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

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, I 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 third 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 specific industrial and analyst questions. We are including information in our press release and on this conference call on various GAAP and non-GAAP measures. We have posted the 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 acquisition activities, share-based compensation and certain other adjustments that described in our press release and in the reconciliations on…

Thank you, Eric, and good afternoon, everyone. Our December quarter results were well above the midpoint of our revenue guidance marked by our disciplined execution as well as our resilient end markets. Net sales grew 4.6% sequentially and 23.4% on a year-over-year basis to achieve another all time record are $2.17 billion. The December quarter also marked our ninth consecutive quarter of growth. Non-GAAP gross margins came in above the high-end of our guidance at a record 68.1%, up 38 basis points from the September quarter and up 202 basis points from the year ago quarter. Non-GAAP operating margin also came in above the high-end of our guidance at a record 47.5%, up 62 basis points from the September quarter and up 283 basis points from the year ago quarter. Due to a rapid increase in net sales over the last 2 years, operating expenses at 20.65% were 185 basis points below the low end of our long-term model range of 22.5% to 23.5%. Our long-term operating expense model will continue to guide our investment actions to drive the long-term growth, profitability and durability of our business. Our consolidated non-GAAP diluted earnings per share was at the high-end of our guidance at a record $1.56 per share, up 30% from the year ago quarter. Adjusted EBITDA at 51% of net sales and adjusted free cash flow at 34.6% of net sales for both very strong in the December quarter, continuing to demonstrate the robust cash generation capabilities of our business. As Eric mentioned, we have excluded $385 million of long-term supply assurance payments made by customers from our adjusted free cash flow calculation. Since these payments are refundable when customers fulfill their purchase commitments. Net debt declined by $701.2 million, driving our net leverage ratio down to 1.56x, exiting the…

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 that in a continuing challenging supply environment. The Board of Directors announced an increase in the dividend of 9.1% from last quarter to 35.8 cents per share. This is an increase of 41.5% from the year ago quarter. During the last quarter, we purchased $229.5 million of stock in the open market. We also paid out $180.3 million in dividends. Thus the total cash return was $409.8 million. This amount was 60% of our actual free cash flow of $682.9 million during the September 2022 quarter. Our pay down of debt as well as record adjusted EBITDA drove down our net leverage at the end of December 2022 quarter to 1.56 from 1.84 at the end of September. Ever since we achieved an investment grade rating for a debt in November 2021 and pivoted to increasing our capital return to shareholders, we have returned $1.867 billion to shareholders through December 31, 2022 by a combination of dividends and share buybacks. In the current March quarter, we will use the adjusted free cash flow from the December quarter to target the amount of cash returned to shareholders. The adjusted free cash flow excludes $385 million that we collected from our customers for long-term supply assurance payments. These payments are refundable when customer fulfill their purchase commitments. The adjusted free cash…

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

Hi, good afternoon. Thank you so much for taking the question. I had a question on the pricing environment. In calendar '22, you grew your business about 25%. What percentage of that was pricing versus volume, and as you look ahead to calendar '23. considering the demand backdrop, considering potential price hikes from some of your foundry partners, how do you think about pricing and how do you see pricing play out and any implications for your margin profile in calendar '23. Thank you.

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

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

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

Yes, as I mentioned, in the three categories of what we believe is differentiating our results, a part of it, which is structural is what we have done for multiple years on how do we grow organically? How does the total system solutions approach which is a huge amount of work across the company come in and then it takes time for it to pay off. That's been happening for multiple years. How do we focus on higher growth opportunities from a market megatrends standpoint. Those are all we believe, unique growth drivers for Microchip, and are in fact structural growth that is being built into what our long-term growth will be.

Thank you.

Thanks, Vivek.

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

Hey, guys. Thanks for taking my question. I realized that you got out of the business of providing some estimation as to how many quarters in a row you may be able to grow sequentially into the future. But since you did comment on the June quarter, I was hoping that maybe you can share with us the magnitude of the sequential increase you might see in June and then perhaps may this sequential growth continue beyond the June quarter?

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

Thank you. Thank you, Ganesh.

Thanks, Gary.

Our next question comes from the line of Joshua Buchalter with Cowen & Company. Please proceed.

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

So what Board has decided is that given $6.62 billion still owing on the debt, and some of that debt, I think at least $2 billion of that debt have an interest rate of below 100 bps. And when that comes up from maturity, we will be renewing it. If we were renewing it today, it will be over 5%. So in that kind of current environment and interest rates are still rising, the Board decided to not go to 100% cash return right away today. They decided to do that over eight quarters. We double the rate at which we are increasing the cash return, we were increasing it like 60%, going to 62.5%, going to 65%. And what we have said is now we will go up 500 bps of the quarter. So current quarter 62.5%, next quarter, 67.5%, then 72.5% and 77.5%. At that rate, I think in seven quarters or so will be 97.5% and then go to 100%. I think that's a more reasonable approach to pay down some more debt along in the next eight quarters.

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

Thanks for the color and congrats on the results.

Thank you.

Our next question comes from the line of Raji Gill with Needham & Company. Please proceed.

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

From our perspective, we did that analysis. And in the process of doing the analysis, we had to validate which assumptions we were making, that were reasonable assumptions, which assumptions perhaps are changing over the next 3 to 5 years of time. And we don't know about industry investments necessarily, but we do know that our partners and us in the communication that we have had, have a high confidence prep to being able to satisfy the 300 millimeter trailing edge capacity requirements that our business requires. And with our partners and us, we have concluded that our business is best met with the best overall results in partnership with them.

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

Long lead times are never a good thing for either the customer or for us. There's more uncertainty the farther out in time you go. So providing shorter lead times and working towards getting it is in the best interest of our customer and what they need to plan for and for us and what we need to plan for. And we expect that the bookings and backlog will reflect that change in lead time out in time. Now we're not there today. We're expecting to get there in the second half of the year. And it will still take time, through much of this year that we have to get through the constraints. It also has an unknown, which is what happens in the back half of this year on the demand side of the equation. And if you remember over the last 2 years, the lead times have been driven not because we didn't increase supply, it's because demand increased faster than we could bring out supply every single quarter for about eight quarters. And so we're working hard to be able to get that supply line improvement to bring lead times into a more manageable situation to bring backlog into a more manageable timeframe. And then the demand side of the equation may or may not effect it farther as we go into the second half of the year.

Thank you.

You’re welcome.

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

Yes, thank you. I had a question on both internal and channel inventory. So it sounds like near-term you want to build even more internally to kind of manage it externally or manage the channel. I was just hoping you could give us some numbers on where you intend the targets to go. I mean, I know what your targets are for channel inventory. But perhaps for the next couple of quarters, how do you view the internal inventory days going versus those in the channel.

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

Yes, so we specifically guided in our release today for inventory days ending March to be between 157 and 164 days. Beyond that, we really haven't given any color. But we'll continue to manage our manufacturing operations and our purchases from our suppliers to be in the right spot to support our customers.

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

Great, color. Thank you.

Thank you.

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

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

Toshi, let me have Ganesh answer that.

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

Makes sense. Thank you.

Thank you.

The next question comes from the line of William Stein with Truist Securities. Please proceed.

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

Yes, so we would expect that over time that percentage will increase to -- be within our long-term model range, which we shared with the street last November, November 2021 at our Analyst Day. And so we're well below that today. We've had a couple of fantastic growth years, and it's been difficult to keep up with the span, and particularly hiring people. And we're seeing some of that free up today. So, we are still continuing to hire and add people to our teams to make sure we are supporting the long-term growth of the business with having the people and processes and systems in place to drive that. So you should expect over time that it will gradually inch its way up, but it's not something that happens overnight. You've been seeing that we've been investing significantly in increased operating expense dollars over many quarters now and just that haven't been able to keep up with the rate of revenue growth. And actually in the current quarter, the midpoint of our guidance is actually just slightly higher in percentage terms than what we achieved last quarter. I think it's 20.7% this quarter versus 20.65%. Again, it's the net, but we are continuing to invest and making progress on the hiring front.

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

Great. Thank you.

Thanks, Will.

Our next question comes from the line of Ambrish Srivastava with BMO Capital Markets. Please proceed.

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

We're not getting into specific guidance on second half growth and where it's going to be. I think we're judging based on what are we doing to be able to continue to improve the supply lines, both our own as well as what we're doing with our partners. We are judging where we expect demand to be out in time, but we don't have any certainty around it. And those are -- it's a multivariable equation, that if you project out under certain circumstances, certain assumptions that you make that we can in the second half of the year begin to get closer to that 26 week lead time. We could be wrong. The demand could come back roaring in the second half that we're not thinking about as it did in '21 -- 2020 and 2021. But under a reasonable set of expectations that we are internally modeling but we're not externally communicating, we think that's what we can get to. And we think that's where we need to get to, to kind of run this business on a consistent basis and have it as a strong way in which our customers and us together can plan for business.

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

And by the way, you can go back in 2020 and look at the fourth quarter performance in 2020 and you will see that we had barely a ripple in the first half and strong growth in the second half.

Right. Thank you, guys. Appreciate it.

Our next question comes from the line of Harlan Sur with JPMorgan. Please proceed.

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

So while we don't break out guidance by end market, in the March quarter, China -- Greater China has always had a decline. There are 7 to 10 days of holidays for Chinese New Year. And we don't expect this year is any different. What we are cautiously optimistic is that with the worst of COVID behind in the December and January time frame, that post Chinese New Year, which is right about now, China will come back and have a more constructive approach to where their economy and therefore, our business will go as well. I can't give you that as an absolute it's going to go happen. And so we are modeling for a normal China quarter this quarter and something more could happen depending on how business comes back post-Chinese New Year.

Thanks, Ganesh.

In vast number of cases, majority of the cases when we help the customer in China or distributor to not get the product because they had inventory, we had so much other demand for that product in U.S. or Europe, and other customers because we're still carrying huge amount of unsupported backlog. So in most cases, where we accommodated a customer, we ship that product to somebody else.

Thanks, Steve. Thanks, Ganesh.

Thanks, Harlan.

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

Hey, guys. This is Matt Myers on for Chris. I just wanted to circle back on your PSP for a second. I was curious because you guys have said in the past that your PSP is well over 50% of your backlog. I was just curious where that is now, and what the differences are between PSP versus non-PSP backlog?

It remains well over 50% to this day.

Got it. That's helpful. And then do you have any updates on utilizations and how they've changed in the quarter and kind of what your expectations are going ahead?

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

All right. Thank you.

I mean utilization is essentially 100%, right?

Yes.

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

Great. Thank you.

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

Yes. Hi, guys. Good quarter and guide here. Just a quick question on the -- on inventory levels. I was wondering if you could give some color on what [indiscernible] look like at the customer side, if you were to look at the different segments, industrial or orders?

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

The only thing I would say is that we don't have a customer that is so large that their business or their inventory would change our business materially. You can take any of the customers and if they are public companies, you can do an analysis of what inventory they carry. And we do that, but we don't know what the inventory is. And in many cases where we are shipping product that is from constrained corridors from legacy technologies that don't have as much excess capacity. We don't believe our inventories are what they're carrying. But honestly, we don't know and they don't report the same way as our distribution channel partners report to us.

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

Well, you need both sides of that equation, right? So our supply lines are improving. The fact that parts of the industry have slowed down, has opened up capacity incrementally to us. Our lead times are still long. And it's really -- there's a tremendous amount of work we have to do over the next 6, 9, 12 months to one by one by one, get it back into a range. And we're still expecting that the 26 weeks is kind of an average lead time. We are going to have some that are longer, some that are shorter than where we go. But directionally, it's where we want to go. It's what makes it constructive for our customers to plan better and for us to serve them better.

Got it. Thanks.

Thank you.

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

Hey, thanks guys. I guess one clarification and a question. You seem to indicate that there was some weakness in China, but I think Ganesh or Steve, you just mentioned that you're planning for a normal quarter in China in Q1. So any delineation there? And then for the question, you mentioned that some "other customers" have too much inventory. Is there any rhyme or reason there? Any commonality between end markets or geographies? Or is it just sort of spread out all over the place? Thanks.

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

Got it. Thanks, Ganesh.

You’re welcome.

Our next question comes from the line of Chris Caso with Credit Suisse. Please proceed.

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

Yes. So let me parse your question. So number one, we are continuing to expand the existing facilities we have. Those are the three fabs in the U.S., our assembly and test facilities in the Far East, et cetera. So there is no backing off from capacity where we believe we can bring on cost effective capacity that will go forward. Now 300-millimeter was a fairly large step for us, right? We don't have that infrastructure. We had a lot of thinking to do on how would we load a fab because you can build a fab and you can get the help to get the government funding, whatever else, to do that. But still, at the end of the day, there are several things that are important to have. And the most important one is do you have enough wafers to load it and have the cost per wafer and the absorption cost effective or not. That was going to be a challenge we knew at all times. And second, we need to be able to license the technologies because unlike in 200-millimeter where we own the vast majority of our technologies, in 300-millimeters, we would need to license that technology from our partners. That all said, as we looked at on balance, how could we achieve our business objectives. In the conversations we were able to have at the highest levels of our partners, we came away with plans and commitments for what was needed to support our business that we felt very confident that being able to work in the model we have today with our partners was completely supportive of our business and substantially derisk the execution of a greenfield 300-millimeter fab.

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

It's -- the jury is still out. But let me tell you right in the middle of all of this, we continue to have customers approaching us for long-term supply agreements, long-term supply agreements that are predominantly in a 5-year window of time. So many, many of our customers build substantially valuable end equipment. I mean if you think of aerospace defense, commercial aviation, medical, automotive, many of the large industrial equipment, et cetera, they are trying to have assurance of supply as the most critical element of what they are planning for. Now how they want to do it with us, whether it is standard backlog, PSP backlog, long-term supply agreements is really a business decision that they need to make on the risk rewards or where they want to go. But I can tell you that for the customers that we're dealing with for many, many, many of them, the value of the supply assurance is extremely high on their agenda and is the reason why they are continuing to be a participant in the PSP program and signing up to be an increasing number of long-term supply agreements that they're signing up for.

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

Yes, Chris, a lot of conversations are taking place at the CEO, CPO levels for these. And I think customers are much more thoughtful about a long-term view. They're not looking at a one or two quarter. The cycle may be slower than what we thought. They're as much worried about what happens in 2024 and what happens in 2025 and how do they build a supply chain that is reliable, resilient and enables their growth on these very, very high valued and equipment.

Got it. Thank you.

Thanks, Chris.

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

Great. Thank you. I guess, I just wonder how you see the progression of bookings here. You've got this elevated backlog. You have lead times coming in. It seems like the book-to-bill should go pretty far below 1, but then we probably -- it's just math at that point, it's not really that there's an air pocket at the end. But I guess, historically, a lot of times, there's been air pockets at the end. So as -- I know you guys have seen a lot of these types of environments. Just how are you thinking about it? And how will you know if that lead time reduction means you need to take more action to kind of -- the actions you've already discussed to protect your earnings power?

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

Great. Thank you.

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

Thanks for the follow-up. Actually, just a comment and a question. Comment, if I just annualize your March quarter guidance, it suggests annual sales growth somewhere in the 10% to 11% for this year, and I just wanted to make sure that, that is kind of the message you are giving. My question is on gross margin. Usually, when you grow sales, you have been able to grow gross margin. But I know I'm nitpicking, but I think for March, you are guiding gross margins to go down somewhat and you're also kind of at the higher end of your gross margin outlook. So what's happening to gross margins? Why are they going down? And is 68.5% kind of that final destination or is there more leverage in the model?

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

And any leverage beyond the 68.5%, Eric?

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

And Vivek, we're always balancing growth and gross margin, right? We want both. And so we got to be careful that we don't take one up so high that it affects the other. So we will improve, but we also want growth to continue at the rate that we want.

Understood. Thank you.

Thank you.

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

Yes, thank you for the follow-up. So with fiscal '23 almost behind us, wondering if you have an update for us on your total system solution strategy. I went to two of your major distributors' websites and I think they listed over 4,000 reference designs for Microchip, and that's up substantially from a few years ago. How effective are these reference designs in helping to drive TSS? And do you have any metrics you can share with us on increasing dollar content for customer engagement?

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

Thank you.

Thanks, Harlan.

Our next question comes again from the line of Ambrish Srivastava with BMO Capital Markets. Please proceed. Ambrish, your line is now live.

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

Yes. So we've had extensive discussions about options by which we could move forward, options that our partners were exercised to be able to support what we need, and we’ve had those at the highest levels of our partners' management. And we are confident that what we need in partnership with our supply chain -- our key supply chain partners can be met. And as I said, it does it at a far lower risk and a far better ROIC.

Okay, got it. Thank you.

Thank you. There are no further questions at this time. Mr. Moorthy, I'd like to turn the call back to you for closing remarks.

Great. Thank you, and thank you to everyone who joined us on the call today, and we will be seeing many of you on some of the events that are coming up this quarter, but have a good evening. Bye-bye.

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