Good day, everyone. Welcome to Microchip's 2nd Quarter Fiscal 2021 Financial Results. As a reminder, today's call is recorded. At this time, I would like to turn the conference over to Microchip's President and Chief Executive Officer, Mr. Steve Sange.
Please go ahead, sir.
Thank you, operator. 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 Murthy, Microchip's President and COO and Eric Bjornholt, Microchip's CFO. I will first comment on our CEO transition and board appointments. Eric will then comment on our second quarter financial performance and Ganesh will then give his comments on the results. I will then discuss the current business environment as well as our guidance We will then be available to respond to specific investor and analyst questions. Let me begin by commenting on Today, we announced that I will transition to an executive chair role effective March 1, 2021.
Michael Chip's current president, Ganesh Muthi, will step into the role of President and CEO effective March 1, 2021. Financial will also join the Board of Directors effective January 4, 2021. I joined Microchip in a February1990 as Senior Vice President of Operations and was promoted to President to lead this company in July 1990. Microchip then had sales of about $60,000,000 and it was losing about $10,000,000 per year. The main product line at that time was commodity e drums and the gross margin of the company was about 30%.
The turnaround of the company was documented in my book, driving excellence, how the aggregate system turned to microchip, from a failing company to a market leader. We took Microchip public in March of 1993, with annual sales of $89,000,000 and a market capitalization of $85,000,000. In the last 27 years as a public company, Microchip's net sales grew to $5,200,000,000 and its market capitalization grew to approximately $30,000,000,000. Today, Microchip Produces industry leading growth and margins. Since its IPO, Microchip stock price has grown approximately 20,000 percent, excluding dividends, Microchip has also completed its 120th consecutive quarter of profitability on a non GAAP basis In the last 30 years, Microchip transformed from a small company focused on nonvolatile memory products to an embedded solutions powerhouse with a broad and innovative range of solutions as well as leadership position in the industrial data center, automotive communications, consumer And Aerospace And Defense Markets.
We have also been an industry consolidator, having acquired about 20 companies including well known industry names like Silicon Storage Technology, Standard Microsystems, Microw, Atmel, and Microsemi. All of the acquired companies were successfully integrated into Microchip's business and created outstanding value for the stockholders Microchip. Leading Microchip for the last 30 years has been the greatest privilege of my 42 years in the semiconductor industry I turned 65 in July of this year. I often thought about transitioning to an executive chair role By that date, I discussed this with our Board of Directors as part of our succession planning process earlier this year, but no decision was made at that time. Then given the unexpected COVID-nineteen pandemic, the board and I thought it was best to delay any transition so that it would not occur during a very turbulent and unpredictable time.
I have now decided that the time is right to make this change. The overall decision was made easier given that Microchip has someone as qualified as Ganesh to assume the CEO role and given the strength of the rest of our management team. I have known Ganesh for 39 years since hiring him as a new college graduate at Intel in 1981. He has a demonstrated track record of success a proven partnership over the last 19 years at Microchip makes him my logical successor. He is an energetic articulate and thoughtful leader who is widely respected amongst our customers, partners, suppliers, investors and analysts, as well as the entire Microchip and Flowy Days.
Ganez joined the Microchip in 2001 and served as the vice president of multiple business units. In 2006, he was promoted to a Executive Vice President with expanded business unit and manufacturing responsibilities and assume the role of Chief Operating Officer in 2009 Genej has served as President and Chief Operating Officer from February 2016, Since then, Ganesh and I have jointly led Microchip. Now starting March 1, 2021, Ganesh will become the President and CEO of Microchip I will remain as an Executive Chairman. I will work with Ganesh to continue to drive the strategic direction of this company and maintain a strong culture and succession planning that we have developed here. We also announced today that starting January 4th 2021, Kieran Rapp will join the Board of Directors of Microchip and will also join its audit committee.
Karen is no stranger to the technology investment community. She's currently the CFO of National Instruments, She also serves on the board of Plexus, which is a contract manufacturer. Karen brings with her extensive large company large public company experience and significant leadership accomplishments in Financial Management, Financial Governance, information technology and cyber security. We are already pleased to have Karen join our board. I will now pass this call to Eric Bjornholt, and we will cover the earnings part of this conference call.
Eric?
Thanks Steve, and good afternoon, everyone. We are including information in our press release and this conference call on various GAAP and non GAAP measures. We have posted a full GAAP to non GAAP reconciliation on the Investor Relations page of our website at www.microchip.com, which we believe you will find useful when comparing our GAAP and non GAAP results. We have posted a summary of our outstanding debt and our leverage metrics on our website. We will now go through some of the operating results including net sales gross margin and operating expenses.
Other than net sales, I will be referring to these results on a non GAAP basis, which is based on expenses prior to the effects of our acquisition activities share based compensation and certain other adjustments as described in our press release. Net sales in the September quarter were $1,310,000,000, which was flat sequentially and above the high end of our narrow guidance range from September 9, 2020, when net sales were expected to be down between 2% and 6% sequentially. We have posted a summary of our GAAP net sales as well as end market demand by product line and geography on our website for your reference. On a non GAAP basis, gross margins were very strong and near record levels at 62.2%. Operating expenses were at 23%, and operating income was an outstanding 39.2 percent, all better than the high end of our revised guidance from September 9th.
Our factory underutilization charges decreased from $13,900,000 to $12,200,000 sequentially as we started to ramp our factories continued wrap of our factories to lead to lower underutilization charges in the December quarter. Non GAAP net income was $416,400,000, Non GAAP earnings per share was $1.56, $0.15 above the midpoint of our guidance and $0.10 above the high end of our guidance from September 9th. On a GAAP basis, in the September quarter, gross margins were 61.7% and include the impact of $6,000,000 of share based compensation expense. Total operating expenses were $581,700,000 and include acquisition intangible amortization of $232,900,000 special charges of $4,300,000, $700,000 of acquisition related and other costs, and share based compensation of $43,700,000. The GAAP net income was 73,600,000 expense was impacted by a variety of factors, including tax reserve releases associated with the statute of limitations expiring, offset by tax reserve accruals associated with developments of the Alteric court case during the period.
The Fird tax impacts of enacted changes in tax law occurring during the period, deferred tax impacts of our convertible debt exchange transactions occurring during the period other matters. Our non GAAP cash tax rate was 5% in the September quarter. We expect our non GAAP cash tax rate semi 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 US interest deductions that we believe will keep our cash tax payments low, The remaining cash tax payments associated with the transition tax are expected to be about $221,000,000 and will be paid over the next 5 years. We have posted a schedule of our projected transition tax payments on the $61,400,000.
We had 120 days of inventory at the end of the September quarter, up 3 days from the prior quarter's level, and primarily a result of our strong gross margin performance. Inventory at our distributors in the September quarter were at 30 days, which was flat to the prior quarter. We believe distribution inventory levels for Microchip are still low compared to the historical range we have experienced over the past 10 years, which is between 27 47 days. Our cash flow from operating activities was $455,800,000 in the September quarter. As of September 30, our consolidated cash and total investment position was $370,300,000, We paid down $331,100,000 of total debt in the September quarter.
Over the last nine full quarters since we closed the Microsemi acquisition, and incurred over $8,000,000,000 in debt to do so, we have paid down $2,950,000,000 of the debt and continue to allocate substantially all of our cash excess cash beyond dividends period, which we feel is a testimony to the cash generation capabilities of our business as well as our ongoing operating discipline. We continue changed $796,100,000 of our 20 25 2027 convertible senior subordinated notes for cash and shares of common stock. While these transactions did not impact the overall level of debt on our balance We believe that these convertible exchanges will benefit stockholders by significantly reducing share count dilution to the extent our stock price appreciates over time. Our adjusted EBITDA in the September quarter was 566,700,000 and our trailing 12 month adjusted EBITDA was $2,181,000,000. Our net debt to adjusted EBITDA, excluding our very long dated convertible debt, that matures in 2037 and is more equity like in nature was 4.04 at September 30, 2020, down from 4.24 at June 30, 2020.
Our dividend payment in the September quarter was $95,300,000. Capital expenditures were $6,300,000 in the September 2020 quarter. We expect about $35,000,000 in capital spending in the December quarter and overall capital expenditures for fiscal 2021 to be between $110,000,000 $120,000,000. Our capital expenditure forecast for fiscal increase our internal capacity in the face of constraints our outsourcing partners are experiencing, which Ganesh will talk more about. We continue to add capital to maintain and operate our internal manufacturing operations support the production capabilities of new products and technologies as well as to selectively bring in house some of the wafer fabrication assembly and test operations that are 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 September quarter was $39,000,000. Will now turn it over to Ganesh to give his comments on the performance of the business in the September quarter. Ganesh?
Thank you, Eric, and good afternoon, everyone. Let's start by taking a closer look at microcontrollers. In a weaker than normal macro environment, our microcontroller revenue performed better than we expected. Our microcontroller revenue was sequentially down 1.8% as compared to the June quarter. On a year over year basis, our microcontroller revenue was up 0.8%.
Microcontrollers overall represented 53.7 percent of our revenue in the September quarter. Now moving to analog, our analog revenue was sequentially down 2.3% as compared to the June quarter. On a year over year basis, our analog revenue was down 8.2%. The weaker year over year performance of our analog revenue as compared to our microcontroller revenue was primarily due to our product lines, which originated from Microsemi, which had higher exposure to Huawei, the communications end market in general, the commercial aviation market and the space market. Analog represented 27.6 percent of our revenue in the September quarter.
Our FPGA revenue was up 24.8% sequentially. As compared to the June quarter and achieved an all time record, even going back to the Microsemi history. On a year that although the FPGA revenue trajectory is positive, the revenue does have some lumpiness associated with it because of the large exposure to the aerospace market. FPGA represented 8.3% of our revenue in the September quarter. Our licensing, memory and other business, which we refer to as LMO, was flat in revenue as compared to the June quarter.
LMO represented 10.4 percent of our revenue in the September quarter. In October, we completed the acquisition of 2 small private companies, The first acquisition was New Zealand Based Tecron International, a global leader of Timekeeping Technologies And Solutions, for smart grid and other industrial applications. Timing is an operational necessity for real time smart grid management and monitoring. Modernization, complexity and cybersecurity challenges within the power utilities are driving the need for more precise, secure and reliable time. Acquiring TECron enables us to expand our offering for the expanding smart energy and industrial markets.
The second acquisition was Toronto based leg up computing, whose high level synthesis tool expands our FPGA edge compute solution stack, To make it easier for software engineers to harness the algorithm accelerating power of Microchip's PolarFire FPGA, and Polar Fire's system on chip platforms. The Legup acquisition also complements the VectorBlox acquisition we made a year ago, which added domain expertise in the areas of machine learning algorithms and vector processing for edge compute applications. Tecron and Leggop were very small tuck in acquisitions, more akin to acquiring intellectual property, along with domain experts, to help us accelerate our business and hence not material to the rate at which we're paying down our debt. The 2 acquisitions are expected to add less than $1,000,000 of revenue in the December quarter. In mid September for the U.
S. Department of Commerce Regulation, we stopped all shipments to Huawei. Our Huawei originated revenue represents about 1% to 2% of Microchip's overall revenue and was sequentially down from the June quarter to the September quarter. We are working with the Department of Commerce to apply for licenses for products and technologies that we believe had no impact to U. S.
National security interests. We do not know if or when such licenses may be granted. Therefore we have no Huawei revenue in our December quarter guidance that Steve will provide. During the September quarter, we began to experience rising constraints in our supply chain due to to complete manufacturing of all their products prior to their shipment ban, competition for market share by Huawei's competitors seeking to replace them which further stressed the supply chain and ongoing shift of semiconductor manufacturing out of China to avoid tariffs and trade sanctions pressuring the capacity in other Asian countries where we manufacture through our partners, a very significant mobile phone refresh cycle which competes for the same outsource capacity we used. And last but not least, the rising demand from the automotive, industrial and consumer markets, which we saw.
The confluence of these factors created supply chain constraints, which are continuing into the December quarter. At times like this, we are fortunate to have our internal factory capabilities, and we are making strategic capacity investments as we seek to better position our business for growth. Given the current market dynamics, we are providing some qualitative trend insights into our principal end markets for the September quarter. As expected, we saw medical devices for elective procedures, like hearing aids, pacemakers, etcetera, which experienced a slowdown in the June quarter as individuals and hospitals delayed elective procedures also started the recovery in the September quarter. As expected, we also saw the work from home related markets of computing and data center as well as medical devices for hospitals revert to more normal demand patterns as a surge we saw in the June quarter dissipated.
In general, enterprise demand remains weak as most businesses remain predominantly with work from home policies, thus deferring enterprise spending for the office environment. Finally, before I hand off to Steve, I would like to take the opportunity to express my deep gratitude to Steve and to the Microchip Board of Directors for the responsibility being entrusted in me when the baton gets handed next March. As we all know, Steve will be leaving mixed shoes to fill with an impeccable 30 year history as CEO of Microchip. Yet the partnership we have forged over many years of working together, In addition to the support of our long tenured executive team at Microchip, gives me confidence to lead the next phase of Microchip. I would especially like to thank Steve for being my mentor and my partner through the many years that we have engaged business challenges and opportunities together.
And for everything I've been privileged to learn from him. I am particularly glad and thankful that Microchip and I can count on his continued support and advice in his Executive Chair role. Thank you once again, Steve. Let me now pass it to Steve for comments about our business and our guidance going forward. Steve?
Thank you, Ganesh. Today, I would like to first reflect on the results of the fiscal second quarter of 2021, I will then provide guidance for the fiscal third quarter of 2021. The September quarter continued to demonstrate what the best of Microchip culture and its people represent. Our global team of operations, business units, sales and marketing and support groups all came together in the middle of a global pandemic, while working with a pay card and delivered a superb quarter. Despite the COVID 19 pandemic challenges, we delivered net sales of $1,310,000,000 that was essentially flat sequentially and down only 2% from the year ago quarter.
This is compared to our net sales guidance which was to be down 4% sequentially at the midpoint as we capitalize on strong turns opportunities in September. We also delivered outstanding non GAAP gross margin of 62.2%, which were near an all time record level, We also achieved non GAAP operating margin of 39.2 percent above the high end of our guidance. Our consolidated non GAAP EPS was $1.56 above the midpoint of our guidance. Our bookings were very strong in the September quarter. We began the September quarter with a backlog position on July 1, to be down 8% from the backlog for we ended the quarter at essentially flat compared to minus 4% as the midpoint of our guidance.
Now I will discuss our guidance for the December quarter. Our bookings have remained strong in October we are seeing a good recovery in the automotive, industrial, home appliance and medical device, medical devices for elective procedures markets. At the same time, work from home related markets of computing and data centers as well as certain medical devices that surge with the pandemic revert to more normal demand. Here's one of the factors that we have to account for in our guidance for the December quarter, And that is Huawei effect, Huawei was over 1% customer in the September quarter, and it will be 0 in the December quarter. Taking all these factors into consideration, we expect our net sales for the December quarter to be between flat to up 5% sequentially.
Considering that seasonally, December quarter is down by approximately 2% to 3% and counting minus 1 percent Huawei effect, we believe that our guidance is well above seasonal and represents multiple industries recovering as well as Microchip continuing to gain market share in multiple end markets and product lines. Investors and analysts have asked us in the last few months about making a call about the bottom of this cycle. With tremendous uncertainty about COVID 19 situation and the elections we have not been willing to make the call. Today, we are making that call. We expect that June September quarters was the bottom for this business cycle for Microchip, We are guiding to a much stronger than seasonal December quarter, and we expect significant growth in calendar year 2021.
Based on the much better than expected financial results in the September quarter, we gave our employees half of their September quarter salary sacrifice back in the form of a bonus. We have also been gradually lowering the percentage of salary sacrifice and just yesterday, the Board of Directors approved the entire company to revert back to full salary later this month. These salary changes are dialed into our guidance that we're providing today. We thank all of our employees worldwide that have traveled this journey of shared salary sacrifice with us in the past 3 quarters, enabling us to be prepared for multiple contingencies as COVID-nineteen uncertainties unfolded. This represents the best of Microchip culture and the commitment of her employees to ensure the long term success of the company.
For December quarter, we expect our non GAAP gross margin to be between 62.4% 62.8% of sales, which will be a new all time record. We expect non GAAP operating expenses to be between 23.1% and 23.7% of sales. We expect non GAAP operating profit to be between 38.7 percent 39.7 percent of sales. We expect our non GAAP earnings per share to be between $1.51 per share to $1.63 per share. We also expect to pay down another approximately $300,000,000 of our debt in the December quarter.
We continue to believe in the strength and diversity of the businesses and end markets we are in to achieve long term change. In the past, we have been providing a mid quarter update often to coincide with our presentation at sell side financial conferences. Our peers and competitors typically do not provide a mid quarter update. Beginning this quarter, we will discontinue this practice and no longer plan to provide such updates. Given all of the complications of accounting for our acquisitions, including amortization of intangibles, restructuring charges and inventory write up on acquisitions, Microchip will continue to provide guidance and track its results on non GAAP basis, except for net sales, which will be on a GAAP basis.
We believe that non GAAP results provide more meaningful comparisons to prior quarters and we request that the NLS continue to report non GAAP estimates to first call. With this operator, will you please poll for questions?
And we'll take our first question from Embri Srivastava with BMO. Please go ahead.
Thank you. Steve, congratulations and you'll be missed. And Ganesh, congratulations to you as well. I guess you'll have to take over, Steve's role to keep us on a
toes when we get on
this call to ask a question.
It's a hard act to follow.
Big shoes to fill, but, we'd be expecting you to. Two questions for me. One is on the constrained side. Could you just help us understand how has that translated into lead times. And then if you didn't have the constraints, how much of the business, or or what would the guidance have been?
And then the second question is, maybe Eric can help us on this one, is on the capacity side. So a lot of moving parts there. So what was the what has been the outsourced versus insource, both front and back end, and then the capacity, the CapEx increase what should we be expecting both those 2 to be? And then how is that going to impact gross margin?
Do you want to take the lead times, Steve?
No, you go ahead, taken.
So on lead times, the vast majority of our line items still have a 4 to 8 week type of lead times for standard products. There are specific package combinations that do have longer lead times. What is happening is, for the factors that I described, it is, eating into multiple layers of the supply chain, so into the packaging and some of the sub assembly involved in the packaging and into the testing. Infrastructure as many of these things come together at the same time. So, we don't have huge issues with supply issues.
But we have spot issues with specific package product combinations where they are. But by and large, for the vast majority of our products, we still have pretty good lead times.
Go ahead, Eric.
Okay. So the, the second piece of your question was there was kind of multi there, but we've got some capacity questions. So we are making investments as we walk through in our prepared remarks and wafer fab assembly and tests to increase our capacity. And if you look at last quarter, We did about 39% of our wafer fab in house, 47% of our assembly, and about 54% of our test. These are relatively slow moving metrics, even with making investments.
But over time, we absolutely would expect the assembly and test percentages to go up as we make these investments. But again, they're relatively slow moving metrics. But The investments that we're making, are all gross margin accretive. And, you can see that our gross margin were guiding up in the current quarter. And we are expecting lower under utilization charges in the current quarter as we ramp our factories.
And, all these incremental adds to capacity that we're making whether it's fab, assembly or test, should add all should all add to gross margin benefits for us down the road.
Unable to quantify at this point, Eric, as to how to think about the longer term, not the gross margin. What would the, steady state, assembly and test would look like and front end would look like
in source versus source?
So again, I don't expect wafer fab to move significantly in terms of the percentage that we do in source versus outsource. As the business grows, obviously, we're making investments. On the assembly and test side, we do expect those percentages to go up. Ganesh, do you want to give a comment on where you think they can go over time?
Yes, they move a little bit more slowly, over time. And, we expect that they will probably be in the north of 60% longer term for assembly, probably north of 70% for test, and there's a lot of moving parts into going to that. But that's what we like to be at. It gives us some control. It gives us capacity when it's difficult to get outside.
Gives us some control on our costs as well. And, it all pays for itself, in, in short periods of time in the way we measure what we do or don't do.
Good. Thank you, congrats.
As far as to Microsemi and Atmel acquisitions, we were at about 70% assembly and 95% test. So as we bought these 2 large companies atmel and Microsemi, they were much more outsourced than we were. And percentages dropped quite dramatically. And we've been working our way up. And, you know, I'd really like to get that to the highest in 60% assembly and probably higher than 80% tests, but it's painful, slow transition because there's just too many variants, too many packages, too many test programs correlate and all that.
So it's an ongoing effort that will go on for years, but there are really no quick movements.
Right. Got it. Perspective on the historicals. Thank you.
We'll go ahead and take
our next question from Vivek Arya with Bank of Securities. Please go ahead.
Thanks for taking my question and congratulations and best wishes to both Steve and Ganesh. Steve, my question is, both near term and the growth you're expecting for next year. When I look at near term in the September quarter, your microcontroller and analog sales were down a little bit year on year, also they are down a little bit. So I'm curious what is giving you the confidence to say we are at the bottom of the cycle when there is still some macro uncertainty because of elections and lockdowns. So I'm just curious to hear those views.
And then When you say significant growth for calendar 2021, when I look at consensus growth numbers right now, therefore, about I think 7% or so sales growth. What does significant mean? Does it mean 5%, 10%, 15%, what is significant in your book? Thank you.
Well, what gives us the confidence is really we have worked through all the, if you go back to February March timeframe, many of the estimates that the analysts and investors had were very, very large drop because of COVID of the type of 20%, 30%. Many people were modeling the business like the 2009 global financial crisis, even some of our competitors were, we saw it clearly, and we were not modeling the business to be down that much. And we were right. Our business was up in March. It was down only 1.3% sequentially in June.
It is flat in September, and it's going up in December. So we kind of have been relatively, more correct than anybody else. We are seeing substantial backlog building up, the backlog for the current quarter, is significantly stronger than the backlog for the last quarter. And this is supposed to be seasonally down quarter, still we think we're going to do pretty well. And then, the bookings we're receiving which are aging into the next quarter and the quarter after just very, very large.
We're getting very, very strong bookings. Now some of that is concerns about the supply chain, a lot of constraints and all that. So people are giving orders earlier not that a backlog is much larger than before at a similar point in time, but that doesn't mean all that becomes growth. Because people give you orders earlier. And then, then the call chart rolls off because you already got the booking But despite all that, we're expecting a much, much better March quarter and a significant growth after that, You asked what does significant mean.
It means a lot more than 7% that you have with consensus. Welcome.
And we'll go ahead and take
our next question from John Pitzer with Credit Suisse. Please go ahead.
I'll add my congratulations to both Steve and Ganesh. And Steve appreciate all the help over the years. I'm sure a lot of the analysts on the call the same way. I guess my first question is, Steve, you're calling sort of for the bottom of the cycle, June September levels. I think what's very impressive is where your operating margins are despite the fact that we're at the bottom of the cycle.
I'm just kind of curious. I know that expenses have been a little bit light this year because guys have pulled back on things like variable comp. But given that you're not in the market of buying assets and you're really going to be just focusing on operational efficiencies, how should we think about incremental operating margins and kind of where operating margins can go from here?
So, I think, we have given a longer term model, which is 63% gross margin, 22.5 percent operating expense and 40.5 percent operating margin. We're not quite there. We're getting close midpoint of our guidance is about 62.6 percent in gross margin this quarter and I don't quite have the number on the top of my head on the operating margin. We got a little bit more to go before we really get to our numbers. And We will be analyzing and going into the next fiscal year.
We'll be looking at all that. And at some point in time, coming back to the street with a new, longer term targets when we think that current targets have even been achieved or within a striking range.
That's helpful. And then for my follow-up for Ganesh, your commentary around FPGAs and your prepared comments, notwithstanding kind of your caution a lumpy business. I'm just kind of curious if you can talk a little bit about kind of your core advantage in that market. That's becoming sort of a rarer asset over time now with some of the M and A activity in the space. What kind of longer term prospects do you see in the FPGA space for you?
Sure. So, in the FPGA market, we play specifically in the mid range of FPGAs which is measured by how many logic elements there are in it. We don't go after the very high end. There are other players who are invested there. But in the mid range and lower end, we focus on applications that need low power.
We have nonvolatile memory on these products. That have security needs and a robustness needs. And those take us into end markets that we really like. Those end markets are defense and aerospace. They are automotive, now with Microchip taking FPGA products into our historical strength and industrial, once again, Microchip taking FPGA into our historical strength.
So those are the end markets that we believe we're able to take over the long term. The advantages of what we bring with our FPGA products in terms of low power, security, robustness, and being able to position it into markets where we have the strengths.
Thank you guys.
And we'll go ahead and take
our next question from Toshiya Hari with Goldman Sachs. Please go ahead.
Hi guys. Thanks for taking the question and congrats to both Steve and Ganesh. Steve, you talked about, your December quarter guidance being roughly 5 percentage points above typical seasonality, maybe 6% when you take into consideration the Huawei dynamic. You also talked about end market strength and share gains contributing to that outperformance. What portion of that 5% to 6%, outperformance relative to typical seasonality is share growth and what percentage is market strength.
And you sort of alluded to this before, but, are you concerned at all that, customers are pulling in demand? And you see a correction in sometime in the first half of twenty twenty one? Thanks.
Well, first of all, it's impossible to break down the, the season, because growth better than seasonality into the two components that you described, good portion of the growth is mark share and what portion of the growth is really just better end market. That's really very, very difficult on a short term basis. You could really do a longer term comparison on a growth rate basis, looking at how everybody else grew. We have no idea how everybody else is going to do this quarter or next quarter or year. So I'm going to really have a good answer to that question.
But to question about a correction next year because customers are pulling in. We don't really see customers pulling in demand. We see customers pulling in placing their orders and then scheduling them into the next year, next quarter and the quarter after. And this is something we asked for to our letter back in July. We asked the customers that in addition to the near term orders that you've been giving us, please give us a longer term backlog, tell us your requirements in the time of building constraints so we can plan accordingly and put the capacity in place.
And customers have responded very strongly. So we're getting very strong bookings But, the component of the bookings that's, you know, that's aging into the net quarter and even a quarter after is very, very good. We have a lot of backlog already for the June quarter, and we have very, very strong backlog for the March quarter. So they're not pulling in deliveries. They're pulling in placing orders and scheduling the deliveries.
So they're not left short in case there are constraints.
Got it. And then as a quick follow-up, Steve, obviously you've had a very successful career, over multiple decades. Anything you feel like you left on the table? I know you're not necessarily leaving the company, but anything on your to do list that Ganesh and the team can potentially move forward with? Thank you.
Well, you know, I don't have any regrets in the timing of, you know, as I'm doing it, it's more, much more age related and family situation and grandkids and all that. But I could really go back to the Microsemi acquisition, which we announced in 2018. And the goals we had set out in terms of earnings per share and overall accretion and we were talking about achieving $8 by the end of the per year. Some of those got interrupted by 2 major industry events, one was the entire U. S.-China trade war that kept some wind out of the sails and then COVID-nineteen.
And due to those 2 events, you know, our credit rating came under pressure. The leverage became much higher in an uncertain situation, which was comfortable in a growing business, but not as comfortable in a in a situation when leverage is high and business has led an uncertainty back in the March time frame, analysts and investors were asking me questions regarding what happened if your business was down 35%. And I was telling them, our business is not going down 35%, and they were not leaving it. Like, why not? What if it happens?
So, you know, so I would say that, last 2 years have been difficult. And if we were able to have the normal level of growth in the last 2 years and all the accretion that we have achieved on the top of that you know, we would be, we would be, you know, over $8 of earnings per share today. And hopefully, stock would be near $200 rather than where it today. And I leave that for Ganesh to put a 200 in front of it.
Thank you. Good luck, Ganesh.
Thank you.
And we'll take our next question from Harlan Sur with JP Morgan.
Good afternoon. And let me also offer my congratulations to Steve and Ganesh. I guess, first question, what was book to bill in the quarter? And then given the strong demand environment and constraints, now may not be the right time to be executing to this, but I believe that you guys still have a network of very small fabs in your manufacturing footprint. So if you can just maybe, how much of this is yet to be consolidated?
Can you just remind us how much more COGS savings just to come as you consolidate these smaller fabs and over what period of time?
So we're not specifically providing a book to bill ratio for Q2. I think we had given the reason for that many times in the past, book to bill ratio was very good. And usually, we have seen investors and analysts essentially take the book to bill ratio and try to translate that into the growth number, you know, which does not really work because I already I already said that a lot of the bookings, strong bookings that we are receiving are actually aging into the March quarter and some even into June quarter. So bookings are the bookings we receive for aging over the next 12 months. And you divide their number by billings in 1 quarter.
So it's a little bit of apples and oranges. Bookings over the next 12 months aging over the next 12 months, but billing shift into the last quarter. The number was very good, but providing that numerically, that number we have seen investors not interpret it correctly. What was the second part of your question?
It had to do with cost of sales improvement and ongoing consolidation of factories and things like that. So I'll start and then Steve or Ganesh can add on to that. So we announced last November some restructuring of our Colorado wafer fab and we're making excellent progress on those fronts and have achieved a large amount of the cost savings that we outlined at that time. And you've seen our gross margins hold up extremely well. There's still work to be done.
Our operations teams and both the front end operations and the back end operations are extremely busy and we talked about our capital expansion plans and the improvement that we'll see in gross margin there. And, obviously, the more product running through our own factories absorbs the large flywheel of activities that we have on the cost side. So, got a lot of good things working on gross margin. We've guided at the midpoint this quarter to 62.6%, which isn't very far away from our 63% target. So we feel good about that.
And, but I don't think we're going to talk specifically about some of the specific actions that are being taken, but we're doing well on the operations appropriately. Steve, are you going to ask anything to add to that?
Well, yes, what I will add is that If you look at our gross margin and operating margin performance in this down cycle, I mean, it's been exemplary and compared it to any of the prior cycles, We did just extremely well. Our gross and operating margins did not go down by many hundreds of basis points. I think gross margin used to go down by 600 plus basis points. Now why is that? I think that's partially the result of diversifying the business, creating several end markets, the acquisitions we did really help us build that serving the entire solution of the customer with total system solution So the revenue didn't fall as much, the gross margin didn't fall as much, and the operating margin didn't fall as much.
And we are sitting at near record gross margin and just a tad shy of the record operating margin at the bottom of the cycle. And as we go from here, as the revenue increases, and we are ramping all of our factories, as I spoke about, and all our high volume fabs and assembly and tests at all on a rapid ramp to provide the growth that we see into next year. We have increased our capital expense budget. So as we achieve that RAM, the incremental cost of the next product we make is much lower than cost of the product we're making today because you get better absorption and the incremental growth in operating margin. You understand that concept.
So it's a very, very exciting time. We're going into where at the bottom of the cycle, we are near a record and And then from there, as the factories ramp and the under utilization first goes to 0 and then you go above that and incrementally starts dropping gross and operating margin, that would be very, very good. And what do we need to do is really put some numbers around it. And at some point in time, talk to you regarding what does that mean in the long term model that we're not prepared to do today?
Got it. Okay. And maybe just a quick follow-up on the product side. I saw that you guys actually introduced a risk 5 based FPGA product. But wanted to get your views on any initiatives that the team has in terms of risk 5 open architecture as in addition to your MCU product portfolio.
Thank you.
So we are part of the risk 5 foundation through the Microsemi acquisition. It had started before us. The first point of implementation is on the FPGA, SoC product lines. And we did introduce that, as you know, There are many possibilities with the risk 5 and, they are being evaluated within Microchip, but there's really nothing to report at this point beyond what we have done on PGA.
And we'll go ahead and take our question from Craig Hennbach with Morgan Stanley. Please go ahead.
Thank you. Certainly quite the journey, Steve, in the last few decades, to see that the company evolved just organically and through M and A. On the last point, including M and A, I one of the things that's in focus now is with total system solutions. Maybe you can just give some context or update of kind of where you stand with that and some of the efforts you're driving through, the sales force?
So I think when you look at a embedded controlled system, a microcontroller based system, it has large number of components around it, And over the years, the number of components have increased. Now, even go back 10, 15, 20 years ago, It will usually have some sort of power management, AROD converters, reference devices, maybe some discrete devices, some static RAM, some memory flash memory, nonvolatile memory, it will have those kinds of things. But over the years, the amount that goes around that microcontroller has increased substantially and it increased substantially with connectivity. So today, you need a USB Ethernet, Wi Fi, Bluetooth, you know, display driver, touch functionality. So just, you know, high voltage sensors and others.
So the number of components that go into an embedded control system have really multiplied in the last 20 years. And we began our journey of really, selling things around our microcontroller beginning in about 99, 2000 And then we did a small analog acquisition of telecom semiconductor in 2001. And with those resources then and adding through it, we started building our analog franchise. And then we didn't really start doing drum roll up acquisitions till about 2010. But the result has been that we have added all those products now available from Microchip.
You can buy them as a kit but you can buy them separately. But if you now look at a reference design for an application and find any embedded control application in home, in industry, in car, in, you know, in any place, you know, open an open an appliance and look at its, you know, printed circuit board, you can essentially have everything on that from Microchip today. A microcontroller, a memory, a analog, converters, offense, some sensors, power management, drivers, connectivity, Bluetooth, ethernet, Wi Fi, 802.11, anything else. And so we feel that, you know, we have done all that and now we have a powerful franchise to be able to sell that entire solution. And the challenge in the last couple of years has been now training the Salesforce to really be able to take that kind of message to the market and they're doing very well at it.
So at this point in time, we do not really feel a burning desire to have to do another acquisition. The valuations of Sky High, you know, will never meet our taste. And number 2, we still have high leverage. We're paying down debt, and we have clearly signaled to the street that when our leverage goes down and then we're still producing a large amount of free cash flow, a more likely use of that free cash flow is the increasing dividend and start buyback and all that and not the new set of acquisitions. So I think that's where we are because we feel we have completed the solution.
We have an enormous scale and do not have the scale disadvantage anymore. And with that, we are going to grow the business organically. Thank you.
And we'll go ahead and take our next question from William Stein with Trus Securities. Please go ahead.
Thanks for taking my question. And I'll add my congratulations on the transition. It's been a it's been quite a run. Congrats on that. I want to dig into the concept of book to bill and backlog that You've made very positive comments around Steve, but, maybe I can ask about it this way.
It sounds like the book to bill was very strong. Backlog's up a lot, but it's coming more in the form of duration of backlog as opposed to what's deliverable in the near term. Is there any metric you can give us around that, around the duration or around maybe what portion of March you think is now filled? And then the concurrent question with that is those behaviors from customers typically happen under one of two conditions, either the customer suddenly have, a lot more confidence or optimism in their business. And the other is when they think they're not going to be able to get supply.
I wonder if you could comment as to which of those you think is driving the improved duration of the backlog.
So I think it's a combination of it. Obviously, having such a broad customer base of 125,000 plus customers, you often don't really know how the customer is thinking. So you get samples of it as you talk to the large customer and visit them. And we're really not even visiting them these days. Introduction is largely virtual.
But I think it's a combination of customers reading about, strengthening lead times in the industry constraints their hearing. And when they have an experience from not being able to acquire one component, let's say, from one of the other suppliers, the purchasing manager's action offering is to really go ahead secure and place the order on all the components whether the lead times are going out at a particular supplier or not. And in our case, we specifically advised the customers back in March that we were getting largely short term orders and we need short term orders to make the quarter. That's great. We thank them But we also needed your longer term orders so we can more efficiently build the parts and batch process it and placed the orders on our suppliers ahead of time and so on and so forth.
And what I would say is that the customers have responded extremely well. I mean, our customers have always responded to our letters extremely well. And, and what you have seen is a quarter later, we're exactly a quarter after we wrote that letter, and customers have placed a large amount of backlog, you know, that, that ages into the following quarter.
Maybe just want to clarify one thing Steve said there, he mentioned the letter to customers in March. It was actually in July. I know that's what he meant to say, but just for the record.
I meant in July, yes, July 7 was the date I thought. Yes, somewhere in July.
And we'll go ahead and
take our next question from Sean Harrison with Loop Capital. Please go ahead.
Hi, afternoon. And my Best to wish. An easy question, hopefully, and then a question more on distribution with the volatility in FPGA associated with the aerospace business. Should we assume that you kind of see more of a normalization here in the December quarter? And then second, Steve, how are the distributors reacting to the tightness in supply or the tightening of supply out there?
I know you highlighted that channel inventory days are still low, but is there any pressure for them to to add more microchip stock?
So, what was the, I'll take the distribution. What was the first part of the question?
On the FPGA trends, why don't I take that one team. So as we have said many times, FPGA is a more lumpy business. Trajectory wise, if you plot the last many quarters, you'll find that it is up into the right quarter to quarter there are going to be changes depending on which lumpy business is coming through or is delayed for whatever reason. And that's what you will continue to see But if you look at it over 8, 9, 10 quarters, you'll see that it is up into the right, as an overall FPGA business for us. Colat, Steve?
So on the distribution front, we're getting huge orders from distribution, just as well as we are getting it from direct customers. So our bookings were strong, in both in the distribution channels as well as in the direct channels. And the behavior is largely similar where we're getting bookings to make the we got the bookings to make the September quarter and we're getting good bookings to fill up the December quarter but very large number of bookings are really actually aging into the March quarter and some even in the June quarter. So distributors also are layering in the backlog so that if the lead time push out further, they're not impacted, and placing the backlog already going into the next quarter. So when we wrote the letter, the letter was not only to our direct customers, it was also the same as is to the distributors and they have responded in time.
In our distribution, overall inventory has been low for quite some time. I think it hit 15 year low. And then from that, it has only come up a day or 2. So in the coming year, as we are expecting significant growth. My sense is, it's really up to distribution, but my sense is that the distributor will have to the inventory and can sit at a fifteen year low.
Fantastic. Thank you.
And we'll go ahead and
take our next question from Chris Caso with Raymond James.
Yes, thank you. And, and Steve and Ganesh Congratulations to you both. It's been a pleasure working with you both. The question is regarding seasonality. And you mentioned your view of of normal December seasonality down 2% to 3% sequentially.
I know in the past, since the Microsemi acquisition, you've hesitated to make a call on seasonality because there really hasn't been much of a normal environment since that acquisition closed. Given that you've you've offered that for December. Do you have a view or an updated view on what you'd consider to be normal seasonality for the March June September quarters?
We really don't. I think, I think we're going to have to run a whole year normal and kind of start to look at it. If you go back prior to the Microsemi acquisition, then March quarter will usually be up sequentially. I would say a couple of percent, 2.5% this year, March was up 1.3, although it got impacted at the late part of March with the China not coming back from the COVID-nineteen crisis, despite all that, I think we were up a couple of percent and could have been more. So I think the March seasonality is somewhere around 2.5% But I think there are less data points on it with the acquisition than would be otherwise.
If you take the Microsemi out, feel comfortable with a couple of 2.5 percent. Add the microsemi in, we don't have enough data points.
Right. Okay. Understood. Just as a follow-up with regard to the repayment of debt, Eric, this is for you. Just could you give us a sense of what your expectations will be over the next few quarters Again, assuming that there is some degree of recovery, as you say, you should be generating more cash.
And how does that affect the timing on getting to your net debt target, which I believe is 3?
Yes. I mean, we've been generating a bunch of cash each quarter, you know, we indicated that we expect about a $300,000,000 debt pay down in the current quarter. You know, there's some positives and negatives. Obviously, if revenue is growing, we're going to throw off more operating margin and we are specifically trying to invest a bit more in capital as talked about. So our CapEx was extremely low in both the June September quarters, and it's going to be higher here in December March.
So a bit of an set. But, you know, I would expect $300,000,000 plus range. And, as the business environment proves, that's only gonna go up. So we're making really good progress on debt pay down and, you know, expect that to continue. And you know, you mentioned the three three times or less and, you know, that's what we're looking for, looking to be an investment grade, rated company.
And, you know, over time, we will absolutely get there.
Got it. Thank you.
Time, if you could please just limit yourself to one question to allow everyone in the queue, be able to pose your question. That is star. We'll take our next question from Janet Ram Kasun. Please go ahead.
Well, congratulations guys. Steve, thanks very much. It's been a real pleasure to be along your side, for the 30th some years, since you became CEO. And, again, congratulations to all. I had actually 2 really quick.
Jake, can you give a little color on what's going on in the auto business? Do you feel that we there's a secular change happening in, demand for autos because of COVID and safety And secondly, can you provide a little more color on Huawei? When did you apply for the license? And what is can you give us what your best case scenario might be if you were to get the license? And when you get it, how fast can you ramp up?
Well, 1st of all, you know, thank you. I think even with us for probably the entire 30 years or so, or 27 years as a public company. And prior to that, even, long association. So thank you. And I remember you came to visit a booth in Las Vegas at the CES conference earlier this year.
Regarding your specific question on Huawei and Automotive, so the Automotive business is saw the largest decline out of any end market back in the June quarter because, many, many factories, this downright shutdown. And then in the September quarter, they started to bring the factories back up, and the business was up from June quarter to September quarter, But the September quarter factories were not full from the beginning. They were ramping during the quarter. So there is a quite a substantial growth in the automotive segment, at least for us from September quarter to December quarter, as the factories continue to ramp. So the automotive business now from this point on kind of looks normal cars are selling.
The inventory is low. So they're rebuilding their inventory. Lots and lots of automotive customers are making investments into electric vehicles where we have significant content And the content in a electric vehicle is actually higher than the content in a regular vehicle. So automotive business should look going forward. From here.
The other part of your question is of Huawei license, when did we apply? Let me hand it off to Ganesh to answer that question.
Yes. So our application was within the last month. It is a very uncertain process of how it, it navigates through Department of Commerce and whoever else would have to weigh in on it. I think it's impossible to give you an estimate of what might happen and when and what would it mean, you know, the business with Huawei has many products and is not just a single license, we would need multiple licenses and each one has a separate application you'd have to go through. So, and we have a prioritized process that we're going through with it.
Given the uncertainty of the process we did not believe trying to count on any revenue, made sense. And, once we have line of sight, to the license. We would still need to work with Huawei on what they would need when we would be able to ship them product to be able to provide any kind of guidance on what does it mean to our business.
Thanks very much.
Thank you, Janet.
Great. You're welcome.
And we'll go ahead and
take our next question from Matt Ramsay with Cowen. Please go ahead.
Thank you very much. Good afternoon and congrats to you both. Ganesh, I wanted to ask a question. I noted some of the private company tuck ins and some of the investments that you've been making over the last few quarters regarding the edge opportunities. Our team has done quite a lot of work on Edge as an emerging market and both on Edge clients and on sort of Edge cloud.
And I wonder if you might give a little context as to how big of an opportunity you guys might think about being over the next 3 to 5 years for Microchip. And if it's something that might evolve out of your FPGA franchise or out of your microcontroller franchise or if there's need for a bit heavier handed compute, that might be acquired as you guys approach some of these edge opportunities? Thank you.
When we think of the edge, it all comes around the megatrend of artificial intelligence and machine learning that we have spoken about. And we think of that in 3 different buckets, so to speak. There's a part of it, which is the best known many people, which is what happens on the cloud. And that is the domain of many people who have very large and highly, processor intensive compute. We do play in the cloud, but our role in the cloud is predominantly around PCIe switches and a few other things that are associated with how CPUs, GPUs, from other companies, talk.
The Edge is the second part. And Edge is an exceptionally important part as you think of, factory automation and the industrial IoT, because at that edge compute for the factory is where Much of that machine learning is going to be taking place and the application of artificial intelligence. There, we have introduced using FPGA as one of the platforms a number of solutions, smart embedded vision is one piece of that, which can go into, machine vision for factories, physical security, medical vision, depending on that end application. But surrounding these products, our, many of our standard products too, it needs microcontrollers, analog, security, things that process And then the 3rd element of, artificial intelligence machine learning we're looking at is all the way at the end where the sensing is taking place. And there again, we're looking at our standard microcontrollers and, some of the other products as to how can they do a, to a lesser extent, but what is exactly needed at the end nodes, the, the learning and the, inferencing that is needed using standard microcontroller.
So It's a much bigger field than just the edge alone in terms of our interest, but certainly FPGA at the edge is a key part of how we intend to prosecute that.
Thanks for the perspective. Really appreciate it.
And we'll go ahead and take
our next question from David O'Connor with Exane BNP Paribas. Please go ahead.
Great. Thanks for taking my question and congratulations on the results. Maybe a question on my side going back to the supply chain constraints, which exact category of products are impacted there. And Ganesh, in your prepared remarks, you talked about Huawei, you talked about the mobile phone refresh, some reshuffling of share as well and capacity maybe. So it seems more short term related.
So question is, do you think these constraints dissipate from the March quarter? Are they here to stay with us for some time? And I have a follow-up on the gross margin.
Well, the general comment would be that, it affects the supply chain of people who are packaging product, their supply chain, which can be lead frames, it can be substrates can be equipment that does bonding and various other things. And, it may not be things that we are directly involved in, but it consumes bandwidth and capacity of the supply chain, both directly what we deal with and then their supply chain as well. And so all of these compete in many cases for either the materials or the equipment capacity that is out there that we would otherwise be using And then as we go to use them, we find that in some cases, they're constrained. We've been able to manage through a lot of it. We do have second sources for some of these things.
And we do have a lot of internal capability. And as Eric mentioned, we are accelerating, bringing more capacity internal for some of the package types. So, what normally happens in business is when you have these constraints, the companies that are in the business of providing that capacity or that material, respond with what they can do to take advantage of that situation. And so there is a capacity response that they somewhat. Some of it also, it's possible that there could be a surge in demand that then begins to dissipate.
We can't really predict where that is. But we think that there are going to be constrained through the December quarter. And it's possible some of that will spill over into the quarter as well, but I don't have any line of sight into exactly when all the constraints will dissipate.
That's very helpful. And maybe a quick follow on on the gross margin for Eric. Eric, the, you talked about the strength in the March quarter. And it seems, from just the higher utilization, you could hit that 63% gross margin in the March quarter. My question is on the additional CapEx that's you budgeted for calendar year 'twenty one.
How much of a headwind is that as that capacity comes online? Does that come on slowly through 'twenty one or that going to come initially and we have to factor that into as a gross margin headwind into 2021?
So in terms of when the capacity comes online, it depends whether it's wafer fab, assembly or test. And, so it just just depends on what qualification we have to go through and the work that needs to be done in our factory. So it comes on gradually over time. I don't, I don't view it at all as any sort of headwind to gross margin. It's just a matter of, can we get it installed and up and running and get product out the door.
So I think, I think gross margin is in good shape. I didn't make a specific comment on gross margin for the March quarter. So I want to make it clear we were just speaking about the current quarter, but, there are lots of things that we're doing in our business and not the least of which is if we get into a better revenue environment as we look forward into 'twenty one, That's going to do very good things for our gross margin and we'll continue to evaluate the long term model because we're getting close.
I'd like to clarify one thing. You said, somehow the capacity or the CapEx, adds a headwind to the gross margin. That's entirely opposite of what we will experience. I believe the comment of the CapEx, the writing headwind to the gross margin comes from when you build a large greenfield fab and you spend a $1,000,000,000 then the process has to be qualified and it slowly ramps. Meanwhile, the factory is depreciating.
That's the kind of a headwind of a gross margin probably you're talking about. And we experienced that back in, 2003, when we were bringing our fab 4 up in, in Gregor, Oregon, the kind of capacity we're talking about is not that. It's, made up of $300,000 to a $1,500,000 various pieces of equipment in assembly and test and fab and the diffusion tubes and others incremental capacity. And it becomes productive really quarter after it is added. And it never has a headwind to the gross margin.
It's always accretive to the gross margin because the product it produces to produce these at an incrementally lower cost than the average product without that. So there is no headwind to the gross margin. There's only accretion to the gross margin. You.
We'll go ahead and take our next question from Vijay with Mizuho. Please go ahead.
Yes. I'll add my congratulations to Steve and Ganeshia. Just I'll combine my two questions. I know looking at the back half here, you're seeing some strength in auto industrial and also a nice recovery in China. Just wondering what your revenue exposure was in that industrial auto and especially or into China?
And lastly, I'm sure there's some COVID impact on the gross margin line. Even though margins are very impressive where they have rebounded. Just wondering, what that, if you have kind of size that coin impact and that should go away or resume into next year. So that's it. Thanks.
I don't know if I got all that. I think the first part was really asking the mix of industrial and automotive Ginesh, we have that. The last quarter, we only provided once a year.
Yes. And it doesn't move dramatically quarter to quarter. What we have shown publicly measured at the end of March for the prior year was that, industrial was 28% of our revenue automotive was 15% of our revenue. Obviously, in the June quarter, there was more headwinds in those two end markets, but I don't really have a number And then those are all reversing as we went into the September quarter and into the December quarters itself. So those end market percentages for us usually don't change that dramatically over time.
And then I'll pass it back on the other part of the question.
I didn't understand the gross margin question. Can you restate that?
Oh, I was wondering, in terms of COVID, on a logistics and operational basis, resume there's some impacts. So I was just wondering what the COVID impact was to the gross margin. And I would assume that would reverse, should we entail with next year or so?
It's it's very small.
So impact of so impact of COVID and gross margin was, more like in the June quarter when We ran our factory in, Philippines at a much lower capacity because we couldn't get all the people in and We had 150 people living in the facility and working and sleeping there at 30% of the factory's capacity, there was no COVID impact in September quarter. I mean, minors providing meals and others to the people who living there, but there was really no meaningful impact in, September quarter. And there is no recovery of that next year because there's no impact now.
Right. The amount in the June quarter was $2,800,000 and you'll see that in our press release, but there was nothing that we broke out separately because it was immaterial. To the September quarter results.
And we'll go ahead and take our last question from Mark Lapakis with Jefferies. Please go ahead.
Great. The last question on Steve's last call, that's quite an honor. So thank you for taking the question, guys. Ganesh, congratulations and Steve. Thanks a lot for all the great insights that you saved.
I will miss them. I just had a kind of a strategic question for Steve. You kind of described a scenario where the M and A slows down, you enter a deleveraging cycle and a, and then a capital kind of a capital return cycle. What does that say, what should investors take away? What that means about the semiconductor industry?
And does it necessarily mean that there ultimately that there's a different set of requirements from Microchip to their customers? Does it mean that there's a there has to be a regearing of Microchip, a Microchip 3.0, if you will, How should investors take away from that or is Microchip 2.0 the perfect equation for what we expect to see, next in semisent for Microchip specifically?
Thank you. You know, if you look at a microchip of, you know, 10 years ago, it was providing predominantly microcontroller, which was, you know, 80% plus of our business, and a small amount of business remaining was either some analog products, some memory products, but they were largely we couldn't complete a customer solution. So when we called on a customer, We largely provided microcontroller and maybe a little bit of other stuff they wanted. And the customer will surround our microcontroller with analog coming from Maxim, ADI, TI, intracellular others, would buy Wi Fi or connectivity from people who made maybe, USB from Cypress, maybe Ethernet from some internet company and so on and so forth. And, we, you know, many times, there's an old story.
I think if you have, you know, 2 couple of minutes. I'll tell you back in, 1993 time frame when we went public, we used to have a partnership with Maxim, where we will, you know, get, you know, get hotel rooms where we will invite the customers and give seminars. Jointly. And, you know, we will take the front half of the room and, Maxim will take the back front half of the day and Maxim will take the back half of the day. We'll tell them how to design our microcontrollers, and Maxim will teach them how to add analog around our microcontrollers.
And it was a great partnership that lasted for about 5 years. We both benefited, shared the expenses, and we didn't have any analog products at that time. And the story is 20 years old. It was with Jack Gifford of Maxim who died many years ago, so many people wouldn't know it. And then, Maxim, Jack Gibson wanted Microchip to pay him something because he said, we're bringing all the customers and you're benefiting from selling their microcontrollers.
And I said this has been a great partnership for 5 years. We sold micro controller, you saw the analog, you know, why are you disturbing this partnership? But he got greedy and that broke the partner So we decided to go into the analog business. And fast forward 20 years, we're doing 1,610,700,000,000 and analog now, attaching our own analog around microcontrollers. And in the process, we have acquired or built USD, Wi Fi, Ethernet, Bluetooth, you know, flash memory, staticgram, and all the others.
So when you look at it from our customer's perspective, a customer is getting a complete solution available from us today. And a future M and A is not really required from a customer's perspective because we can complete the solution now. Now you can always have an acquisition at further depth in any area, acquire more analog or acquire more Wi Fi or acquire more something. But we also have large number of design teams that are building and completing those solutions. So what we really said is that you know, at the late stage of industry consolidation, the valuation have run sky high, you know, we bought Microsemi at 5xs, And, you know, A and B just paid 10 x sales for Zydance.
So, you know, we believe the valuations are way too high. We're not gonna pay that. We don't need other acquisitions and our customers are going to be very, very well served by our complete solutions already. Does that make sense?
And that concludes today's question and answer session. I'd like to turn the call back over to Mr. Sankey for any additional or closing remarks.
No. I think I when I thank our investors who have been with us for, for long, and I certainly have great relationship and a long career with all of you, I'll still be here, not going away. We still have, a conference coming up to a Frederick Suisse conference and in early December, then, the next earnings call in February. And then on March 1, I become executive chair, but you will still see me at the Investor Circuit and conference calls and investor conferences and others. So I'll still continue to be involved with Microchip and not going away.
Thank you very
Once again, that does conclude today's conference. We do appreciate your participation. You may now disconnect your phone lines.