All right, great. We'd like to get started. Good afternoon, everyone. Thank you for joining us. My name is Toshiya Hari. I cover the semiconductor space at Goldman Sachs. Very pleased, very excited to have the team from Microchip with us this afternoon. We have Eric Bjornholt, Senior Vice President and CFO, and we have also Sajid Daudi from the Investor Relations team. I have a bunch of questions, but I believe, Eric, you wanted to make some opening remarks.
Yeah.
Over to you.
Well, thanks for hosting us today, and good afternoon, everybody. So, first of all, you know, before I start, you know, I wanna highlight that I'll be making certain forward-looking statements in this discussion and refer you to our SEC filings that highlight important risk factors about the company. So, yeah, Microchip has had a really good last couple of years. We posted record revenue, record gross, and operating margins last quarter. Free cash flow has been fantastic.
We've been on this journey, moving away from acquisitions that we did from 2010 to 2018, kind of cumulatively finishing with the Microsemi acquisition in 2018, and have really built a semiconductor company focused on the embedded control environment, where we can provide complete solution sets to our customers that we call TSS, or Total System Solutions. So what you've seen over the last 5+ years is organic growth. We've been gaining a lot of share. The business model's changed dramatically. Our leverage has come down, and we are moving towards 100% free cash flow return to our shareholders between now and March 2025.
We're returning 72.5% this quarter, based on last quarter's free cash flow, and then in six quarters, we'll be at a 100% free cash flow return. So it's a much different company. Our gross and operating margins are doing extremely well. Two years ago, a little over two years ago, at our Analyst and Investor Day, we set an operating margin model target of 45% non-GAAP operating margins. Last quarter, we posted 48.1%. We'll do the same this quarter at the midpoint of our guidance, so really functioning very well, and the growth of the company has been significant.
We think we're focused on the right areas of growth in the marketplace and combining our focus on these total system solutions that I mentioned on some of the fastest-growing mega trends in the industry, we think will continue to allow us to gain share as we move forward. But we are facing some headwinds in the business today. We've highlighted that in our last investor call, and I would say that China is quite weak for us. We have customers that are self-identifying inventory positions with us, and we're working through them to allow a pushout of those orders, and that will absolutely impact our December quarter. We talked about the December quarter having amplified seasonality for us, and, you know, typical December quarter is down 3% or 4%, and we think it'll be worse than that. So, you know, we're working with customers.
Lead times are coming down rapidly, but what we've seen since our earnings call, is the environment really has not gotten any better, and we've seen some of these requests for pushout and whatnot, continuing to grow. So we're working through that as lead times come down, but we're very focused on managing to a soft landing, which for us would mean continuing high gross and operating margins. We've said that we don't see a situation where our non-GAAP operating margins could fall below 40%, and our free cash flow will be quite high. So with that, I'll turn it over for questions.
Great. Thank you so much for that, Eric. That's a great overview. So I guess maybe kicking off with a couple of near-term questions, and you somewhat covered this, but, you know, four or five months ago, when you gave guidance for the June quarter, you had noted at the time that September was unlikely to be down, and you're guiding, or you did guide, September down to 1% at the midpoint, which is pretty marginal.
Yeah.
But directionally down. So I guess my first question is, which end markets, which geos are driving that? Is it broad-based, or would you be able to sort of highlight a couple of things that are driving the incremental weakness?
So I would say the largest area of weakness that we've seen has absolutely been China. So, you know, we were expecting, coming out of the COVID lockdowns, coming out of Chinese New Year, that the June quarter would be a strong quarter for us. Typically, June is very strong in China, coming off a weaker March, and that just did not develop. So what happened is the sell-through activity through distribution was really low, and China distributors built inventory, so that was probably the biggest negative surprise that we saw. You know, but we also are seeing some signs of weakness in industrial and automotive in Europe. You know, the German economy has posted two consecutive quarters of negative GDP, so technically, you could say that they're in recession.
Some of that is probably associated with the weakness in China because it's a heavy export economy, but we're seeing that trickle down to a broader range of industrial and automotive customers.
Got it. And I do have a couple of geopolitical questions later on in the session, but just for context, China, in terms of consumption of your products, just for context, how big is that business for you today?
Yeah. So last fiscal year, our last completed fiscal year, China was about 21% of our revenue based on what we ship into China. And, you know, our gut feel is about half of that is designed outside of China for consumption outside of China, and so we're probably looking at about 10% of revenue that is for domestic consumption. And there's a relatively high percentage of that, that is going to be highly proprietary, you know, the customer has to use Microchip for the solution that they're driving. And so maybe you're left with half of that or 5% of the revenue that's really kind of subject to domestic-type competition in China.
Got it. Got it. Okay, and I guess that was sort of my follow-up question. When you talk about some of the incremental softness in China, is that purely a market dynamic, or is there competition in that role playing a role there as well?
You know, competition is really no different today than what we've seen historically. Most of our competition is from the larger competitors. You know, obviously China is investing heavily in semiconductors, and, you know, some of that is being invested on the trailing edge technologies, so microcontroller and analog and other things. But it is very hard to compete for a new competitor to compete with a Microchip or some of our larger competitors that have hundreds of thousands of SKUs in the portfolio and give customers options in terms of what they're purchasing.
Particularly, when you're serving the end markets that have longevity like we have, you know, those new competitors in China might typically be focused on, you know, something that's kind of high volume, consumer-oriented, and that's not typically where Microchip plays with the product lines that we have and the gross margins that we drive.
Got it. And the December quarter outlook as of today, being subseasonal, I guess, relative to seasonality, is the weakness there pretty much the same dynamics as China and industrial and automotive in Europe, or is there something else layering in as we move into?
It's that, and I just think that, you know, we had this Preferred Supply Program, we still have it in place where customers were giving us 12 months of non-cancellable, non-reschedule backlog. And the end markets that many of our customers are servicing have weakened over that time period. And so, there's many customers that are either in an over-inventory position or potentially heading to an over-inventory position with the backlog they have in place, and that's what's driving these discussions about pushing out orders.
Right. Okay, that makes sense. Eric, you, you've been in this business for a very long time. You've seen many, many cycles. As you sort of compare and contrast this cycle, this downturn with other cycles, what are some of the similarities? What are some of the fundamental differences?
Maybe start with the largest difference is, you know, we have never seen the gap between supply and demand that we had entering this cycle, and that caused huge kind of undercapacity situation. That capacity got allocated to markets that were strong at kind of the start of COVID, and that would've been medical, work from home-related activities, and then people got caught short on inventory when the end market environment was actually pretty healthy. And, you know, that just, you know, caused lead times to stretch out and caused customers to have to place orders beyond what they were used to. And, you know, we had 52-week lead times for a large portion of our product line. And so today, you know, lead times are normalizing, but they still have a ways to go.
You know, we ended last quarter or started this quarter with average lead times of just below 26 weeks, and those are coming down rapidly. But what that tells you is that the booking activity is quite low. But many of our customers had 9 or 12 months of backlog with us, and they just don't need that anymore. With lead times where they're at and where they're heading to, you know, just ordering patterns have changed. And, you know, we will get back to a situation where we have much more turns to take in a quarter than we have for the last two years, but that would be normal operating environment for us, but not something that we've seen for the last two years.
Got it. I’m sure you guys get this question from investors as well, but the one we get all the time is: because the recent upturn was so strong for so long, should we be bracing for a longer and/or deeper downturn? I don’t expect you to guide beyond December, but how do you, at a high level, think about that?
I'm not even going to guide for December.
True.
Anyway, you know, this was an extended upcycle. We, we don't know. I mean, typically, we would say an inventory correction or a cycle might last two or three quarters on the downside, and that would be our expectation. But, you know, the honest answer is, we really don't know at this point in time. With lead times falling, bookings being low, we're gonna have to see an inflection point at some point in time where we start getting those short-term orders coming in to fill up the backlog. And, you know, that's unknown at this point.
Right. Okay, that's fair. PSP is a program/topic that comes up in our conversations with investors. Just to level set, can you take us back to 2021 when you guys introduced and implemented the program? What was the catalyst? What was the customer response, and how has it played out relative to your expectations and how you had planned it back then?
Okay. Okay, so PSP is our Preferred Supply Program. We introduced it in February of 2021 based on customer feedback, that they were looking for a way to give them more assurance of their supply. So we developed a program in conjunction with our customers, where customers would give us 12 months of non-cancellable, non-reschedulable backlog, and they would, you know, every month or every week that rolled by, put more backlog on us to fill up that 12 months. And that allowed us to know that we had solid backlog. We knew where to go invest, we knew what orders to place with our foundry partners, we knew which equipment we had to purchase, we knew what hiring we needed to do, we knew what raw materials we need to have, and that allowed our supply chain to be more predictable for our customers.
You know, it was different. You know, a customer in the past might have had 13 weeks of backlog with us, and then they had 52 weeks. You know, forecasting out 52 weeks in time, some customers can do that with pretty good accuracy because their businesses are very stable, and others can't, so they're making some guesses. You know, we know that customers manage that program in a way where some of them only gave us 9 months, or they gave us 12 months of backlog, but you could see months 10, 11, and 12 had less backlog than our normal run rate. So I think customers naturally kind of hedge themselves in that. You know, over time, it's been a really good program.
Customers that have participated in the program have been serviced better than those who did not, and, you know, I think we've built a lot of customer loyalty through that program. Now, what can happen is when the environment changes, right, and customers have 52 weeks of backlog and their end market changes, they might be faced with an over-inventory situation or at least an over backlog, and, you know, can Microchip help them do that?
Right.
... Ultimately, it comes down to a discussion, as you know. It can't be heads, the customer wins, and tails, Microchip loses in that discussion. So it has to be, "Hey, we've gone out and made commitments, and because of that, you have skin in the game, customer, just like Microchip does, and how can we find a reasonable working solution?" Sometimes that means might be the customer opens up a new design opportunity for us that we didn't have before, and, you know, we work with them to manage their inventory situation over time. But, you know, most of these customers, again, have been served very well, but we've made changes now. Now, the PSP program is no longer a 12-month program. It's a 6-month program, which is more in line with...
That's for new orders starting in August. But, you know, that's more in line with where our lead times are, so it makes sense. And I suspect, as lead times continue to fall down, that PSP, as a percentage of our backlog, will continue to fall. But there's gonna be customers that want to continue to participate in a program like that because they've been serviced well. And, you know, some of those customers are actually entering into long-term supply agreements with us that cover a longer period of time than the 12 months covered by PSP.
So it's a mix based on customer and end market, but, you know, these long-term supply agreements are typically with customers who are selling an end product that has a really high value compared to the content of semiconductors or the Microchip content in their system, and they just wanna make sure they don't get caught short.
Got it. Got it. I guess my follow-up question was, if I'm a customer, and if I'm able to cancel and/or reschedule, what's my downside in signing up for PSP? But to your point, you're landing at a sort of a compromise, if you will-
Right
... where the customer is giving up something as well.
Yeah, and let me make it clear that we are not giving in on the noncancelable piece of the program.
Got it.
Right? So it's, it's just the reschedulable piece that we are working with customers with when they're self-identifying that they have an issue.
Okay, got it. And the shift from 12 months to 6 months, this was fairly recent?
Yeah, just happened in August.
In August?
Yep.
Okay.
Yep.
Got it. Got it. Okay, that makes sense. So we touched on lead times a little bit. At the start of the year, I think you were at 52 weeks ±?
Roughly, yep.
Roughly. And currently, you're around 26.
Yeah, we're under 26 today.
Under 26 now. And what's sort of a comfortable, kind of, steady state lead time, average lead time for a business like Microchip?
So, I mean, it's always going to be a range, right-
Sure
... based on how deep our portfolio is. We, you know, could have a product that's in stock and can ship to you tomorrow, and another product that still has a 52-week lead time. But we've actually posted a letter on our website to our customers, saying that by the end of the calendar year, you could say, call it the start of next calendar year, we expect 80%-90% of our standard products, you know, general MCU, analog products, to have 4-8-week lead times.
Okay.
So, and-
Again, that's fairly recent?
Mm-hmm.
Okay.
Yep.
Yeah. Got it.
That, that's where customers' expectations of where lead time should be. So if we have a softer December, we will build some die bank from our factories, get that inventory positioned, so it's through the wafer fab and probe process, and then when we get an order from a customer, can turn it through the assembly and test process pretty quickly, and that's what customers have been accustomed to historically.
Got it. Okay, that makes sense. Shifting gears a little bit, on pricing of your products and, you know, across the market, it's been a tailwind for your business over the past couple of years. What are your expectations for pricing going forward, particularly in light of what you've just sort of described from a demand perspective? And is it sort of... You know, from a cost perspective, could there be continued sort of inflationary pressures as well?
Yeah
... that sort of force you to price up, if you will?
Yeah. So, you know, just, just, you know, what's happened over the last two years is there's been so much inflationary pressure on the pressure on the business, with higher capital costs, higher labor costs, that we've seen, our foundry partners have seen, our subcontractors have seen, and, you know, those costs have all come through to our bill of materials. And we have marked those costs up for a Microchip-like margin and passed those on to our customers, and been very transparent about that. So we haven't gouged customers. You know, we probably could have charged 2, 3x, in certain cases, what we charged the customers, because they were such, in such need of the product. We didn't do that, right? So we were transparent.
My expectation is generally that pricing will be flat on a go-forward basis, but, you know, there still is, you know, pretty heavy inflation in the economy, and if we, if we have that rising pressure, you know, we may have to pass on price increases to our customers. That's not our intention in the current fiscal year, to have a price increase. We've heard of other competitors talk about potential price increases in 2024. We would like to avoid that, but, it, it depends on what the situation is gonna be. If our foundries raise prices on us by 20%, you know, we're not gonna eat that. Our, our customers will eventually pay for that, but hopefully, that's not the case.
Right. And the timing at which you sort of gain visibility on, on things like that, that's year-end, beginning of next year, typically?
Sometimes. You know, so sometimes the foundry negotiations go like that. Others, it's just a contract-by-contract basis or a PO-by-PO basis with our suppliers.
Okay. So it's case by case, right?
Yeah.
Okay.
Yeah, and we do not wanna be in the business of raising prices on our customers on a regular basis. It's very disruptive to them.
Right.
And so what we've done historically, the last couple of years, is kind of accumulate those costs and roll those out to a broad set of products at a given point in time. Again, that's not our intention for this next year.
Got it. Okay, that's helpful. You're, you're assuming a 10%-15% revenue CAGR on, on a through-cycle basis. I guess, one, what was embedded from a pricing perspective in that 10%-15%, to the extent you had explicit sort of assumptions there? And as you think about the mega trends, I know you're exposed to all sorts of verticals, you're very broad-based, but if there are one or two or three things that you really focus on and highlight and invest in, what, what are they?
So on the revenue CAGR, you know, we outlined this in November 2021, at our Analyst Day, and we said, using fiscal 2021 as a baseline, we expected 10%-15% growth for the next five years, so through fiscal 2026. Fiscal 2022 and fiscal 2023 were both great years, growth years for us. So, you know, we're confident in saying that, but it is not what we said the long-term growth rate forever and ever is of Microchip, right? You know, what we said at the Analyst and Investor Day is that we would expect to outgrow the market. We'd be about 2x what the market growth would be.
We're focused, bringing to your question on megatrends, we're focused on these areas of the market that we think have legs behind them, our fastest-growing areas of the market for many years to come, and, you know, those are: 5G, data center, advanced driver assist, EV-
Sustainability.
Sustainability. So, you know, all, all these things are, you know, have lots of good trends behind them. I can't say that we're more excited about one versus the other. Some are larger than others today. You know, the data center and the industrial IoT piece is the larger pieces of the business. But if you measure from fiscal 2021 to fiscal 2023, our last completed fiscal year, Microchip in total grew about 55% over that time period, and the megatrends grew 109%. So 2x the company growth rate, they now represent, at the end of fiscal 2023, about 45% of overall revenue.
Got it. Okay. And then maybe from a device-type perspective, you know, FPGAs and silicon carbide, obviously, two businesses that are in different stages of their maturity, but maybe expand on those two and what kind of role they play within the context of the overall portfolio.
Okay. So FPGA, we broke out the revenue for that in fiscal 2023. It's about a $550 million business. It grew over 30% that fiscal year. I think it had another record quarter in the June quarter, so it's performing very well. You kind of think about Microchip playing in the mid-range of FPGAs. You know, this business came to us through the Microsemi acquisition in 2018. Originally, it was the Actel business that Microsemi acquired, and it's done extremely well. Under Microsemi, it had a very much of a aerospace and defense focus, and they had expanded into industrial and, I think, communications. We're continuing to emphasize those markets, taking it into markets where Microchip has a larger exposure than Microsemi had historically. And we see tons of opportunities. We're introducing new products.
You know, we, we get lots of questions about a competitor encroaching on us from the low end, and then we've got our high-end competitors in AMD and Intel. And we think we sit very well in the mid-range, but we're introducing new products that can expand our served available market. And again, we've got a lot of new opportunities in FPGA that the Microchip team has opened up to the Microsemi team, and it's worked both ways. I mean, we've got new opportunities for, you know, general microcontrollers and analog products that we didn't have prior to Microsemi, and that was one of the synergies we were hoping for from the acquisition that have really come to fruition. So it's been really good. Do you want to talk about silicon carbide?
Or even in, just on the FPGA side, just to add one point is, it's really helped, you know, kind of have that choices customers need, right? So when you're looking at product choices, that becomes a building block of when you kind of start a design, right? So it plays really nice with the TSS side. And then silicon carbide, same thing. Like, we're making, you know, kind of classic Microchip way, where we're, we're gonna enter the market, study it, and then look for areas where we can excel and establish ourselves. And so, slightly different from some of the competitors right now. We're not as vertically integrated. There's areas or opportunities that we're seeking.
There's some auto opportunities, but we think there's a pretty big opportunity in the industrial side as well, and continuing to kind of make good progress there.
Okay. And that's primarily a device business, correct?
It is.
That's IC.
Yep.
Okay. Got it. Okay. But you, both you guys talked about TSS, and, you know, obviously, that's been a big focus of the company as you've, you know, shifted away from acquisitions to more organic growth. You know, how has that differentiated you vis-a-vis the competition, and then how has that resonated with your, with your customers over the past couple of years?
So it really makes us a more value-added supplier to our customer. And, you know, it, you know, as Sajid kind of alluded to, you know, the initial decision that a design engineer is making when building their system tends to be around, you know, the brains of the system, which can be a microcontroller, a microprocessor, an FPGA, an ASIC. You know, we have those things in our portfolio, and that gives us a very good first look into what the engineer is trying to achieve in their system. And we can position the rest of the portfolio, whether it's analog, timing, security, memory, connectivity, whatever it is, around that. And ultimately, we benefit the design engineer because we speed their time to market.
They're not messing around with, "How the heck am I gonna get XYZ competitor's part to interact with the other competitor's part?" And, you know, so if we, if we make the design process easier for them, they want to work for us. And, you know, we might not have the lowest overall bill of, bill of materials, but the cost to bring that solution to market is cheaper and it's faster in working with a single supplier. So it, it's, it's working great. We can see that the number of parts per system that we're selling to customers is increasing, and that's a relatively slow-moving metric when you think about, we sell into many, many applications that might last for 10, 15, 20 years.
On new opportunities, our business units, our sales organization are all focused on working together to get the best customer answer and the right Microchip solution. There's not competition between the business units. They're all working together to drive the right answer for the customer.
Right. And the customer relationships and the designs have to be stickier.
... They are.
They think about long term?
Yep.
Okay. All right. On geopolitics, obviously, the backdrop continues to be a challenging one for you guys and for everyone. You know, you said China was roughly 20%, both local and export. Has the evolution in the US-China relationship sort of impacted how you think about the Chinese market and your strategy around that, or has that not really changed over the past few years?
So to some degree, you know, in terms of our footprint from a subcontracting perspective of manufacturing that gets done there, we don't have any of our own manufacturing in China, but some of our subcontractors are there. That is de-emphasized to some extent. When we are looking at investing resources, we want to do that where we have the largest bang for the buck, longer term from a technical sales perspective, and so we probably made some slight modifications there. Really hasn't changed anything in terms of product direction and things like that, but, you know, on the edge, I think it's probably modified our investment decisions to some degree. The, you know, restrictions in terms of, you know, blocking from trading with certain customers has had an impact on us.
Many times that's not with a direct customer of ours, but it might be a customer of one of our customers, that they now can't sell into the end system that was being produced because of an export control that's been put in place. And that was kind of invisible to investors over the last couple of years when we had so much backlog and more demand that we can service. But, you know, Ganesh highlighted that on our last earnings call, that that has had a direct impact on our business and, you know, even though it hasn't been visible, it's not immaterial.
Okay. And, I guess we talked a little bit about the competitive landscape in China. When we talk to, you know, companies in the region, I feel like low-end microcontrollers and power semis are the two areas where, you know, just from a sheer number of company perspective, I feel like there's a growing ecosystem, if you will. I guess you mentioned there isn't a ton that goes on between you guys and local players, but from a low-end microcontroller perspective, should we be worried? Are you guys concerned? Are you guys paranoid? You know, how do you stack against some of the local guys?
So, I would say we don't have our head in the sand, right? We know that China is making heavy investments in semiconductors, but to build a business that can compete with the product depth that we have, you know, takes a long time, right? We've built this business over three-plus decades, and our competitors have, too. So, you know, there's going to be pinpoint areas where we might see some competition. I would say more of that's going to be on the consumer side of the business, where, you know, we're in consumer appliances, but outside of that, really not a lot of consumer, and so I think it's relatively muted. And then we sell a lot of products that are high-end, complex chips that, you know, they just don't have the capabilities today.
But longer term, they're going to continue to invest, and so, like I said, we don't have our heads in the sand, but today we see the competition as minimal, but we expect it will likely grow over time.
Got it. Okay. Maybe I'll pause here and see if I can get a mic at the back, please.
For your auto business, comparing the sort of the leading auto chip suppliers compared to some of the commentary from you and TI, it seems like there's been a little bit more softening at your business than it has with theirs. And I wondered if you had any thoughts around why?
So I don't have a lot of insight into what some of, you know, the guys you're referring to are seeing, right? We have 17% of our business that is automotive. Of that, we've got about 3% that is EV-related. And so, you know, I know EV is still pretty strong, but it's a relatively smaller piece of our business, and so that could explain some of it. It could just be, it could explain differences that companies have had in lead times over the period, last period of the last couple of quarters. But, you know, overall, we are seeing some softness in the automotive market. We aren't seeing softness from a design perspective. You know, we're still getting designed in. The content in vehicles is going to grow over time.
But, you know, I think what's probably happened is, you know, the auto guys really got caught short early on in the pandemic because they just stopped buying, and then that capacity got allocated elsewhere. And so now there's been a period of time where they've gone from no inventory to building up some buffer inventory, right? Because they don't, I don't think most of them want to be kind of just in time anymore over what's happened last time. And I think there's been some catching up that's happened, but I, I, I have no way of really comparing what we're seeing versus a competitor.
Yeah, thank you for taking my question. I know you guys have been allowing pushouts. Is there, like, a maximum period that you can allow the pushout for? Is it, like, one year or two years, or how do you best think about that?
Yeah. So a 1-year or a 2-year pushout would be a very long pushout. You know, if you think about it, you know, in PSP, we're asking originally for 12 months of backlog, and so, you know, that should really be mostly the extent of backlog that people have. Now, there's certain cases where lead times were a little bit longer than that, or customers gave us more visibility, but, you know, most times we're talking about a quarter or 2 of pushout. But there's no firm rule on that.
Again, it's an individual customer situation that we have to assess the situation that the customer is in and what potential benefit can Microchip get by allowing a pushout, because, you know, again, it can't be that Microchip takes all the pain when the customer knew when they placed this order that it was not only non-cancellable, it was non-rescheduleable. So we're giving in on the reschedule piece and would like to see some benefit in return.
... Maybe a question on gross margins. You know, currently in the 67-ish range, as you kind of go through this, this correction, I'm guessing you're, you're cutting production internally, you're cutting wafer purchases at your foundry suppliers. How should we think about the resiliency? You talked about 40% and above operating margin.
Yeah.
To the extent you're willing to share how gross margins play out over the coming quarters, that would be helpful.
Okay. So our stance on inventory and how we're running our internal factories today is that we're continuing to run our internal wafer fabs pretty hard, because right now, actually, our Die Bank is lower than we'd like it to be.
Okay.
Our externally sourced inventory from foundries is a bit higher than we'd like it to be. When foundry capacity freed up in the December and March quarters, we didn't know if that was a short-term thing or it was a long-term thing, but we took advantage of that because we had a lot of unsupported business where we were trying to catch up on. And, you know, because of that, we built some foundry inventory. The internal inventory is still relatively low, so we want to build that up. And, you know, honestly, if we cut production in our wafer fabs, you know, the majority of the costs are fixed, so you can't take out a large percentage of the cost. Maybe you can take out 20 or 25% of the cost.
Mm-hmm.
So what we're gonna do, at least the plan of record today, is continue to run our internal fabs pretty hard, build Die Bank, make that investment in inventory, which we didn't do in the last cycle because our balance sheet situation was much different. We were more highly levered. We were very working capital focused. Today, looking at cash flow, it makes more sense, build the inventory, get it up through Die Bank, and then that inventory is ready to service customers when the next upturn occurs, and the next upturn will occur, guys. It is gonna happen. This industry is gonna grow, and so will Microchip. So that's the plan for now. What we typically see, peak to trough on the gross margin side is 200-300 basis points.
Our non-GAAP gross margins in the current quarter, midpoint of guidance are 68.1%, so, quite high. You know, if we had 200-300 basis points fall from that, we think on the operating margin line, it would be about a 400-500 basis point decline. We're well positioned on that point, too. I know this wasn't your question, but I'm just gonna finish my thought on that-
Please.
was, you know, we've been paying bonuses at a very high level for the last couple of years because, you know, the results have been so good. It's been a challenging labor environment for us, and so people have been working really hard. But that's something that we... It's a lever that we can pull very easily, is take these quarterly bonuses from a high level to zero overnight when we face a more difficult quarter, and that will help us manage through that, but still keep everybody employed, keep our new product introduction on track, and servicing our customers.
I think that was a lever you pulled earlier on in the pandemic, if I recall correctly.
We did-
Or before that.
... but the difference then is we were not paying bonuses at the same high rate that we are today, so that gives us-
Right
… more flexibility. Even with that, our operating expenses as a percentage of sales is well below our target model today.
Right.
So we're in a good spot.
Got it. Okay, makes sense. And then I guess from a capital allocation perspective, you know, you've laid it out clearly, and you guys talk about it every quarter, so I think it's out there. But what's been sort of the, you know, investor feedback and how you deploy capital?
I'd say generally, it's been good. I mean, you, you have a certain set of investors that prefer dividend versus buyback, so there's always that discussion. You know, our view is today is that the buyback is higher than dividend. The dividend is on a solid growth trajectory. I think last fiscal year, it was growing at 9% every quarter sequentially, so about a 40% growth rate. So far this fiscal year, the board's increasing at 7% per quarter, and expect that'll likely continue, but that's a board decision that happens each quarter.
Right.
You know, the subtract answer, when you look at adjusted free cash flow times the percentage we're returning minus dividend, that's the buyback. This quarter, that's $339 million or $340 million.
Mm-hmm
... of stock that we're buying back at what we think are good prices. You know, there's a valuation disconnect between Microchip and some of our high-quality analog peers, and we think that gap should close, and so we are very happy to be buying back stock at the prices where the stock is trading today.
Okay. We do have 30 seconds. I felt like that was a good place to end, but anything else that we should have touched on, or anything you want to highlight before we let you go?
I don't think so. I think we touched on it all. Thanks, everybody.
Okay.
Appreciate it.
Great.
Thank you.
Thanks so much.