between where things are getting freed up and where things are that we require, but I think incrementally it will be constructive and positive for us.

Got it. Okay. Thanks Ganesh.

Thank you.

The next question from Harlan Sur from J.P. Morgan. Your line is open, please go ahead.

Yep. Good afternoon and congratulations on the strong execution. Your near to midterm business continues strong, right? You've talked many times about the unsupported backlog being strong, but I think the market concern continues to be for a broader slow down next year, not so much for this year, just given the mix of your business, maybe as a reflection of your customer's view on next year, your – maybe it's worthwhile to look at your PSP customers, because they're giving you 12 months order visibility, but they have to continue to keep that 12 month PSP funnel going, right? So they're continuing to add orders to the back-end of their PSP funnel every single month. So given that they're booking well into next year, combined with the concerns on a macro slowdown, have you guys seen a deceleration or decline in the PSP sort of order, true-ups on a sequential basis as sort of a reflection on customer demand concerns next year?

Nothing perceptively changing. If you look at PSP as a percentage of our total backlog, it's pretty rock steady within about one percentage point through pretty much the last 13, 14 weeks of time. So it's certainly a good indicator. We pay attention to and we are watching where that is going. I think the strength of our business also is driven by the end markets we're exposed to. And what is out there today where you see many of the concerns and people who are seeing weakness, it's predominantly in consumer driven segments. And so whether that is consumer PCs, consumer mobile phone, consumer electronics, et cetera. And we have no consumer PC exposure. We do have enterprise PC exposure. It's very strong. We have almost no phone exposure. Our consumer appliances are – we don't have consumer electronics so to speak, we do have home appliances and they could be a part of it, but it's such a small piece of our overall thing. So our end market exposure, we're very fortunate to have very durable markets and I think Eric wants to add a comment to it as well.

Yeah, I mean, so on PSP specifically, the dollars amount of PSP backlog that we had leaving June was higher than it was at the end of March. So, I mean the program is still quite effective. Customers are participating in it and adding orders out in time.

Well, thank you for the insights.

We'll take the next question from Tore Svanberg from Stifel. Your line is open. Please go ahead.

Yes. And congratulations on the record quarter. You've talked about being able to manage a bit of a soft landing in case macro continues to deteriorate, obviously you've got the PSP program. Would you talk about some of the other levers that you have, and maybe put them into perspective of your financial, especially gross margin and operating margin, because as you know you have a very, very strong variable cost structure, so any more color you could add would be great?

So I had outlined multiple points that help us with a soft landing. So you mentioned PSP, which is clearly one part of the demand cycle. I think we have in the last six months also been adding to that with some long-term supply agreements, which bolster the demand side of the equation, even farther than just what PSP did. We've talked about how large unsupported is and how that continues to provide a buffer against any ups and downs that may be there in the shorter-term. We will, with any slowing down that we might see use that as an opportunity to rebuild what is a supply chain running on fumes, right? We have our internal die banks and finished goods inventories that have been substantially depleted. While you see some of our days of inventory perhaps moving a little bit up, a lot of that has come from the change in gross margin and really raw materials and end-of-life product that we're buying. On an ongoing basis, to be healthy, we need to be able to run with more inventory, both with our channel partners and our internal factories. All of that will continue to provide absorption and gross margin protection in whatever happens in the cycle. And then we've talked about our capital intensity coming down, coming below the range, again, from a cash preservation standpoint, cash generation standpoint, that will help. And then finally, on the OpEx side, we've always had a large variable compensation element that gives us a large buffer for how we can have expenses come in or out during the different cycles. And I think those are all the elements that give us the comfort on a soft landing, which is to ensure that what we're able to do in terms of our gross margin, our operating margin, our cash generation. All remain strong through whatever that soft landing requirement is.

All good perspective. Thank you.

The next question is from Chris Rolland from Susquehanna. Your line is open. Please go ahead.

Hi guys. Thanks for the question. You guys either Ganesh or Steve, you guys have talked about analog capacity additions for the industry coming in 2023 and beyond. We're now starting to hear about potentially equipment push outs and stuff like that. And maybe a little pumping of the brakes, I don't know if that's the opinion that you guys may have as well. But would love to see kind of longer term, how you view capacity for the analog industry overall? And would it have any sort of effect on your business? Thanks.

Let me take a quick shot and then maybe Steve can answer to it. So I don't want to speak for what the overall industry is doing because different people have different plans and thoughts and what they're doing. I think what we can see is that those technology nodes that are very specialized and analog tends to be that, that tend to be from the trailing edge of the technology nodes that are out there, are underinvested. And yet are critically important in being able to drive the growth for even the leading-edge technology, so that you have more complete solutions. So in that sense, we believe that, that whole end of the market, that requires analog solutions, mixed signal solutions, et cetera, is getting insufficient capital attention, and we are taking some actions for it. I don't know what everybody else is doing, but we think it is going to be constrained for quite a while to come. Steve, do you want to add more?

Certainly, much more of our analog business comes from internal production than the microcontrollers do. And we earlier described – Ganesh described in his prepared comments about the growth of the microcontroller business versus the growth of the analog business. We are doing much better in capacity increase inside than we are doing it outside of our partners. And with microcontrollers having a large component of production outside and analog having large production inside, we have been able to make more capacity available for analog, hence, stronger near-term growth that we have seen. The inside capacity on trailing edge technologies where analog runs, it also is a bit easier to add then to really get capacity outside. You talked about equipment push outs. I mean some of the equipment push outs happened in the last 12 to 18 months. And a lot of the equipment is here now after a push out, something that was supposed to come in September arrived in January, February, but it is in production now, and it's contributing to the growth, and we believe will continue to contribute to the growth in the December quarter, as Ganesh mentioned before. We're not hitting up a brand-new new kind of push out. I mean the push out has been a continuous phenomena as our suppliers are dealing with their own COVID-19 shutdowns based on where they produce ability to hire and all that, we have substantial equipment coming in line. This quarter, some came online last quarter, and some will come in line in December quarter, which we think will continue to add to internal capacity to grow our business.

Yes. And we are clearly not instructing our capital equipment suppliers to push anything out. We still need this equipment coming in as soon as we can get it.

If anything, as I've mentioned in other calls, we are preferentially helping all of our capital equipment suppliers by providing them semiconductor solutions to the extent they are constrained, so that it helps not just us but helps the industry complete the equipment that they're building.

So the other point I wanted to reemphasize, and I think Ganesh said that, where to the extent our foundry and assembly and test partners are seeing some slowdown in the business coming from consumer PCs and cell phones. We are taking advantage of it because we have been able to increase the output by taking that slack both at the foundries and assembly/test OSAT guys, in addition to our incremental capacity. And hopefully, we will continue to take advantage of that and capitalize on the upside. That's where we're able to say the growth in the business, again this quarter that we guided a 5% midpoint and we're talking about growth again next quarter.

That’s great. Thanks guys. That’s always insightful.

Great. Thank you.

It appears that there is no further question at this time. Mr. Speaker, I'd like to turn the conference back to you for any additional or closing remarks.

We thank you all for attending and taking time from your day to be in this call. And we look forward to speaking to many of you as well as seeing some of you at some of the conferences we'll be at. So thank you, and good afternoon, everyone.

This concludes today's conference. You may now disconnect.