It is now 9:00 A.M., the 2017 annual meeting of the stockholders of Microchip Technology Incorporated will please come to order. I am Steve Sanghi, CEO and Chairman of the Board of Microchip Technology. I would also like to introduce additional members of the audience. First, I will introduce the other members of the Board of Directors, Matt Chapman, CEO of Northwest Evaluation Association, L.B. Day, President of L.B. Day & Company, Inc., Esther Johnson, retired Executive of Carrier Electronics, and Wade F. Meyercord, President of Marcour & Associates. Next, I will introduce the company's corporate officers that are in attendance today. Ganesh Moorthy, President and Chief Operating Officer, Eric Bjornholt, Vice President and Chief Financial Officer, Steve Drehobl, Vice President, MCU8 division and Technology Development division, Mitch Little, Vice President, Worldwide Sales and Applications, Rich Simoncic, not present. He is Vice President, Analog and Interface Product Division.
Mathew B. Bunker , Vice President, Back-End Operations, Steve Caldwell, Vice President, Wireless Solutions Group. Lauren Carr, Vice President of Global Human Resources, Rod Drake, Vice President of MCU32 Division, Randy Dzwings, Vice President of Memory Products Division, Fanie Duvenhage, Vice President, Human Machine Interface Division, Mike Finley, Vice President of Fab Operations, Patrick Johnson, Vice President of Mixed Signal and Linear Division, Bryan Liddiard, Vice President of MSLD and Marketing Communications, Sumit Mitra, Vice President of Wireless Solutions Group and MCU32 Division, Mitch Ogradowski, Vice President, USB and Networking Group and MCU16. I always say you need a new title. Mark Reiten, Vice President licensing. Dan Termer, Vice President, Automotive. Joe Thompson, Vice President, MCU16 Division. Kim Van Herk, Vice President, General Counsel and Corporate Secretary, Robert Williams, Vice President, Global Information Services.
Several other appointed officers who are not present are either located at other domestic or international sites, all are traveling today. Two Partners of the firm of Ernst & Young, the company's independent registered public accounting firm, are also here today. They are Ron Butler and Eric Lewis. I would also like to introduce Rob Ishii, he is in the back, a Partner with the law firm of Wilson Sonsini Goodrich & Rosati, who serves as the company's outside general legal counsel. Pursuant to the company's bylaws, I have been appointed by the Board of Directors to serve as Chairman of the meeting. Rob Ishii will serve as Secretary of the meeting. Notice of this meeting, stating the time, place, and purposes, was mailed on or about July 13, 2017, postage prepaid to each stockholder of record at the close of business on June 28, 2017.
Affidavits of mailing have been received by the company and are available for inspection at this meeting. 232,723,905 shares of common stock were outstanding at the close of business on June 28, 2017, and are entitled to vote at this meeting. Just some matters with respect to the voting of your shares. If you have already mailed in your proxy and you do not want to change your vote, then you do not need to do anything at this time. If you did not turn in your proxy yet, or if you wish to change a proxy you previously submitted, or if you hold a proxy to vote the shares of another stockholder, please submit those proxies to us at this time. Anyone that needs to submit a proxy? Cheryl will collect those proxies now. No one?
If there's anyone here who did not submit a proxy and who wishes to vote their shares in person, please raise your hand and Cheryl will distribute a ballot to you. Anybody needs a ballot? We will collect those ballots when we open the polls for voting in a few moments. In accordance with the provisions of Delaware law, the board of directors has appointed Rob Cefleta to serve as the Inspector of Election at this meeting, and he subscribed the oath of his office prior to the meeting. Rob has informed me that a quorum is present, and I declare the meeting open for business. If there are any questions that relate directly to one of the proposals, I would like to receive that question at the time we consider each of the proposals.
We have reserved time after we complete the business matters of the meeting for a presentation of the company, followed by a question and answer period. So please hold all questions not related to the proposals until the question and answer period. The first proposal is to elect five directors to serve for the ensuing year until their successors are elected and qualified. A nominee for director shall be elected if the votes cast for such nominee's election exceed the votes cast against such nominee's election. Nominations for directors will now be received. I recognize Rod Drake.
My name is Rod Drake. I nominate Steve Sanghi, Matthew W. Chapman, L.B. Day, Esther L. Johnson, Wade F. Meyercord, for election as directors of the company.
Mitch Little.
I second the nominations.
Since no other nominations were received, the nominations are now closed. The second proposal is to consider and vote to approve the amendment and restatement of Microchip's 2004 Equity Incentive Plan to increase the number of shares of common stock authorized for issuance thereunder by 6 million shares, to reapprove the Equity Incentive Plan for purposes of Section 162 of the Internal Revenue Code, and make certain other changes as set forth in the amended and restated plan. The affirmative vote of the holders of a majority of the shares of common stock represented at the meeting is required to adopt the proposal. A motion calling for a vote on this proposal will now be received. I recognize Mike Finley.
My name is Mike Finley. I move for the adoption of the following resolution. Resolved, that the proposal to approve the amendment and restatement of Microchip's 2004 Equity Incentive Plan to increase the number of shares of common stock authorized for issuance by 6 million, reapprove Microchip's 2004 Equity Incentive Plan for purposes of Section 162 of the Internal Revenue Code, and make certain other changes as set forth in the amended and restated plan, as more fully described in the company's proxy statement, dated July 13th, 2017, be approved.
Joe Thompson.
I second the motion.
The third proposal is to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018. The affirmative vote of the holders of a majority of the shares of common stock represented at the meeting is required to adopt the proposal. A motion calling for a vote on this proposal will now be received. I recognize Dan Termer.
My name is Dan Termer. I move for the adoption of the following resolution. Resolved, that the proposal to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31st, 2018, as more fully described in the company's proxy statement, dated July 13, 2017, be approved.
Ganesh Moorthy.
I second the motion.
The fourth proposal is to hold an advisory, non-binding vote regarding the compensation of our named executives. The affirmative vote of the holders of a majority of the shares of common stock represented at the meeting is required to approve this proposal. A motion calling for a vote on this proposal will now be received. I recognize Mark Reiten.
My name is Mark Reiten. I move for the adoption of the following resolution. Resolved, that the compensation of our named executives, as more fully described in the company's proxy statement, dated July 13th, 2017, be approved on an advisory, non-binding basis.
I second the motion.
The fifth proposal is to hold an advisory, non-binding vote on the frequency of voting on the compensation of our named executives. The frequency period receiving the most votes will be approved on an advisory, non-binding basis. Is there any discussion from any stockholder on this? A motion calling for a vote on this proposal will now be received. I recognize Matthew Bunker.
My name is Matthew Bunker. I move for the adoption of the following resolution. Resolved, that an advisory vote on the compensation of our named executives be held every one year, as more fully described in the company's proxy statement, dated July 13th, 2017, be taken.
Robert Williams.
I second the motion.
The polls are now open for voting on the proposals before the meeting. The time and date of opening of the polls is 9:11 A.M. today, August 22, 2017. Cheryl, please collect the ballots of those stockholders who wish to vote in person. If you have a ballot, please raise your hand so that we can collect them. We'll wait for everybody to turn in their proxy, if anybody has one, and for the results to be tabulated. Anybody? The polls are now closed. The time and date of closing of the polls is 9:12 A.M. today, August 22, 2017. Will the inspector of election please announce the vote?
With respect to proposal 1, I hereby declare that all the nominees have been duly elected as directors of the company to serve for the ensuing year and until their successors are elected and qualified. With respect to proposal number 2, I hereby declare that the proposal to approve the amendment and restatement of Microchip's 2004 Equity Incentive Plan, increasing the number of shares of common stock authorized for issuance thereunder by 6 million, reapproving the 2004 Equity Incentive Plan for purposes of Section 162(m) of the Internal Revenue Code, and making certain other changes as set forth in the amended and restated plan, has been adopted. With respect to proposal number 3, I hereby declare that the proposal to ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm of Microchip for the fiscal year ending March 31, 2018, has been adopted.
With respect to proposal 4, I hereby declare that the compensation of the company's named executives has been approved on an advisory, non-binding basis. With respect to proposal 5, I hereby declare that a frequency period of one year for holding an advisory vote on the compensation of the company's named executives has been approved on an advisory, non-binding basis.
This concludes the formal portion of our meeting. Remember, there's a presentation soon after I adjourn the formal portion of this meeting. Before I adjourn the meeting, is there any further business? If not, I will entertain a motion to adjourn. Eric Bjornholt?
I move that the meeting be adjourned.
Steve Drehobl ?
I second the nomination.
All in favor say aye.
Aye.
Opposed, say no. The ayes have it. The meeting is adjourned. Please stay seated. Before I begin this presentation, I wish to remind you that during this presentation, I'll be making projections and other forward-looking statements regarding the future financial performance of Microchip. These statements always involve predictions, and the actual results may vary materially, so I refer you to Microchip's filings with the SEC regarding some very important risk factors about the company. With that, in today's presentation, I'll be introducing you to Microchip 2.0. The company you have known for the last 27 years or so is the company Microchip 1.0. I'll go through several slides to recap the highlights and accomplishments we have had during the Microchip 1.0. I'll lead you to really what the new company, Microchip 2.0, is and will do going forward.
We thank the support of shareholders during the entire Microchip 1.0, and look forward to your support during the Microchip 2.0. This was our June quarter financial result. I won't read every bullet. On slide two, for the phone audience, everything was a record. Sales of various strategic product lines, income in all categories, operating our record earnings. It was our 107th consecutively profitable quarter. These are the following things I will cover a little bit in Microchip 1.0. A consistent growth, perennial market share gains, high margin business model, very shareholder friendly with consistently increasing dividends and free cash flow, and a very successful M&A strategy. Let's first look at the consistent growth. This is the revenue slide for Microchip since fiscal year 1993 when we went public, so almost over a 25-year period. We have posted 107 consecutive quarters of profitability.
The sales are also shown divided by MCU, analog, memory, licensing, and multi-market and others. This is on slide four. Going to slide five, shows the growth of our analog yearly revenue. We break this out. As you can see, based on the last quarter run rate, this was about a $950 million annualized business, and heading higher. Slide six shows the total microcontroller market share. This is Microchip's revenue in microcontrollers as a percentage of the MCU 8, 16, 32-bit revenue reported by the Semiconductor Industry Association. The first many points on this slide are by year. Then after some time, I changed them to quarters, so you can see the granularity. The large spike you see about four or five quarters ago was the acquisition of Atmel, which brought in significant additional microcontroller business.
From the very beginning, you see a large amount of market share growth, a big jump by addition of Atmel. Since then, we have gained further market share with Microchip and Atmel combined, last quarter's share standing at about 16%. This shows a little bit differently. This shows our market share ranking against all other competitors. I could go back on this chart to 1990. Microchip will be bottom of this chart behind everybody in U.S., Europe, Asia, and Japan. Then our share continued to rise. We were in the top 10 by 2003. Then the share continued to increase, becoming number three in 2016. The two above us also have done significant acquisitions. Renesas was a merger of Hitachi, Mitsubishi, and NEC, the three large Japanese giants. NXP is a merger of NXP and Freescale.
Their market share also increased through acquisition. Microchip market share also shows Atmel in the very last one, 2016. I'll show you several slides that are just all the slides going up and to the right. That's kind of one of the saying, if the graphs go up and to the right, unless you're measuring defects, if you're measuring revenue, earnings, profits, percentages, graphs which go up and to the right are good graphs. I'm on slide eight that shows non-GAAP net sales. You saw a slide for the last 25 years. This kind of zooms in in the last eight or nine years, so you can see a little more granularity here. 17.6% compounded annual growth rate. Slide nine shows the non-GAAP gross profit over the same period, 18.2% compounded annual growth rate.
Slide 10 shows the non-GAAP operating income in $, which shows 20.4% compounded annual growth rate. Slide 11 shows the non-GAAP net income and diluted EPS growth. The EPS is in the line, and the net income is in the bars. That's again another chart up and to the right. Slide 12 shows the free cash flow as a % of revenue. The bars are free cash flow in $, and the line is free cash flow in % of revenue. Again, another chart up and to the right. EBITDA. EBITDA has grown at 17.6% compounded annual growth rate. EBITDA and net leverage. The bars are EBITDA in $, and the line is essentially net leverage. It's the total amount of loans Microchip have divided by the EBITDA.
When we acquired Atmel, we borrowed a large amount of money and our leverage was quite high and several stockholders were concerned about taking on such a high leverage. With the tremendous growth in EBITDA, paying down some of the loans we had, you can see that the line EBITDA leverage has come down very substantially and kind of no longer considered very high. I'm on slide 15. This shows $4.7 billion return to shareholders. The blue line is the dividend per quarter, and the scale is to the right, and the bars are total amount of $ delivered back to the shareholders with the scale on the left. $3.3 billion have been paid in dividends, and $1.4 billion have been returned to shareholders with buybacks. This has been very shareholder-friendly company that has constantly shared its profits through share buybacks as well as dividends. Okay.
This was largely Microchip 1.0. As I make a transition to Microchip 2.0, what has made it in a way possible is in 2008, we started to do a series of acquisitions. Since then, we have bought about 17, 18 different companies. Each company here has brought an additional technology to Microchip, which we are able to sell along with our microcontrollers, either on that chip or around that chip. By successfully building a large portfolio through various acquisitions, we now all of a sudden find ourselves to be able to serve a much larger portion of the customer's board with Microchip-built products. I'll show you how that works.
That has made it possible through all these successful acquisitions to now make a transition, I introduce to you Microchip 2.0, with a vision to be the very best embedded control solutions company ever. I'm on slide 17. This company builds products and applications and solutions that are smart, connected, and secure. Microchip 2.0. Seven elements of it. One, providing total system solution in embedded control. Second, we have leading customer preference to design with our MCUs, and I'll show you that survey done by EE Times. Third is multiple growth drivers, which will drive our business going forward. Fourth, record growth margin target, again with multiple drivers. Fifth, record low operating expense target as a percentage of revenue, with again, multiple drivers that are providing leverage on OpEx. Number six, our end market mix is now skewed to industrial and automotive.
During much of Microchip 1.0, our end market mix was more dominated by consumer household appliances and stuff like that. The industrial and automotive tends to be more sticky sockets and considered higher, better business. Number seven, the new long-term model with industry-leading operating profits. Let's look at some of them. First is the total system solution in embedded control. Here is an example. We got hundreds of these pages, and I'll show you five today. First is an automotive water pump. A Microchip 1.0 will largely sell a microcontroller in it, which is shown in the middle, a dsPIC33. It may also sell some of the analog parts shown in green, but a Microchip 2.0 will add many additional chips coming from our acquisitions. The three red ones came with the Micrel acquisition, and one blue at the bottom came with the Atmel acquisition.
You could see that the total amount of value we can add to the customer nearly doubled on this slide in the Microchip 2.0. Here is an example of an alarm panel uplink, where a Microchip 1.0 would have sold three chips. They're all analog, a battery charger, an op-amp, and an I/O expander. A Microchip 2.0 is adding large number of additional analog chips from Micrel. Here's a third example, a router. This application came to us from Atmel, and Atmel would sell a microcontroller in the center, MPU. As part of Microchip now, a Microchip 2.0 will add five other chips from Micrel. I'm on slide 23. No. Hello, hello. SOS.
It doesn't want to come up.
It doesn't like the router.
There's a laptop over here.
Control, alt, delete.
It works?
Escape doesn't work. Nothing works. I wanted Bill Gates in the audience. Well, they have to get a new laptop and set it up and load it. Meanwhile, let me just take some questions. Let's have a conversation. Any questions I can handle right now? I see some of the ex-employees in the audience. Welcome back. I see some people that came to us from acquisitions, some employees who are in the audience. I also see some local shareholders that have shown up. Any questions? Should have brought a laptop.
I've got one. Let me go to Vijay.
Who's Vijay?
Well, we can play [inaudible] over there.
Oh.
23. Do you have the cord?
I could just use it here.
Okay. God.
This definitely has a competitor's microcontroller in it. Okay. The next example is a PC dock, here you can see that a Microchip 1.0 will only have one chip in it, PIC32, which is a 32-bit microcontroller, shown in green. A Microchip 2.0, all the red ones are from Micrel. All the brown color is all the parts from our SMSC acquisition. There is a USB hub and port, there are a number of other parts. The blue one is an authentication chip from Atmel. You could see a Microchip 2.0 has substantially larger content in the customer's board, where in many cases, the entire board can be made up of Microchip content. That is the gist of providing the total system solution to the customer. The last example on page 24 is a display module.
Here again, the center green chip is a 32-bit microcontroller from Microchip, but a Microchip 2.0 adds other chips from Micrel, one from SST, and the blue one from Atmel. Like I said, we have hundreds of these examples, and going forward in various presentations, I'm going to change them around and have different examples over time so the shareholders can see. Second is the leading customer preference to design with our MCUs. Not only around our MCU, we're adding many other chips like you saw in the prior slides, but even when it comes to MCU, in surveys, customers have shown a preference to design with Microchip's microcontrollers. These are slides from EE Times. AspenCore is the parent company of EE Times, and they asked their readers, the embedded engineers, which of the following 8-bit chip families would you consider for your next embedded project?
You can see that Microchip PIC and Atmel AVR, which are both ours now, is almost all of it, and has a 5 to 1 or 6 to 1 advantage over the next nearest competitor. The same question was asked for the 16-bit chip family, then the Microchip dsPIC and PIC24 were again on the top. First time ever, we crossed Texas Instruments. They went down year-over-year, we went up. Again, we have the leading preference to design with our chip. In the next slide is, which of the following 32-bit chip families would you consider for your next embedded project? On 32-bit, while on this slide, STMicro shows on the top, Microchip PIC32 is the number two. As you go down, and maybe I should have colored those slides, there's an Atmel SAM, there's AVR32, there's Arduino.
When you add all of those together, Microchip again is the number one preference for embedded designers to design with one of our solutions. The next question EE Times asked is, what's most important when choosing a microprocessor? Some people would expect that answer to be a given company, a given chip, a given architecture, a given microcontroller that may be popular. The answer was really none of those. The embedded developer's answer was, it is an ecosystem. The ecosystem is really whatever you want to put in it, software, hardware, tools, support, debugging support, technical support, websites, availability of the product, no end-of-life policy, on and on. Ecosystem is really whatever person thinks is a part of the ecosystem. When the question was asked, which company-- Okay, hello. Let's see what we can do here. Only giving me two options. There was two unattractive alternatives.
When the question was changed here to which vendor has the best ecosystem for your needs, customers believe that Microchip ecosystem was one of the best, most preferred, and kind of tied with TI, but it's rounding down or rounding up, and by the slide they gave us, we were number one. Multiple growth drivers. These are multiple growth drivers which will be driving our business going forward in Microchip 2.0. The first is the microcontroller market growth and share gains. I shared with you how we have gained share so far, and with such preference to design with our products, we should continue to gain further share. Second is the analog growth and attach opportunity.
That is all the attach of analog and various products that will go around our microcontrollers, wired as well as wireless connectivity, the entire Internet of Things thrust, and all the chips we have in that area that we can attach with our microcontrollers. Fourth is security. Security is becoming extremely important. Anytime you want to connect to the Internet, you are subject to a hacking risk and all that. People can hack into your cars, your homes, your data, and we have significant security offerings. You have to authenticate through that chip before you can get on to the Internet bus, and that would be driving our business. In the automotive area, we have many different solutions in automotive networking, human machine interface, access control, lighting and body electronics. Finally, our technology licensing business, which was acquired when we acquired Silicon Storage Technology.
Back then, it was a $40 million business. It's at a $100 million run rate today and will grow further. Gross margin drivers. Our gross margin last quarter was already over 60%, and our long-term guidance is 62.5%. Here are some of the elements that will get us there. Increasing fab utilization. All our three fabs are ramping capacity. To grow further utilization, savings from Micrel fab closure. Micrel fab was closed back in November, and much of the Micrel product is still coming from inventory we built prior to the closure. As more and more product shifts towards building it from our eight-inch fab, the cost is substantially lower, and those savings will continue to accrue. Third is increasing back-end plant utilization. Some of our large acquisitions, both Atmel and Micrel, did most of their testing at the subcontractors.
Atmel had 90% of its testing at subcontractors. Microchip had 90% of its testing in-house. After these acquisitions, our overall percentage of product we tested ourself went down quite a bit. Total amount of testing we did in-house went to about 55%, and we have a goal to take it back up to over 80%. As we are doing that, it will dramatically increase the back-end plant utilization at a much lower cost. Fourth is porting Atmel products to Microchip assembly test technology. Some of the initial products we have done are giving very good results. In one case, we replaced 17 test systems by one test system, giving equivalent output of the 17 test systems. A factor of five or factor of six is really all over the place.
A lot of these porting and transfers are going on, which are all adding to the gross margin, stable to rising pricing environment and riching product mix as we go forward. Operating expense leverage drivers. Here, basically, prior to the Atmel acquisition, Micrel and some other companies, Atmel would be developing peripherals, developing the technology, qualifying the technology, ESD structures, pad structures, packaging qualification on microcontroller, on analog and wireless, and Microchip would be doing the same. Today, as we have combined them together, we are porting them to common process technology, common ESD structures, common packaging quals, common marketing communications, common conferences, common this, common that. We have already dramatically beaten the numbers that we gave a year ago as a guidance to the marketplace.
This synergy coming from the common roadmaps on microcontroller, analog, wireless, and memory, from being on a common process technology, common IP libraries, common ecosystem, synergy in marketing, is just all tremendous. We're able to grow this revenue with a significantly lower incremental OpEx for sales growth. That's why already, last quarter, we had the lowest operating expense as a percentage of revenue, and we're guiding to even go lower this quarter. Next is the revenue mix by end markets. Like I said earlier, for most of Microchip 1.0, our largest segment was consumer. Today, our largest segment is industrial with 35% of our business, automotive with 25% of the business, and then consumers and others are after that. 60% of the business is in these two markets, with high margin, sticky sockets, and really our kind of marketplace. Finally, financial results, guidance, and long-term models.
There's a lot of data on this slide. Let me highlight a couple of them. Starting with the net sales, I'm showing it for the last five quarters actual. Net sales have been record every quarter for the last five quarters. Gross profit has gone up in dollars, record gross profits, and gross margin has incrementally increased every quarter, starting from 55.8%, going up to 60.4% last quarter. Operating income started from 27.4% five quarters ago, and now it's 37.5%, 1,000 basis points improvement in operating margin over these last five quarters. Finally, the diluted EPS, starting from $0.84 five quarters ago to $1.31 last quarter. Current quarter guidance is our first quarter ever to be over $1 billion quarter, $4 billion run rate. The actual guidance is $1,001.3 million. Gross margin goes higher again a little bit, 60.5%-60.75%.
Operating expense percentage goes a little lower again, and operating margin to be another all-time record between 37.5%-38.25%. In the long-term model shown on the bottom right, we're looking forward going forward with a 7%-9% revenue growth expectation, gross margin to be 62.5%, operating expense to be 22.5%, and operating margin to be 40%, which puts us in the range of only couple other companies that can talk about making 40% operating margin in this industry. We'll be in the top club of about three companies, I think. Summarizing the presentation today, we are a consistent revenue grower and market share gainer with multiple growth drivers, a high margin business model, and shareholder friendly. Currently strong business conditions with June quarter revenue that was above the high end of guidance. We're guiding the September quarter to be our first billion-dollar revenue quarter.
We're experiencing significant capacity challenges, and from quarter to quarter, we are rolling forward significant amount of revenue that's delinquent to customers' needs, because the growth has picked up so much and capacity is a little bit behind, and we think it will take us up to one year to catch up before lead times are normal. We have revised our long-term financial model up to a non-GAAP gross margin of 62.5%, operating expense of 22.5%, and 40% operating income. Finally, as I showed today, we're launching Microchip 2.0. Some of these slides I showed about a couple of months ago to the investors, so it's still a launch in process as we take that message around the world to our customers, to our investors, to our employees, providing total system solutions that are smart, connected, and secure. Thank you very much. I'll open it up for questions.
Anybody has a question on any part of it? If there are no questions, this meeting is done. Thank you for attending. Thank you.