Good day, everyone, and welcome to Microchip's Third Quarter Fiscal 2021 Financial Results Conference Call. As a reminder, today's call is At this time, I would like to turn the call over to Chief Financial Officer, Eric Bjornholt. Please go ahead.
Being recorded. Thanks, Chloe,
and good afternoon, everyone. During the course of this conference call, we will be making projections and other forward looking statements regarding future events being recorded. 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 based on the results of operations. In attendance with me today are Steve Sanghi, Microchip's Chairman and CEO and Ganesh Moorthy, Microchip's President and COO. I will comment on our Q3 financial performance and Steve and Ganesh will then give their comments on the results and discuss the current business environment as well as our guidance.
We will then be available to respond to specific investor and analyst questions. We had an unintentional posting of our earnings release on our website shortly before the normally scheduled timing today. Once we determine this occurred, we move quickly to get the releases sent out over our normal distribution processes. We are including information in our press release and our 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, which we believe you will find useful when comparing our GAAP and non GAAP results.
We have also posted a summary of our outstanding debt and our leverage metrics on our website. I will now go through some of the operating results, including net sales, being recorded in the quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's
quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's
quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's quarter's
quarter's quarter's quarter's quarter's quarter. Being recorded. Net sales in
the December quarter were $1,352,000,000 which was up 3.3% sequentially and above the midpoint of our quarterly guidance. We have posted a summary of our GAAP net sales by product line and geography, as well as our total end market demand on our website for your reference. Based on the guidance of the fiscal 2020. On a non GAAP basis, gross margins were a record at 63%, operating expenses were at 23.2% and operating income was a record 39.8 percent. Our factory underutilization charges decreased from 12,200,000 to $3,700,000 sequentially as we continue to ramp our factories to respond to the strong business conditions.
We expect the continued ramp of our factories to lead to no underutilization charges in the March quarter. Non GAAP net income was 444,900,000 based on non GAAP earnings per diluted share was $1.62, $0.05 above the midpoint of our guidance. On a GAAP basis in the December quarter, gross margins were a record at 62.6% and include the impact of $6,400,000 of share based compensation expense. Total operating expenses were $600,200,000 and include acquisition and tangible amortization of 231,600,000 special charges of $4,300,000 $5,400,000 of acquisition related and other costs and share based compensation of $44,800,000 The GAAP net income was $36,200,000 or $0.13 per diluted share and was adversely impacted by $142,100,000 loss on debt settlements associated with debt refinancing activities in the quarter. Our December quarter GAAP tax expense was impacted by a variety of factors, notably the tax benefit recorded on the convertible debt exchange transactions occurring during the period.
Our non GAAP cash tax rate was 4.25% in the December quarter. We expect our non GAAP being recorded. The cash tax rate for fiscal 2021 to be about 4.8 percent, exclusive of the transition tax. Any potential tax associated with restructuring the Microsemi operations into the Microchip global structure and any tax audit settlements related to taxes accrued in prior fiscal years. We have many tax attributes and net operating losses and tax credits as well as U.
S. Interest deductions that we believe will keep our cash being impacted by the future. Our inventory balance at December 31, 2020 was 666,100,000 We had 120 days of inventory at the end of the December quarter, which was flat the prior quarter's level. Inventory at our distributors in the December quarter We're at 26 days, which is a record low level and down from 30 days at the end of the prior quarter. In the current environment, it is quite challenging for Microchip for its distributors to increase days of inventory.
In the December quarter, we exchanged $1,086,000,000 of our 2025, based on the current quarter of 2027 and 2,030 7 convertible subordinated notes for cash, shares of our common stock and a new convertible bond that matures in 2024. While these transactions did not impact the overall level of debt on our balance sheet, We believe that these convertible exchanges will benefit stockholders by significantly reducing share count dilution to the extent our stock price appreciates over time, approximately $2,900,000,000 In the December quarter, we also issued a $1,400,000,000 senior secured bond and used the proceeds from that transaction to pay off our Term Loan B, which we were paying an interest rate of about 2.15 percent on. Our cash flow from operating activities was $509,700,000 in the December quarter. As of December 31, in the December quarter. But please remember that this is inclusive of the cash paid for our various debt financing activities in the quarter, including putting a cap call in place for our newly issued convertible bonds.
Over the last 10 full quarters since we closed the Microsemi acquisition substantially all of our excess cash beyond dividends to aggressively bring down this debt. We have accomplished this despite the adverse macro conditions during most of this period, which we feel is a testimony to the cash generation capabilities of our business as well as the ongoing operating discipline we have. We continue to expect our debt levels to reduce significantly over the next several years. Our adjusted EBITDA in Our net debt to adjusted EBITDA excluding our very long dated convertible debt that matures in 2,037 and is more equity like in nature was 3.93 at December 31, 2020, down from 4.04 at September 30, 2020. Being recorded.
Please note that the amount of the 2,030 7 bonds will reduce by $407,700,000 during the December quarter as part of the financing transactions, which has impacted this metric. Our dividend payment in the December quarter was $96,000,000 Capital expenditures were $21,400,000 in the December 2020 quarter. We expect between $50,000,000 $60,000,000 in capital spending in the March quarter In last quarter's conference call, we explained that our capital expenditure plan for fiscal 2021 had increased as we more rapidly prepared for growth being recorded in our business as well as actions we were taking to increase our internal capacity in the face of constraints our outsourcing partners are experiencing. Our fiscal 2021 capital expenditures are coming in lower than we indicated last quarter due to longer equipment lead times and deliveries pushing out due to overall industry conditions. We continue to add capital to maintain and operate our internal manufacturing operations, currently outsourced.
We expect these capital investments will bring gross margin improvement to our business and give us increased control over our destiny during periods of industry wide constraints. Depreciation expense in the December quarter was $40,300,000 I recorded. I will now turn it over to Ganesh to give his comments on the performance of the business in the December quarter. Ganesh?
Thank you, Eric, and good afternoon, everyone. Let's start by taking a closer look at microcontrollers. Our microcontroller revenue performed well with revenue sequentially up 3.3% as compared to the September quarter. On a year over year basis, our microcontroller revenue was up 5.9%. We continue to introduce a steady stream of innovative new microcontroller solutions, including the 1st safety certified being recorded in the Q1 of 2019, the first Trust and Go Wi Fi module delivering powerful 32 bit microcontroller functionality being recorded for hyperscale data centers and telecom service providers and last but not least, 3 new broad market 8 bit microcontroller families to extend our leadership in this product line.
Microcontrollers overall represented 53.7% of our revenue in the December quarter. Moving to analog. Our analog revenue also performed well and was sequentially up 3.1% as compared to the September quarter. On a year over year basis, our analog revenue was up 2.6%. During the quarter, we continued to introduce a steady stream of innovative analog products too, being recorded in the first highly integrated radiation hardened motor controller And finally, a family of low latency PCI Express 5.0 and Computer Express Link retimers.
Being recorded. Our FPGA revenue was down 8.5% sequentially being recorded. As we cautioned on our prior conference calls, FPGA revenue does have some lumpiness associated with it because of the large exposure to the aerospace and defense market and the associated purchasing patterns. During the quarter, we announced a radiation hardened a 4th generation FPGA family and a low power radiation tolerant 5th generation PolarFire FPGA family. FPGA represented 7.3 percent of our revenue in the December quarter.
Our licensing, memory and other being recorded. The product line, which we refer to as LMO, was up 13% in revenue as compared to the September quarter, bearing with strength in licensing revenue driving this growth. LMO represented 11.4% of our revenue in the September quarter. Being recorded. A quick note about our product line reporting.
Given the relatively smaller size of our FPGA product line and about 7% of our revenue as compared to our microcontroller and analog product lines. We have decided that starting in calendar year 2021, We will no longer break out the FPGA product line separately. Our FPGA products remain important to our overall total system solutions goals. We continue to make significant investments in our FPGA products and expect those investments will help drive our long term growth being recorded into a new category that we just call other. From an end market standpoint, we continue to see the automotive, industrial and consumer markets strengthened further in the December quarter, approximating a V shaped recovery in the second half of calendar year twenty twenty as compared to the first half.
The end markets have benefited earlier in the year from the work from home related demand surge, namely computing, communications and data center remained at more normal demand patterns as the surge we saw in the June quarter dissipated. The Huawei ban, which was in effect for all of the December quarter and represented 1% to 2% of our overall revenue, had a more pronounced negative impact on our data center business, where it was a more meaningful percentage based on the business. Finally, demand for our products that go into the office environment, which we refer to as enterprise demand, being weak as most businesses remain predominantly with work from home policies, thus deferring enterprise spending for the office environment. The supply chain constraints that started in the September quarter continued to grow through the December quarter. A robust overall business environment accentuated by rising demand from the automotive, industrial and consumer markets, combined with low levels of inventory in the distribution channel, being recorded in constraints in practically all of our internal and external factories.
Since September, we have been ramping our internal factories being recorded, as well as investing in capital additions to further expand our internal capacity. We have also worked with our supply chain partners to increase our fab, based on the current strength of the business environment, we expect that the constraints we are currently seeing likely to continue through much of calendar year 2021 and possibly into calendar year 2022. Being recorded. As a result, we have seen our lead times stretch out for many of our products where the constraints are most acute. We have also experienced increases being recorded in material and subcontracted manufacturing costs and have taken steps to secure capacity for 2021.
Let me now pass it to Steve for comments about our business and our guidance going forward. Steve?
Thank you, Ganesh, and good afternoon, everyone. Today, I would like to first reflect on the results of the being recorded. I will then provide guidance for the fiscal Q4 of 2021. Being recorded. The December quarter represented the shift of the business cycle back to revenue growth with a 3.3% sequential growth December quarter revenue also grew over prior year's December quarter by 5%.
We started ramping our internal factories in September, in the December quarter, but still constrained some of the revenue upside. We delivered a record non GAAP gross margin of 63%, helped by significant reduction in factory underutilization and better overhead utilization from revenue growth. We also achieved non GAAP operating margin of 39.8%, an all time record being recorded and getting very close to an emotional 40% mark. We also hit a record EBITDA of $593,400,000 being recorded despite revenue not at a record yet showing the robust strength of our business model. Our consolidated non GAAP EPS was $1.62, $0.05 above the midpoint of our guidance.
Our bookings were exceptionally strong in the December quarter and were an all time record. We received bookings both for short term as well as into the future quarters. The backlog is also an all time record. Being recorded. Please remember that bookings as well as the backlog is what is shippable in the next 12 months.
The backlog for the March quarter is the strongest The December quarter was constrained by product availability. We will have more internal and external capacity in the March quarter here to stay with us through calendar year 2021. In response to the business environment, we have taken 3 actions. Being recorded. First, in the middle of December, we changed our cancellation and push out terms with our customers and distributors.
We changed our standard terms so that an order cannot be canceled or pushed out within 90 days of shipment effective January 1, 2021. We gave customers a couple of weeks to adjust their backlog before it went firm for 90 days. In response to our change in terms, we did not see any unusual cancellations or push outs, which indicates to us that the backlog was firm being meted by our customers. That gave us a solid backlog for the March quarter, which cannot be canceled or pushed out. The second action we took was that we sent a letter to our customers on January 4, 2021, informing them of the business environment.
We also inform them that we are seeing broad based cost increases and some aggressive commercial terms based on our supplier base and we must pass these cost increases to our customers through a broad based price increase. Being recorded. The third action we took just this morning, we posted a letter on our website and sent it to our customers and distributors onetwo, 2022. The program has the following elements. The customers participating in this program will have to place The capacity priority will begin for shipments in July 2021.
The program will not be a guarantee of supply. We expect that a significant portion of our capacity will be booked under this new program with a large committed non cancellable backlog for 12 months. Microchip will be in a stronger position to make capacity being recorded in all material commitments to our suppliers, buy capital equipment with confidence, hire employees and ramp up manufacturing being recorded and manufactured products more efficiently. Taking all these factors into consideration, The March quarter guidance at the midpoint would represent record GAAP net sales with the prior record being in the September quarter of 2018. The September quarter of 2018 based on GAAP sell in revenue recognition was $1,432,000,000 Some of you may still carry a sell through base number of $1,513,000,000 being recorded for September 2018 in your historical financial model spreadsheets.
The March quarter will also be limited by product availability being recognized with a new wave of COVID cases plaguing the planet and at the same time ramping up vaccinations. Being recorded. For the March quarter, we expect our non GAAP gross margin to be between 63.3% 63.7% of sales, being recorded, which would be a new all time record. We expect non GAAP operating expenses to be between 23.2% and 23.6 percent of sales, and we expect non GAAP operating profit percentage to be between being recorded in the Q1 of 2019. We expect our non GAAP earnings per share to be between 1 point approximately $350,000,000 of our debt in the March quarter.
Finally, I want to cover one other area, which is our future cash return being recorded. At the rate we're paying down debt, we expect to break a net leverage of 3 within a year and continue to decrease from there. At that time, we expect to begin distributing more of a substantial amount of free cash flow being recorded to the investors in the form of dividends and stock buybacks. Regarding buybacks, through multiple being recorded. We have essentially bought a substantial amount of stock back from the future.
Being recorded. Our first convert buyback was in March 2020 being recorded. By doing these various buyback transactions, we have purchased a total of $3,525,000,000 based on the value of our convertible bonds. For the transactions from March 2020 to September 2020, being issued a total of about 20,400,000 shares of our common stock to the investors for in the money value of their bonds. If these bonds had remained outstanding until an assumed stock price of $140 per share, the stock price about now, The dilution would have been about 26,400,000 shares.
Thus, our repurchases had the impact of creating based on a savings of about 6,000,000 shares worth $840,000,000 savings to our investors at $140 per share. This calculation does not include our November 2020 transaction, which was very recent and executed at $133,047 per share, so it is not yet accretive. Therefore, while we have not done any open market being recorded in the Q1 of approximately 6,000,000 shares. At some point in the future, we expect to start pure stock buyback from the open market. We are also initiating a path to higher dividends and not waiting until our leverage reaches a given number being recorded before the dividend starts to increase.
In this regard, we announced today that the Board of Directors have approved a dividend increase of being recorded at 5.8% sequentially to $0.39 per share, up from $0.3685 previously. Recorded. We expect to continue to increase dividends quarterly as part of our cash return strategy. Given all of the complications of accounting for our acquisitions, including amortization of intangibles, restructuring charges and inventory write based on acquisitions. Microchip will continue to provide guidance and track its results on a non GAAP basis except for net sales, based on a GAAP basis.
We believe that non GAAP results provide more meaningful comparison to prior quarters, being recorded and we expect that the analysts and we request that the analysts continue to report their non GAAP estimates to first call.
Being participants limit themselves to one question at this time. If you have a follow-up question, please reenter the
Steve, can you hear me?
Yes, now.
I apologize. I did not hear my name get called. I started caller. I apologize for that. Just really quickly, we've lived through multiple times of you sending out customer letters and we kind of have an understanding of how the market responds to that.
I'd be kind of curious, the preferred being recorded. The wire agreement that you talked about in your opening remarks. Is this the first time that you have done that? And if it's not, what's been the historical response
So the Preferred Supplier program is brand new. I have not ever implemented it In my 42 years of career, and I have never seen anybody else do that too, the program is largely a response The industry seems to be 30% plus sure to really what the capacity requirement is. And many of our customers have been asking, what can they do if they give us longer term demand, longer term orders, being recorded. Will that give them parts? Will that give them better support?
Now customers can give us longer term orders, But if the orders are cancellable or rescheduleable after 90 days, which was the case part of the program, Then I could have a lot of orders for September December and could buy capital to hire people to rent, But just before I get there, people could cancel, if there was a double ordering, people were asking more than they need, And they canceled part of the orders. So that is often the problem always and you guys ask the question, is there any double ordering or whatever. And this program basically eliminates all that. It asks the customers to place 12 months of backlog, which will be non cancelable, non reschedulable, so I can take that one to the bank, buy raw material, Just in need of the
times. And I know it was just this morning, but what do you expect the intended response to be from your customers?
Being. The response is positive. They would place such orders. I don't expect any customer being recognized to place their entire backlog on every product on the PSC program because customers themselves have being recorded. We have a good market share on that particular design, being recorded.
But some others could be some new programs where the demand is yet not known. So I think customers We'll really take a lot of the products and put it on PSP and some others that they want.
Perfect. Thank you, guys.
Welcome. We'll take the next question. It comes from Toshiya Hari. Please go ahead.
Hi, good afternoon. Thanks so much for taking the question. Steve and Ganesh, given the current What are your thoughts on pricing across your microcontroller and analog business? And if you can kind of speak to gross margins on the back of that, that would be helpful. And I guess sort of related to that, given The preferred supplier program, how should we think about the economics of that program?
Thank you.
So we sent a letter to our customers on January 4th, really informing them, 1st of the business environment and also informing them that we were seeing broad based cost increases and some very aggressive commercial terms from our suppliers who were facing similar issues from their suppliers, really up and down the supply chain, being really developed that program and we got several 100,000 SKUs and going through the price increase on which part and how much and passing on to the customers, working through their contracts and long term prices and stuff like that. So all that really has been implemented at this point in time. We aren't breaking out what portion of the guidance is price increase. That's kind of relatively difficult, but the price increases have already been made effective. As far as the economics of the PSP program, the economics of the PSP programs being recorded.
We are in having a committed non cancelable, non reschedulable backlog on the books that we can build it in batches, buy raw material ahead if we wanted, Increase our inventory if we wanted to serve that and build it whenever we have a lull. Essentially, that's where the economics are, to be able to serve the customers better who join the program and micro being recorded. Not be subject to ordering more than they need and double ordering because they're not going to double order and order more than they need If they cannot reschedule or cancel. So that's where the economics are. There's no price change with that price program is totally separate.
Being recorded. We'll take
the next question that comes from Vivek Arya. Please go ahead.
Thanks for taking my question. Steve, you use this phrase, significant revenue growth in calendar 2021, and you're starting the year at about 10% year on year growth. Is that a significant number? Is it something higher than that? And more importantly, what kind of growth can your supply chain support this year?
Well, I don't know, you must have noted what I said. I thought I talked about The question really was that Street had 7% growth. Do you expect something higher than that? Being recorded. And my answer was yes.
So whatever anybody interpreted, I don't know what significant means. And I can't really give you a number for the growth for the year, Although, I think the revenue is more constrained by capacity than the demand, at least now and for the next several quarters, which leads to your second question, what kind of growth the supply chain support? I think one of the problems that we're dealing with is that The supply chain is not as stable. We're finding that assembly test subcontractor will commit They can do X number of parts per week. And as we get there, they would change that number, they would lower that number or push it out by a couple of weeks.
Well, what happened? What happened was they got a de commitment from their supplier. They didn't get some bonders they were expecting. They couldn't hire some people. Somebody tested positive for COVID, so they had to send 50 people home who had come in contact with it.
So there's no slack in the system. Everything that gets built gets shipped. There's absolutely no slack in the system. So There was an earthquake in Taiwan. We had a car that hit our substation in a fab in Oregon They're knocked out about 3 or 4 days, partial knockout, not complete.
None of those things are makeable because all factories are working 7 days a week, being full board, so any delay in equipment just leads to a commitment. So I think those are all the based on a different plan or to approve a change. And in the last 6 months, we have been so successful in getting even all the automotive customers that they would buy the product from this alternative assembly site or test site and all that. So we're getting help in that area, but it's still a very, very complicated process to put it all together. And therefore, we're not willing to dollarize the number or what percentage we could grow, not yet.
Thank you. Being
recorded. We'll take the next question that comes from Craig Hettenbach. Please go ahead.
Yes, thanks. Steve, just a question on the disty inventory at 26 days. When would you expect that to perhaps get back kind of within normal ranges. And any trends you could share just by geography in terms of disti resales?
So distribution would love to grow the inventory in this environment to serve their end customers better, being recorded. But the DC inventory can't grow. There is not enough product available to grow the inventory because product keeps getting shipped out. Another point I would like to make is that our inventory as well as distributor inventory is calculated based on last 90 days of sales. So it's based on the prior quarter.
Essentially, if you the real value of the inventory is to support the future. So if you take our guidance and take the midpoint of that guidance, let's say, and calculate the days of distributed inventory or microchip inventory based on that guidance, then the inventory numbers are extremely low. But they're calculated as we report, which is a standard convention based being recorded. In a very stable environment, flat sales, it doesn't matter. But in a significant growth, The real inventory is actually much lower than the numbers we're reporting, and we don't think it's going to grow.
I think our internal inventory will being. We expect by several days and distribution to do the same.
Got it. And then just a follow-up for Ganesh on the total system solution. Any progress there or things you can share with us in terms of developments?
Sure. So it's not a 1 quarter progress, it's a multi quarter activity that we've had. The processes that need to be put in place have been there. New processes are going in. It is reflected in how we see the design activity taking place, being recorded, some of which we've shared anecdotally in some of the conferences.
We will share some more this coming quarter as well. But I think the power of the whole coming together, putting all the different parts of Microchip on a customer's board is very much strong and alive and a key part of our growth strategy.
So I know you started the December quarter with your distributor inventory levels slightly below average. And it looks like you under shipped into the channel by about $26,000,000 in the December quarter. Is that how we should think about perhaps what How much higher your revenue could have been if you had available production capacity and whatnot, a similar amount
We had unsupported orders for every geography, for every product line, for direct as well as for distribution. So just picking a number that the distribution inventory went down by I'm just saying that's the revenue we missed for the December quarter will not be accurate. We're not breaking up a number, but The total amount of revenue that we missed also was also from direct and essentially maybe geography.
Being recorded.
Okay. As a follow-up, I wanted
to ask about your philosophy towards M and A when you get to that magical net leverage ratio of less than 3 times. Is that should we take that to mean that you're also open to some M and A transactions at that point as well?
I think we have spoken extensively about this in the past, saying that we believe There was an era of M and A in the last 12 years or so. We did 16, 17, 18 acquisitions, a few large ones being public and less than small, private and all that was intent to scale the company 10x or so and being recorded. Now we are over $5,400,000,000 company and really not have a scale disadvantage to our competitors. I think we have achieved that and being recorded. And other than resistors and capacitors and connectors and battery, everything else is really made from Microchip.
So today, there is not that need for M and A and there are no gaping holes. So we are really building our strategy going forward on organic growth built from really large amount of success in providing total system solutions to the customers. It could be a tuck in acquisition here and there, private, very small, really buying some people, which is a technology pipeline or something like that. But there's really
being
recorded. We'll take the next question. It comes from Chris Caso. Please go ahead.
Yes, thank you. First question is about some of the capacity additions that you're undertaking now. Could you talk about, 1, the direction of CapEx over the next couple of quarters as you try to address these some of these supply constraints. How long does it take to get the capacity in place? And then lastly, to what extent being what's going to be the quicker and more sustainable path to getting some more product to your customers?
Frank, do you want to take the CapEx question?
Sure. Sure. So we've indicated that in the very short term, so the March quarter, we're expecting to spend between $50,000,000 $60,000,000 in CapEx. We've kind of given general guidance to The Street that longer term, we expect our CapEx as a percentage of net sales to be somewhere between 3% 4%. This quarter, we'll be going through our annual operating plan for our next fiscal year and we'll provide kind of a more detailed forecast in fiscal 'twenty two.
But Yes, I wouldn't be surprised if we're on the high end of that range for next fiscal year. We've been well below it for the last 2 fiscal years. And So, quickly, the demand environment is driving that. And I'll start with the second piece of the question and Steve, we're going to ask you to add on to it. But we have been making being recorded.
And actually this last quarter, we did 55% of our assembly In house, that's up significantly quarter on quarter, and we did 57% of our final tests in house. So these metrics going to be slow moving, but we are making progress on that and is allowing us to take a little bit more control of our own destiny. So with that, I'll turn it back to Steve.
So, I think one of your questions implied that what portion of the CapEx we were spending for internal versus external. I think 100 percent of our CapEx is really being applied to grow the capacity internally. The external capacity growth, we're getting it just by getting larger allocation and negotiating for larger piece of the total capacity pie at foundries and subcontractors. We're not really spending our CapEx dollars in growing their capacity, but our capacity is growing significantly outside also. But overall, as Eric mentioned, especially in the assembly and test area, being recorded.
All right. As a follow-up,
Given the strongly better than seasonal March, the fact that you've got backlog that's difficult to fill all of that. How do we think about seasonality through the rest of the year? And there are always difficult questions right now, but Any kind of qualitative comments that you can provide would be helpful.
I think Seasonality has been difficult to define for Microchip for some time because of all these acquisitions and Especially with Microsemi, the end market mix changed so much that we said, if you got a year or 2 years of stable environment, Then one could figure out what the seasonality would be, and we haven't gotten that stable environment. First was the U. S.-China trade, then last year was the COVID, And this year is this runaway growth or capacity constraints. So in this environment, it's not the seasonal factor that's changing what you can or cannot do. It's a combination of how much capacity you can grow, what the overall demand is.
Sorry, I can't really comment much on seasonality in this kind of environment.
Thank you.
We'll take the next question. It comes from Harlan Sur. Please go ahead.
Good afternoon. Thanks for taking my questions. Maybe as a follow-up to the last question, and I know the difficulties and complexities in quantifying full year revenue generation being recorded. Maybe more near term, I assume that the team is almost fully booked for the June quarter. Maybe you guys can confirm that.
About seasonality, but typically June is up sequentially. So your foundry wafer requirements are probably already fixed for June, given the lead times from your foundry partners, but wondering if you guys would be able to bring on and qualify additional wafers in assembly and Capacity in time to support higher levels of revenues from where you are here in March, if it plays out that way in June?
So you can't qualify different fabs in a matter of 3 months or 6 months, based on the process and products, it's a much longer effort. So a lot of the capacity growth is really coming out of growing capacity where the processes are already installed. We got being recorded. Some processes are installed outside as well as inside and most of the other majority of our processes either run outside all run inside. And when they run outside, they usually only either run-in 1 foundry or the other foundry.
So there's really No process that runs in 3 or 4 different foundries. They may run-in 3 or 4 different fabs of the same foundry, Like the TSMC could run-in 3 different tabs of TSMC, but it doesn't run-in TSMC as well as global as well as UNC or something. So the capacity growth is largely coming from where the processes are already installed from a fab standpoint. From an assembly test standpoint, yes. We're qualifying additional alternate assembly subcontractors, which could give additional capacity.
But there also, majority of the growth in assembly as well as test is coming from buying capital and installing in 3 of Microchip's large facilities, 2 in Thailand and 1 in Philippines. They are basically doing a record amount of assembly and test every day and capacity is rising every week, every month,
being Harlan talking about or kind of implying that June quarter is fully booked and that is not the case. June quarter isn't fully booked. The March quarter isn't fully booked. It can be fully booked on certain products and you maybe can ask and expand on that a little bit.
Yes. I mean, even for this quarter, We have strong backlog, but we have some turns yet to take and there is turns to take for the June quarter. As Eric mentioned, there are certain product lines which can be much closer to being booked up. And that's Typically, it is starting at a much higher backlog than would typically a normal quarter would be, but there is still work to be done and there's capacity coming online, Which will help with some of the growth, both that's helping this quarter, as you can see versus December and some more into June.
Okay. So you answered my what was going to be my third question or what was my third question in that, which is irrespective of how the If June quarter backlog ends up suggesting a higher June quarter, You guys would have the capabilities in place foundry or internal to drive higher revenue levels sequentially in the June quarter?
Absolutely, yes.
Okay. Thank you, Steve. Thank you, Ganesh.
Welcome, Mark.
Being recorded.
We'll take the next question at this time. It comes from Ambrish Srivastava. Please go ahead.
Hi, thank you. 1 on near term and then I had a longer term, Steve, and really just wanted to make sure I understood that part. On the near term, The preferred supplier program you started just this morning, but does the guide for March, does it include The change in cancellation from 45 to 90, is that part of has that been implemented long enough to reflect in the March guide?
So that was told to the customers in early December, Maybe it was the middle of December, around maybe 8th December, and we gave them then the following 3 weeks or so to make any changes to the backlog they wanted to make. And on January 1, the backlog will go hard for the 90 days. So, and there were very few changes made and it was just meaningless, very small changes. So as of January 1, being recorded. Whatever was on our books for the March quarter became firm, but no changes could be made.
And that backlog position for the March quarter was very strong, Strongest we have ever seen in our careers. Now as Ganesh answered earlier and Eric answered, That doesn't mean the March quarter was fully booked because you always have products where there's product available and customers and distributors can continue to come and buy those products where the lead time is still fairly short and shippable within the quarter. But very large number of products were also completely booked And nothing available for March on some products even nothing available for June. So the impact of that 90 days was effective on January 1.
And then
as you go, as you finish the month of January, then the backlog is now hard for February, March, April. Being. The PSP program is an entirely new program. The 90 day program was applicable to all customers worldwide direct to distribution. The PSP program is a customer's option.
It's not we can't force them to give us 1 year of backlog. So that was an option given to the customer that they can have an ability to get preferred supply support If they would give us 12 months of non cancelable backlog, which helps us in bringing catastrophe online being recognized by the company's capital and we hire people with confidence and it gives them preferential capacity. So there is something in it for both.
Got it.
Got it. Just want to make sure this
is clear that that has zero impact on the March quarter.
Being recorded. Yes. Yes. And then just to confirm, the PSP program support starts from July. Now the orders, they can place it now for 12 months.
But if they come up with a whole bunch of new orders for March, April, May, June, They can't get the supply ripped off from other people who have placed the backlog before. So PSP being Capacity support does not begin till July.
Got it. I wasn't confused about PSP. I just wanted to make sure The March quarter is it sounds like you were able to pull together a lot of internal and external to guide to what you did and it also has Some validity, a lack of a better word, because of the 90 day that you started in December. That's what I wanted to understand, because there's a concern about double booking, but sounds like the way you have framed it and the way you're running the business at this point, it seems like You have quite a lot of visibility on that. My longer term question, Steve, and thanks for addressing that.
Your business model is transforming And you've been talking about M and A being less of a priority given where the valuations are and focus on organic. So the question and you addressed it by I think the buyback, even though not directly, you have been bringing down dilution. What was the point you made on dividend? I missed What's the formula that you have in place for dividend growth?
We don't really have a formula in place. We just Board will meet every quarter and decide the dividend for every quarter. In the current quarter, we Grew the dividend by 5.8 percent and you could expect that Board will grow the dividend every quarter And that's really a commitment. And we told you in the last couple of quarters that we would build a glide path towards higher dividend and this is a glide path towards a higher dividend. So if you accumulate the increase in dividend for 4, 5, 6 quarters, Then by middle of 2022, you already would have a significantly higher dividend after seeing 6 increases of the kind we just did.
That's really what we're trying to do, to get to higher dividends. And by that time, leverage would have come down and such a that higher dividend being really be supportable at that point in time from the cash flow and still have enough cash available to keep bringing the debt down further.
Got it. Thank you.
We'll take the next question. It comes from Chris Danely from Citi. Open.
Hey, thanks guys. I guess just a little bit of color on the capacity constraints and shortages. Steve, you talked about it being in the automotive, industrial and consumer sectors or end markets. Most of your competitors are just saying automotive. Would you expect This is spread to those other end markets, for your competitors and other folks in Senes.
And then what when do you remember These shortages being this bad, do we have to go back to like 2010 or 2000?
I do not remember shortages being this bad ever. So this is just like this is a 6 Sigma event in terms of shortages, call it a black swan event, although that's more meant for negative. I don't really know what other competitors are seeing what, but our capacity based on the same fabs, the same processes, sometimes they are the same parts We can ship into an automotive or ship into an industrial. So the capacity constraints would really be shared by all markets. Now the largest increase in demand has been in automotive, where in the June quarter, automotive demand went to 20% of normal because all the factories shut down.
And as the demand has gone back to a 95% of normal or 100% normal. That's a 5x increase in auto demand. So they are seeing sort of the worst shortages Because they didn't place their orders, they didn't really guide towards having this strong Evitiate recovery, so their part is a little worse than that, There's also a could just prevent a 1999 power drill from not shipping. So the hurt factor is quite different. So therefore, The noise from automotive, the escalations of the management chain and the pressure and all that is really of a different level.
We'll take the next question that comes from Harsh Kumar. Please go ahead.
Yes. Hey, guys. First of all, congratulations on the tremendous guide. I guess, the sign of what you're seeing.
Steve had 2, and I'm just going to lump them all into 1.
Being recorded. Wanted to go back to what Harlan was talking about earlier. As you get over your supply issues, let's say, whether it's June or July, Am I incorrect in thinking based on your kind of what you mentioned, the press release is having a very strong year. As you're able to supply, Should you not expect the second half that is better or stronger? Or help me think about linearity from here?
And then for Eric, Your question is
on gross margin. If I'm not
mistaken, you're at your target or very close to it. With no M
and A, Would there not be
a potential need to think about that gross margin, how fast should it get more and more efficient?
So I think taking the question of capacity, you mentioned somehow that we catch up by June, July. We don't expected to catch up on demand capacity balance for the balance of the calendar year 2021 and could possibly go into 2022. I mean, we already know that the demand on lots and lots of products being placed where we have no product available. If you place an order today, we're shipping you in September, October And people are booking September, October, November fast. And with PSP programs, We're going to get backlog all the way through next January, February.
So I don't think the capacity issue is getting solved in the next 4, 5, 6 months. I think we're talking a 12 month at least to solve that to really have the capacity to get in balance. I don't remember the other part of your question.
I'll take the gross margin question. So We did actually update our long term targets for gross and operating margin back in December. We took the gross margin target to 65% And the operating margin target is 42%. So we essentially achieved what was our prior target of 63% on the gross margin being recorded with these last quarter results and are guiding at the midpoint to about 63.5% this quarter. So Gross margin has absolutely been a highlight over the last couple of years.
We're continuing to do all the right things to be efficient in our operations to drive going to help us continue to make improvement on gross margin into the future, and we can go through that separately if you'd like, Harsh.
Appreciate the clarification, Eric. No, I'm good. Thank you. Being recorded.
We'll take the next question that comes from Janet Ramkason. Please go ahead.
Nice creativity guys with this new program. I was going to ask a question about the margins as well. It just seems to me that if you have a lot of visibility and you could pure supplies in a more timely and efficient manner. And you just plan better, generally speaking, as you go as you exit 2021, you should be in a position where you would hit those You could hit those target margins a lot sooner. Am I correct in thinking that, Steve or is there something I'm missing?
Well, the PSP program It doesn't really do anything to the margin. And it, politically, it could make us more efficient if we get large amount of backlog, being recorded. Lots and lots of customers take up on that offer and then we can build the product more efficiently. It could help a little bit on the cost side of the equation, but PSP program wasn't launched to drive margins. It was launched to get a firm customer backlog that we can be confident of growing our capacity and not have any double ordering or excess ordering in that backlog, which could go away when we get there.
So that's why it was launched. It was not launched for margin, and I don't think it's going to have a lot of impact on margin. Now as we are growing through this growth period, you have 3 or 4 things happening. Number 1, all the underutilization is going away. Most of it has gone away in March, but some could be going away in June.
Number 2, as the incremental being added. The incremental capacity usually is more productive because you're not adding The entire every machine, you're adding bottlenecks here and there. So when you add that capacity, The incremental margin thrown for every dollar of revenue tends to be better and you could go back in the We are bringing some products, both in fab and assembly and test from outside to inside, and Those moves are accretive. There could be something else. The impact of price increase, I think, is going to be relatively benign because we largely launched that to offset the cost increases, but You can't always increase the price on a product where you have seen the cost increase.
You got to look at the product whether there's a competitive element there or It's a proprietary product, so the price increase and cost increase don't completely match product by product. But overall, We might get some benefit certainly in revenue, probably not in margin.
That's very helpful. Thanks very much. A great quarter.
We'll take the next question at this time. It comes from Dennis Piacanen. Please go ahead.
Hi, thanks for taking my question. I'm here to ask a question on behalf of Raji Gill. Is there any chance you could provide us with some more color on the various kind of end market gross margins? How did those move throughout the last quarter? So if you maybe can break it out by your reporting segment?
We don't break up gross margin either by end market or by product line. So we report at a company level and that's all we have.
And if you want, as a follow-up, how do you expect kind of the recent investments into The internal capacity to impact your margins over the next three quarters, would you say that there's going to be a noticeable impact Of the internal capacity coming online and has that been factored into your guidance? Or do you expect that to maybe hit towards the kind of the end of the calendar year?
So I was going to say, I think these come on slowly. They're not going to make big We want to improve our gross margins to the long term target, but I would not be looking for quarter by quarter, these are making big changes in the gross margin of the company overall.
We'll take the next question that comes from Christopher Rolland from Susquehanna. Please go ahead.
Thanks for the question, guys. Just two quick ones for me, and then I'll get off. I guess, Steve, first of all, PSD, Ultimately, what percent of revenue do you expect to go through the PFD program versus other? And then secondly, as you bring some internal capacity home, even on the wafer side, does this bring up being recorded. A conversation about 300 millimeter fab or not.
Is that at what point
being. We really have no idea. It's never been done before. It is being launched by taking on questions from many large customers saying, What can you do to make sure I get capacity support in the second half? I'm delinquent now.
You're not giving me everything I need. How can I ensure that I get that in future? And so we came up with this program and saying if you commit that your orders for the next 12 months of non cancellable, non reschedulable, then we will go with confidence, build a product and give you preferential support. So we do not know what the uptake would be. I'm just purely guessing.
We just launched it this morning and I've gotten 3 or 4 inputs since then, being recorded. One from a major distributor and few from customers, one customer I've talked to personally. So I think this is heart of the test. So that's that. The other part of your question was the 300 millimeter.
There is no plan to do any 300 millimeter being recorded. And number of small, 4 inches sort of fabs that we are transitioning product away from those 4 inches to being recorded. The 12 inches of the capacity continues to be at our foundries for any foreseeable future.
Thanks, guys.
There are no further questions at that time. Being recorded and for question and answer session for today. I'd now like to turn the conference back over to Mr. Sankey. Please go ahead.
Yes. I want to thank everyone for attending the call. Also want to say that this is my last call as CEO. As many of you know, Dinesh Murthy would be the CEO starting March 1. I would still attend the call.
I will stay engaged with the investors, But Ganesh will take the lead role. And if some of you are expecting to find a softer version of Thank you all. Bye bye.
This concludes today's call. Thank you for your participation. You may now disconnect.