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 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 to specific investor 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 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 acquisition activities, share-based compensation and certain other adjustments as described in our press release and in the reconciliations on our website. Net sales in the December quarter were $2.169 billion, which was up 4.6% sequentially. We have posted a summary of our GAAP net sales by product line and geography on our website for your reference. On a non-GAAP basis, gross margins were a record at 68.1%, operating expenses were 20.6% and operating income was a record 47.5%. Non-GAAP net income was a record $863.7 million.

Non-GAAP earnings per diluted share was a record $1.56 and at the high end of our guidance range. On a GAAP basis in the December quarter, gross margins were a record at 67.8%. Total operating expenses were $659.2 million and included acquisition intangible amortization of $167.4 million, special charges of $6.5 million and $0.3 million of acquisition-related and other costs, and share-based compensation of $37.1 million. GAAP net income was a record $580.3 million, resulting in a record $1.04 in earnings per diluted share. As compared to a year ago quarter, our December quarter GAAP tax expense was impacted by a variety of factors, notably the tax expense recorded as a result of the capitalization of R&D expenses for tax purposes.

Our non-GAAP cash tax rate was 11.9% in the December quarter. We now expect our non-GAAP cash tax rate for fiscal '23 to be about 11%, exclusive of the transition tax and any tax audit settlements related to taxes accrued in prior fiscal years. A reminder of what we communicated over the past couple of quarters. Our fiscal '23 cash tax rate is higher than our fiscal '22 tax rate for a variety of factors, including lower availability of tax attributes, such as net operating losses and tax credits as well as the impact of current tax rules requiring the capitalization of R&D expenses for tax purposes. We are still hopeful that the tax rules requiring companies to capitalize R&D expenses will be pushed out or repealed.

If this were to happen, we would anticipate about a 300 basis point favorable adjustment to Microchip's non-GAAP tax rate in future periods. Our inventory balance at December 31, 2022, was $1.165 billion. We had 152 days of inventory at the end of the December quarter, which was up 13 days from the prior quarter's level. We have increased our raw materials inventory to help protect our internal manufacturing supply lines. We are carrying higher work in progress to help maximize the utilization of constrained equipment as well as to position ourselves to take advantage of new equipment installations, which should relieve bottlenecks. We are investing in building inventory for long-lived, high-margin products whose manufacturing capacity is being end of life by our supply chain partners.

We need to take actions to help ensure that our supply lines can feed growth beyond what we expect in the March 2023 and June 2023 quarters, and our reported days of inventory is a backward-looking indicator. As gross margins rise, the effective days of inventory for the same physical inventory rises and with every 100 basis points of gross margin growth, it creates approximately three incremental days of inventory. Inventory at our distributors in the December quarter was at 22 days, which was up three days from the prior quarter's level. Our cash flow from operating activities was a record $1.278 billion in the December quarter. Included in our cash flow from operating activities was $385 million of long-term supply assurance receipts. We are going to adjust these items out of our free cash flow to determine the adjusted free cash flow that we will return to shareholders as these payments will be refundable over time as purchase commitments are fulfilled.

Our adjusted free cash flow was $751.6 million and 34.6% of net sales in the December quarter. As of December 31, our consolidated cash and total investment position was $288.9 million. We paid down $719.1 million of total debt in the December quarter, and our net debt was reduced by $701.2 million. Over the last 18 full quarters since we closed the Microsemi acquisition and incurred over $8 billion in debt to do so, we have paid down almost $6.2 billion of the debt and continue to allocate substantially all of our excess cash beyond dividends and stock buyback to bring down this debt. Our adjusted EBITDA in the December quarter was a record at $1.106 billion and 51% of net sales. Our trailing 12-month adjusted EBITDA was also a record at $4.051 billion. Our net debt to adjusted EBITDA was 1.56 at December 31, 2022, down from 1.84 at September 30, 2022, and down from 2.58% at December 31, 2021.

Capital expenditures were $141.3 million in the December quarter. Our expectation for capital expenditures for fiscal year 2023 is between $525 million and $545 million as we continue to take actions to support the growth of our business and ramp our manufacturing operations accordingly. We continue to prudently add capital equipment to maintain, grow and operate our internal manufacturing operations to support the expected long-term growth of our business. We expect these capital investments will bring gross margin improvements to our business and give us increased control over our production during periods of industry-wide constraints. Depreciation expense in the December quarter was $55.3 million.

I will now turn it over to Ganesh to give us comments on the performance of the business in the December quarter as well as our guidance for the March quarter. Ganesh?

Ganesh Moorthy - President and Chief Executive Officer

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 of $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 two 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 were 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 1.56 times exiting the December quarter. During the December quarter, we returned $409.8 million to shareholders in dividends and share repurchases, representing 60% of the prior quarter's free cash flow. We expect to get below 1.5 times net leverage by the end of the March quarter. And as Steve will share with you later, the Microchip Board has decided to increase the rate at which capital will be returned to shareholders starting in the June quarter. My heartfelt gratitude to all our stakeholders who enabled us to achieve these outstanding results and especially to the worldwide Microchip team whose tireless efforts and strong sense of ownership are what enable us to navigate effectively in the midst of turbulent times.

Taking a look at our net sales from a product line perspective, our Microcontroller net sales was sequentially up 3.5% in the December quarter and set another all-time record. On a year-over-year basis, our December quarter microcontroller net sales were up 25.6%. Microcontrollers represented 56.3% of our net sales in the December quarter. Our analog net sales were sequentially up 5.9% in the December quarter and also set an all-time record. On a year-over-year basis, our December quarter analog net sales were up 21.2%. Analog represented 28% of our net sales in the December quarter. In the December quarter, our FPGA net sales also achieved a new record. While our overall business remained strong in the December quarter, the consumer appliance end market was weak as was our overall business in China.

Our China business was initially impacted by COVID lockdowns and then subsequently impacted by the rapid transmission of COVID when lockdowns were lifted. Both actions adversely impacted our customers' operations during the December quarter, resulting in inventory at many customers and distributors being higher than normal. In response to the weaker business environment in China, and a small but increasing number of other customers who have inventory and requested pushouts, we took action in the December quarter to delay or redirect some shipments and plan to do more of the same in the March quarter. This is designed to reduce customer and channel inventory overbuild, but will also increase the inventory on our balance sheet in the near term. In the medium term, we expect this will give us a better chance to achieve a soft landing and position us well to respond to a stronger demand growth as the macro environment improves.

As a result of the uncertain macro environment and the multiple quarters worth of backlog in our books, most of which is noncancelable, our bookings have slowed down, as we expected. Given the circumstances, we view the booking slowdown as a positive, which will serve to preserve the quality of new backlog that gets placed. Our unsupported backlog, which represents backlog customers wanted to ship to them in the December quarter, but which we could not deliver in the December quarter, remained well in excess of the actual net sales we achieved. Unsupported backlog did decline slightly for the first time in nine quarters, and we are continuing to work hard to further reduce our unsupported backlog as well as our lead times to more manageable levels. While we have seen an increase in request to push out or cancel backlog, these requests remain a small fraction of the very large backlog we have over multiple quarters, and hence, they have not had a material effect on our business.

Despite supply gradually improving, we expect to have supply constraints through much of 2023. However, in order to achieve a more healthy and sustainable business environment, we are driving to bring average lead times down to 26 weeks or less by the time we get to the second half of 2023, and we will be publishing a customer letter to this effect shortly. We believe there are three reasons why Microchip's business is demonstrating more resilience in the midst of the weakness seen by some other semiconductor companies. First, on the demand side, the industrial, automotive, aerospace and defense, data center and communications infrastructure end markets, which make up approximately 86% of our net sales remains solid.

The consumer end market, which is about 14% of our net sales, is experiencing some weakness, but is dominated by home appliances, which are comparatively more resilient. There are some signs that the data center end market could see some headwinds in 2023 although our business remains strong based on the market share gains we have had. Hence, our overall demand remains quite durable because of the end market mix we have consciously gravitated towards over the years. Second, on the supply side, a vast majority of our products are built on specialized technologies requiring trailing edge capacity. This is the capacity that has been most constrained over the last two years which still remains constrained and where there was less opportunity to overship to consumption.

And last but not least, our laser focus on organic growth through total system solutions and higher-growth megatrends from multiple years is giving us increased design win momentum, further share gains and a result in revenue tailwind. If you review Microchip's peak to trough performance through the business cycles over the last 15-plus years, you will observe our robust and consistent cash generation, gross margin and operating margin results. The investor presentation posted on our IR website has details of our performance through the business cycles. We remain cautiously optimistic about navigating to a soft landing for our business, and expect our cash generation, gross margin and operating margin to once again demonstrate consistency and resiliency through the cycle.

Last quarter, we mentioned that Microchip was in the early stages of considering building a 300-millimeter U.S.-based fab for specialized trailing edge technologies. After a detailed analysis, we have concluded not to move forward with this project and that our business objectives would likely be better achieved through our relationships with our foundry suppliers with lower execution risk and a better return on invested capital. The CHIPS Act is already making a positive impact on our business. through the investment tax credit, which started on January 1, and with impending capacity expansion grants that we will be seeking with several of our U.S. semiconductor factories. We believe the CHIPS Act is good for the semiconductor industry and for America as it enables critical investments, which will help even the global playing field while being strategically important for American economic and national security.

Now let's get into the guidance for the March quarter. Our backlog for the March quarter is strong, and we have more capacity improvements coming into effect. However, we are also taking active steps to help customers with inventory positions to selectively push out some of their backlog. Taking all the factors we have discussed on the call today into consideration, we expect our net sales for the March quarter to be up between 1% and 4% sequentially. Further, we expect sequential net sales growth again in the June quarter. At the midpoint of our net sales guidance, our year-over-year growth for the March quarter would be a strong 20.6%. We expect our non-GAAP gross margin to be between 68.1% and 68.3% of sales. We expect non-GAAP operating expenses to be between 20.6% and 20.8% of sales.

We expect non-GAAP operating profit to be between 47.3% and 47.7% of sales. And we expect our non-GAAP diluted earnings per share to be between $1.61 per share and $1.63 per share. At the midpoint of our earnings per share guidance, our year-over-year growth for the March quarter would be a strong 20% despite a much higher tax rate than the year ago quarter. Finally, as you can see from our December quarter results and our March quarter guidance, our Microchip 3.0 strategy, which we launched 15 months ago is firing on all cylinders as we continue to build and improve what we believe is one of the most diversified, defensible, high growth, high margin, high cash generating businesses in the semiconductor industry.

Our Board of Directors and leadership team operate just as long-term owners of the business would, thoughtfully making the key investments in people, technology, capacity, culture and sustainability required to thrive in the long term while being prudent, pragmatic and nimble about whatever short-term adjustments may be required. We are confident we will effectively navigate through whatever macro business challenges may unfold in 2023.

Let me now pass the baton to Steve to talk more about our cash return to shareholders. Steve?

Stephen Sanghi - Executive Chair

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 $0.358 per share.

This is an increase of 41.5% from the year ago quarter. During the last quarter, we purchased $229.5 million of our 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 paydown 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 our 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 customers fulfill their purchase commitments. The adjusted free cash flow for December quarter was $751.6 million. We plan to return 62.5% or $469.8 million of that amount to our shareholders with the dividend expected to be approximately $196 million and the stock buyback expected to be approximately $273.8 million. We also want to provide guidance for our planned cash return to shareholders beyond this quarter.

We expect our net debt leverage at the end of March quarter to be less than 1.5. Therefore, our Board of Directors decided that beginning with the June quarter, we will accelerate the cash return to shareholders. We laid out a strategy for our cash return to shareholders at an Analyst and Investor Day in November 2021. We began with returning 50% of the free cash flow of the prior quarter and increasing it by 2.5 percentage points every quarter. With these increases, we'll be returning 62.5% of last quarter's adjusted free cash flow to investors this quarter. Beginning in June quarter, we expect to double the rate at which we are increasing the percentage of free cash flow returned to shareholders.

In other words, in June quarter, we expect to return 75% of our adjusted free cash flow from March quarter. Then in September quarter, we expect to return 72.5% of adjusted free cash flow from the June quarter, and so on, five percentage point increase every quarter. At this rate, we would approach 100% return of our adjusted free cash flow in about eight quarters. We realize that we are still carrying a debt burden of $6.62 billion in a rising interest rate environment. As some of our debt matures, we will likely be renewing it at a higher interest rate than we are currently paying on such debt. Our strategy of accelerating our cash return to shareholders over several quarters will help us pay down some additional debt and lower our debt service costs.

With that, operator, will you please poll for questions?

Question & Answers

Operator

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

Toshiya Hari - Goldman Sachs - Analyst

Hi, good afternoon and 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? 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?

Ganesh Moorthy - President and Chief Executive Officer

So the price increases in 2022 were 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. And so we don't have a nice easy breakout of what was cost driven - price driven increase versus product shipment increases. 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.

Toshiya Hari - Goldman Sachs - Analyst

Thank you.

Operator

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

Vivek Arya - Bank of America - Analyst

Thanks for taking my questions. 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 in 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?

Ganesh Moorthy - President and Chief Executive Officer

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 megatrend 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.

Vivek Arya - Bank of America - Analyst

Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Thanks, Vivek.

Operator

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

Gary Mobley - Wells Fargo Securities - Analyst

Hi, guys. Thanks for taking my question. I realize 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 perhaps may this sequential growth continue beyond the June quarter.

Ganesh Moorthy - President and Chief Executive Officer

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.

Gary Mobley - Wells Fargo Securities - Analyst

Thank you, Ganesh.

Ganesh Moorthy - President and Chief Executive Officer

Thanks, Gary.

Operator

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

Josh Buchalter - Cowen & Company - Analyst

This is Josh Buchalter on behalf of Matt Ramsey. I wanted to ask about the capital return program. I think some expected a more binary event where when you hit the leverage target, but you're taking a 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?

Stephen Sanghi - Executive Chair

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 for 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 doubled 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 every 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, we'll 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.

Ganesh Moorthy - President and Chief Executive Officer

Josh, if I would 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 at a glide slope that is different today given what we know is the circumstances today.

Josh Buchalter - Cowen & Company - Analyst

Thanks for the color congrats on the results.

Ganesh Moorthy - President and Chief Executive Officer

Thanks.

Operator

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

Raji Gill - Needham & Company - Analyst

Yes. Thank you and congrats as well. I wanted to get a view on 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 I 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?

Ganesh Moorthy - President and Chief Executive Officer

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 three to five 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 path 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.

Raji Gill - Needham & Company - Analyst

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 pushouts. 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?

Ganesh Moorthy - President and Chief Executive Officer

Long lead times are never a good thing for either the customer or for us. There's more uncertainty the further 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 two 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 time frame. And then the demand side of the equation may or may not affect it further as we go into the second half of the year.

Raji Gill - Needham & Company - Analyst

Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Welcome.

Operator

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

Tore Svanberg - Stifel - Analyst

Yes. Thank you. I had a question on both internal and channel inventory. So it sounds like near term, you want to build a little bit 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?

Ganesh Moorthy - President and Chief Executive Officer

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.

J. Eric Bjornholt - Senior Vice President and Chief Financial Officer

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.

Ganesh Moorthy - President and Chief Executive Officer

The way to think about the inventory is this is inventory of product that are very long lifetimes. There is no absolute 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 on 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 as anywhere close to being an issue for us.

Tore Svanberg - Stifel - Analyst

Great color. Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Thank you.

Operator

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

Toshiya Hari - Goldman Sachs - Analyst

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 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?

Stephen Sanghi - Executive Chair

Toshi, let me have Ganesh answer that.

Ganesh Moorthy - President and Chief Executive Officer

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 noncancelability of PSP backlog hasn't really changed. What we have always said is that the noncancelable part of it is not where we are willing to negotiate. It's on the nonreschedulability 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 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. But what we've always wanted was responsibility from a customer placing PSP backlog on us to be able to honor the noncancelability 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 noncancelability.

Toshiya Hari - Goldman Sachs - Analyst

Makes sense. Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Thank you.

Operator

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

William Stein - Truist Securities - Analyst

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?

J. Eric Bjornholt - Senior Vice President and Chief Financial Officer

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 or 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 spend and particularly hiring people, and we're seeing some of that free up to date. 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 yes, 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 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 the 20.65%. Again, it's a net, but we are continuing to invest and making progress on the higher end front.

Ganesh Moorthy - President and Chief Executive Officer

Well, the way I think about it philosophically also is that the opex investments we make are also the critical investments that drive future gross margin improvements, future innovation which we're delivering to our customers. And the whole growth and profitability of the company is dependent on making good 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.

William Stein - Truist Securities - Analyst

Great. Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Thanks.

Operator

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

Ambrish Srivastava - BMO Capital Markets - Analyst

Hi. Thank you very much. I'll speak for myself, Ganesh and Steve. You guys have proven me wrong. I thought, how can it be? We have never seen this kind of “soft landing.” So two quarters in a row you have shown and you've given guidance beyond the quarter. So kudos to you for that. 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. Sort of make sure I understood. So what are your assumptions for the second half demand that is kind of baked into your comments that you can get lead times down to 26 weeks in the back half?

Ganesh Moorthy - President and Chief Executive Officer

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're 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.

Stephen Sanghi - Executive Chair

Let me add to that a bit. 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.

Ganesh Moorthy - President and Chief Executive Officer

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.

Ambrish Srivastava - BMO Capital Markets - Analyst

Great, great. Thank you, guys. Appreciate it.

Operator

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

Harlan Sur - JPMorgan - Analyst

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?

Ganesh Moorthy - President and Chief Executive Officer

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 seven 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.

Stephen Sanghi - Executive Chair

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.

Harlan Sur - JPMorgan - Analyst

Thanks, Steve. Thanks, Ganesh.

Ganesh Moorthy - President and Chief Executive Officer

Thanks, Harlan.

Operator

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

Matt Myers - Susquehanna - Analyst

Hi, 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.

Ganesh Moorthy - President and Chief Executive Officer

It remains well over 50% to this day.

Matt Myers - Susquehanna - Analyst

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?

J. Eric Bjornholt - Senior Vice President and Chief Financial Officer

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

Stephen Sanghi - Executive Chair

I mean utilization is essentially 100%, right? every wafer we can move and every unit we can move to the factory, we're moving it.

Matt Myers - Susquehanna - Analyst

Right. Thank you.

Operator

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

Vijay Rakesh - Mizuho Securities - Analyst

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

J. Eric Bjornholt - Senior Vice President and Chief Financial Officer

So 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 three days 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.

Ganesh Moorthy - President and Chief Executive Officer

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.

Vijay Rakesh - Mizuho Securities - Analyst

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 will be different?

Ganesh Moorthy - President and Chief Executive Officer

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 six, nine, 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're 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.

Vijay Rakesh - Mizuho Securities - Analyst

Got it. Thanks.

Ganesh Moorthy - President and Chief Executive Officer

Thank you.

Operator

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

Chris Danely - Citi - Analyst

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?

Ganesh Moorthy - President and Chief Executive Officer

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're 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, etc. 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.

Chris Danely - Citi - Analyst

Got it. Thanks, Ganesh.

Ganesh Moorthy - President and Chief Executive Officer

Welcome.

Operator

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

Chris Caso - Credit Suisse - Analyst

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?

Ganesh Moorthy - President and Chief Executive Officer

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, etc. 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.

Chris Caso - Credit Suisse - Analyst

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.

Ganesh Moorthy - President and Chief Executive Officer

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 five-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, etc, 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.

Stephen Sanghi - Executive Chair

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.

Ganesh Moorthy - President and Chief Executive Officer

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.

Chris Caso - Credit Suisse - Analyst

Got it. Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Thanks, Chris.

Operator

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

Joe Moore - Morgan Stanley - Analyst

Great. Thank you. I guess I just – I 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 one, 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?

Ganesh Moorthy - President and Chief Executive Officer

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 they're 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, etc. 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're 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.

Joe Moore - Morgan Stanley - Analyst

Great. Thank you.

Operator

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

Vivek Arya - Bank of America - Analyst

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?

J. Eric Bjornholt - Senior Vice President and Chief Financial Officer

Okay. So I'll 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're 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.

Vivek Arya - Bank of America - Analyst

And any leverage beyond the 68.5%, Eric?

J. Eric Bjornholt - Senior Vice President and Chief Financial Officer

So we aren't at 68.5% yet. We're 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.

Ganesh Moorthy - President and Chief Executive Officer

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.

Vivek Arya - Bank of America - Analyst

Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Thank you.

Operator

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

Harlan Sur - JPMorgan - Analyst

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?

Ganesh Moorthy - President and Chief Executive Officer

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.

Harlan Sur - JPMorgan - Analyst

Thank you.

Ganesh Moorthy - President and Chief Executive Officer

Thanks, Harlan.

Operator

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

Ambrish Srivastava - BMO Capital Markets - Analyst

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?

Ganesh Moorthy - President and Chief Executive Officer

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.

Ambrish Srivastava - BMO Capital Markets - Analyst

Okay. Got it. Thank you.

Operator

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

Ganesh Moorthy - President and Chief Executive Officer

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

Operator

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MICROCHIP TECHNOLOGY INC

Q3 2023

Earnings Transcript

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