All right. Welcome back, everyone. We'd like to get started. My name is Toshiya Hari. I cover the semiconductor and semi-cap equipment space here at Goldman in the U.S. Very excited to have the team from Microchip with us today. We've got Eric Bjornholt, Senior Vice President and CFO, and Rich Simoncic, SVP, Analog Power and Interface, Business Unit Head. I will kick off with a bunch of questions, but I will open it up to you all in the crowd, so please be prepared. Eric, thanks for doing this. Really appreciate your time.
You're welcome. Thanks for having us.
I wanted to start off with a near-term question and then sort of transition longer term as we progress. In terms of the near-term environment, you know, you guys had guided the current quarter in terms of revenue to grow 2%-3% at the midpoint. I think on the earnings call, you talked about September also unlikely to be down, I think was the language that you guys used. I realize it's only been a couple of weeks, several weeks, but any change in your thought process there? Any standouts from an end market perspective?
No, no change. You know, what's giving us confidence in the current quarter and next quarter is our backlog visibility that we have, and we're in a good position to grow. Midpoint of guidance this quarter is 2.5%. We still believe that we'll be down next quarter.
Got it. I guess, applications, end markets, any standouts? Not necessarily, you know, potential deviation from your guidance, but relative to the past quarter.
Yeah, really no change from what we guided to. I mean, clearly, China is our weakest geography. That hasn't changed, and we really haven't seen any sort of significant bounce back since Chinese New Year, but outside of that, there's really nothing to call out. Industrial, automotive, and data centers still are our strongest markets, and consumer appliance, which is our lowest kind of percentage of revenue, it's about 12%, is the weakest area.
Got it. Okay. I guess, I was hoping you could, excuse me, if you could talk a little bit about customer inventory and channel inventory. The fear that investors have, in terms of the questions that I'm getting, is that you've been overshipping relative to true consumption, and at some point, you would see a decline in your business. Maybe talk about your ability to, you know, gauge and monitor where inventory levels are, and kind of what gives you the confidence to sort of, I guess, it's a backlog, but what gives you the confidence to look out beyond the quarter?
Yeah. I mean, distribution is just a little less than 50% of our revenue. That's pretty easy for us, where our distributors provide us with inventory and sell-through reporting, at least on a monthly basis. We've got a good handle on that, and distribution inventory has grown a little bit from its lows. The low was we had about 17 days of inventory. Last quarter, we ended with about 24 in distribution, which is still kind of on the lower end of what we've seen historically. I think distribution inventory is okay for us. Customer inventory is a little bit harder for us to get, you know, real-time information on.
That really comes through discussions with customers, and we have had, you know, a, what I would call an increasing level over the last quarter of requests for pushout activity from our direct customers, and we get a lot of the same questions from investors that you get, related to our PSP program. Ultimately, that Preferred Supply Program, we think that the backlog that we've had under that program is better than if we didn't have it, because it's very well thought out that Those orders in the PSP program are non-cancellable and non-rescheduleable, and we have given customers a little bit more flexibility on the potential to push out orders, but not cancel orders under PSP.
That, those orders are well thought out because customers have had to go to higher levels within their organizations to get approval to even place those orders. You know, PSP is still strong and well over 50% of our backlog.
Got it. I guess that was sort of my next question on PSP. You know, maybe take us back to Feb of 2021, when you introduced the program, and you sent that infamous letter out to your customers. What drove or what led to the creation of PSP, and has it sort of served its purpose, if you will?
It actually, maybe, it's actually two things that led to the creation of PSP. One is to try and prevent double ordering or triple ordering. One of the biggest factors that always plagues the semiconductor industry is the broker industry, where brokers come in and start consuming up electronics and then reselling them on a marketplace. PSP was a method to curb broker activity so that you don't have this huge buildup of inventory, not just in your distributors, but within a broker network. It's meant the two biggest reasons: one, three, give us visibility. Two, ensure that we didn't have a lot of double ordering or low-quality backlog.
The last one is to prevent bad behavior that plagues the semiconductor industry of broker activity. It really worked on all three of those dynamics. Yeah, I mean, customers who signed up for the PSP program early have been serviced very well, and most of those customers continue to be PSP participants today. Some of those customers are now entering into long-term supply agreements with us, which cover a typically a five-year period. Those customers have been serviced very well through the PSP program and are now looking for further assurance that they will have priority of our capacity into the future.
Okay. I guess on that point, Eric, the long-term supply agreements, have you ever disclosed how big that is as a percentage of your backlog, or that would be a subset of your PSP, correct?
Every customer that has entered into a long-term supply agreement with us has been a PSP customer.
Right.
That's really just an extension of that program. They typically don't give us more direct coverage in terms of order visibility beyond 12 months. It kind of functions as PSP, they have the highest level of priority going out in time, you know, allows us to put capacity in place for them, either whether it's directly in our factories or through our partners.
Got it. Okay. Now, yes, just on PSP, you know, when you introduced it, I think collectively as a market, we were under the impression that, again, there was little room for negotiation and rescheduling of delivery schedules and things like that. To your prior point and the point you made on the call, you're being a little bit more flexible. I just want to clarify, pushouts are okay, but cancellations, you're still not taking?
That's correct. I mean, in some cases, we will offer to a customer that, "Hey, you could pay a pretty significant penalty as a cancellation fee," and customers just aren't taking advantage of that, right? I mean, this is backlog that they will need eventually. I mean, typically, it's customers that have very durable end markets that are entering into these PSP programs or long-term agreements with us. With that, you know, if they don't need the product next quarter, they likely need it the quarter after that. As they've seen the economy weakening, they've been able to make adjustments because this is a 12-month backlog that we're getting, and it's when they're placing that 13th month or next month of backlog, they modify it and place 50% of what they had the month before, as an example.
Right. Okay, got it. The one question that we get quite often from investors is on pricing. It's been accretive to you guys, it's been accretive to the broader industry. Can you speak to sort of the magnitude of price increases that you've experienced over the past couple of years? Now that demand appears to be moderating, should we be expecting a potential decline in pricing, or do you expect pricing to be relatively sticky given the nature of the-
I'll start with an answer, and Rich can chime in if he wants to. You know, pricing has been very stable for us historically. You know, really 8 to 10 years ago, we stopped giving kind of annual price declines to customers. As we felt inflationary pressures on our business, whether that was in increased capital and labor costs of our own, or what our foundry partners or other service providers were passing on to us, we were inclined to pass that on to customers, not to gouge them from a gross margin percentage perspective, but to pass those costs on to them. We were consistent with that with our customer base. I think they were appreciative in terms of the transparency that we had through that process, and really, it was relatively easy to do that.
You know, customers were seeing that in other areas of their supply chain also. In terms of the stability of pricing going forward, you know, we've seen some of these costs not decline, but the pressure go down a little bit. We aren't seeing as significant of increases from our foundry partners as an example. We've already made the investments that we've had to in capacity, and we have more capacity coming on next year. I think it will moderate, and we did say for both fiscal twenty-two and fiscal twenty-three, that the majority of our revenue increase actually came from volume increases, not from pricing. Anything else on pricing you want to add, Rich?
You know, I think most customers have realized that the trickle down of equipment, depreciated equipment coming down into trailing edge technology doesn't really exist anymore. That model is dead. Equipment I use on three or six , you know, it does not trickle down. In fact, the growth of three and six nanometer devices, the one epiphany that occurred over the last two years, is that you can't sell that device without all of these trailing edge technologies. The entire industry has learned a big lesson in the last 2.5 years that you have to actually not depend on depreciated equipment on those older nodes, but you have to invest in new equipment. That depreciation cycle, you know, will take five to seven years, depending on whatever company is in there. I think most companies know that, or most customers know that today.
Got it. No, that makes sense. In, in terms of profitability, in your business, since the beginning of the pandemic, I think you've expanded gross margins by nearly 700 basis points, operating margins by 13 percentage points. You have a couple of charts in your presentation that are extremely helpful in sort of framing the cycles, if you will. How should we think about the resiliency in your business model? You're a bigger company. You've got a bigger manufacturing footprint. How should we think about, margins going forward, assuming sort of a soft landing, if you will, in your business?
Yeah. We've made an outright statement that we don't see any scenario where operating margins could fall below 40% on a non-GAAP basis. You know, they're about 48% today. You know, I think we will do much, much better than that. You know, there's a couple of reasons for that. Let's start on the gross margin line. We are less dependent on internal manufacturing today than we have been historically. I think our last fiscal year, we did 37% or 38% of our wafer fab in-house. The rest is all outsourced. If we had to cut production in our factories, you know, the impact as a percentage of cost of sales would be much lower than it's been historically.
In those charts that you referenced that are on our website, you know, we were integrating acquisitions through much of that time frame and acquiring companies that had a much lower gross margin. That was impacting the gross and operating margins during that time frame. That's not the case today. We haven't done an acquisition in the last 5 years and don't intend to do another large-scale acquisition. That should really help on the gross margin side of things. On the operating margin side, you know, we are well below our operating model today in terms of operating expenses. Because we've been limited on resources, we've been paying our employees very high variable compensation over the last couple of years, you know, it did again this last quarter. These are quarterly programs.
If we were to hit a softer spot, those are easy things to pull back on and take these high percentages down to a lower percentage and moderate any impact on OpEx. Operating margins will stay high throughout the cycle.
Okay.
I think, you know, some investors don't quite understand the impact of the acquisitions in terms of margin synergy. I mean, Microsemi was essentially operating as 22 separate companies. When you integrate all those entities into one operating system, it unleashes a tremendous amount of synergy, buying power, leveraging technology across business units, how we go to market with different solutions. That was something that we realized with Atmel on a larger acquisition, where they were over a dozen separate companies within one company. You know, Microsemi was 22 companies within the umbrella of a company, but working extremely inefficiently. We finally finished the integration of those 22 different companies in the last year. That unleashed a great deal of that.
Right.
Margin that you see today.
Yeah, in integrations, he's referring to integrating in the common ERP system. Now we're functioning as a single company.
Got it. Okay, that makes sense. Eric, you talked about how you rely less on internal capacity today, vis-a-vis past cycles, and you're dependent on external foundry. How easy or not easy is it to cut wafers at your foundry suppliers? Because oftentimes they talk about, you know, commitments from their customers, people like yourselves. How smooth is that adjustment, if you will?
I mean, we have partnerships with all of our large suppliers, including our foundry partners. You need to be very balanced in that, and we can't take a foundry from 10,000 wafers a month to 2,000 wafers a month overnight. That's not how a partnership should work. We do moderate those purchases, and actually, our foundry inventory is much higher today than our internal factory inventory. We'll moderate over time based on the environment, and we are comfortable holding higher levels of inventory than we have historically. You know, obviously, since the Microsemi acquisition, the net leverage we have on our balance sheet has come down tremendously from almost 5 times to under 1.5 today.
We have balance sheet capacity to hold higher levels of inventory, and our inventory is very long-lived, so we don't really have to worry about obsolescence, but it's a balance. And, you know, today we are focusing on taking a little bit of that foundry inventory down and continuing to run our internal factories pretty hard.
Okay, got it. I think a couple of quarters ago, you guys had, you know, floated the idea of building a 300 millimeter fab in the U.S. Ultimately, you decided against it. What were some of the pros and cons as you were debating that potential move inside the company?
There was a number of factors that led to our final decision. You know, first of all, you know, during the upcycle, our foundry partners weren't really committing to make the investments that were needed for us on the, what I would call the more trailing edge technologies, because they saw the benefit on the leading edge and were allocating most of their capital dollars in that fashion. What the foundry partners in the industry found out is that, you know, our customers, Microchip and other companies like Microchip, and then the customers for Microchip and our competitors, were willing to pay higher prices and then support the capital investments that it would take for our foundry partners to make those investments.
You know, through that process, we were looking at, you know, would it make sense for us to build our own 300 millimeter factory with CHIPS Act funding, other government funding, versus our foundry partners doing that? Ultimately, we got to the right decision that our foundry partners were going to make those investments and not require us to do that.
Okay. All right. It's very clear. Maybe transitioning to more of the business side, if you will, and get Rich to make a couple of comments on the analog business specifically. It's been a great business. You grew north of 20% the past two calendar years, taking share. What's been sort of the driving force there in terms of whether it be end markets or device types or, you know, key strategies inside the company?
Broadly, the key strategies that we employ, the same thing with the TSS. We identify anchor devices, so whether the anchor device is a PCIe bus switch device from Microsemi, an FPGA, a 32-bit MCU, or MPU. Then we target a particular megatrend or application segment, and then we build out that reference design or solution. So, we've become quite proficient at bringing the 28 different business units together and then serving up those solutions to clients. The other thing that has really happened from a TSS standpoint is, you know, we've really gone in providing additional tools to them. Now we've automated a lot of the serving up of those devices and solutions. We actually have created. We started investing over two years ago in an AI/ML engine that actually serves up the solutions when our sales force puts in an anchor device and an application.
It populates that solution with the appropriate devices based on all of our design history from our databases. It not only looks at past history but it looks at customer journey that's taking place on our web, and then a number of other devices that we have within the company, and then serves that up to customers. We've seen a dramatic improvement in overall productivity of finding the right device that goes with the right anchor device at the right time during that design cycle. That is, you know, we really did a great job during our COVID period, and since we weren't doing any large acquisitions, we got to take a whole bunch of our internal resources and just work on overall productivity, TSS, megatrends, reference designs, and that focus is what's really helped catapult a lot of the attach growth that we're seeing now with analog.
What differentiates you from other companies that perhaps also have analog and microcontroller technology under one roof? I know you've got more than that, but what?
You know, I think the biggest thing is we don't reward different business units for outgrowing the other, right? The competition is not internal for resources. The competition is all directed external. From an employee equity or bonus system, it all is how well all 28 business units work, not individually how each business unit performs. When you remove that internal competitive element for resources, everyone just works together to maximize the revenue externally. The second part of that is we are still the only semiconductor company, thankfully so, that doesn't pay sales commissions to our CEMs.
Our CEMs are not competing against each other for various sockets or design wins at different locations around the world. The reason why it works is essentially those two things, and those are the two hardest things for any company to put together, is how do you compete for resources internally, R&D resources specifically, and then how do you eliminate a commission-based sales force? Most companies haven't figured that out.
Yeah, I think, you know, one thing that Rich didn't mention, that I think is really important, is that we've got such a strong foothold in microcontrollers and MPUs and FPGAs, which tend to be the first product that is selected by an engineer when they're building out their embedded system. Then that gives us an early view into what else the customer needs to be successful with the analog and the timing and connectivity and security products that go around that. I think that that is a strategic advantage that Microchip has over much of our competition.
Got it. Okay. Interesting. You talked about megatrends, and I think, you know, one of the beauties of your company or your business model is it's very diversified, so it's hard to pinpoint to one thing and say that's driving the company. That said, what are some of the things that you guys are focused on, excited about investing in when you're thinking about resource allocation?
Right now, we're seeing, you know, conversation that happens in every customer, is security and sustainability, right? You know, efficiency. You know, how do I use less resources? Everybody's targeting Net Zero at 2030, 2040, 2050. Those programs don't exist without semiconductors, right? There is a huge amount of discussion or focus on how do I reduce overall energy usage in every application. That is probably one of the largest or fastest-growing areas for us, and that's why we made that a megatrend last year. We, we folded in AI/ML, it essentially was emerging in almost every megatrend. Rather than have that as a separate one, that just becomes a function within all the megatrends. Sustainability or preservation of natural resources is just paramount in almost every customer conversation.
Got it. In terms of that AI/ML sort of exposure, if you will, what kind of technology, what kind of device type is most sort of geared to that cycle?
We're, you know, obviously on 64 bit FPGAs, vision systems, occupancy sensor in cars, occupancy sensors for rooms, we're seeing those applications. Pushing down some of those algorithms onto 32 bit, just doesn't compute with some people. They think every AI system needs a GPU, and that's not correct. We're pushing those algorithms or methodology down into 32 bit, 16 bit, and 8 bit MCUs, to determine the degradation of a motor, a fan, an IoT node, to see if people are in a room or machine sensors. All can use certain amounts of AI or ML algorithms out on that IoT node. We're spending a lot of time working with customers on pushing it out there, and we're working on a number of development tools to make it easier for them to go enable those systems.
Got it. Okay. Maybe I'll pause here and see if we have any questions in the audience. We'll keep going. The competitive landscape, specifically with Chinese companies, I wanted to hit on, given how you describe the TSS approach, I'm pretty sure, pretty confident that that strategy, you know, the overlap with local Chinese companies is minimal, if any. What are your thoughts on competition in China, the non-TSS side of your portfolio, if you will? Do you expect competition on a three to five year view, or do you think the gap is significant enough that you worry more about Western competition, if you will?
I think a lot of that competition is more on a consumer-type application front, and Microchip really doesn't play that much within consumer-type products. You know, that's typically consumer products are somewhere between a range of 12% and 14% of our revenue. We don't play in PCs, we don't play in cell phones. You know, where we do play in consumer is mainly in appliances, and those are built worldwide, right? We don't have as much exposure in some of those. When we bundle or package some of these together, it's not just, you know, a bag of devices. There's often software or layout or some expertise that we provided to create that system approach. It's a bit different.
It's not individually selling piece parts.
Got it. Got it. I guess a follow-up on competition. You know, Rich, to the extent you're, you know, going head-to-head with other incumbents in the space, you've outperformed in a meaningful way, but I'm sure there are instances where you go in and come out not winning. What is, or what are the typical reasons or the drivers, if you will, when you're not necessarily successful when competing for business? Is it pricing, irrational pricing on the part of your competitors, or is it something else? What are some of the factors that come into play?
You know, there's always some factor, right? There's always some level of irrational behavior.
Sure
somewhere in the world, right? Most of the time where we don't win is where we may not have the right solution for that particular end client, right? Even that information, when we're targeting a certain market, we learn from that, and we adjust our methods going forward to make sure that we win. It's usually when we don't have the right solution, that hits it out of the park with that client.
Okay. All right, great. maybe transitioning to capital return and M&A. Eric, you talked about M&A being a thing of the past for the most part, maybe some tuck-ins going forward potentially. Holistically, how do you think about capital return? I think Steve has been pretty transparent and vocal, in terms of your plans, but if you can kind of level set the audience on your thoughts there.
We are focused in getting to 100% free cash flow return by the March 2025 quarter. seven quarters from now, and increasing the percentage of free cash flow that we're going to return to shareholders by about 5% each quarter. It's 67.5% of last quarter's free cash flow. This quarter, increase that to 72.5%, next quarter, 77.5%, the quarter after that. By March of 2025, we'll be at 100% free cash flow return. The thought is that we'll be roughly a 50/50 split between dividend and share buyback. It'll fluctuate quarter to quarter, but that's the plan, and we're on track to get there.
Leverage today, we ended last quarter with about 1.45x leverage. Leverage will continue to come down between now and then. Where it settles, I don't know, but we'll be below 1.5 as we are today. I think it's a really good path that we've laid out for shareholders. We're on track to get there.
Yeah, I mean, to your point, it's very clear and very methodical, approach toward, in terms of capital return. What's been the feedback from investors on what you've laid out?
I, you know, I think there was a few shareholders that were expecting us to get to one and a half times leverage, that we go very quickly to 100%. I think with interest rates where they're at today, we thought it was prudent to pay down a little bit more debt between now and when we get there, but I think general feedback has been very positive from our shareholder base.
Okay. Got it. Just going back to M&A, any certain technologies or, you know, end market exposures, go-to-market, anything that you feel like is lacking still at Microchip? Do you feel pretty good about, you know, what you have, and you're going to be super opportunistic?
Most of it. Oh, good.
Go ahead.
Yeah, most of it is just plug-in, where we find particular opportunities or technologies that come our way. You know, we're still doing smaller acquisitions, you know, almost on a quarterly basis. It's not material enough to make the press. You know, we've done a couple of AI acquisitions to help support our FPGAs and our microcontrollers. We've done some acquisitions to expand our design footprint, and much faster than trying to hire resources. We've done some smaller acquisitions in the analog space to help fill in our portfolio. Most of it is just looking at smaller plug-ins and medium-sized or smaller companies.
Yeah, you know, looking to fill a hole, an IP or an R&D team or something like that. You know, these tend to be $20 million, sub $20 million dollar deals that don't move the needle.
Okay. Makes sense. Rich, you briefly talked about FPGAs, and I think the FPGA business got a call-out on the earnings call recently. Maybe talk a little bit about the trends you're seeing there. I'm sorry, I forget how big the business was in the most-
Yeah, we said-
Recent
... last fiscal year, it was, you know, roughly $550 million.
About $500 million. Very good growth. Like, what's the outlook there for FPGAs?
You know, this is one of the things that we do very well, is when we, you know, acquire these different companies, typically, companies leave business units siloed, right? They have to fend for themselves. One of the things that we did with the FPGA group is said: Okay, where can we invest in and leverage it and grow it, right? We chose two specific areas that we were going to grow FPGA, and one is we were going to move it from a very small, aerospace, mainly defense focus, move it into communication markets, move it into industrial markets. We're going to bolster it with some AI acquisitions in terms of software, to move it into vision control and robotics.
So we did all of those, right? We looked at the business strategically, what did we need to invest in it to grow it, made those investments, and that FPGA business has really flourished. You know, we identified medical markets that we could take it into, and so we've got a pretty extensive customer base. Just by doing some of those synergy reviews and revamping their overall business and investment model, we were able to grow it significantly. Now, the same thing happened on Microsemi with the PCIe and their data center business. You know, now we're bringing those data center products into automotive applications, right? We know how to do automotive very well at the company and growing it there, too. FPGA has really flourished by using that same process that we've done through multiple acquisitions.
I think the other thing that both in FPGA and data center that Rich has mentioned, is these tend to be complex systems that have lots of what I would call attach opportunities for the rest of Microchip around it, and we're maximizing that.
Okay. Yeah, that makes sense. I'll pause here again. Any questions from the crowd?
Yeah, Rich, you were saying, earlier that, the, you know, fully depreciated equipment is no longer as readily available, so presumably, your cost of manufacturing goes up. If you guys think about sort of the next upcycle, you know, does the percentage of business that gets outsourced, does that number continue to drift higher? You know, I'm looking at TI, which seems to be taking a different strategy. What sacrifices, if any, do you think you guys are making by going this route, of doing more business with the foundries?
We are more than doubling our capacity internal to our own wafer fabs, right? We are continuing to invest and grow those. We've worked with our foundry partners on some of the trailing edge technologies to share in those nodes, and move some of that internal to Microchip. On some of our more advanced nodes, we've worked with them to put the capacity in place, you know, whether it's at three nanometers, 6, 16, 40, 65. There really wasn't a need for us to go build out those factories, but there was a need to really invest and build out some of the trailing edge technologies that we had, whether it was silicon carbide, whether it was drivers, whether it was some of our analog peripherals, MEMS or MEMS timing devices. We decided to focus on those technology corridors internally.
My second question is just, if the outlook for gross margins is modest slight improvement over time, You know, how do you sort of account for the higher cost of manufacturing that's going to come through here over the next several years? Is it, you know, Eric, you were saying earlier that, you know, 8, 10 years ago, you stopped providing price discounts, annual price discounts. What's the trend going forward? Are you telling customers that there's just more inflation in the products that you're building, and therefore, you know, do you see a scenario where you see annual price increases for customers for the products you're building?
I mean, we would not plan on annual price increases, but if inflationary pressures continue on the business, we would not hesitate to pass those costs on. You know, having a price increase discussion with the customer is never a fun conversation, but ultimately, you know, we have to drive a certain margin structure for the company, and if we see inflationary pressures that we can't offset with efficiencies, we would pass those on to customers. There's no plan to annually raise prices on customers unless inflationary pressures put us in that situation.
Just wondering, instead of a 300 millimeter fab, if the CHIPS Act and just the environment in the U.S., have you given any thought to an 8-inch fab in the U.S. with a lot of government backing? Is that something that could be attractive to consolidate operations?
We have two very large eight-inch fabs in the U.S. already. We have a six-inch fab, which we've already started converting to eight-inch in Colorado Springs. We're adding another annex of eight-inch, as well as an annex for silicon carbide at that same location. We are expanding those footprints in all of those locations, and we have applied for CHIPS Act money to further expand those locations. You know, Microchip is the largest provider of aerospace and defense semiconductors by a large margin.
You know, for nothing leaves Earth's orbit without considerable content from Microchip, and some of those technologies can only be built, believe it or not, on older technology, even older than that, three or four inch wafers in very boutique type of fabs that we have in the U.S., too. Those need to be expanded as well. We're investing on those onshore as well as assembly of those products onshore.
Hey, guys. In the last 10 years, pockets of analog MCU have consolidated quite a bit. There's been, like, 10 or so billion-dollar deals. On the pricing point, is there a way that, you know, if you wanted to, the industry goes from pricing going down 2%-3% a year to now kind of being more in your power if you wanted to? The flip side of that argument is, as a result of the consolidation, can you now use price as a lever to go out and take share and bulk orders and that sort of thing?
You know, customers, you still have to be successful in selling their products, right? The idea of gouging or using that, if their product, their end products are uncompetitive, how does that serve us, right? We really don't look at it that way. We go into a customer, we look at what they're trying to achieve, we look at the market they're trying to go after, and position that correct solution at the right price point to go. We don't really do pricing based on cost plus, right? That's a losing proposition. Our pricing is based on what we think that value brings to that particular application. I don't know, Eric, if you have.
Yeah, I think consolidation in the industry has been a help on pricing to some degree, because a lot of the poorer players in pricing were acquired because their business models sucked, to just put it bluntly. I think, I think it has helped, but I think, you know, most of that consolidation has probably already happened in the industry, and we have more rational players that we're competing against today.
Thank you.
Yeah, you can't have profitless prosperity in the most capital-intensive business. It's what led to the consolidation in semiconductors.
Maybe in the last couple of minutes we have, you know, Microchip is obviously a well-covered stock, but Eric, in particular, as you know, debate the business and the industry and your stock with investors and sell-side analysts, any aspects of your business or the broader industry that we overlook or collectively underestimate, underappreciate?
I guess what I would say is when Microchip views its business, and when our longer-term shareholders view our business, they view us as a very high-quality, high-margin player, and, you know, that's proved out with the close in operating margins and the cash flow that we generate.
I feel that we have a pretty significant discount that we trade at to some of our analog competitors that we compare with very favorably when you look at gross operating margin, free cash flow margins, capital returns. I think that's the opportunity for shareholders, longer term, that gap should and will close over time. I think that we've been in an environment that has been one of uncertainty for investors. I completely understand that these things don't happen overnight. I think if you look at our model, it supports a higher multiple over time, whether you look at a P/E or you look at EV/EBITDA or any of those things. I think that significant discount that we see today should close.
You know, I think that some still view us as a conglomerate of acquisitions, and there's been a little bit of a discount that has been applied because of that, but we haven't done an acquisition in 5 years. We've talked about our M&A strategy going forward, not really being one to go out and do large-scale acquisitions. You know, I think at Microchip, all we can do operationally is continue to execute, and I think that gap will close.
Got it. Great. On that note, I'd like to close. Thank you so much for participating.
All right.
We appreciate it.
Appreciate it.
Thank you.
Thank you, everybody.